domestic markets review: january 2010 · jpy60.3 billion ($755 million) samurai bond, the second...
TRANSCRIPT
DOMESTIC MARKETS REVIEW: JANUARY 2010
Summary
3
NNOONN--IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
5
Credit markets
Financials
Australian banks have issued $8 billion of
bonds in January to date, all unguaranteed
issues offshore. While the share of bonds
that is unguaranteed continues to increase
overall – underpinned by the major banks
for whom it is generally cheaper than
guaranteed funding – there were some
large guaranteed issues (totalling
$12 billion1) by the major banks in
December. The major banks have tended to
issue guaranteed bonds opportunistically in
recent months, particularly in response to
reverse enquiries where the cost of raising
funds is lower as no marketing or road
show expenses are paid.
6
Major banks
Australian Banks’ Bond Issuance
Source: RBA
$b
10
20
10
20
10
20
10
20
Other Australian-owned banks
Guaranteed Unguaranteed
$b$b
$b
2006 2007 20092008
A$ equivalent, monthly
0
3
6
0
3
6
0
3
6
0
3
6Branches and subsidiaries of foreign banks0
3
6
0
3
6
0
3
6
0
3
6
$b$b
Guaranteed by the UK Government2010
The largest offshore issue in
January was a US$3 billion ($3.3 billion)
deal by ANZ which comprised 3-, 5- and
10-year tranches. The hedged spreads on
the 3- and 10-year tranches were around
10-15 basis points tighter than previous
issues by a major bank. In mid-January,
Westpac priced a three-tranche Samurai
deal (totalling $1.3 billion), the first
Samurai bond issued by a major bank since
early 2009. The Westpac Samurai deal was
met with strong demand from across ‘the
full spectrum’ of institutional investors in
Japan, with over 140 investors
participating. The 5-year tranches priced at
the tight end of initial guidance, with the
spread slightly wider than a guaranteed
issue of the same tenor by Westpac in
February 2009 (the last time the bank
issued a Samurai bond). The 7-year fixed
rated tranche is the first ever of such
duration issued by an Australian bank in
Japan and was the result of a reverse
enquiry.
8
Domestically, secondary market spreads on
the major banks’ 3-year unguaranteed
bonds have fallen around 5 basis points
since end November , to around 125 basis
points over CGS. While these spreads
remain well below their peak of 240 basis
points in September 2008, they have
increased around 30 basis points since
September 2009. Including the cost of the
guarantee fee, spreads on guaranteed
bonds are lower at around 135 basis points
over CGS. With CGS yields rising slightly in
December and January, yields on the major
banks’ guaranteed and unguaranteed bonds
have risen to around 6.3 per cent for
3-year debt.
Major Banks’ Bond Pricing*3-year $A debt, monthly
2
5
8
0
100
200
* Includes fee for guaranteed issues.Sources: RBA; UBS AG, Australia Branch
CGS
Spread to CGS
Unguaranteed(rated AA)
Guaranteed(rated AAA)
% BpsYields
2008 20102006
* Includes fee for guaranteed issues.Sources: RBA; UBS AG, Australia Branch
2008 20102006
9
Spreads on the major banks’
domestically-issued subordinated bonds are
broadly unchanged from end November
levels, at around 235 basis points over
CGS.
Major Banks' Bond SpreadsDomestic; spread to CGS; 1-5 year bonds
0
100
200
300
400
500
600
Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009
Jan-2010
Jul-2010
0
100
200
300
400
500
600
Bps Bps
Subordinated
Senior
Source: UBS AG, Australia Branch
18
No new hybrids were issued in January to
date. ANZ raised $2 billion from its new
hybrid issue ‘CPS2’ in mid December last
year. The issue was upsized from
$750 million. Pricing on the hybrid was
310 basis points over BBSW, 30 basis
points tighter than CBA’s $2 billion PERLS
hybrid issue in mid October. With the
pricing of ANZ’s hybrid securities, financials’
hybrid issuance for the December 2009
quarter reached its highest level since the
onset of the financial crisis. Non-financial
corporates have not issued hybrids since
December 2008.
25
IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
26
The major banks’ average funding cost is
estimated to have increased by 35 basis
points since end November. This was driven
by increases of about 40 basis points in the
costs of short-term debt and deposits. The
average cost of long-term debt increased
by about 21 basis points.
l l l l l l l2
4
6
8
2
4
6
8
Major Banks’ Average Funding Costs
Sources: APRA; Bloomberg; Financial reports; RBA; UBS Australia AG2003
Deposits
% %
2004 2006 2007 2010
LT debt
ST debt
RMBS
Total (excluding equity)
2005 2008 2009
On a marginal basis, it is estimated that the
major banks’ NIM has declined by 4 basis
points since end November, with the cost of
new funding rising by 27 basis points and
27
rates on new loans increasing by 24 basis
points. Over this period, deposits have
driven the increase in funding costs, while
household lending rates have risen by more
than business lending rates.
Marginal Interest Rates onthe Four Major Banks’ Assets and Liabilities
Change from 30 November 2009 to 15 January 2010
-25
0
25
50
75
25
0
25
50
75
Bps
Overall funding costs
Funding CostsBps
Sources: APRA; Bloomberg; RBA; UBS AG, Australia Branch
Weights of total funding liabilities and assets
As discussed in previous monthly notes, a
narrowing in the marginal NIM is normal
during the early part of tightening cycles as
market rates (which are more important for
funding costs) typically rise faster than the
cash rate (which is more important for
lending rates) during these periods.
32
The major banks’ 3 and 5-year
‘special’ term deposit rates are currently
25-75 basis points above yields on the
banks’ bonds of equivalent maturity,
33
compared to around 50-60 basis points
below these yields in mid 2009.
Major Banks’ Pricing of Term Depositsand Bonds
A$ debt, term deposit ‘specials’
-100
0
100
200
-100
0
100
200
* Includes fee for guaranteed issues** Prior to September 2008 it is the 24-month spreadSources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2007
Unguaranteed debtBps 3-year spreads to CGS Bps5-year spreads to CGS
2008 2009 2007 2008 2009
Average ‘special’term deposit rate**
Guaranteeddebt*
(rated AA)
(rated AAA)
2010 2010
- CONFIDENTIAL -
GOVERNMENT GUARANTEE SCHEME: DECEMBER 2009 FEE REPORT
This paper briefly recaps use of the Australian Government Guarantee Scheme. A separate paper for the Council of Financial Regulators also covers international developments.
1
- CONFIDENTIAL -
More timely data show that there has not been any significant guaranteed issuance in January to date (Graph 3). Unguaranteed issuance has been relatively firm though, totalling $7.7 billion. The main issuers were the four majors. This highlights that the increase in offshore guaranteed issuance by Westpac in December reflected opportunistic issuance to lower cost/widen their investor base rather than a problem of access to funding.
Graph 3 Australian Banks ' Bond Issuance*
A$ equivalent $b $b
Offshore (guaranteed) • Domestic (guaranteed)
25 • Offshore • Domestic p _____________
2C 20
:: ____________________________________ ________
Unguaranteed share of total issuance °"°
2006 2007 2008 2009 2010 * January 2010 is month to date; excludes 12-15 month paper, considered
as short-term' under the Austratan Govemment Guarantee Scheme. Scvxce: RBA
Market activity and yield spreads suggest that changes in funding market conditions are yet to fully remove the incentive to issue guaranteed across the banking system. For the AA-rated major banks, in the domestic market it appears to remain cost-effective to issue unguaranteed for 3-year maturities and avoid the 70 basis point guarantee fee, though it is less clear for unguaranteed 5-year maturities and offshore (Graph 4).
2
- CONFIDENTIAL -
Graph 4 Major Australian Banks' Unguaranteed Bonds Domestic, spread to guaranteed bank bonds, 10-day mosing average
Bps
Bps
100
100
80
80
60
60
40
40
20
20
A
0 DJ FMAMJ J ASOND J
2008 2009 Source: UBS AG, Australia Branch
3
- CONFIDENTIAL -
Financial StabilityDepartment 18 January
ri
RBA PAPER FOR CFR CONFERENCE CALL ON 20 JANUARY 2010: EXITING FROM THE GUARANTEE SCHEME
- CONFIDENTIAL -
Australia
Market activity and yield spreads suggest that changes in funding market conditions are yet to fully remove the incentive to issue guaranteed across the banking system. For the AA-rated major banks, in the domestic market it appears to remain cost-effective to issue unguaranteed for 3-year maturities and avoid the 70 basis point guarantee fee, though it is less clear for unguaranteed 5 year maturities and offshore (Graph 7).
5
- CONFIDENTIAL -
Graph 7 Major Australian Banks' Unguaranteed Bonds Domestic, spread to guaranteed bank bonds, 10-day moving average
Bps Bps
100
100
80
80
60
60
40
40
20
20
0 D J FMAMJ J ASOND J
2008 2009
Scarce UBS AG, Ausirala Branch
1 1 1
rol
DOMESTIC MARKETS REVIEW: FEBRUARY 2010
Summary
• Domestic secondary market spreads on major banks’ guaranteed bonds fell around 10 basis
points following the announcement that the Guarantee Scheme would be withdrawn at
end March, as investors factored a ‘scarcity premium’ into the price of these bonds. In
contrast, the cost of unguaranteed debt has remained broadly unchanged.
2
NNOONN--IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
4
The largest unguaranteed deal in February
was a 4-year $1.8 billion domestic issue by
ANZ, the first domestic deal by a major
bank this year. The issue comprised a
$1.2 billion floating rate tranche and a
$600 million fixed rate tranche, which
priced at 95 basis points over BBSW/swap
(equivalent to 146 basis points over CGS).
ANZ’s unguaranteed deal was met with
strong investor demand, with the issue
upsized from $500 million and pricing at
the lower end of initial guidance.
5
Major banks
Australian Banks’ Bond Issuance
Source: RBA
$b
10
20
10
20
10
20
10
20
Other Australian-owned banks
Guaranteed Unguaranteed
$b$b
$b
2006 2007 20092008
A$ equivalent, monthly
0
3
6
0
3
6
0
3
6
0
3
6Branches and subsidiaries of foreign banks0
3
6
0
3
6
0
3
6
0
3
6
$b$b
Guaranteed by other governments2010
6
Spreads on major banks’ guaranteed bonds
trading in the domestic secondary market
have fallen around 10 basis points (to
124 basis points, including the cost of the
guarantee fee) since the announcement
that the Guarantee Scheme would be
withdrawn, as investors have factored a
‘scarcity premium’ into the price of these
bonds. In contrast, the cost of
unguaranteed debt has remained broadly
unchanged at around 130 basis points over
CGS for 3-year debt. With CGS yields rising
in February, yields on the major banks’
guaranteed and unguaranteed bonds have
increased to around 6.1 per cent for 3-year
debt.
Major Banks’ Bond Pricing*3-year $A debt, monthly
2
5
8
0
100
200
* Includes fee for guaranteed issues.Sources: RBA; UBS AG, Australia Branch
CGS
Spread to CGS
Unguaranteed(rated AA)
Guaranteed(rated AAA)
% BpsYields
2008 20102006 2008 20102006
7
Spreads on the major banks’
domestically-issued subordinated bonds
have fallen by 5 basis points since end
January, to around 235 basis points over
CGS.
The largest offshore issue in February was
a subordinated 10-year €1 billion
($1.5 billion) deal by NAB, which priced at
133 basis points over swap (equivalent to a
hedged spread of 270 basis points over
CGS). Also, ANZ issued a 5-year
JPY60.3 billion ($755 million) Samurai
bond, the second time an Australian entity
has accessed the Samurai market this year
(after a Westpac issue in January). The
ANZ deal priced at 45 basis points over
swap (equivalent to 197 basis points over
CGS), the same as the pricing on Westpac’s
5-year floating rate tranche in January.
21
IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
22
Cost of Funding
The major banks’ average funding costs
and lending rates are estimated to have
risen only slightly since end January,
increasing by 6 basis points and 3 basis
points respectively. The major banks’ net
interest margin (NIM) on their outstanding
interest-earning assets and liabilities
declined by about 3 basis points over the
month.
0
2
4
6
8
0
2
4
6
8
Average Rates on Major Banks’ OutstandingLending and Funding
2010
Lending rate
% %
200820062004
Funding cost
Spread
Sources: APRA; Bloomberg; Financial reports; RBA; UBS AG, Australia Branch
As discussed in previous monthly
notes, some narrowing in the marginal NIM
is normal during the early part of tightening
cycles as market rates (which are more
important for funding costs) typically rise
faster than the cash rate (which is more
important for lending rates) during these
periods.
On a marginal basis, the major banks’ NIM
is estimated to be little changed since end
January, with little movement in lending
rates or funding costs. However, since mid
2009, the estimated marginal NIM is
23
20 basis points lower, with a 96 basis point
increase in funding costs outweighing a
76 basis point increase in lending rates.
Marginal Interest Rates onthe Major Banks’ Assets and Liabilities
Change from 30 June 2009 to 11 February 2010
-50
0
50
100
150
-50
0
50
100
150
Bps
Overall funding costsFunding CostsBps
Sources: APRA; Bloomberg; RBA; UBS AG, Australia Branch
Weights of total funding liabilities and asse
1.0
1.5
2.0
2.5
3.0
1.0
1.5
2.0
2.5
3.0
1.0
1.5
2.0
2.5
3.0
1.0
1.5
2.0
2.5
3.0
Major Banks’ Net Interest Margin
Source: RBA2010
OutstandingMarginal
200820062004
% %
Banks’ profits
CBA recently released its profit result for
the half-year ending 31 December 2009.2
24
1.5
3.0
1.5
3.0
12
18
2.0
2.5
3.0
3.5
3
6
9
12
40
45
50
55
60
0
0.2
0.4
0.6
0.8
$b %
% %
% %
CBA’s Results*
* From 2006, figures are under AIFRS.** Expressed as a percentage of net loans.
2007 20102004
Asset quality**
Impairedassets
Bad and doubtfuldebts expense
2001 2007 201020042001
Net impaired
assets as a percentage of net loans and
advances were 64 basis points as at
December 2009, an increase of 28 basis
points from December 2008.
27
The average rate on ‘special’ term deposits
at the major banks is little changed since
end-January, at 6.16 per cent. The major
banks have continued to offer higher rates
on their 3 and 5-year ‘special’ term
deposits relative to rates on bonds of
equivalent maturities. These spreads are
currently around 95 basis points and
20 basis points, respectively.
Major Banks’ Pricing of Term Depositsand Bonds
A$ debt, term deposit specials
-100
0
100
200
-100
0
100
200
* Includes fee for guaranteed issues** Prior to September 2008 it is the 24-month spreadSources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2007
Unguaranteed debtBps 3-year spreads to CGS Bps5-year spreads to CGS
2008 2009 2007 2008 2009
Term depositspecials**
Guaranteeddebt*
(rated AA)
(rated AAA)
2010 2010
30
Westpac closes part of RAMS and tightens
lending criteria
Westpac also reportedly notified brokers of
changes to lending standards (across all of
its brands) that took effect on 20 January.
Maximum loan to valuation ratios (LVRs)
for new customers have been lowered from
92 per cent to 87 per cent. The maximum
LVRs for new low-documentation customers
is 80 per cent.
31
Domestic Markets Department
16 February 2010
CBA Half-Year Profit Results lJnderlying* Headline
Growth** $b Gr6wth**
Bad and doubtful debts 1.38 (14) 1.38 (14)
* Excluding significant items ** Year-on-year percentage change
CBA's Results*
RELEASE NOTE
CBA PROFIT RESULT FOR THE HALF-YEAR TO DECEMBER 2009
Net interest income
Underlying net interest income increased by 33 per cent to $6.0 billion. Average interest-earning assets rose by 25 per cent, primarily due to a 36 per cent increase in housing lending. 2 $b
The Group net interest margin (NIM)in the December 2009 half was 2.18 per cent, 13 basis points higher than in the previous corresponding period (19 basis 1.5
points on a pro forma basis). The Australian NIM was 23 basis points % higher than in the December 2008 half and 8 basis points higher than in the June 2009 half. On a pro forma basis, the 30
NIM was up 30 basis points since the 2.5
December 2008 half. However, the 2.0 overseas NIM declined.
%
The increase in the NIM was driven by 60 loan repricing and reduced holdings of liquid assets, which was partly offset by the impact of a higher share of lower 50
margin assets (particularly home loans).
Interest spread and margin
Margin
s
Asset qua lity**
ee debts
Impaired
assets
I I
1SIS!ZSM!ZSj 40
2001 2004 200T 20102001 From 2006, figures are under AIFRS.
** Expressed as a percentage of net loans.
%
18
12
%
12
9
6
3
%
0.8
0.6
0.4
0.2
Asset quality
The bad and doubtful debts expense (BDDE) in the December 2009 half was $1.4 billion. This was 0.59 per cent of lending assets (annualised), down from 0.73 per cent in December 2008 and 0.64 in June 2009. The lower BDDE largely reflects the underlying improvement in the economic conditions, the absence of new large single name problem loans and a slight decrease in collective provisions. CBA continues to maintain a conservative approach to provisioning, with their total provisions (specific and collective) remaining at around 1.1 per cent of lending assets since the June 2009 half. Net impaired assets as a percentage of net loans and advances were 64 basis points as at December 2009, an increase of 28 basis points from December 2008.
Anna Brown Institutional Markets Section Domestic Markets Department / 10 February 2010
BANKS' COMMERCIAL PROPERTY LENDING & ASSET QUALITY - DECEMBER 2009 1
Asset quality
El
5
By bank type, the rise in impaired assets over the December quarter was driven by the smaller Australian-owned banks (Graph 6).
The value of impaired assets at the major banks remained broadly flat over the December quarter and fell at the foreign-owned banks, but impaired asset ratios increased for both these groups, due to the relatively larger fall in exposures.
Graph 6 Australian Commercial Property Impaired Assets
Per cent of outstandings, by bank type*
%
15
15
12
12
Majors** Total
3
Other
2003 2005 2007 2009 * Consolidated, Australian operations; matched sample of 27 barcs; figures
for December 2009 are preliminary estimates. Includes St George, and Barticwest from March 2009.
Sources: APRA; RBA
5
! ! E I I I
For the five large banks that have overseas commercial property exposures, the impaired assets ratio fell by 25 basis points over the quarter, to 3.2 per cent This ratio is now broadly in line with these banks' Australian exposures (3.1 per cent). The reduction over the December quarter was fairly broad-based across property types and individual lenders. It is unclear whether this reflects an increase in assets returning to performing status or banks writing-off bad debts from their balance sheets. The major banks' relatively low commercial property impaired asset ratios in countries that have experienced more difficult economic conditions (New Zealand and the United Kingdom) may reflect their conservative lending profile. For example, the Bank of England estimates that the major United Kingdom banks' losses on commercial property were around 7 per cent of total exposures in 2009.13 In contrast, the major Australian banks reported a specific provisions ratio for overseas commercial property lending of around 1 per cent as at December 2009.
Ben Mowatt and Lara Pendle Financial Stability Department 10 February 2909
13 See Bank of England Financial Stability Report December 2009
on
HACK, Mark
From: HACK, Mark Sent: Thursday, 11 February 2010 08:52 To: BLACK, Susan Subject: RE: Government Guaranteed Bank Bonds 11 February 2010 [SEC=UNCLASSIFIED]
Security Classification: UNCLASSIFIED
Guaranteed Bond Spreads Spread to CGS
Bps
ME B an k* Bps
100
100
80
80
60 Major banks 3-year guaranteed
60
40
40
20
20
0'
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10
Feb-10
* 3-year domestic bond issued on 13 August 2009.
Source: UBS AG, Australia Branch
CONFIDENTIAL
- 1 -
Fortnightly Briefing on Lending
CONFIDENTIAL
- 3 -
4. Bank funding
Spreads on major banks’
guaranteed bonds trading in the domestic secondary market have fallen around 10 basis points since the announcement that the Guarantee Scheme would be withdrawn, as investors have factored a ‘scarcity premium’ into the price of these bonds. In contrast, the cost of unguaranteed debt has remained broadly unchanged.
CONFIDENTIAL
- 4 -
Reserve Bank of Australia and Australian Prudential Regulation Authority
12 February 2010
CONFIDENTIAL
BANKS' DOMESTIC NON-PERFORMING ASSETS - DECEMBER QUARTER 2009'
1
CONFIDENTIAL
The major banks' business NPL ratio rose slightly over the past six months, but at 2.8 per cent remains lower than for the other bank types.
2
CONFIDENTIAL
Graph 6 Non-performing Business and Other Loa ns*
Domestic books, per cent of outstandings by bank type % I
5
4
3
2 reignowned /
-- Majors**
2003 2004 2005 2006 2007 2008 2009 2010 * Includes bill acceptances and debt securities ** Includes St George, and Bankwest from March 2009 Source: APRA
Graph 7
Non-performing Business and Other L oans*
No
No
30
30
20
20
10
10
0
0
10
10
20
20
qn J S DM J SDM J S DM J SD 3°
2006 2007 2008 2009 * Includes bit acceptances and debt secudties SoLrce: APPA
5
4
3
2
1
0
Housing loans
%
0. E
0.€
0.
Graph9 Non-performing Housing Loans
Domestic books, per cent of outstandings by bank type*
I 1%
0.0
2003 2004 2005 2006 2007 2008 2009 2010
* Includes St George, and Bankwest from March 2009 Source: APRA
). 8
).4
).2
).0
3
CONFIDENTIAL
Graph 13 Non-performing Personal Loans
Domestic books, per cent of outstandings by bank type
A 1.5 / \\__
1.5
0.0
2003 2004 2005 2006 2007 2008 2009 2010
* Includes St George, and Bankwest from March 2009 Source: APRA
1.
0.
MR
1.2
).6
).3
).0
Ben Mowatt Financial Stability Department 18 February 2010
5
SECURITISED HOUSING LOAN ARREARS - DECEMBER 2009
3
Graph 7 Arrears Rates by lender type*
90+ days, Prime loans
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
2003 2004 2005 2006 2007 2008 2009 * Full-dec and low-doc loans. Excludes self-securitisations.
Includes Adelaide Bank Bank of Queensland, Beridigo Bank and Suncorp-Metway
Includes Macquarie Securitisation. Sources: Perpetual; RBA
Rob Johnson Financial Stability Department 23 February 2010
CONFIDENTIAL
- 1 -
Fortnightly Briefing on Lending
CONFIDENTIAL
- 3 -
4. Bank funding
Overall, spreads on major banks’ bonds trading in the domestic secondary market are little changed over the past fortnight. Guaranteed spreads remain around 10 basis points below their level prior to the Treasurer’s announcement on 7 February, as investors have factored a ‘scarcity premium’ into the price of these bonds.
CONFIDENTIAL
- 4 -
Reserve Bank of Australia and Australian Prudential Regulation Authority
26 February 2010
DOMESTIC MARKETS REVIEW: MARCH 2010
Summary
• There has been a narrowing in secondary market spreads on major banks’
unguaranteed bonds this month, while spreads on guaranteed bonds have remained
broadly unchanged.
3
NNOONN--IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
5
Major banks
Australian Banks’ Bond Issuance
Source: RBA
$b
10
20
10
20
10
20
10
20
Other Australian-owned banks
Guaranteed Unguaranteed
$b$b
$b
2006 2007 20092008
A$ equivalent, monthly
0
3
6
0
3
6
0
3
6
0
3
6Branches and subsidiaries of foreign banks0
3
6
0
3
6
0
3
6
0
3
6
$b$b
Guaranteed by other governments2010
6
The largest offshore issue in March
was a US$3.5 billion ($3.8 billion) privately-
placed deal by CBA which comprised 3-, 5-
and 10-year tranches. While spreads paid
on the bond were slightly higher than
recent comparable deals by a major bank, a
fall in hedging costs meant the (hedged)
cost of the deal was 20-35 basis points
below other US$ deals.
7
Spreads on major banks’ guaranteed bonds
trading in the domestic secondary market
are little changed over the past month.
8
Spreads on the major banks’
domestically-issued subordinated bonds
have fallen by around 10 basis points since
end February, to 210 basis points over
CGS, bringing the index to its lowest level
since February 2008. Like the fall in
spreads on senior bonds, the decline in
spreads on subordinated debt was broad
based.
0
100
200
300
400
500
600
Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009
Jan-2010
Jul-2010
0
100
200
300
400
500
600
Bps Bps
Subordinated
Senior
Source: UBS AG, Australia Branch
Major Banks' Unguaranteed Bond SpreadsDomestic; spread to CGS; 1-5 year bonds
IINNTTEERRMMEEDDIIAATTEEDD MMAARRKKEETTSS
27
Cost of Funding
We estimate that the major banks’ net
interest margin (NIM) on their outstanding
interest-earning assets and liabilities has
increased only slightly since end February
(3 basis points).
0
2
4
6
8
0
2
4
6
8
Average Rates on Major Banks’ OutstandingLending and Funding
2010
Lending rate
% %
200820062004
Funding cost
Spread
Sources: APRA; Bloomberg; Financial reports; RBA; UBS AG, Australia Branch
The major banks’ average funding cost is
estimated to have increased by 14 basis
points since end February, with the cost of
deposits increasing by about 21 basis
points and short and long-term capital
market funding increasing between
5-10 basis points.
l l l l l l l2
4
6
8
2
4
6
8
Major Banks’ Average Funding Costs
Sources: APRA; Bloomberg; Financial reports; RBA; UBS Australia AG2003
Deposits (excluding CDs)
% %
2004 2006 2007 2010
LT debt
ST debt
RMBS
Total (excluding equity)
2005 2008 2009
30
The major banks also continue to offer
higher rates on term deposits with longer
tenors relative to the rates on bonds of
equivalent maturities (particularly at the 3-
year maturity), although the gap has
narrowed recently.
31
Major Banks’ Pricing of Term Depositsand Bonds
A$ debt, term deposit specials
-100
0
100
200
-100
0
100
200
* Includes fee for guaranteed issues** Prior to September 2008 it is the 24-month spreadSources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2007
Unguaranteed debtBps 3-year spreads to CGS Bps5-year spreads to CGS
2008 2009 2007 2008 2009
Term depositspecials**
Guaranteeddebt*
(rated AA)
(rated AAA)
2010 2010
CONFIDENTIAL
E1
MEMORANDUM FOR THE BOARD MARCH 2010 MEETING
Financial Stability
CONFIDENTIAL Financial Stability March 2010 Meeting
The Australian Financial System
The profitability of the largest Australian banks has remained very solid. Though provisions for bad loans have reduced profits from the buoyant pre-crisis levels, average return on equity has remained in double digits, and analysts generally forecast that the provision cycle has peaked. Funding conditions have improved markedly since the height of the crisis, allowing banks to make less use of liquidity facilities provided by the Reserve Bank and increasingly issue bonds without using the Government wholesale funding guarantee scheme.
Profits and asset quality
E5
CONFIDENTIAL Financial Stability March 2010 Meeting
Graph 10
5
10
Australian Banks’ Profitability
* Second half figures are half year to December for CBA and half year to September for ANZ, NAB and Westpac. Includes St George, and Bankwest from the first half of 2009.
Sources: APRA; Citigroup; Morgan Stanley; UBS; banks’ annual and interim reports
$b
0.3
0.6
5
10
0.3
0.6
$b
$b$b
Major banks’bad debt charges*
1H101H091H081H071H101H091H081H07-1.5
0.0
1.5
-1.5
0.0
1.5
$b$b
1H06
Actual Analysts’ forecasts
Provisioning charges have been the main factor weighing on profits in the recent period. After adjusting for mergers, the major banks reported charges for bad and doubtful debts of $7 billion in the latest half year, compared with $6 billion in the same period a year earlier. The recent rise partly reflects higher provisions on exposures to small-to-medium-sized enterprises, and a relatively larger rise in provisions against the business conducted by the major banks in New Zealand and the United Kingdom than on operations in Australia. The foreign subsidiaries have also seen their bad debt charges increase slightly over the year
Despite the increase in charges for bad and doubtful debts over the latest period, recent commentary by the major banks and equity analysts suggests that charges may have already peaked or will do so in the first half of this year (Graph 11).
Graph 11
0
10
20
0
10
20
Major Banks’ Profitability*
2010
%
2006200219981994
%After tax and minority interests
0.0
0.5
1.0
1.5
0.0
0.5
1.0
1.5
Charge for bad and doubtful debtsPer cent of average assets
%%
Return on shareholders’ equity
1990* From 2006 data are on an IFRS basis; prior years are on an AGAAP basis.
Includes St George, and Bankwest from 2009.Sources: Citigroup; Credit Suisse; Deutsche Bank; Morgan Stanley; RBA; UBS;
banks’ annual and interim reports
FY10 estimate
FY10 estimate
1986
E6
CONFIDENTIAL Financial Stability March 2010 Meeting
Graph 14 Commercial Property Impaired Assets
Per cent of outstandings*
0
3
6
9
12
15
0
3
6
9
12
15
* Consolidated, Australian operations; matched sample of 27 banks.** Includes St George, and Bankwest from March 2009.Source: APRA
2009
Retail
% By property type By bank type
Total
Residential Office
E7
Foreign-ownedbanks
Total
Other Australian-owned banks
Major banks**
20072005200920072005
%
CONFIDENTIAL Financial Stability March 2010 Meeting
Graph 18
0.0
0.5
1.0
1.5
2.0
0.0
0.5
1.0
1.5
2.0
Default Probabilities*Simple average of major banks’ estimates
* On-balance sheet portfolios assessed under Internal Ratings-basedApproach only
Source: APRA
SMEexposures
% December 2008 December 2009
%
Corporateexposures
Residentialmortgages
Bankexposures
E10
CONFIDENTIAL Financial Stability March 2010 Meeting
E11
Funding conditions and guarantee arrangements
Funding conditions have generally continued to improve over the past six months, and banks have increasingly accessed funding without use of the Government guarantee arrangements. In bond markets, it has generally become cost effective for the major Australian banks to issue unguaranteed, without paying the guarantee fee, and so the share of bond issuance that is guaranteed was close to zero in January, after accounting for virtually all issuance a year earlier
CONFIDENTIAL Financial Stability March 2010 Meeting
E27
Financial Stability Department 25 February 2010
FABBRO, Daniel
From: FABBRO, Daniel Sent: Wednesday, 3 March 2010 11:51 To: DAVIES, Michael Subject: FW: COFR briefing [SEC=UNCLASSIFIED]
Attachments: 2a Guarantee Scheme Market Developments.doc Security Classification:
UNCLASSIFIED
Mike, Here is the FS briefing for tomorrow's COFR meeting
0
Agenda Item 2(a) Wholesale Funding Guarantee: Recent Market Developments
on 7 February, the Governmeht announced that the Guarantee Scheme will be closed to new issuance on 31 March 2010.
Consistent with this, the indicative spread between the major banks' guaranteed and unguaranteed three-year debt widened by around 10 basis points immediately after the announcement (Graph 2). This
spread has since narrowed somewhat, with the growing supply of guaranteed issues having slightly increased the relative yield of guaranteed debt.
Graph 2 Major Banks' Domestic Unguaranteed Bonds
Spread to gLusranteed bank bords, 5-day rrusving average Bps
100
80
60
40
20
5year boRis Bps
100
80
60
40
20
DJFMAMJJASONDJFM 2008 2009 2010 Sorrce. fiBS AG, Australia Branch
Reserve Bank of Australia 2 March 2010
CONFIDENTIAL
- 1 -
Fortnightly Briefing on Lending and Funding
CONFIDENTIAL
- 3 -
4. Bank funding
• Spreads on the major banks’unguaranteed bonds trading in the secondary market have fallen 5-10 basis points over the past fortnight, to be at their lowest since around October 2009.
CONFIDENTIAL
- 4 -
Reserve Bank of Australia and Australian Prudential Regulation Authority
12 March 2010