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Banks on global hunt for $125b
DANNY JOHN
May 17, 2010
ALMOST $125 billion of pre-global financial crisis long-term funding used by the major banks to finance mortgages, personal loans and business credit will have to be replaced at much higher prices between now and September next year.
The debt, taken on by the four big banks before September 2007, when wholesale funding costs soared in the wake of global credit crunch, needs to be refinanced as a consequence of a three-to-five-year rolling program of maturing credit.
Long-term wholesale finance makes up about 25 per cent of the big banks' total funding needs and this has become progressively more expensive as international credit markets have adjusted to the new credit environment.
The original debt cost as little as 17 basis points over the official cash rate and was a major factor in the explosion of cheap credit that kept the economy motoring on in the early part of this decade.
But that all changed after the subprime mortgage scandal in the United States sparked the global crisis in which the overseas debt markets dried up.
Over the past year Australian banks have been paying an average of 75 basis points - 0.75 of a percentage point - above short-term money-market rates and that figure is set to grow as more costly debt is taken on.
At the height of the crisis in September 2008, banks were paying nearly 200 basis points - 2 per cent - over the cash rate and that was blamed by the big banks for the soaring cost of domestic and business credit.
Those levels have since fallen but credit markets remain volatile, as witnessed a week ago during the Greek debt crisis when credit spreads jumped by 20 basis points in a day.
Homeowners, for instance, are at present having to pay almost 3 percentage points above the Reserve Bank-set official cash rate of 4.5 per cent for their mortgages as the banks pass on their higher funding costs.
The big four are predicting their average cost of funding will rise to between 85 basis points and 110 basis points by mid next year as their remaining long-term cheap debt is replaced by more expensive finance.
The cost of mortgages, personal and business loans is therefore set to remain at high levels - possibly until 2015 - as the duration of the debt now being taken on by the banks stretches out to five years.
The banks argue that taking on longer-term debt is a consequence of the need for greater surety of finance and a demand from regulators for them to hold more liquidity to combat any further shocks to the global financial system.
Of the big four the country's biggest lender, the Commonwealth Bank, needs to replace the largest amount of wholesale debt over the next 16 months.
That amounts to $50 billion and represents almost 40 per cent of the total debt held by the big banks. The figure is evenly split between this year and next.
Both Westpac and ANZ estimate that they will need to source $27 billion in finance over the same period, while NAB is targeting about $19 billion.
The industry's best hope of reining in those figures is a continued growth in customer deposits which is a much cheaper source of funding. Between 56 per cent and 60 per cent of the big four's funding needs are now provided by deposits, according to their latest financial results.
DANNY JOHN
May 17, 2010
ALMOST $125 billion of pre-global financial crisis long-term funding used by the major banks to finance mortgages, personal loans and business credit will have to be replaced at much higher prices between now and September next year.
The debt, taken on by the four big banks before September 2007, when wholesale funding costs soared in the wake of global credit crunch, needs to be refinanced as a consequence of a three-to-five-year rolling program of maturing credit.
Long-term wholesale finance makes up about 25 per cent of the big banks' total funding needs and this has become progressively more expensive as international credit markets have adjusted to the new credit environment.
The original debt cost as little as 17 basis points over the official cash rate and was a major factor in the explosion of cheap credit that kept the economy motoring on in the early part of this decade.
But that all changed after the subprime mortgage scandal in the United States sparked the global crisis in which the overseas debt markets dried up.
Over the past year Australian banks have been paying an average of 75 basis points - 0.75 of a percentage point - above short-term money-market rates and that figure is set to grow as more costly debt is taken on.
At the height of the crisis in September 2008, banks were paying nearly 200 basis points - 2 per cent - over the cash rate and that was blamed by the big banks for the soaring cost of domestic and business credit.
Those levels have since fallen but credit markets remain volatile, as witnessed a week ago during the Greek debt crisis when credit spreads jumped by 20 basis points in a day.
Homeowners, for instance, are at present having to pay almost 3 percentage points above the Reserve Bank-set official cash rate of 4.5 per cent for their mortgages as the banks pass on their higher funding costs.
The big four are predicting their average cost of funding will rise to between 85 basis points and 110 basis points by mid next year as their remaining long-term cheap debt is replaced by more expensive finance.
The cost of mortgages, personal and business loans is therefore set to remain at high levels - possibly until 2015 - as the duration of the debt now being taken on by the banks stretches out to five years.
The banks argue that taking on longer-term debt is a consequence of the need for greater surety of finance and a demand from regulators for them to hold more liquidity to combat any further shocks to the global financial system.
Of the big four the country's biggest lender, the Commonwealth Bank, needs to replace the largest amount of wholesale debt over the next 16 months.
That amounts to $50 billion and represents almost 40 per cent of the total debt held by the big banks. The figure is evenly split between this year and next.
Both Westpac and ANZ estimate that they will need to source $27 billion in finance over the same period, while NAB is targeting about $19 billion.
The industry's best hope of reining in those figures is a continued growth in customer deposits which is a much cheaper source of funding. Between 56 per cent and 60 per cent of the big four's funding needs are now provided by deposits, according to their latest financial results.
