Here’s a graph we’ve seen a couple of times this year from the Reserve Bank, the latest being yesterday’s speech in Sydney by RBA deputy governor Ric Battellino. But it is also a graph that you don’t see mentioned or brought out in public by our big banks, except when they are taking tea with credit rating agencies such as Standard & Poor’s and trying to convince them that the dependence on offshore funding is not as high as everyone thinks.
Certainly the main points of the graph were totally absent from yesterday’s AGM from Westpac in Sydney. They will be hard to hear at today’s NAB annual meeting and tomorrow’s ANZ AGM will no doubt hear Mike Smith, the CEO, talk about a lot of things, but not this graph.
It shows that because of the surge in domestic savings (running at 10%) and low demand for loans, the banks have been able to build substantial deposit cushions, allowing further cuts in offshore borrowing at a time when the eurozone is making it tougher and more expensive to borrow.
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Now banks have been forced to pay higher costs as loans borrowed offshore back in 2008, 2009 and last year (one-, two- or three-year money), roll over and have to be refinanced at higher rates. We saw this week the NAB actually raise $800 million in a domestic short-term borrowing, there was a cost, the rate was 1.30% over the bank bill rate (or about 5.6% all up). It’s safer, there’s no forex risk and the NAB knows its lenders, unlike in Europe where loans are often sold off, especially now with European investors desperate to raise cash).
But all banks have benefited from the deleveraging and caution by savers (which include corporates).
Battellino told a Sydney conference yesterday that bank deposits had risen 9% in the past year. That’s more than twice as fast as the 3.5% growth in total lending in the economy in the year to October 30.
He said that “has been more than sufficient to fund the increase in banks’ lending”. So the banks are sitting on a rising amount of cheap, safe local deposits, which are not going anywhere and have proven to be more “sticky” than previously seen thanks to cleverer marketing by the banks.
Now that’s a key point: here’s the deputy head of the key economic and interest rate setting organisation telling us that our banks have been more than able to fund the lending increases in the past year from deposits, not from offshore. And if these domestic deposits are costing a bit more, then that’s the price of competition and it should be shareholders (and bank boards and management) that feel the pain, not customers. After all, the higher level of local deposits is making our banks safer and improving their ability to keep funding.
They also undermine the silly comments from Gail Kelly to the media after yesterday’s AGM when she hinted at possible credit rationing in Australia. As Battellino pointed out, deposit growth in this country has “been more than sufficient to fund the increase in banks’ lending”. So that’s yet another furphy from a major bank.
And that’s a point to remember when listening to comments from bank leaders at AGMs.
Such as Kelly’s talk of higher funding costs will put pressure on margins and it needed to balance economic realities before passing on central bank interest rate cuts to customers. She told the meeting that the crisis in Europe has slowed growth, made customers cautious and hurt revenue in its markets and treasury business.
“Higher funding costs are a reality of this environment and are continuing to place pressure on interest margins,” she said. “We are very mindful of the impacts of interest rate decisions on customers but these must be balanced with what is economically responsible.”
And while that is true, it would also help if she acknowledged the considerable benefit the bank (and all banks) are getting from local deposits, which are cheaper and safer than offshore borrowings.