Welcome to the great Australian funding squeeze. From Goldman:
Our macro team has recently reinstated their view that the Reserve Bank of Australia (RBA) will cut cash rates two more times in CY16 (Australia and New Zealand Economics Analyst: Forecast Change: Why the RBA will cut again, February 18, 2016). In this piece we undertake a detailed, bottom-up assessment of the extent to which margins are at risk as cash rates fall, extending on the work we first published in March 2015 (Assessing the rate cut risk to banking net interest margins; prefer ANZ (CL-Buy), March 27, 2015).
We conclude that even if cash rates remain unchanged at 2.00%, margins will fall by about 4 bp versus the Sep-15 quarterly margin (previous GSe -2bp), driven by the grind lower of the replicating portfolio and higher wholesale funding costs, partially offset by the mortgage book repricing that has been announced by the banks since 4Q15. Beyond that, if we assume the major banks hold onto 10bp of mortgage repricing per rate cut then: x if cash rates fall 25bp to 1.75%, we estimate this will have no meaningful impact on margins; or x if cash rates fall 50bp to 1.50%, then margins will fall by a further 2bp, equating to a cumulative 6 bp reduction in margins versus the Sep-15 quarterly margin (Exhibit 1; versus previous GSe -2bp, therefore refer to earnings changes below).
The full text of this article is available to MacroBusiness subscribers
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.
