By Gareth Vaughan
New Zealand banks have lent more money than they've taken in through deposits for the first time in four years.
Or put another way PwC's latest Banking Perspectives report, covering the second-half of the big five banks' 2013 financial years, shows a net cash outflow with customers for the first time since 2009.
Sam Shuttleworth, PwC financial services partner, told interest.co.nz in a Double Shot interview the banks collectively were "slightly a net borrower." (See chart at the foot of this story). Shuttleworth said if credit growth continues at current rates, it's unlikely deposits will keep pace with lending. This means banks may need to ramp up other funding sources such as overseas wholesale borrowing and domestic bond issues.
But, with the Reserve Bank expected to start increasing the Official Cash Rate from its record low of 2.5% from March, banks are also likely to increase the interest rates they pay on deposits, making these more attractive for savers and investors. ANZ, the country's biggest bank, yesterday raised its rates on nine month, one year, and 18 month term deposits.
"Of course they've got the retail deposits and with potential rising interest rates, there could be an opportunity there to increase those deposit rates to become more attractive when you compare it to the equity markets, which have been performing strongly over the last 12-24 months," Shuttleworth said.
"The banks themselves, yes they can access the wholesale markets offshore. We have seen a slight reduction in reliance down to about a third of banks' borrowing now from offshore. But clearly there's also the domestic markets where they can actually do local bonds and so forth, or other wholesale raisings domestically to mitigate any increase in (lending) growth that does occur," added Shuttleworth.
PwC says major bank funding increased to $317 billion in the second-half of the 2013 financial year from $312 billion in the first-half. This saw the banks reduce wholesale funding to $104 billion, or 32.8% of total funding, from $106 billion, or 34%.
Both Westpac and ANZ have done five-year domestic bond issues in the past couple of weeks. ANZ raised $400 million and will pay investors interest of 5.43% per annum. Westpac raised $325 million and is paying 5.545%.
More covered bonds?
One funding source the big five banks could tap is covered bonds even though they've already issued $13.2 billion worth. Combined they still have the capacity to issue billions of dollars worth given the Reserve Bank says they can use up to 10% of their total assets as security for covered bondholders, who are currently mostly institutional investors in Europe. Ring fencing up to 10% of a bank's assets for covered bondholders means, in the event of a bank failure, unsecured creditors including depositors must be satisfied from the bank's remaining assets with covered bondholders jumping to the front of the queue.
From the banks' perspectives, more covered bond issues wouldn't harm their core funding ratios. The Reserve Bank enforced core funding ratio means banks must secure funding for at least 75% of their lending from equity, retail deposits, and wholesale sources such as bonds (including covered bonds) with durations of at least a year. The industry wide core funding ratio was 85.5% at the end of December.
Meanwhile, the latest Reserve Bank sector credit figures show the level of household borrowing (mortgage and consumer borrowing) grew at 0.4% on a seasonally-adjusted basis in December, its slowest rate in five months. However, PwC points out corporate lending grew 2.2% in the period covered by its report, the fourth consecutive half-year where the major banks have reported corporate lending growth. This, the firm says, is an indicator businesses have confidence in the future of the New Zealand economy.
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