1
DOMESTIC MARKETS REVIEW: JANUARY 2010
Summary
3
NON-INTERMEDIATED MARKETS
5
$12 billion 1)
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.
Credit markets
Financials
Australian banks have issued $8 billion of
bonds in January to date, all unguaranteed
issues offshore. While the share of bonds
that is unguaranteed continues to increase
overall – underpinned by the major banks
for whom it is generally cheaper than
guaranteed funding – there were some
large
guaranteed
issues
(totalling
6
Australian Banks’ Bond Issuance
A$ equivalent, monthly
Major banks
$b
$b
20
20
10
10
$b
$b
Other Australian-owned banks
6
6
3
3
0
$b
0
$b
Branches and subsidiaries of foreign banks
6
6
3
3
0
2006
 Guaranteed
Source: RBA
2007
2008
 Unguaranteed
2009
2010
0
 Guaranteed by the UK Government
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
increased
September
around
2008,
30 basis
they
have
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
Spread to CGS
Yields
%
Bps
Unguaranteed
(rated AA)
8
200
CGS
5
100
Guaranteed
(rated AAA)
2
2006
2008
2010 2006
* Includes fee for guaranteed issues.
Sources: RBA; UBS AG, Australia Branch
2008
2010
0
9
on
Spreads
the
major
banks’
domestically-issued subordinated bonds are
broadly unchanged from end November
levels, at around 235 basis points over
CGS.
Major Banks' Bond Spreads
Domestic; spread to CGS; 1-5 year bonds
Bps
Bps
600
600
500
500
400
400
Subordinated
300
300
200
200
Senior
100
100
0
0
Jan2007
Jul2007
Jan2008
Jul2008
Jan2009
Source: UBS AG, Australia Branch
Jul2009
Jan2010
Jul2010
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
INTERMEDIATED MARKETS
26
Major Banks’ Average Funding Costs
%
%
RMBS
8
8
Total (excluding equity)
LT debt
6
6
ST debt
4
4
Deposits
2
l
2003
l
2004
l
2005
l
2006 2007
l
l
2008
l
2009
2010
2
Sources: APRA; Bloomberg; Financial reports; RBA; UBS Australia AG
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.
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
Marginal Interest Rates on
the Four Major Banks’ Assets and Liabilities
Change from 30 November 2009 to 15 January 2010
Bps
Funding Costs
75
Bps
75
Overall funding costs
than business lending rates.
50
50
25
25
0
0
-25
25
Weights of total funding liabilities and assets
Sources: APRA; Bloomberg; RBA; UBS AG, Australia Branch
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 Deposits
and Bonds
Bps
A$ debt, term deposit ‘specials’
3-year spreads to CGS
5-year spreads to CGS
Unguaranteed debt
Bps
(rated AA)
200
200
100
100
0
0
Guaranteed
debt*
Average ‘special’
term deposit rate**
(rated AAA)
-100
2007
2008
2009 2010
2007
2008
2009
* Includes fee for guaranteed issues
** Prior to September 2008 it is the 24-month spread
Sources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2010
-100
- 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
2
- 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)
• Offshore
• Domestic
25
p
_____________
20
2C
:: ____________________________________
________
°"°
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
DJ FMAMJ J ASOND J
2008
2009
0
Source: UBS AG, Australia Branch
3
- CONFIDENTIAL -
Financial StabilityDepartment
18 January
ri
3
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
1
0
D J FMAMJ J ASOND J
2009
2008
Scarce UBS AG, Ausirala Branch
rol
1
1
4
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
NON-INTERMEDIATED MARKETS
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 $500 million and pricing at
the lower end of initial guidance.
5
Australian Banks’ Bond Issuance
A$ equivalent, monthly
Major banks
$b
$b
20
20
10
10
$b
$b
Other Australian-owned banks
6
6
3
3
0
$b
0
$b
Branches and subsidiaries of foreign banks
6
6
3
3
0
2006
 Guaranteed
Source: RBA
2007
2008
 Unguaranteed
2009
2010
0
 Guaranteed by other governments
6
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
Spread to CGS
Yields
%
Bps
Unguaranteed
(rated AA)
8
200
CGS
5
100
Guaranteed
(rated AAA)
2
2006
2008
2010 2006
* Includes fee for guaranteed issues.
Sources: RBA; UBS AG, Australia Branch
Spreads on major banks’ guaranteed bonds
trading in the domestic secondary market
2008
2010
0
7
Spreads
on
the
domestically-issued
major
subordinated
banks’
swap (equivalent to 197 basis points over
bonds
CGS), the same as the pricing on Westpac’s
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,
JPY60.3 billion
ANZ
issued
($755 million)
a
5-year
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
5-year floating rate tranche in January.
21
INTERMEDIATED MARKETS
22
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.
Average Rates on Major Banks’ Outstanding
Lending and Funding
%
%
Lending rate
8
8
6
6
Funding cost
4
2
0
4
2
Spread
2004
2006
2008
2010
0
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
Cost of Funding
The major banks’ average funding costs
and lending rates are estimated to have
risen
only
slightly
since
end
January,
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.
Major Banks’ Net Interest Margin
%
%
3.0
3.0
Marginal
Outstanding
2.5
2.5
2.0
2.0
1.5
1.5
1.0
2004
2006
2008
2010
1.0
Source: RBA
Marginal Interest Rates on
the Major Banks’ Assets and Liabilities
Banks’ profits
Change from 30 June 2009 to 11 February 2010
Bps
Funding Costs
Bps
Overall funding costs
150
150
100
100
50
50
0
0
-50
-50
Weights of total funding liabilities and asse
Sources: APRA; Bloomberg; RBA; UBS AG, Australia Branch
CBA recently released its profit result for
the half-year ending 31 December 2009. 2
24
CBA’s Results*
$b
%
3.0
18
1.5
12
%
%
3.5
12
3.0
9
2.5
6
2.0
3
%
Asset quality**
60
Bad and doubtful
debts expense
55
50
Impaired
assets
45
40
2001
2004
2007
2010 2001
* From 2006, figures are under AIFRS.
** Expressed as a percentage of net loans.
2004
2007
Net impaired
%
assets as a percentage of net loans and
0.8
advances
0.6
December 2009, an increase of 28 basis
0.4
points from December 2008.
0.2
0
2010
were
64
basis
points
as
at
27
The average rate on ‘special’ term deposits
at the major banks is little changed since
end-January, at 6.16 per cent. The major
banks have continued to offer higher rates
on
their
3
and
5-year
‘special’
term
deposits relative to rates on bonds of
equivalent maturities. These spreads are
currently
around
95
basis
points
and
20 basis points, respectively.
Major Banks’ Pricing of Term Deposits
and Bonds
Bps
A$ debt, term deposit specials
3-year spreads to CGS
5-year spreads to CGS
Unguaranteed debt
Bps
(rated AA)
200
200
100
100
0
0
Guaranteed
debt*
Term deposit
specials**
(rated AAA)
-100
2007
2008
2009 2010
2007
2008
2009
* Includes fee for guaranteed issues
** Prior to September 2008 it is the 24-month spread
Sources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2010
-100
30
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.
Westpac closes part of RAMS and tightens
lending criteria
31
Domestic Markets Department
16 February 2010
5
RELEASE NOTE
CBA PROFIT RESULT FOR THE HALF-YEAR TO DECEMBER 2009
CBA Half-Year Profit Results
lJnderlying*
Bad and doubtful debts
1.38
Growth**
Headline
$b
Gr6wth**
(14)
1.38
(14)
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
* Excluding significant items
** Year-on-year percentage change
CBA's Results*
%
$b
The Group net interest margin (NIM)in
the December 2009 half was 2.18 per
cent, 13 basis points higher than in the
1.5
previous corresponding period (19 basis
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
30
2009 half. On a pro forma basis, the
NIM was up 30 basis points since the 2.5
December 2008 half. However, the 2.0
overseas NIM declined.
18
12
12
9
Margin
6
3
s
%
The increase in the NIM was driven by
loan repricing and reduced holdings of
liquid assets, which was partly offset by
the impact of a higher share of lower
margin assets (particularly home loans).
%
Interest spread and margin
Asset qua lity**
0.8
60
debts
50
ee
Impaired
assets
40
%
II
2001 2004 200T 20102001
From 2006, figures are under AIFRS.
** Expressed as a percentage of net loans.
1SIS!ZSM!ZSj
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
6
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 t ype*
%
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
7
HACK, Mark
HACK, Mark
Thursday, 11 February 2010 08:52
BLACK, Susan
RE: Government Guaranteed Bank Bonds 11 February 2010 [SEC=UNCLASSIFIED]
From:
Sent:
To:
Subject:
Security Classification:
UNCLASSIFIED
Guaranteed Bond Spreads
Spread to CGS
Bps
Bps
ME B an k*
100
100
80
80
Major banks 3-year guaranteed
60
60
40
40
20
20
0'
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
* 3-year domestic bond issued on 13 August 2009.
Source: UBS AG, Australia Branch
Feb-10
8
CONFIDENTIAL
Fortnightly Briefing on Lending
-1-
CONFIDENTIAL
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.
-3-
CONFIDENTIAL
Reserve Bank of Australia and Australian Prudential Regulation Authority
12 February 2010
-4-
CONFIDENTIAL
BANKS' DOMESTIC NON-PERFORMING ASSETS - DECEMBER QUARTER 2009'
1
9
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
Graph 7
Non-performing Business and Other Loa ns*
Non-performing Business and Other L oans*
Domestic books, per cent of outstandings by bank type
%
I
No
No
5
5
30
30
4
4
20
20
3
3
10
10
0
0
10
10
20
20
reignowned
/
2
2
--
1
Majors**
0
qn
J S DM J SDM J S DM J SD 3°
2006
2007
2008
2009
2003 2004 2005 2006 2007 2008 2009 2010
* Includes bill acceptances and debt securities
** Includes St George, and Bankwest from March 2009
Source: APRA
* Includes bit acceptances and debt secudties
SoLrce: APPA
Housing loans
Graph9
Non-performing Housing Loans
Domestic books, per cent of outstandings by bank t y pe*
%
I
0. E
1%
). 8
0.€
).4
0.
).2
0.0
2003 2004 2005 2006 2007 2008 2009 2010
).0
* Includes St George, and Bankwest from March 2009
Source: APRA
3
CONFIDENTIAL
Graph 13
Non-performing Personal Loans
Domestic books, per cent of outstandings by bank type
A\\__
/
1.5
1.
1.5
1.2
0.
).6
MR
).3
0.0
2003 2004 2005 2006 2007 2008 2009 2010
* Includes St George, and Bankwest from March 2009
Source: APRA
Ben Mowatt
Financial Stability Department
18 February 2010
5
).0
SECURITISED HOUSING LOAN ARREARS - DECEMBER 2009
10
3
Graph 7
Arrears Rates by lender t ype *
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
11
CONFIDENTIAL
Fortnightly Briefing on Lending
-1-
CONFIDENTIAL
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.
-3-
CONFIDENTIAL
Reserve Bank of Australia and Australian Prudential Regulation Authority
26 February 2010
-4-
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
NON-INTERMEDIATED MARKETS
5
Australian Banks’ Bond Issuance
A$ equivalent, monthly
Major banks
$b
$b
20
20
10
10
$b
$b
Other Australian-owned banks
6
6
3
3
0
$b
0
$b
Branches and subsidiaries of foreign banks
6
6
3
3
0
2006
2007
2008
 Guaranteed  Unguaranteed
Source: RBA
2009
2010
0
 Guaranteed by other governments
6
The largest offshore issue in March
was a US$3.5 billion ($3.8 billion) privatelyplaced deal by CBA which comprised 3-, 5and 10-year tranches. While spreads paid
on the bond were slightly higher than
recent comparable deals by a major bank, a
fall in hedging costs meant the (hedged)
cost of the deal was 20-35 basis points
below other US$ deals.
7
Spreads on major banks’ guaranteed bonds
trading in the domestic secondary market
are little changed over the past month.
8
Major Banks' Unguaranteed Bond Spreads
Domestic; spread to CGS; 1-5 year bonds
Bps
Bps
600
600
500
500
400
400
Subordinated
300
300
200
200
Senior
100
100
0
0
Jan2007
Jul2007
Jan2008
Jul2008
Jan2009
Source: UBS AG, Australia Branch
Spreads
on
the
domestically-issued
major
subordinated
banks’
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.
Jul2009
Jan2010
Jul2010
INTERMEDIATED MARKETS
27
Major Banks’ Average Funding Costs
%
%
RMBS
8
8
Total (excluding equity)
LT debt
6
6
ST debt
4
4
Deposits (excluding CDs)
2
l
2003
l
2004
l
2005
l
2006
l
2007
l
2008
l
2009
2010
Sources: APRA; Bloomberg; Financial reports; RBA; UBS Australia AG
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).
Average Rates on Major Banks’ Outstanding
Lending and Funding
%
%
Lending rate
8
8
6
6
Funding cost
4
2
0
4
2
Spread
2004
2006
2008
2010
0
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
5-10 basis points.
increasing
between
2
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 3year
maturity),
although
narrowed recently.
the
gap
has
31
Major Banks’ Pricing of Term Deposits
and Bonds
Bps
A$ debt, term deposit specials
3-year spreads to CGS
5-year spreads to CGS
Unguaranteed debt
Bps
(rated AA)
200
200
100
100
0
0
Guaranteed
debt*
Term deposit
specials**
(rated AAA)
-100
2007
2008
2009 2010
2007
2008
2009
* Includes fee for guaranteed issues
** Prior to September 2008 it is the 24-month spread
Sources:Bloomberg; RBA; Thomson Reuters; UBS AG, Australia Branch
2010
-100
CONFIDENTIAL
MEMORANDUM FOR THE BOARD
MARCH 2010 MEETING
Financial Stability
E1
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
Australian Banks’ Profitability
$b
Major banks’
bad debt charges*
10
 Actual
 Analysts’ forecasts
5
$b
10
5
$b
$b
0.6
0.6
0.3
0.3
$b
$b
1.5
1.5
0.0
0.0
-1.5
1H06 1H07 1H08 1H09 1H10
-1.5
1H07 1H08 1H09 1H10
* 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
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
Major Banks’ Profitability*
%
%
Return on shareholders’ equity
After tax and minority interests
20
20
10
10
FY10 estimate
0
0
%
Charge for bad and doubtful debts
Per cent of average assets
1.5
%
1.5
1.0
1.0
FY10 estimate
0.5
0.5
0.0
1986
1990
1994
1998
2002
2006
0.0
2010
* 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
E6
CONFIDENTIAL
Financial Stability
March 2010 Meeting
Graph 14
Commercial Property Impaired Assets
Per cent of outstandings*
%
By property type
%
By bank type
15
15
Foreign-owned
banks
12
12
Retail
9
9
Major banks**
6
Total
3
Residential
0
2005
2007
Total Other Australianowned banks
Office
2009 2005
2007
6
3
2009
0
* Consolidated, Australian operations; matched sample of 27 banks.
** Includes St George, and Bankwest from March 2009.
Source: APRA
E7
CONFIDENTIAL
Financial Stability
March 2010 Meeting
Graph 18
Default Probabilities*
Simple average of major banks’ estimates
%
 December 2008
 December 2009
%
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
SME
exposures
Corporate
exposures
Residential
mortgages
Bank
exposures
0.0
* On-balance sheet portfolios assessed under Internal Ratings-based
Approach only
Source: APRA
E10
CONFIDENTIAL
Financial Stability
March 2010 Meeting
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
E11
CONFIDENTIAL
Financial Stability
March 2010 Meeting
Financial Stability Department
25 February 2010
E27
14
FABBRO, Daniel
From:
Sent:
To:
Subject:
FABBRO, Daniel
Wednesday, 3 March 2010 11:51
DAVIES, Michael
FW: COFR briefing [SEC=UNCLASSIFIED]
Attachments:
Security Classification:
2a Guarantee Scheme Market Developments.doc
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
Bps
5year boRis
100
100
80
80
60
60
40
40
20
20
DJFMAMJJASONDJFM
2008
2009
Sorrce. fiBS AG, Australia Branch
Reserve Bank of Australia
2 March 2010
2010
CONFIDENTIAL
Fortnightly Briefing on Lending and Funding
-1-
15
CONFIDENTIAL
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.
-3-
CONFIDENTIAL
Reserve Bank of Australia and Australian Prudential Regulation Authority
12 March 2010
-4-