Banks brace for funding challenge as liquidity facility winds down

By Gerard Perrignon
Published July 21, 2022 | 2 min read

QT and slowing growth will mean choppier market conditions as the Australian banking cohort adjusts to higher funding costs and reduced demand for mortgages.

Australia’s banks face more difficult funding conditions in coming years as a key central bank loan facility phases out and low fixed-rate mortgages mature in an environment of rising interest rates. Despite higher funding costs and a potential decline in asset quality, the ‘Big Four’ banks are well-positioned to weather the challenges, panelists at the recent KangaNews Debt Capital Market Summit said.


New funding sources will need to be tapped

Australia’s bank treasuries will soon need to lean more heavily on bond markets to meet global liquidity requirements as the Reserve Bank of Australia’s (RBA) Committed Liquidity Facility (CLF) is wrapped up by the end of this year. Following last year’s closure of the term funding facility (TFF), a low-cost, three-year funding facility established by the RBA during the COVID-19 pandemic,  the banks face a significant refinancing task as billions of dollars’ worth of fixed-rate loans mature over the next two years. Quantitative tightening (QT) has added to the pressures, raising wholesale funding costs and narrowing windows for issuance.

The removal of the CLF is expected to take some liquidity out of the Australian market but the major banks’ strong credit profiles and flexibility to respond to  emerging events puts them in good stead to access globally diversified funding. Banks have already moved to shore up their balance sheets by turning to covered bond markets, having largely eschewed the category during the TFF draw-down period. The major banks executed some A$19 billion in covered bond issuance in the first half of 2022, about 30% of the domestic sector’s total funding, said Gerard Perrignon, Managing Director, Debt Capital Markets at RBC Capital Markets, who moderated the bank treasury session at the KangaNews summit. The share is roughly double the run-rate over the past 10 years and may remain elevated due to strong investor demand. The CLF phase-out has also made covered products more attractive as banks focus more on their short-term Liquidity Coverage Ratio versus their longer-term Net Stable Funding Ratio requirements to meet global banking standards.


Bank deposits to be impacted as customers adjust to rate rises

As QT takes hold and households and businesses grapple with higher loan repayments, banks will be closely watching the impact of deposits on their balance sheets. Deposits outstripped loan growth since the onset of the COVID-19 pandemic but may be expected to taper as the cash rate rises. More bank customers are likely to shift into higher-rate term deposits but such change may be gradual if New Zealand is any guide. New Zealand started QT in late-2022, well before Australia, but banks have seen little movement toward higher-interest products among customers in their deposit bases. New Zealand may also provide a preview for the resilience of customer bases in the new era of increasing rates. Banks have seen a reduction in loan applications and loan growth as demand falters but have yet to note a material impact on performance. Customers’ balance sheets remain in good shape while banks have kept their level of provisioning elevated. One of Australia’s major banks reported that delinquencies, losses and dynamic loan-to-valuation ratios were lower across its New Zealand loan book compared to its Australian counterpart.

Nevertheless, the Australian banking cohort is expecting slower home mortgage growth as markets price a 3% cash rate by year’s end and a peak of 3.5% in the first half of 2023. Business loans for the small-to-medium enterprise (SME) segment may not be impacted to the same extent, with customers more concerned by supply chain problems and how to solve labour shortages than rising repayments. Some SMEs will need to make changes to their businesses to manage those challenges, which will stoke demand for refinancing. Institutional lending could yet provide further opportunities for banks to shore up their loan books, including sustainable issuance.

QT and slowing growth will mean choppier market conditions as the Australian banking cohort adjusts to higher funding costs and reduced demand for mortgages. Overall, the banks’ robust credit profiles and strong financial buffer leaves them well-placed to manage the funding challenge.

Gerard Perrignon

Gerard Perrignon
Managing Director, Debt Capital Markets, RBC Capital Markets

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