As Australian banks' funding pressures ease, will rate cuts follow?
By Swati Pandey and Paulina Duran
SYDNEY, March 22 (Reuters) - A fall in funding costs for
Australia's biggest banks is raising the prospect that they
could hand on the savings to consumers in the form of lower
lending rates, which would in turn reduce pressure on the
central bank to ease policy.
The benchmark short-term bank-bill swap rate (BBSW), the
main measure of banks' funding costs, has fallen close to 40
basis points from a 2018 high of 2.2 percent. Almost
three-quarters of that fall has come in the past six weeks or
so, offering the banks a bigger lending margin.
Lower lending rates from Commonwealth Bank of Australia
, ANZ Banking Group, Westpac Banking Corp
and National Australia Bank would help them
regain some public goodwill after high-profile hearings into the
financial sector smeared their reputations.
"I suspect politically they would pass it all on," CLSA
banking analyst Brian Johnson said. Nearly two thirds of
Australian banks' funding is linked to the BBSW.
Analysts said that while it is too early to bet on lower
lending rates, the slide in the BBSW has at least raised the
CBA and ANZ declined to comment on future rate moves.
Westpac did not return requests seeking comment, while a
spokeswoman for NAB said "we continually review our products and
A fall in consumer lending rates would be timely for the
A$1.9 trillion ($1.4 trillion) economy, which slowed sharply in
the second half of 2018.
The banks have raised their mortgage rates during the past
eight months and they tightened lending standards, weighing on
the once-booming property market and small businesses.
So if they now offer some payback by cutting rates, it would
be welcomed by the central bank, which has kept its policy rate
at a record low of 1.5 percent since August 2016 awaiting a pick
up in economic activity. Financial markets have been
pricing in an easing in policy later this year.
"There is a strong bias for BBSW to drop in April," said
Prashant Newnaha, senior rates strategist at Singapore-based TD
Newnaha expects A$65 billion of cash to be injected into the
financial system from bond maturities, buybacks and corporate
dividends over March and April. That is 50 percent higher than
The fall in BBSW to 1.8 percent compares with a variable
lending rate for an owner-occupier loan on average of just under
4 percent and boosts bank profit margins for now.
Analysts estimate that a move of about 25 basis points in
BBSW translates into a change in profit margins of about 4 basis
points, on average, for the major banks.
But banks are in no rush to cut lending rates just yet.
Their net interest margins narrowed about 3-4 basis points
to 1.9 percent to 2.2 percent in the six-months ended December,
contributing to a slowdown in bank earnings growth.
And while the spread between the three-month BBSW and
cash-rate is the smallest in a year - indicating an easing in
funding conditions - it is nowhere close to the averages of the
two years through 2017, noted Westpac rates strategist Damien
"The move in recent weeks had surprised markets," he said.
"I think now most people are sitting back and watching it,
saying this is interesting. I don't think there are big bets of
speculative positions on it going in either way right now."
($1 = 1.4079 Australian dollars)
(Reporting by Swati Pandey and Paulina Duran in Sydney; Editing
by Neil Fullick)
© 2019 Thomson Reuters. All rights reserved. Reuters content is the intellectual property of Thomson Reuters or its third party content providers. Any copying, republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters shall not be liable for any errors or delays in content, or for any actions taken in reliance thereon. "Reuters" and the Reuters Logo are trademarks of Thomson Reuters and its affiliated companies.