- Three of Australia’s big four banks, as well as many smaller lenders, recently announced increases to variable mortgage rates.
- Higher wholesale funding costs — around 20% of bank funding collectively — was the catalyst cited by the banks for the increase.
- TD says a major factor behind higher funding costs has been a “flatlining” of deposit growth at a time when credit is growing modestly.
Australian wholesale funding costs are likely to remain elevated or even increase in the period ahead, says Annette Beacher, Chief Asia-Pacific Macro Strategist at TD Securities.
And that means recent out-of-cycle variable rate mortgage increases announced by three of Australia’s big four banks, and a variety of smaller lenders, may not be the last.
“Offshore factors have played a significant role in higher AUD funding costs, but price action into the end of Q2 2018 suggests factors specific to the Australian market were likely at play,” Beacher says.
“We believe these domestic drivers of AUD funding are more likely structural in nature. This implies elevated funding levels are likely to remain a feature of the Australian market landscape.”
This chart from TD shows the differential between the Reserve Bank of Australia cash rate to three-month bank bill swap rate (BBSW) — the level banks are willing to lend to each other on a three-month unsecured basis — over the past four years.
Clearly, the spread between the cash rate and BBSW has widened significantly this year, contributing to increased margin pressures given wholesale funding accounts for around 20% of the funding mix for Australian banks.
While there is not one sole factor behind the recent increase, Beacher says much of the increase is linked to growth in deposits, the largest share of banking funding by some margin.
“Deposits as a proportion of total funding are sitting at decade highs, but total deposit growth is flatlining,” she says.
“We believe the peak in deposit growth in June 2017 and the steady rise in BBSW is not a coincidence. Deposit rates need to rise or interbank funding needs to increase to match the steady demand for credit.
“Until then, the fallout is an ongoing elevated cost of funds.”
Given that view, and unless year-ended growth in credit slows even further from the current level of 4.4%, Beacher says there’s a clear risk that recent out-of-cycle mortgage rate increases may not be the last.
“We cannot rule out more standard variable rate hikes down the track if BBSW-OIS remains elevated or widens even further heading into year-end,” she says.
Definitely something to watch in the period ahead, particularly for those borrowers already worried about repayment levels or those considering whether to switch to a fixed-rate facility.
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