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RBNZ highlights good times continuing to roll for bank funding

Posted in Bonds

By Gareth Vaughan

Highly favourable global funding conditions and an effective 100 basis points reduction in term deposit funding costs over the past year are highlighted in the Reserve Bank's June Monetary Policy Statement.

"Local banks' funding costs continue to fall," the Reserve Bank says.

"Deposit growth has remained high relative to credit growth, thereby covering much of the funding requirements for new loans. This has reduced the banks' incentives to pay higher rates for this source of funding," says the Reserve Bank.

"For example, despite rising six-month bank bill rates as the market anticipates increases in the Official Cash Rate, the average six-month term deposit rate has remained steady for the past year. This shows up as a reduction of about 100 basis points in the term deposit funding spread over that time. Retail deposits make up more than half of total bank funding, and are a key driver of lower funding costs for banks," the Reserve Bank says.

On top of this New Zealand banks have the opportunity to take advantage of "highly favourable" overseas funding conditions, which have driven down funding spreads for long-term debt issues.

"(New Zealand) banks have issued very little long-term debt over the past couple of months after being fairly active in the market in the first quarter. The credit default spread for Australia's banks' five-year senior debt is a reasonable proxy for the trend in New Zealand banks' long-term wholesale funding costs. Since the beginning of the year, this spread has fallen by about 25 basis points to less than 60 basis points, its lowest level in about six years," the Reserve Bank says.

"Lower New Zealand dollar basis swap spreads have reduced the cost by a further 10-15 basis points for offshore issuance."

Although New Zealand banks haven't yet made much use of current favourable offshore funding conditions, some of their parents have. ANZ Banking Group, for example, has borrowed at margins over benchmark US government debt of between 26 basis points and 60 basis points over the past week or so. The Sydney Morning Herald suggested the European Central Bank's recent move into negative interest rate territory will allow Australian banks to borrow cheaper than at any time since the global financial crisis resulting in either increased bank profits, or lower mortgage rates for home­owners.

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3 Comments

We New Zealanders will engage

We New Zealanders will engage in hand wringing and finger twisitng only when we see massive dividend remittances to Australia
The people who score most are Australian superannuation funds and shareholders accross the ditch .
We should have an income tax surcharge on the Banking sector

... not just " we New

... not just " we New Zealanders " .. ... some of the big one's too ...
 
Except , I need to put off the hand wringing and finger twisting for awhiles ...
 
... because  the World Cup has kicked off .... catcha on the other side when Australia winz ... hope you can carry on with your hand wringing and finger twisting in my absentia ... Pip pip !!!

Or Boatman, we recognise that

Or Boatman, we recognise that we are incapable of saving and therefore actually owing such assets ourselves, and until we do, we'll be paying dividends to foreigners forever. Tax them excessively in their minds on that and you can expect less capital investment into our infrastructure and services with it....banks included who have competing capital demands to expand their Asian operations.