The bank funding cost rocket is taking its toll on bank margins, from Banking Day:
Offshore, Macquarie Bank made its first issue from its newly established covered bond program and Westpac also sold covered bonds.
Macquarie Bank sold €500 million of covered bonds with a five year term to maturity. The bonds priced at 40 bps over swaps, which according to NAB, translates back into Australian dollars at 126 bps over bank bills.
Westpac sold US$1.35 billion of five-year covered bonds, priced at 98 bps over swaps. This should translate to 122 bps over Australian bank bills.
These are covered bonds so the spreads are tighter than the usual unsecured bonds that make the majority of wholesale debt funding. We have add 20bps or so to get to the cost of unsecured so we’re hovering around 140-150bps.
CBA CDS is pricing 126bps as of Friday:
So, if anything, the CDS market is under-pricing the degree of spread widening at the moment. Recall that a bank’s net interest margin is made up of:
- BBSW 2.08%;
- plus the cost of borrowing which is 1.4% on unsecured debt;
- making a total funding cost of 3.48% versus a current discounted mortgage rate of 4.85%;
- delivering a pure net interest margin of 1.37% (covered bonds, deposits and other factors will shift it).
That is way below the 2%+ margin reported by all banks last quarter. This is the result, from Domainfax:
Westpac is the latest bank to increase interest rates for business customers and blame the move on higher funding costs, following similar changes from NAB and ANZ.
Some of Westpac’s home loan customers will also face a rate hike, as the bank is also increasing interest rates on lines of credit held against residential property.
The bank announced changes that will mean rates set in reference to a bill margin, which are commonly used by commercial customers, will increase by 0.23 percentage points.
Rates on various other types of business loans that are often used by smaller businesses, including overdrafts, will lift by 0.19 percentage points.
It is also increasing interest rates by 0.3 percentage points on a range of business loans that it no longer offers to new customers.
Expect moar as the Mining GFC drives funding costs to new highs.
