Australian bank bondholders are demanding record yield premiums relative to non-financial debt as lending profitability wanes amid the slowest credit growth in three decades.
Australian financial bonds yielded 308 basis points, or 3.08 percentage points, more than government debt on May 1 compared with the 257 basis-point spread for industrial company notes, Bank of America Merrill Lynch indexes show. The 51 basis- point premium is the widest on record. Globally, spreads on bank securities were 105 basis points wider than on non-financial bonds, compared with a 171 basis point premium on Dec. 31, the indexes show.
Westpac Banking Corp. (WBC) and Australia & New Zealand Banking Group Ltd. (ANZ) say returns on loans are dropping as competition for deposits and Europe’s debt crisis drive up funding costs while home owners increase borrowing at 5.3 percent a year, the slowest pace since records began in 1977. National Australia Bank Ltd. (NAB) and Commonwealth Bank of Australia (CBA) this week withheld part of the central bank’s half-percentage point interest-rate cut to improve margins, drawing fire from Treasurer Wayne Swan, who said the move was “an insult to hardworking Australians.”
“Australian banks have suffered from guilt-by-association to the broader global banking sector, and their bond spreads have not been immune,” said John Manning, Sydney-based senior investment manager at Aberdeen Asset Management Ltd., which manages A$14 billion ($14.4 billion) of fixed income assets. “Intense competition for bank deposits domestically has hurt net-interest margins.”
ANZ Bank is paying an average 28 basis points more to depositors and 15 basis points extra to bondholders compared with six months ago, relative to the cash rate, Chief Executive Officer Michael Smith said May 2.
Six-month term deposits cost Australian lenders the most relative to the borrowing benchmark on record last month, according to central bank data. The higher funding costs have driven the gap between the lenders’ mortgage rates and the Reserve Bank of Australia’s 3.75 percent benchmark to the widest in 18 years, when the nation was recovering from its last recession, data compiled by Bloomberg show.
Westpac reported yesterday the smallest increase in first- half profit since 2009 as competition to attract deposits squeezed margins. The bank’s net interest margin, a measure of lending profitability, fell 4 basis points to 2.17 percent as of March 31 from the year-earlier period, it said in a regulatory filing.
ANZ’s margin fell 9 basis points to 2.38 percent from a year earlier, more than the 6-point decline expected by analysts, the lender reported May 2. Profitability was lowest in Australia, where the margin dropped 15 basis points.
“The issue in Australia was continued margin pressure driven by higher deposit pricing and higher long-term wholesale funding costs,” Smith told investors on a call. “It’s incredibly competitive.”
Elsewhere in Australian credit markets, KFW, the biggest seller of kangaroo bonds this year, added A$450 million to an existing line of debt due in May 2015.
The notes were priced to yield 111 basis points more than similar-maturity government debt, according to a statement from National Australia Bank, which helped arrange the sale.
Australia’s benchmark 10-year bond yield fell 7 basis points to 3.57 percent yesterday in Sydney, or 164 basis points more than similar-maturity Treasuries. The rate dropped to a record low 3.534 percent on May 1.
Australia’s dollar, the world’s fifth-most traded currency, bought $1.0304.
The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk rose 3 basis points to 156 as of 5:35 p.m. in Sydney, according to Markit Group Ltd.
Of the A$27.8 billion of corporate bonds sold in Australia this year, 86 percent was sold by banks, according to data compiled by Bloomberg.
Standard & Poor’s has created an Australian corporate bond index where the constituents are equally weighted, meaning the gauge contains less financial debt, J.R. Rieger, a vice- president at the ratings company, said in an interview in Sydney yesterday.
“The discussions with us have been ‘S&P, we don’t want to have our portfolios so heavily weighted in financials, is there an alternative strategy that you can benchmark for us’,” he said.
Commonwealth Bank will reduce its variable home loan rate by 40 basis points, taking the standard rate to 7.01 percent a year, the Sydney-based lender said in an e-mailed statement yesterday. National Australia Bank dropped its rate by 32 basis points a day earlier.
ANZ reviews its interest rates on the second Friday of every month. Westpac hasn’t announced its plans.
Even after the May 1 rate cut by the central bank, Australia has the highest borrowing costs among major developed nations, weighing on the housing market and consumer confidence.
Housing credit growth held at 5.3 percent in March, down from 8.3 percent two years earlier and the least since central bank data began in 1977.
Sales of new homes in Australia fell in March to a record low, according to the Canberra-based Housing Industry Association. House prices declined in the three months through March, extending the longest losing streak in at least a decade, the Australian Bureau of Statistics said May 1.
“With an uptick in concerns about the health of the Australian housing market, we expect Australian bank bonds to underperform their benchmarks,” said Krishna Hegde, Singapore- based head of Asia credit research at Barclays Plc. “We don’t see the relative spreads of financials and industrials changing in the near-term.”
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