Following H&H’s post early this morning, Macquarie is casting a sceptical eye over bank funding, arguing that the domestic issuance of covered bonds is only buying time for the major banks and pointing out that unsecured lending will have to start again at some point:
Given the recent covered bond issues, the depth of the domestic Government bond market vs. the covered bond limit (A$370b vs. cA$80b) and an emerging increase in demand for A$ assets, it may be the majors who continue to issue covered bonds domestically. While this is likely to provide short term (but expensive) relief from funding pressures, expensive unsecured wholesale issuance will need to recommence at some point. Similarly, the implications of sustained AAA issuance by the majors cannot be underplayed in terms of the crowding out impact in the Government, Semi-Government and RMBS space, impact on domestic credit costs and liquidity mark to market impacts.
Macquarie flags three problems if there continues to be a reliance on covered bonds, domestically issued:
“1. Cost of funding – the elevated cost of secured funding suggests that the cost of unsecured funding is baked in whilst the current macroeconomic uncertainty remains. If the global economic outlook doesn’t improve in the next 6-18 months the majors will be forced to tap the unsecured wholesale funding markets and an elevated cost.
2. Mark to market losses on federal and semi-government bonds – the majors are likely to be taking a mark to market loss on federal and semi-government bonds following the widening of spreads in their liquidity books.
3. Securitisation markets – Given recent covered bond issuance, related funding vehicles such as securitisation are unlikely to be economic at implied spread levels (c190bp+).”
It also argues that:
There’s only so much money in the local market after all. Macquarie has a couple of nice charts. First on the impact on state government bonds as the banks soak up local demand:
It also argues that:
If the banks were to utilise their total regulatory allowance of covered bonds in 2012 (i.e. 5% of their total effective domestic asset balance allowance) the majors would fill c60% (NAB), c64% (CBA),c74% (WBC) and c76% (ANZ) of their 2012 funding requirements.
And provides the following chart on the banks ongoing funding needs for this year:
For those brave enough to go into the sector, Merrill, which has a neutral rating on the sector, is advising reallocating from CBA into ANZ. Morningstar is saying that both CBA and NAB offer attractive upside, but their risk profiles differ. CBA is the most profitable of the four majors, with a sector-leading Return on Equity of 19.5%, and the biggest market capitalisation of $79bn. But CBA is also the most expensive on a PE and dividend yield basis. NAB has a FY11 Return on Equity to 15.3% and improving earnings quality. NAB is the largest business bank in Australia, CBA the largest consumer bank.