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Moody’s warns on growing bank wholesale debt
Topic Started: 3 Sep 2014, 01:13 PM (182 Views)
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From Moody's:
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Data from the Australian Prudential Regulation Authority (APRA) highlights the trend that bank loans in Australia started to rise faster than deposits during 1H2014. As a result, banks could be pressured to increase their use of wholesale funding, a development which we would view as a key credit sensitivity for the Australian banking system.

That said, any increased exposure to the wholesale funding markets is likely to be partly offset by higher holdings of liquid assets and improvements to maturity structures, supported by the implementation of first the new Liquidity Coverage Ratio (LCR) requirement in 2015 and second of the Net Stable Funding Requirement in 2019.

Since the global financial crisis, Australian banks have markedly improved the stability of their funding and their holdings of liquid assets. They have also targeted far more sustainable refinancing profiles. However, their structural reliance on wholesale funding remains a key sensitivity for their high ratings. Therefore, how they manage their funding and liquidity, as credit growth picks up, will represent an important rating focus.

Shortfall in net deposits is increasing…

Since 2008, funding conditions for Australian banks have been supportive with deposit growth exceeding lending growth. However, from this year, the growth rates for deposits and loans have started to converge. As shown in Exhibit 1, during 2014, the amount by which annual deposit growth has exceeded loan growth declined to 0.43 percentage points as of July 2014 from 3.60 percentage points as of July 2013.

Whilst current trends highlight, as indicated, an emerging pressure on banks to increase debt issuance, it is too early to tell whether their shift towards a higher level of wholesale funding will be sustained. In addition to the increase in the net deposit shortfall, the greater focus on wholesale funding by banks has been driven by an improvement in wholesale market conditions. The latter may have incentivized the banks to pre-fund their funding requirements while market conditions are favourable.

Furthermore, their exposures to wholesale markets may continue to rise, we expect this risk to be mitigated by improvements in the maturity structures of their wholesale debt and an increase in their holdings of liquid assets. As shown in Exhibits 8 and 9, whilst CBA’s full-year 2014 results showed a rise in wholesale issuance, the weighted average maturity of its debt rose to 3.8 years, while liquid assets, as a percentage of total assets, increased to 16.6%.

Since the crisis, the major banks have been focused on lengthening the duration of their debt to avoid maturity concentrations in future years. Should debt issuance be sustained above levels seen in recent years, they would need to issue a greater proportion of their debt at even longer maturities to avoid maturity concentration risks.

Finally, bank liquidity is supported by their ability to repo self-securitized residential mortgage-backed securities with the Reserve Bank of Australia (RBA) as well as the RBA’s Committed Liquidity Facility, to be created in 2015.

However, Australian banks remain structurally reliant on wholesale funding, which is a key credit sensitivity. Therefore, should the rise in the wholesale funding task of banks, on a dollar basis, become sustained, it would become credit negative in the absence of offsetting rises in liquid assets and/or a lengthening of their debt maturity structures for the purpose of avoiding sizeable maturity concentrations.
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