Morgan Stanley expects Australian banks to buy up big on bonds

Photo: Loic Venanca/ AFP/ Getty Images.

The Big Four banks will be very active in capital markets this year according to Morgan Stanley analysts, who estimate $142 billion in bond sales to September 2017.

That will be just short of the $148 billion raised in 2016 and much higher than the $105 billion issued two years ago, according to the investment bank. Only ANZ, the smallest of the big four Australian lenders, will cut its debt market funding sharply. CBA and National Australia Bank’s issuance is set to increase.

This chart shows their reliance on debt markets

While debt spreads remain lower than previous years, the of Australia’s AAA credit score remains a potential risk that would also lead to a rating downgrade for the banks, Morgan Stanley said. Australian banks are beholden to swings in credit markets, which provides them with a third of their total funding.

Australia’s credit rating is at risk with Standard & Poors maintaining a negative rating watch, which implies a one-in-three chance the AAA score could be downgraded within the next two years. Other challenges include global macro-economic, geo-political volatility and any signs of material weakness in the Australian economy and or housing market, according to Morgan Stanley.

For now though, bond spreads are unlikely to give a headache to the banks, the analysts said.

“While spreads on new wholesale term debt issues are 25-30 basis points higher than spreads on maturing 2 and 3 year debt, they are still 25-50 basis points lower than spreads on debt issued in 2012,” analysts said.

Pressure on net interest margins, a key measure of lending profitability, is more likely to come from lending competition and a squeeze in deposit spreads, they said.

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