It appears that the Australian banking system continues to pay the price for the European crisis and its reliance on foreign funding. As I mentioned last week CBA paid a high price to issue covered bonds in the European market due to the costs of swapping Euros back to AUD.
It would appear that this pain has continued with ANZ’s auction later in the week. The result was a another +33bps on the Euro-based auction followed by a similar swap rate on the conversion, leading to a final rate of around +245bps.
Australia & New Zealand Banking Group Ltd. (ANZ) priced 1 billion euros of 10 1/2-year covered notes at 133 basis points more than the euro mid swap rate on Jan. 9, equating to about 245 basis points over the Australian benchmark, Bloomberg data show.
The spread on ANZ’s A$550 million of 6.75 percent senior unsecured notes due in May 2016 was 154 basis points yesterday, according to prices from the lender.
The five-year Australian dollar Euribor basis swap, which measures the cost of switching interest based on the euro area interbank offered rate, or Euribor, for payments linked to Australia’s bank bill swap rate, was last at 90.3 basis points, Bloomberg data show.
“While access to wholesale funding markets in the 2012 financial year has commenced with better momentum, funding costs for new issuance remain very elevated,” Rick Moscati, ANZ’s group treasurer, said by e-mail. The bank’s covered bond sale provides “good tenor extension to our funding profile and a differentiated set of investors.”
This rate suggests an outright cost to ANZ of about 6.7% for the funding using this source. Although it may not be a completely appropriate comparison is does appear that ANZ is currently offering a cheaper mortgage product than it can provide funding for via secured international wholesale markets.
All good fodder for Friday’s rate decision. It maybe time to prepare yourself for an out-of-band rise.