We'll find out soon enough if the banks are going to follow the RBA's lead.
SMH: Mortgage stretch raises bank costs
Quote
A SLOWDOWN in the housing market is starting to strain banks' balance sheets, with the biggest lenders being forced to pay top dollar to lock in longer-term funding.
Commonwealth Bank and Westpac have tapped local investors for a combined $6.6 billion in recent weeks, paying a premium to secure bonds with a maturity of five years, at a time when Europe's debt problems continue to push up costs.
This month, ANZ raised $1.2 billion in 10-year funds from European investors in the most expensive raising so far this year. It is also planning to sell four-year bonds to Japanese investors in the next few weeks.
Advertisement: Story continues below These high costs are adding to pressure to push through additional interest rate rises on home loans as banks seek to protect profit margins.
While the banks remain well funded, senior executives privately concede a slowing housing market as well as pressures across the east coast economy have meant home loan customers are now taking longer than expected to pay down mortgages.
''The economy has been slowing down, therefore the asset profile has been getting longer and longer,'' a bank executive who specialises in treasury operations said. Under bank accounting rules, loans made to customers are known as assets.
The executive said bonds with a five-year tenure ''are probably as long as you can go'', however they would lengthen the banking system's funding profile. The UBS Australasia chief economist, Scott Haslem, said the recent bond issues by CBA and Westpac set an expensive benchmark and pressured bank margins.
It also suggests smaller banks ''may now find it difficult to lend profitably'', he said. This strengthens the case for the Reserve Bank to cut interest rates by 25 basis points at next week's board meeting as it seeks to keep the cost of credit low across the economy.
CBA's latest accounts show its average funding book is running at 3.6 years, down from 3.8 years in the 2010 financial year.
Through a complex process used
to fund home loans, banks generally calculate that most mortgages will be paid down between five and eight years, instead of the 25-30 years that most borrowers initially take out a loan for.
This is because of several factors, such as home owners selling their property part way through the loan and paying off the entire debt, while some borrowers repay more than the minimum required amount, speeding up the process.
But a property market in which pricing has remained subdued has led to more home owners choosing to stay in their existing property.
At the same time, rising consumer caution is curbing additional mortgage payments, with more funds being diverted to short-term savings.
Another bank executive said the longer-term funds being raised by banks were putting additional pressure on profit margins, which were already being squeezed by the havoc Europe's problems were wreaking on global wholesale fund markets.
''Nobody wants to see the [funding] term shorten, that's why banks are now paying top dollar. The problem is whether the cost can ultimately be passed on to the borrower.''
The first two months of the calendar year are traditionally the busiest time for banks raising wholesale funds. However, concerns over Europe's debt problems have pushed pricing higher, causing fund-raising to slow sharply. Since the start of the year, banks have raised $12.8 billion both locally and offshore, figures compiled by Deutsche Bank show. This time a year ago, the amount was $23.9 billion, the figures show.
Deposits now account for about 50 per cent of funding, but banks will have to make up for the shortfall through a combination of short-term and long-term wholesale funding.
Australian banks need to borrow as much as $80 billion over the next year to replace maturing funds, analysts say. Much of this will be in the form of covered bonds, which are bonds secured by assets such as home loans.
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cobran20, on 12 December 2011 - 08:15 AM, said:
