The European Central Bank’s decision to push interest rates into negative territory is allowing Australian banks to borrow more cheaply than at any time since the financial crisis and is likely to increase their profits or cut homeowners’ mortgage costs.
ANZ Banking Group raised $US2.25 billion ($2.4 billion) from US investors in New York on Monday night. The bank is paying 1.25 per cent for $US750,000 in three-year fixed notes, a margin of 40 basis points above benchmark three-year US government bonds.
The ECB’s move was aimed at discouraging major US and UK financial institutions from parking surplus funds in the euro zone, which pushes the region’s currency higher and makes exports less competitive.
The decision to impose negative interest rates means that big US and UK financial institutions will likely follow the lead of Japanese investors in hoovering up high-yielding Australian securities, including bank debt.
Australia’s banks have been quick to capitalise on the abundant and cheap liquidity sloshing around financial markets. Last week, Westpac Banking Corp sold $2.5 billion of residential mortgage-backed securities at the lowest yields since the financial crisis.
Macquarie Group sold $1.035 billion of asset-based securities – mainly Australian car and equipment loans and leases – which was the largest and cheapest such deal since the financial crisis. ING Bank Australia also sold a $1.25 billion RMBS deal.
ANZ also raised $US1.25 billion in five-year fixed rate debt, paying 2.25 per cent, or 60 basis points above benchmark five-year US government bonds and $250,000 in three-year floating rate debt, on which it paid 26 basis points above the 3-month benchmark rate.
The easy availability of cheap funding could exacerbate the already bruising battle for market share in the country’s home loan market.
Last month, the Australian Prudential Regulation Authority, which is worried that banks are dropping lending standards in the fierce battle for market share, issued tough new guidelines on how banks should monitor and manage their mortgage risks.
APRA chairman John Laker warned that against the backdrop of rising house prices and strong competition,
“APRA is seeing increasing evidence of lending with higher-risk characteristics and it does not want this trend to continue.”
The ECB’s decision to cut its key interest rate means that Australian bonds are likely to remain in favour with offshore investors, which will keep upward pressure on the local currency.
Investors can earn a yield of 3.78 per cent on 10-year Australian bonds, which is one of only 11 countries boasting a triple-A credit rating, compared with 1.4 per cent on comparable German bunds and 1.7 per cent on French 10-year bonds.
Although Australia’s banks will welcome lower rates, German savings banks and insurance companies have been campaigning against the ECB’s interest rate cuts, prompting Germany’s powerful Bundesbank to spend the past fortnight providing background briefings to German reporters explaining the need for lower rates.
Earlier this month German savings banks and insurance companies warned a cut in interest rates would hurt savers. German life companies are also opposed to low interest rates because some have sold products with guaranteed returns of around 4 per cent – well above the 1.4 per cent return on 10-year German bunds. Germany’s finance minister is planning measures to support life insurers struggling to meet guaranteed returns to clients in the face of low interest rates.
The voracious appetite for Australian debt has seen the Australian credit default swap index, which insures holders of corporate bonds against non-payment, drop below 80 points for the first time since 2010.
Extremely loose monetary policy by the world’s major central banks has stifled volatility in global markets, with the Chicago Board Options Exchange Volatility Index (known as the VIX) from the start of April through to last week falling to its lowest level for a full quarter since the first three months of 2007.
HSBC Australia chief economist Paul Bloxham said “globally, the fact that central banks continue to keep monetary policy very loose – and the Europeans have entered into new territory in terms of unconventional policy – is making the cost of capital lower for banks.
“And that’s what it’s supposed to do. It’s supposed to make monetary conditions in these countries – and globally – easier.”
Australian banks need to raise about $100 billion a year in wholesale markets, about half of which is raised offshore.Lower funding costs will benefit both the major and the regional banks, and reduce the pressure on them to offer attractive interest rates to lure local deposits.