Aussie bank funding costs tipped to rise on global turmoil

Investors and analysts predict Australian banks could face higher funding costs as a result of the turmoil in global banking, as credit markets grow jittery and lenders compete more fiercely for deposits.

Amid a tumultuous period in global banking, including the emergency takeover of Credit Suisse by UBS on Monday, local experts say the most direct impact for Australian lenders could be more expensive funding. This trend could dampen profit margins, some said, while others predicted smaller lenders would be hit hardest because they may need to pay more to attract deposits.

Even before the turmoil sparked by the collapse of Silicon Valley Bank (SVB), local banks needed to raise tens of billions on wholesale markets to repay cheap funds borrowed from the Reserve Bank’s term funding facility (TFF) during the COVID-19 pandemic. Analysts say replacing that funding in a more volatile environment could drive up lenders’ funding costs.

The RBA’s assistant governor for the financial markets, Christopher Kent, said Australian banks had “unquestionably strong” capital and liquidity positions, but they would still need to replace money borrowed under the TFF with more expensive funding.

In a speech on Monday, he said Australian banks were preparing to replace $76 billion in TFF credit between April and September, adding: “However, conditions in global bond markets have been strained recently following the failure of Silicon Valley Bank in the United States.”

UBS banking analyst John Storey said the tremors of the past week could put pressure on Australian banks to pay more for deposits because lenders would want to continue expanding their deposit portfolios in an uncertain time. The market jitters sparked by SVB’s collapse are also expected to push up the cost to banks of borrowing from wholesale markets.

‘We’ve seen credit spreads widen globally. Some of the smaller banks may find they have to pay higher interest rates on their deposits.’

Will Curtayne, portfolio manager at Milford Asset Management

“You probably will see the banks having to compete a little bit harder for their deposits,” Storey said.

If funding costs do rise as expected, Storey said banks might seek to pass on some increase to customers, but competition in mortgages also remained fierce. “I would be surprised if the banks absorbed a lot of these funding cost increases, but are we going to see out of cycle increases in mortgage pricing? I’m not sure that’s going to happen,” Storey said.