Australian bank funding cost rocket continues to lead global stress

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The Australian bank funding cost rocket is still refusing to cool off. Yesterday CBA CDS prices were unchanged at 120bps:

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Meanwhile, our US and European cousins are seeing enormous relief:

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Australian banks continue to lead developed market funding stress in this cycle now with an eye-popping spread to the US and Europe. This may mean we’re about to fall back or that the Australian-specific concerns are not letting up at all. I’d guess a bit of both.

Another test of local funding costs now looms, from Banking Day:

ING Bank (Australia) is marketing a series of notes to raise $A460 million via what is to be known as the IDOL 2016-1 Trust. These notes are backed by fully verified (“full doc”) Australian prime residential mortgages.

Preliminary ratings have been assigned by Moody’s Investors Service as:

  • Class A $460.0 million Notes, (P)Aaa (sf);
  • $15.0 million Class AB; and
  • $25.0 million Class B Notes that are not rated by Moody’s.

A pre-sale note from Moody’s disclosed that all loans in the portfolio benefit from Lenders Mortgage Insurance policies, covering losses up to 100 per cent of the principal amount, the accrued interest of each loan and reasonable expenses involved in enforcing the mortgage.

All loans in the pool were originated with full income verification.

And while the portfolio “is geographically well diversified due to ING’s wide distribution network”, noted Moody’s, the portfolio “exhibits origination vintage concentration.”

That is, just under 80 per cent of mortgages were originated during 2014 and 2015.

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Sensibly opportunistic. The spreads may be painful but they are proving to be sticky.

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.