Reuters: Financial Services and Real Estate: TEXT-Fitch:Australian banks will look to assets to protect margins

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TEXT-Fitch:Australian banks will look to assets to protect margins May 3rd 2012, 07:49 Thu May 3, 2012 3:49am EDT (The following statement was released by the rating agency) May 03 - Australian banks will continue to retain some of the interest-rate cuts by the Reserve Bank of Australia, or even increase lending rates independent of any RBA rate action, in order to reduce pressure on net interest margin caused by higher funding costs. Such an approach, combined with close management of operating expenses, will be important for the banks to maintain or even boost profit in an environment where loan growth is subdued and capital requirements are set to increase under the soon-to-be-implemented Basel III framework. National Australia Bank and Commonwealth Bank of Australia have announced that they will cut their standard variable mortgage rates by 32bp and 40bp, respectively, rather than the RBA's full 50bp cut announced on Tuesday. We expect other banks to announce similar rate cuts. Australian banks' net interest margins have dropped steadily since the onset of the global financial crisis in 2008, particularly in their Australian retail operations, with the trend continuing in the last six months. For example, Commonwealth Bank of Australia's NIM fell by 10bp to 2.15% in H112, while NAB's NIM came down by 9bp to 2.19% in Q1FY12. These levels are still healthy, especially when compared with many of their international peers, but the downward trend means that we expect banks to take advantage of opportunities to increase asset pricing. Funding costs are likely to remain high in historical terms during 2012, which means the weighted-average cost of funding is likely to continue to rise, putting further downward pressure on NIMs. One reason that funding costs are rising is because banks are trying to reduce their reliance on wholesale funding, which accounts for about 35%-45%. In addition, the Australian Bankers Association estimates that around half of the wholesale funding derives from offshore investors, and just over a third have a duration of less than one year, and Fitch considers both of these factors unstable. The introduction of covered bonds has helped extend duration, but there are still regulatory limits on the maximum amount of covered bonds a bank can issue. Deposit costs are also a significant contributor to the rise in funding costs, as the banks seek to attract this more stable form of funding. Adding to the pressure, depositors are becoming more savvy about their investments, seeking out higher-interest-earning accounts. Link this Share this Digg this Email Reprints

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