Downgrade Threat Sees Banks Favor Deposits, Debelle Says

Australia’s banks are paying the same to raise funding through three-month deposits as they are on five-year unsecured bonds as they seek to safeguard credit ratings, central bank Assistant Governor Guy Debelle said.

Lenders’ debt issuance is holding in line with maturities even as funding costs drop, amid a “desire to maintain a strong rating, with the latent threat of a downgrade if wholesale issuance were to grow ‘too large’,” the Reserve Bank of Australia’s Debelle said in prepared remarks of a speech in Sydney today. “This reflects the somewhat misplaced assessment of ‘deposits good, wholesale funding bad.’”

Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp., which all hold Standard & Poor’s fourth-highest credit grade, have cut reliance on bond markets since the 2008 collapse of Lehman Brothers Holdings Inc. roiled financial markets. Outstanding notes issued by the nation’s four biggest banks dropped to $392 billion currently from $437 billion in the third quarter of 2010, data compiled by Bloomberg show.

Term deposits with banks increased 7.7 percent to A$546.4 billion in the year to January, the most in RBA data going back to 1984. Such holdings may be nearing a peak as debt costs fall and a stock market rebound tempts customers back into riskier assets, Commonwealth Bank Treasurer Lyn Cobley said March 12.

Spreads Narrow

Yields on Australian dollar-denominated financial notes dropped 119 basis points over the past year to 143 basis points more than similar-dated government debt, near the narrowest spread since 2007, Bank of America Merrill Lynch data show. The gap on a broad market gauge of all bonds in the nation has narrowed more quickly than the global average, the data show.

Australia’s bond market is benefiting from strong international demand for assets in the nation’s currency, Debelle said today. Sales of sovereign notes by Japanese investors have been “more than compensated for” by other asset managers boosting purchases, and the market has become more attractive to foreign borrowers, he said.

“Kangaroo issuance has been supported by the broad-based reduction in spreads, the attractive basis, and foreign investors looking beyond AAA instruments for Australian dollar exposure,” he said. “These foreign investors have been notably active and Asian investor participation in particular continues to grow.”

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