Rate pressure builds

JANUARY and February are usually the biggest months for banks to raise funds on global markets, but pricing for debt has skyrocketed since the end of last year.

This does not bode well for home owners. Banks are likely to come under further pressure to continue raising interest rates – even if the Reserve Bank keeps rates on hold.

Intense competition for funds from cash-strapped European governments and other banks has been increasing borrowing costs on global markets. The banks commonly blame this for forcing interest rates higher on loans.

The higher costs are likely to put the big four lenders in a bind, given that banking is still reeling from last year’s mauling by politicians after a round of super-sized interest rate rises in November.

The higher costs mean banks face having profit margins squeezed.

The state of competition in the banking sector and lending rates will again come under scrutiny this week, with Westpac boss Gail Kelly scheduled to appear before a Senate committee in Sydney tomorrow.

Credit market jitters – mostly linked to lingering concerns of default by Portugal, Greece and Ireland – have coincided with the period that is traditionally the busiest for Australian banks borrowing from wholesale markets.

Australia’s big banks will need to borrow more than $130 billion from local and overseas markets in the next year to help fund their lending books. Global pension funds, including Australian superannuation funds, are the biggest investors in bank bonds.

But billions of dollars in funds already raised by banks including Commonwealth, ANZ and National Australia Bank since the start of the year have been costing more than this time last year.

Credit analyst Philip Bayley, of ADCM Services, said the gap between the interest rates that wholesale lenders charge and benchmark rates such as government bonds had been widening.

‘There has been an expectation through last year that credit spreads have been narrowing, but when you look at the numbers they’ve been moving wider,’ he said.

Locally, Commonwealth Bank has the biggest requirement from wholesale markets, eyeing more than $50 billion over 2010-11. Westpac is looking to raise as much as $35 billion and NAB is looking to borrow up to $30 billion. ANZ plans to raise $20-$25 billion.

The Australian government is expected to borrow about $50 billion for its funding needs this financial year.

ANZ chief executive Mike Smith warned of rising funding costs, pointing to concerns spreading through credit markets about prospects of a default by a European government. “Every time it happens, it gets credit markets in a situation where costs have increased,” he told CNBC television in Hong Kong.

Commonwealth Bank tested US markets in this year, raising $US300 million from debt investors. This prompted ANZ to weigh in quickly with a monster $US3 billion issue at rates higher than equivalent issues a year ago.

In the past week, NAB has tapped European markets. Hardest hit has been Macquarie Group, which has been forced to pay as much as 3 percentage points over US Treasury notes for $750 million of long-term debt, compared with a range of about 2.2 percentage points last year.

Posted by Eric Johnston – The Age Busine on 20th January, 2011