Tipping point anybody? Normally Australia’s big banks would soar on rate cuts as volume growth and curve steepening lifted their profits outlook. Not today:
Smash. And why we know, from Goldman year’s ago:
…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:
Our expectation is that term deposit (and cash management to a lesser degree) pricing will become quite sticky as the cash rate falls below 2.0%, as was the experience in the both the United Kingdom and Canada in 2008/09. This will particularly be the case as the domestic banking regulator, APRA, shifts its focus in 2016 towards the Net Stable Funding Ratio (NSFR), which is likely to place pressure on the banks to both term out and improve the quality of their funding (i.e. preference for deposits over wholesale). Furthermore, we note that the recent move out in funding costs has historically correlated with higher rates being paid by the banks on deposits (Exhibit 2).
We estimate that the replicating portfolio represents about a 5bp p.a. margin headwind for the banks over the next 2-3 years.
Looks like this little dash for trash is over.