Australian bank funding worries resurface

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From Banking Day:

Sean Keane, of Triple T Consulting, wrote in his bulletin for Credit Suisse on Friday that “it has become very noticeable in recent days that the level of enquiry about the risk to Australian bank funding has substantially increased.”

“Given the geographic dispersion of the source of these enquiries there is little doubt that investors all around the world are now mulling the risks to banks down under.

“The concern being expressed by overseas observers is that the sharp outflow of funds that have been exiting Asian emerging markets has the potential to spill over into Australia, triggering disinvestment and the non-renewal of existing funding contracts.”

…Keane note that “at this stage the wobble in Asian markets, and the weakness in the Australian dollar, does not appear to be causing Australian banks any particular difficulties.

A couple of points to note. Banking Day also notes that:

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For the third week in a row there was no public corporate bond issuance in the domestic debt capital market. The volatility in global financial markets that is the cause of this lack of issuance activity looks set to continue for a while yet.

June could become the first month in which no public issuance occurs since May 2010. May 2010 was the time of the first Greek default, although it was called a bail-out at the time.

It is already five weeks since a major bank – NAB – tapped the public bond markets. Bank of Queensland was the last bank to do so, in the last week of May.

So banks aren’t issuing debt, perhaps assuming current ructions will pass. There is no doubt that the price has risen a lot in the past six weeks. CDS prices bottomed in May just above 70 points and are trading above 120 points today. These prices directly reflect the cost of 5 year wholesale debt and a 70% jump on the global yield back-up and then China’s problems is not to be sneezed at. It’s much more than any move in any comparable developed country major banks. These levels are still well below last year European crisis at 250 points but they’re certainly going the wrong way.

It’s just as well that Australian banks are the most profitable in the developed world, according to the BIS, largely because they eaten so much net interest margin over the past few years:

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The next rate cut will not be passed on in full is my bet.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.