The wholesale funding costs for Australia’s major banks were little changed in the past month, despite Moody’s decision to downgrade their credit ratings.
Analysis from Deutsche Bank’s Andrew Triggs and Anthony Hoo shows that funding costs for both short-term and longer-term debt are tracking positively for the big banks.
The cost of insuring 5-year bonds issued by Australian banks in US dollars is currently tracking at around a two-year low, the analysts said.
Comparatively, the premium investors are demanding to buy short-term bonds fell over the last month, but remains elevated from 2015 levels.
“These trends appear supportive to margins, even after taking into account the impact from issuing longer term debt,” Deutsche Bank said.
Triggs and Hoo said the cost of credit default swaps (CDS) on 5-year debt issued in US dollars by the big Aussie banks was little changed over the past month.
A credit default swap is a form of insurance for the buyer of issued debt. If credit default swaps were higher, it would imply that Australian bank debt was riskier.
“While higher than the first few months of 2017, this remains at a very low level relative to the past two years,” said Hoo and Triggs.
Turning their focus to short-term funding costs, the pair looked at the premium Aussie banks are charged for the issuance of 90-day debt.
“The 90-day bank bill/OIS spread improved slightly (down 2 basis compared to a month ago), though it remains at elevated levels relative to the last few years,” they said.
The OIS — or Overnight Indexed Swap rate — is a comparative low-risk rate used to measure the level of liquidity in inter-bank lending.
If there’s a higher spread between the short-term debt issued by banks and the OIS, it means that the market considers that bank debt more risky.
Looking at the trend of short-term funding costs, the pair said it bodes well for Australia’s major banks.
“While improvements in short-term wholesale funding spreads take time to roll through the book, short-term spreads do look to be a tailwind to margins from here,” they said.
The two analysts said the levy announced by the South Australian government last week is unlikely to have a material effect on bank earnings. However, they said it increases political risks in the sector and is likely to lead to a re-pricing of South Australian mortgages.