- Aussie lenders may need more term debt on regulatory changes
- Macquarie estimates shortfall for three banks at A$41 billion
Australian banks may need to sell a lot more longer-dated bonds to get into the kind of shape regulators will be happy with.
The country’s major lenders, fresh from raising A$20 billion ($15.4 billion) in equity capital last year, face the prospect of ramping up their longer-term debt funding to comply with stricter rules under the global Basel III framework. With credit costs already increasing and net interest margins being squeezed, that could add to pressures for National Australia Bank Ltd. and some of its peers.
Lenders are already feeling the pinch from regulations designed to prepare them for a possible downturn and they’ll have to ensure that their balance sheets are adhering to rules on the proposed net stable funding ratio over the next year and a half. While Commonwealth Bank of Australia is poised to meet NSFR requirements, the next three biggest lenders could need to raise a combined A$41 billion in additional term-debt by 2018, according to an estimate from Macquarie Group Ltd.
“There will be incremental pressure on banks to lengthen funding profiles, whether that’s via longer-dated capital markets issuance or just simply more competition for higher-quality deposits,” said Anthony Ip, a credit sector specialist at Citigroup Inc. in Sydney. “It presents additional pressure on funding costs.”
Rules aimed at increasing capital cushions in the event of an economic slowdown or a housing downturn forced the lenders to raise record amounts of equity in 2015, depressing Australian bank share prices and adding fuel to the widening in credit spreads that’s come amid an increase in global uncertainty.
The NSFR is a separate part of the broader overhaul of Basel banking standards that’s been undertaken in the wake of the global financial crisis that toppled Lehman Brothers Holdings Inc. more than seven years ago. The requirement on stable funding will force internationally-active banks to take into account the maturity of their assets when making choices about their financing mix.
The Australian Prudential Regulation Authority has proposed that lenders Down Under will need to have stable funding in excess of requirements from Jan. 1, 2018. Fifteen Australian banks, including the biggest four -- NAB, Commonwealth Bank, Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd. -- are likely to be subject to the funding rule, APRA said March 31.
Commonwealth Bank is the only one of the four with the measure exceeding the required 100 percent ratio between available stable funding and required stable funding, according to Macquarie. NAB has an A$18.7 billion shortfall, while ANZ is about A$13.8 billion shy of what it needs and Westpac has a difference of A$8.6 billion, Macquarie analysts led by Victor German said in an investor note.
Spokesmen for all four major Australian banks declined to comment.
Banks will turn to bond markets and deposits to bridge the gap, according to the Macquarie analysts. “We continue to expect competition for deposits to intensify,” they said. “We expect Australian banks to lengthen the duration of their wholesale funding. This is likely to put pressure on their margins.”
Wholesale markets currently account for about a third of funding for the country’s biggest banks, and the cost of issuing bonds has risen amid resurgent market turmoil. The average yield premium over the swap rate on financial company bonds in Australia reached a 2 1/2-year high of 114 basis points last month compared with 73 at the start of 2015, according to a Bloomberg AusBond index. The measure was at 105 on Tuesday.
The banks’ average net interest margin, a key measure of lending profitability, fell to the lowest level in at least 8 years in 2015 amid increased competition and rising funding costs, according to data compiled by Bloomberg based on filings from the four biggest lenders.
“Banks need to go slightly further out on the funding curve, whether that’s in the wholesale market or in the deposit market,” Citigroup’s Ip said. “As you go out further on the curve, funding can become more expensive. It’s incrementally adding to the pressure on NIMs that’s already been borne out by the various banks over the last few months.”