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BFCSA: Australian banks tap bond markets for cheap debt

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Australian banks tap bond markets for cheap debt

Sydney Morning Herald June 20, 2016 - 12:15AM

Clancy Yeates


Australian banks ramped up their borrowing on wholesale markets in the first half, and their debt issuance is now running at the quickest pace since the global financial crisis, as lenders exploit ultra-low interest rates.

As the end of the financial year approaches, local banks have raised more than $60 billion from local and international bond markets so far this calendar year.

That is a jump of roughly 50 per cent compared with this time last year, according to recent analysis from Commonwealth Bank credit analysts, and the strongest rate of debt issuance at June since 2009. 

Record low global interest rates are prompting banks to tap the markets, alongside a widening funding gap created by faster growth in banks' loans compared with their deposits.

Wholesale debt – bonds issued to international or local investors – makes up about 30 per cent of the banking system's funding, and was exposed as a key weakness during the global financial crisis when these markets froze.

Raising funding in this way has become much cheaper for large corporations – including banks – as government bonds yields have plunged to new record lows, caused by investors rushing into bonds, seen as a safe haven.

Australian 10-year bond yields last week dipped below 2 per cent for the first time, while German 10-year bond yields turned negative.

The plunge in yields has lowered the cost of debt for banks, however, they have not benefited as much as other corporations, as the "spread" banks must pay above benchmark rates rose earlier this year.

For that reason, the strong bond issuance by banks is not expected to widen the lenders' profit margins, and some analysts even expect banks will raise interest rates after next month's federal election.

CBA chief credit strategist, Scott Rundell, said the plunge in global bond yields had helped to drag down the cost of raising debt for banks, even though spreads were wider.

"It's been a bit of a cracker of a year for A$ bond issuance. Spreads are a bit wider, but the cost of debt is a lot lower," Mr Rundell said.

Mr Rundell is forecasting Australian banks may raise up to $120 billion in wholesale debt globally this calendar year.

He said the plunge in government bond yields around the world was flowing through into corporate credit markets, allowing big bond issuers, such as banks, to borrow at very low interest rates.

While wholesale funding has been a weak spot in the past for banks, Standard & Poor's analyst Sharad Jain last week said banks were taking a more cautious approach to raising funds, such as through longer-term bonds.

"In the past the banks used to borrow for three to five years. A lot of the issuance in the recent weeks has been seven to 10 years," Mr Jain said.

The banks will also face tougher rules on how they fund themselves from 2018, when the Australian Prudential Regulation Authority introduces the "net stable funding ratio", which is likely to push lenders more towards stable types of deposit funding. 



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