NAB's grand plan
The NAB's pledge to pass on some of the relief it is experiencing in short term funding is at odds with the wider increase in the average funding costs embedded in their books.
National Australia Bank's commitment to passing on at least 25 basis points of any Reserve Bank reduction in the official rate next month sits rather oddly with the presentation Ahmed Fahour gave in support of the announcement today.
The bank's CEO of its Australian operations, while being coy about whether NAB would pass on 50 basis points if that were the size of the official cut, said that the bank had experienced some short term funding relief that it was keen to pass onto customers.
He then went on to give a presentation which showed that, while the cost of short term borrowings for the Australian banks have improved markedly in the past couple of weeks, the outlook for the other elements of its funding base – the cost of shareholder capital, medium and long term funding and deposits wasn't favourable and the average cost of term funding was forecast to continue rising as more of the higher cost funds became embedded in the banks' books.
Indeed, the cumulative weighted average cost of term funding was forecast to increase from less than 20 basis points over the swap rate before the credit crisis to more than 80 basis points. Today it is at about 40 basis points.
Total funding costs today are about 53 basis points over the RBA's cash rate. They are forecast to be about 70 basis points over the cash rate by June next year.
As discussed previously (Banks will take their cut, August 20) about 20 per cent of our banks' funding is longer term wholesale money.
There has been a structural change in the cost of deposits, which are the primary source of funding for smaller banks who can't access offshore wholesale markets. NAB says these deposits, which provide about half of the banks funding, have risen from an average of 14 basis points over the cash rate last year to 67 basis points over the cash rate this year.
Shareholder capital has been made far more expensive by implosions in bank share prices.
Thus the relief so far – and the only real relief in prospect – applies to only about 20 per cent of the banks' funding bases. Most, if not all, of the rest will only become more expensive over the next few years, not less. The longer the crisis persists, the higher the blended cost of funds and the longer those higher costs will persist.
So why did NAB commit itself in advance to passing on a 25 basis point reduction in official rates even as it argued that its blended cost of funds was set to continue to rise in the medium term?
One suspects part of the answer is a mix of pragmatism and theatre. The banks are already being softened up, and set up by, the Government and oddly, the RBA. If they don't pass on a September rate cut they will be held responsible and vilified.
The pragmatic response is to say, if the banks are going to be forced by the political and public pressures into passing on a rate cut, NAB might as well salvage something in return by gaining the credit and the positive PR from being the first bank to commit to a reduction.
The nature of the presentation and the gloomy picture painted by Fahour's slides, however, also points to another agenda, which was also referred to in the presentation.
Fahour has been arguing the case, publicly and privately, for a form of tax preference for deposits that would be analogous to the tax advantage enjoyed by superannuation.
The key point he makes is that the switch in savings from deposits to superannuation since the introduction of compulsory superannuation (and exacerbated by the previous government's simplification reforms, which add to the tax-advantaged status of super) will make it difficult, if not impossible for the banks to finance the level of funding required to meet the Government's objectives on housing availability and affordability. He has sought to have the issue included in the Henry review of the tax system.
NAB's commitment to passing on the first 25 basis points of any reduction will win it some brownie points in Canberra and may get it a better hearing for its case on the tax treatment of deposits.
Within Fahour's presentation, however, lie some escalating issues for the banks and some policy dilemmas for the government. The promise of a 25 basis points cut in home loans is NAB's investment in trying to convince the Government to take the issues seriously and do something to address them.
The bank's CEO of its Australian operations, while being coy about whether NAB would pass on 50 basis points if that were the size of the official cut, said that the bank had experienced some short term funding relief that it was keen to pass onto customers.
He then went on to give a presentation which showed that, while the cost of short term borrowings for the Australian banks have improved markedly in the past couple of weeks, the outlook for the other elements of its funding base – the cost of shareholder capital, medium and long term funding and deposits wasn't favourable and the average cost of term funding was forecast to continue rising as more of the higher cost funds became embedded in the banks' books.
Indeed, the cumulative weighted average cost of term funding was forecast to increase from less than 20 basis points over the swap rate before the credit crisis to more than 80 basis points. Today it is at about 40 basis points.
Total funding costs today are about 53 basis points over the RBA's cash rate. They are forecast to be about 70 basis points over the cash rate by June next year.
As discussed previously (Banks will take their cut, August 20) about 20 per cent of our banks' funding is longer term wholesale money.
There has been a structural change in the cost of deposits, which are the primary source of funding for smaller banks who can't access offshore wholesale markets. NAB says these deposits, which provide about half of the banks funding, have risen from an average of 14 basis points over the cash rate last year to 67 basis points over the cash rate this year.
Shareholder capital has been made far more expensive by implosions in bank share prices.
Thus the relief so far – and the only real relief in prospect – applies to only about 20 per cent of the banks' funding bases. Most, if not all, of the rest will only become more expensive over the next few years, not less. The longer the crisis persists, the higher the blended cost of funds and the longer those higher costs will persist.
So why did NAB commit itself in advance to passing on a 25 basis point reduction in official rates even as it argued that its blended cost of funds was set to continue to rise in the medium term?
One suspects part of the answer is a mix of pragmatism and theatre. The banks are already being softened up, and set up by, the Government and oddly, the RBA. If they don't pass on a September rate cut they will be held responsible and vilified.
The pragmatic response is to say, if the banks are going to be forced by the political and public pressures into passing on a rate cut, NAB might as well salvage something in return by gaining the credit and the positive PR from being the first bank to commit to a reduction.
The nature of the presentation and the gloomy picture painted by Fahour's slides, however, also points to another agenda, which was also referred to in the presentation.
Fahour has been arguing the case, publicly and privately, for a form of tax preference for deposits that would be analogous to the tax advantage enjoyed by superannuation.
The key point he makes is that the switch in savings from deposits to superannuation since the introduction of compulsory superannuation (and exacerbated by the previous government's simplification reforms, which add to the tax-advantaged status of super) will make it difficult, if not impossible for the banks to finance the level of funding required to meet the Government's objectives on housing availability and affordability. He has sought to have the issue included in the Henry review of the tax system.
NAB's commitment to passing on the first 25 basis points of any reduction will win it some brownie points in Canberra and may get it a better hearing for its case on the tax treatment of deposits.
Within Fahour's presentation, however, lie some escalating issues for the banks and some policy dilemmas for the government. The promise of a 25 basis points cut in home loans is NAB's investment in trying to convince the Government to take the issues seriously and do something to address them.
Share this article and show your support
Call 1300 880 160
Start a chat
Schedule a call
