The Australian dollar’s 15 percent decline added about A$7 billion ($6.4 billion) to Australia & New Zealand Banking Group Ltd.’s balance sheet as the lender nears its funding goal for this fiscal year, its group treasurer said.
Under cross-currency swaps linked to debt issued in foreign markets, counterparties return collateral as the currency falls, giving the bank “an immediate cash inflow,” Rick Moscati said in an interview in Sydney today. “It actually reduces the amount of debt you need to issue offshore.”
Australia’s banks rely on overseas markets for as much as 70 percent of their debt funding and the positive impact on their balance sheets from the currency’s fall far outweighs any negative effects, Moscati said. The Australian dollar has slid from a high of $1.0582 on April 11 to a low of $0.9037 on July 3. It was quoted at $0.9201 at 4:39 p.m. in Sydney.
“The potential collateral pool for the Australian major banks from a 10 percent depreciation in the Australian dollar may be as much as A$30 billion,” JPMorgan Chase & (JPM:US) Co’s Sydney-based banking analyst Scott Manning said in a note to investors on July 2. He put the inflow for ANZ at A$6 billion and A$8 billion for the other three banks.
Commonwealth Bank of Australia, Westpac Banking Corp. (WBC), National Australia Bank Ltd. and ANZ Bank have about A$400 billion of bonds outstanding, data compiled by Bloomberg show.
“There is a natural safety-valve mechanism built into the way we issue foreign-currency debt,” Moscati said. If the currency depreciates, demand for Australian credit decreases. The resulting increase in the value of the stock of foreign debt more than offsets that drop in demand, Moscati said.
The bank’s funding task for the year ending Sept. 30 is at the lower end of a range in recent years of A$20 billion to A$25 billion, Moscati said. With A$19 billion having been raised, “we are pretty much there,” he said. “We could call it a day today if we wanted to.”
ANZ said yesterday that it had allocated A$1 billion of ANZ Capital Notes following strong investor demand during a bookbuild process.
The lender has beefed up capital and liquidity over the past five years in response to stronger global banking rules aimed at averting another financial crisis. ANZ’s Tier 1 capital ratio was 12.1 percent as at March 31 from 6.7 percent in 2007.
“With what we know today we think we are appropriately capitalized and now it is more about maintaining that capital rather than continuing to improve it,” Moscati said. “We don’t think there’s a huge amount of capital impost coming down the pipeline” from any further regulatory changes.
Regulatory change, Australia’s housing market and China’s growth are the three main topics for discussion when Moscati meets with foreign investors, he said. Investors are now “far less concerned” about the housing market than five years earlier, he said. Australia’s four major banks have an 85 percent market share of the A$1.4 trillion home mortgage market.
On China, “we still very much believe in the generational change and the urbanization of China that started 20 years ago and will go on for another 20 years,” he said. For debt investors concerned about any possible period of dislocation it is “easier to allay their fears by talking about how much capital we hold, how much liquidity we have and how strong our balance sheet is,” Moscati said.
ANZ Bank (ANZ)’s shares have declined 10 percent since late April and closed at A$28.64 in Sydney today.
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