Higher Funding Costs No Big Deal For Aussie Banks
- Stay Underweight Banks. One of the key areas of push-back from clients to our call for Australian equity market outperformance is concerns about the Banks. We agree sentiment towards the Aussie Banks is being impacted by the Banking Royal Commission and there are still unanswered questions about fines and the prospect of even tougher lending standards. However, valuations are not stretched and the earnings outlook is only modest. We expect there will be an opportunity to move back to neutral on the sector in the months ahead.
- Higher funding costs have emerged. Repatriation of offshore cash holdings by US corporates and several other factors have contributed to the recent tightening in offshore US dollar lending markets. Cash repatriation, resulting from changes to tax law in the US, has occurred during a surge of T-Bill issuance, the end of the Japanese fiscal year. A more structural underlying pressure has come from the reduction of Reserve deposits with the Fed, which began in 2014.
- Tightness in US Dollar Libor Markets Should Ease. Funding pressures in offshore US dollar markets are probably close to their peak as several of the one-off factors abate. The forward rate agreement (FRA) curve suggests these funding pressures should ease in coming months and return to more normal levels. The corporate paper markets have also seen an increase in the cost of funding and these cost pressures should also ease in the months ahead.
- Australian Banks Have Seen an Increase in Funding Costs. Tightening of conditions in short-term US dollar inter-bank lending markets has led to wider spreads in similar Australian dollar markets and this has added to concerns about the sector. However, the funding mix for Australian Banks became more skewed towards deposits following the Global Financial Crisis and deposit rates have fallen recently. Indeed, this has been a timely offset to the pressures on funding in short-term inter-bank lending markets because it means the impact on the overall funding mix has been relatively muted. We estimate the overall mix of funding costs has increased by around 3bp to 1.81%, but this increase is coming off a record low at the end of last year of around 1.78%.
Australia and New Zealand Banking Group provides a range of banking and financial products and services to retail, small business, corporate and institutional clients. Co. operates on a divisional structure with six divisions: Australia, Institutional, New Zealand, Wealth Australia, Asia Retail & Pacific and Technology Services & Operations and Group Centre. Co.'s core products offered include deposits, credit cards, loans, investments and insurance, retail products provided to consumers, and banking and financial solutions provided to business customers through managers, among others. As of Sept 30 2015, Co. had total assets of A$914,869,000,000 and total deposits of A$566,847,000,000.
Commonwealth Bank of Australia provides integrated financial services including retail, business and institutional banking, funds management, superannuation, life insurance, general insurance, broking services and finance company activities. Co. operates in seven segments, Retail banking Services, Business and Private Banking, Institutional Banking and Markets, Wealth Management, New Zealand, Bankwest, as well as International Financial Services and Other Divisions. As of June 30 2016, Co. had total assets of A$933.1 million and total deposits of A$588.0 million.
National Australia Bank provides banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance and custodian, trustee and nominee services. Co.'s division include: Australian Banking, which provides products and services to retail and business customers; National Australia Bank Limited Wealth, which provides superannuation, investment and insurance solutions; and New Zealand Banking, which comprises the Retail, Business, Agribusiness, Corporate and Institutional and Insurance franchises in New Zealand. As of Sept 30 2016, Co. had total assets of A$777.62 billion.
Westpac Banking is a banking organization with branches, affiliates and controlled entities throughout Australia, New Zealand, Asia and in the Pacific region. Co. provides a range of banking and financial services in these markets, including consumer, business and institutional banking and wealth management services. Co. is engaged in the provision of financial services including lending, deposit taking, payments services, investment portfolio management and advice, superannuation and funds management, insurance services, leasing finance, general finance, interest rate risk management and foreign exchange services. As of Sep 30 2017, Co. had total assets of A$851,875,000,000.
About us:
- The business is a Proprietary Limited Australian company that is owned and fully operated by Shane Lee from a small office in Sydney’s CBD.
- Shane worked for 17 years in Sydney-based senior research roles (economist, equity strategist and bond strategist) in global and regional investment banks and a domestic commercial bank prior to starting Macro Strategy Advisors. These roles straddled the asset classes making him uniquely positioned to advise multi-asset investors. He worked for the Reserve Bank of Australia (RBA) for 3 years as a housing, commercial property and equity market analyst and a liquidity forecasting specialist. He worked as a structural engineer in Queensland for 10 years prior to his career at the RBA.
Aim of our business:
- To partner with our clients in their aim to maximise returns. We provide timely, independent and thought-provoking research on thematic macro issues that are impacting or could impact financial markets. We aim to produce research that prompts our clients to question their assumptions.
Services:
- A fortnightly research note.
- Regular presentations and data support delivered by understanding our clients interests and investment process.
- We also in work in confidence to investigate, analyse and report on issues at our clients direction. This work is done on a project-by-project basis.
- As an Australian based business, the main focus is analysing how domestic and global issues impact Australian investors. However, our global and domestic insights are also valued by our offshore clients.
Our Edge:
- Our low cost base relative to our competitors allows us to provide a quality product at a reasonable cost.
- We are fully independent and don’t support a banking function or any third party. We have no interests other than providing our clients with the best possible research.
- Our focus is not point forecasting, but providing rigorous analysis and insight. We don’t routinely focus on the top or bottom 10% of likely outcomes to create a headline.
- Shane’s background in engineering has provided clients with unique insights into global infrastructure and domestic housing issues.
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