Aussie Business Loan Bonanza as Bank Margins Slide May Stall RBA

  • Business lending margins are at the lowest since mid-2000s
  • National Australia sees `encouraging signs' in loan demand

Australian companies faced with a faltering economy are enjoying an unexpected bonanza -- the best bank loan terms in a decade.

Borrowing rates for corporates have dropped by at least 57 basis points since January, while competition from global lenders has driven bank margins to levels unseen since the mid-2000s, according to the Reserve Bank of Australia. The odds of an RBA interest-rate cut by the end of March dropped to 53 percent from more than 80 percent last month amid signs two quarter percentage point reductions earlier this year are starting to bear fruit.

“There’s plenty of reason for businesses to be optimistic to capitalize on the emerging conditions,” said Craig James, a senior economist at the securities unit of Commonwealth Bank of Australia. “Interest rates are at a historic low, the currency has dropped, housing and tourism are strong. If the good economic data continues then there’s no reason for the RBA to touch interest rates in any direction over the next 12 months.”

Business credit grew in September at the fastest pace since February 2009, helping underpin the central bank’s stance that the ingredients are now in place for “animal spirits” to stir as it holds the benchmark rate at a record-low 2 percent. Better demand from borrowers may help stabilize lenders’ loan margins, which fell to a seven-year low in 2015.

A decline in commodity prices has spurred a 25 percent drop in the Australian dollar over the past two years, boosting the competitiveness of manufacturers and the tourism sector. That combined with low interest rates has lured businesses to borrow. Loans to companies increased 6.3 percent in September from a year earlier compared with 4.7 percent at the end of last year, according to data from the central bank.

A gauge of business conditions published by National Australia Bank Ltd. held steady at 9 in October, a report released Tuesday showed. “Business conditions remain encouragingly robust, maintaining the solid gains obtained over the past year despite less than impressive levels of business confidence,” according to the report. The bank’s confidence measure slipped to 2 from 5.

National Australia Bank, the country’s largest lender to corporates, is seeing “encouraging signs,” in business loan demand, Chief Executive Officer Andrew Thorburn said Oct. 28 as the Melbourne-based company revealed annual earnings. He warned the pressure on net interest margins, a measure of lending profitability, wasn’t about to ease though.

National Australia Bank posted its lowest net interest margin on record in the year-ended Sept. 30, hurt largely by business lending competition, according to filings. Net interest margins for the four-largest Australian lenders averaged 2.08 percent last financial year, the lowest since the 2.04 percent level recorded in 2008, according to data compiled by Bloomberg.

“The signs are promising for business credit demand, ” Brett Le Mesurier, a Sydney-based analyst APP Securities Pty., said by phone. “All along the banks have been ceding margins as they fought to maintain market share amid low demand. With business appetite increasing, the lenders may have an opportunity to stabilize margins.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE