There are a couple of stories around this morning about the pressure on bank funding. Firstly from Banking Day:
Margins in banking declined by around 10 basis points over the last six months, Mike Hirst, the chief executive of Bendigo and Adelaide Bank, said in an interview with Business Spectator.
Hirst told the website that Bendigo’s margin – which was reported as being 2.17 per cent in the second half of the June 2011 year – was not “all that different from the majors. Our margin before we share it with our community bank partners is about the same as what the majors’ margin is, so we’re under pretty much the same pressure that they might be under.
“When you move into a much lower interest rate cycle that we’re in now, you actually get pressure also from the low cost deposits because they can’t be moved down at all, so as loans come down, the section that’s funded by low cost deposits or capital gets squeezed. And in this particular market because of the funding issues, you know you’re also getting squeezed on the other term deposits. So, there’s no doubt bank margins have fallen, probably 10 basis points in the last six months.”
Hirst reiterated that Bendigo “will be moving away” from the common practice of adjusting variable home-loan rates broadly in line with the RBA cash rate, a principle first announced before Christmas. The bank may have an opportunity to act on this policy next month given the widespread assumption of a further cut in the RBA cash rate.
Interesting and another reason why the RBA may seek to move lower in February. But, there is a contrary case developing. Also from Banking Day:
Last week, Westpac sold A$1.7 billion of fixed rate, five-year covered bonds at a spread of 165 basis points over swap to yield 5.75 per cent per annum. The spread to swap on the Westpac covered bond was 10 bps tighter than that achieved by Commonwealth Bank the week before. However, the yield paid by Westpac on its term funding was 22 bps tighter than on the CBA bond, taking into account benchmark interest rates early last week.
Westpac also sold $1.4 billion of five-year floating rate notes at a spread of 165 bps over bank bills.
Friday’s rate sheet from Yieldbroker shows that spreads on the Westpac and CBA covered bonds have contracted to 141.9 bps and 143.1 bps, respectively, and to 154.5 bps and 157 bps for the covered FRNs.
For the time being at least it appears that local wholesale funding markets are decoupling from international. The rates implied for new issues by a secondary market trading recent covered bond issues in the 150bps range are well below recent issues by banks in international markets, potentially easing some the pressure on the banks NIMs.
Phil Bayley, principle at ADCM a capital markets consultancy and author of the story, puts this down local investors having a clearer picture on which to base their assessment of Australian bank prospects. In Europe, he says, covered bonds are the only acceptable currency in market. Unsecured debt is dead. Consequently, the market is choked with offerings. In the US the covered bond market is nascent and demand limited.
Here, however, demand remains strong.
In the short term, there are two risks to this decoupling, reckons Bayley. The first is that the local market is relatively limited and another couple of large issues will see it satisfied, driving up yields. The second is that a Greek default will spook international yields back out again.
Either way, this looks more like a window of opportunity than a step shift.
