Relief for Australia’s big banks could be just around the corner thanks to a recent drop in wholesale funding costs which will help boost earnings.
The banks have recently complained about spiralling wholesale funding costs crimping their profits, causing them to rely on domestic depositors to fund their lending.
But the cost to the big four banks of securing funding from wholesale debt markets has fallen by around 80 basis points in the past six weeks, Deutsche Bank’s James Freeman told AAP.
That should help drive an improvement in deposit spreads, because banks will be less willing to chase deposits by offering depositors high interest rates when they can source funds at a lower price in wholesale markets instead.
Deposit spreads, or the gap between what banks pay depositors and the 90 day bank bill, have deteriorated in the last four months by up to 35 basis points across a range of terms.
That resulted in a cost blow-out to the banks and a drag on their group profit margins of between four to six basis points in the first quarter of fiscal 2012, Mr Freeman said.
But conditions are ripe for a recovery in margins because deposit spreads have improved by 14 basis points since mid February, meaning banks can to pay lower interest rates to depositors.
“With out-of-cycle (interest) rate rises in mortgages and continued repricing in business, we believe the ongoing (margin) drag would have been largely offset,” Mr Freeman said.
“That means that any improvement in term deposit spreads from here is likely to largely flow through to the bottom line in the second half of fiscal 2012.”
For every 20 basis point improvement in deposit spreads, banks’ group margins will increase by between five and seven basis points, which in turn, will drive a four per cent rise in earnings per share, he added.
Westpac stands to be the biggest beneficiary, with just a 10 basis point improvement in deposit spreads boosting its margin by 2.9 basis points.
ANZ Bank and Commonwealth Bank’s group margins would widen by 2.7 basis points, while National Australia Bank’s (NAB) group margin would gain just 1.8 basis points because of its underperforming UK operations.
Credit rating agency Moody’s on Wednesday said very weak economic conditions in the UK had seen NAB’s subsidiary, Clydesdale Bank, become “somewhat of a drag” on NAB’s asset quality and earnings.
Moody’s in February warned it may downgrade Clydesdale Bank, five months after its previous downgrade for the UK lender.
The warning came two weeks after NAB announced a review of its 300-branch UK operations.
