BOQ joins rush to buy back debt guarantees

BANK of Queensland has become the latest lender to exploit improving funding-market conditions, with plans to buy back up to $653 million in taxpayer-guaranteed debt.

Under the guarantee of wholesale borrowing, which provided a lifeline to the sector at the height of the global financial crisis, banks have been able to effectively rent the government's AAA credit rating in return for a fee.

Banks embraced the guarantee, which has since closed to new debt issues, with almost $170 billion in debt guaranteed by the taxpayer in early 2010.

But with better market conditions lowering the cost of new borrowing, it now makes sense for banks to buy back their guaranteed debt as it approaches maturity.

BOQ, which was charged a larger fee than the big four for using the guarantee, on Tuesday offered to buy back a batch of government-guaranteed bonds that will mature in October.

Commonwealth Bank, Westpac, ANZ and NAB have all made similar moves in recent months, delivering healthy returns to investors who purchased the bonds at the peak of the financial crisis. The rush comes as banks face more favourable conditions on funding markets, a trend that some industry figures say could ultimately flow into lower rates on mortgages and term deposits.

During the financial crisis in 2009, big banks were typically paying 60 to 110 basis points over the benchmark when they issued new debt, plus the government's fee of 70 basis points.

For a lower-rated bank such as BOQ, the fee was 100 basis points. Now, however, higher confidence on international debt markets means the big four can borrow at about 100 basis points over the benchmark.

Bendigo and Adelaide Bank's managing director, Mike Hirst, on Monday predicted the drop in wholesale funds would cause interest rates on term deposits to ease later this year, as banks compete less fiercely for deposit funding.

The chief executive of the Commonwealth Bank, Ian Narev, also said last week he expected wholesale funding conditions to improve, though he would not speculate about what this meant for people with mortgages or savings accounts.

The BOQ deal is the latest in a spate of buybacks in which Australian banks have spent some $15 billion on government-guaranteed bonds, according to Reserve Bank estimates.

The latest Treasury figures show the scheme's liabilities had fallen to $65 billion in December, and the program had raised about $4 billion in fees for the federal government since its inception in 2008.