If sustained, the trend is likely to boost banks’ profit margins, which have been under pressure as lenders try to woo customers with discounted rates. However, there is also speculation the banks may face competitive pressure to pass on the benefit of cheaper funding to their variable rate customers, or pass on the full value of any RBA cut in official rates.
The RBA’s board will meet next Tuesday, and markets are putting roughly a 50-50 chance on a cut in the cash rate from 1.5 per cent to 1.25 per cent.
Commonwealth Bank’s head of bonds and rates strategy, Martin Whetton, said in a note the “solid” fall in bank funding costs had “extended far beyond expectations”. Mr Whetton said the narrowing of the spread “raises the risk that there’s an out-of-cycle cut”.
Several major banks have already cut fixed mortgage rates in recent weeks, but there is speculation the trend may also cause banks to cut their variable rates, which are paid by most borrowers.
AMP Capital chief economist Shane Oliver said: “Short-term funding costs have fallen lately pointing to a reversal of last year’s 0.1 to 0.15 per cent mortgage rate hikes or at least the banks having little excuse not to pass on any RBA cuts in full.”
Credit expert Phil Bayley, principal of ADCM Services, said bank funding costs had fallen because of the market’s expectation the RBA would cut official interest rates. Banks also have less need for wholesale debt because of the weak demand for loans from customers.
“There is not the same level of demand for short-term funding or long-term funding. The reason there is less of that is because lending growth is slowing,” Mr Bayley said.
However, Mr Bayley said his personal opinion was the banks were unlikely to cut variable interest rates independently of the RBA, and may not even pass on any “official” rate cut in full.
“This time might be a little bit different given that we are seeing funding costs falling, but I would not be surprised if they did not pass on a full 25 basis points,” Mr Bayley said.
Bell Potter analyst TS Lim also said the banks would “probably not” pass on the lower funding costs to their mortgage customers. He said margins remained pressured by clients rolling over from interest-only loans to loans with principal and interest payments.
The decline comes ahead of half-yearly bank profits from ANZ, Westpac, and National Australia Bank over the next week (Commonwealth Bank reports over a different financial year). Net interest margins, a measure of banks’ funding costs compared with what they charge for loans, are expected to be higher in the half.
Citi analysts Brendan Sproules and Thomas Strong said in a note: bank funding costs had fallen “dramatically”, and all else being equal, the trend could boost profits by about 3 to 4 per cent.
Alongside the dip in shorter-term funding costs, the costs to banks of issuing longer-term debt have also fallen.
CBA head of credit strategy Scott Rundell said that for the first time since the financial crisis, the major banks had not issued longer-term Aussie dollar debt over the past two months.
Mr Rundell said the spread on bank bonds issued in early 2019 had also fallen in the secondary market. Five-year, Aussie dollar bank bonds were trading at about 82 basis points above the bank bill swap rate, compared with an average of about 110 basis points when they were issued.
Clancy Yeates is a business reporter.