The AFR again analysed the key drivers of the bank funding cost spike over the weekend:
Geoff Wood, the head of macro and risk at Sydney based hedge fund Morphic Asset Management, said the market now thought the funding costs could remain elevated.
He said the major banks faced a choice – “they either reprice their loans or their profits fall.”
The elevated funding costs also has the potential to become a monetary policy factor, particularly if the major banks increase lending rates as a result.
“If the fund levels do stay elevated, the market has done a quasi hike for the RBA. It means the RBA is on hold longer and the currency is potentially weaker,” Mr Wood said.
…Morgan Stanley banking analyst Richard Wiles said the response of the smaller lenders to mortgage rate hikes had led to “an expectation that the majors are on the verge of announcing a new round of repricing but said they would be reluctant to do so because of regulatory scrutiny.
“While banks can point to funding cost pressures, we believe the potential for adverse outcomes from the Productivity Commission and Australian Competition and Consumer Commission inquiries still make it difficult for the majors to contemplate repricing in the near term.”
…He said that a 15 basis points repricing was required to justify the current valuation of Commonwealth Bank, the nation’s largest lender.
Catherine Allfrey of Sydney-based fund Wavestone Capital said last month that the banks would be forced to respond to the increase in funding costs. That would shave a ‘meaningful’ 5 to 10 basis points off their net interest margins of between 1.7 to 2 per cent over the next 12 months.
They will hike the moment the political window opens. It’s that or much lower share prices. I think that they should move now while everyone hates them anyway and they have the coverage of the smaller banks. Why prolong the pain?
But will that be the end of it? It’s possible. The market may be reassured that the banks still have pricing power and drop BBSW given there is at least one ongoing offset to post-royal commission lowered perceptions of credit quality. Or, the market might at least not drive BBSW higher again as the Fed keeps hiking and the RBA doesn’t.
Or it might just get worse anyway as the market decides that credit quality is now the critical issue and out-of-cycle tightening is hardly going to help!
