Australian bank funding costs have fallen to the lowest level since the global financial crisis, raising pressure on lenders to pass on any future interest cuts in full.
The sharp drop in long-term funding costs coincides with a government decision last week to stop new investments in residential-mortgage-backed securities in response to better market conditions. During the week ANZ sold $1.75 billion worth of five-year bonds at 85 basis points over benchmark swap and bank bill rates. During recent years, banks have paid well over 150 basis points to secure the long-term funding.
The ANZ issue marked "the record for the cheapest five-year issue by a major bank since the GFC", said Philip Bayley, an ADCM Services credit market analyst.
Bank executives have argued that while short-term funding costs had fallen to lows, the price of securing longer-term funding remained persistently high. Economic problems in Europe and pressures on the region's troubled banking system had been the main cost drivers.
Further relief for bank profit margins is expected to come as the three and five-year funding locked in during the depths of the global financial crisis is starting to roll off.
Even so, banks argue that the main pressure is not global money markets, but rather competition for deposits among lenders. This is expected to intensify as more spare funds are ploughed into shares.
At the start of 2012, Commonwealth Bank sold $3.5 billion of secured three-year bonds at a record 175 basis points more than benchmark rates. Before the financial crisis took hold of credit markets in 2008, bank funding costs were running at record lows. ANZ and Westpac issued five-year paper in September 2007 at a spread of 42 basis points over swap and bank bills. Additions were made to these lines in May 2008 at 94 basis points over the benchmark rates.
The Reserve Bank recently played down the significance of a sharp drop in wholesale funding costs for lending rates, saying competition for deposits remained the key influence on banks' costs.