Australian banks are facing a margin squeeze and it's bad news for borrowers

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  • Credit growth in Australia has risen faster than deposit growth for four straight months.
  • A JP Morgan economist said the dynamic is contributing to increased funding costs for banks.
  • Multiple analysts expect the wholesale funding costs for Australian banks to rise in the coming months.

A feature of Australian markets in recent weeks has been the rising costs faced by domestic banks to secure credit funding in wholesale markets.

In other words, the cost of money banks then on-lend to customers is beginning to rise, putting pressure on margins.

And according to JP Morgan economist Henry St John, one factor contributing to the increase is a lack of liquidity.

St John noted that credit growth in Australia is now rising faster than the corresponding growth in deposits:

“The banking system has been short liquidity in this sense throughout much of 2018 to-date,” St John said.

And the shortfall “has contributed to short-term unsecured and secured financing spreads being driven wider during episodes of external stress”.

Credit Suisse analyst Damien Boey pointed to the same dynamic yesterday, in a research note on mortgage rates.

Boey said the rate at which banks lend short-term funding to each other — defined as the 90-day bank-bill swap rate (BBSW) — has been on the rise.

And if history is any guide, banks often pass those extra costs on to home-loan borrowers when inter-bank lending rates rise.

St John’s insight formed part of his analysis of monthly private sector credit data, released by the RBA today.

The figures showed that growth in housing credit eased further, slowing to 0.4% in April from 0.5% in March.

Loans to housing investors slowed further after plummeting in March — not exactly a bullish indicator for house prices for broadly. Growth in business lending rose to 4.3% in annualised terms.

But while private sector credit slowed in April, St John said it still outpaced the growth in deposits for the fourth straight month.

While it’s not the first time that credit has exceeded deposits, the recent shift marks the first time it’s occurred since 2013.

“This leaves domestic funding markets (BBSW and repo rates) somewhat more exposed to further spikes in USD funding costs in coming months,” St John said.

Such a scenario “would weigh on the short-term cost of debt for the domestic banking system”.

Those sentiments were echoed by ANZ senior rates strategist Martin Whetton in a research note today.

“Our discussions with corporate borrowers have highlighted the risk to the upside in BBSW over June and into the half-year end,” he said.

“We expect further rises in short rates in the coming weeks.”

Compounding the problem for the banks is an increasing inability to rely on funding via deposits from Australian savers.

GDP figures for the December quarter showed that Australia’s household savings rate remains near historically low levels.

While the savings rate edged up to 2.7% in Q4 from 2.5% in September, it’s more than halved since the start of 2013.

And high household debt combined with chronically low wage growth is hardly the recipe for a rise in savings — and by extension, deposit funding.

It all adds up to an intriguing outlook, with the prospect that Australian banks, faced with higher funding costs, will pass those costs onto borrowers, at the same time as the property market is cooling and the household savings rate sits near rockbottom.

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