Slowing housing hits bank profit
(31 January 2012 – Australia) Banks’ balance sheets are starting to strain under a slowdown in Australia's housing as the nation's biggest lenders are forced to pay top dollar to lock in longer-term funding.
Commonwealth Bank Australia (CBA) and Westpac have tapped local investors for a combined A$6.6 billion in recent weeks, paying a premium to secure bonds with a maturity of five years at a time when Europe's debt problems continue to push up costs.
This month, ANZ raised A$1.2 billion in 10-year funds from European investors in the most expensive raising so far this year. The bank is also planning to sell four-year bonds to Japanese investors over the next month.
This high cost is adding to pressure to push through additional interest rate rises on home loans as banks seek to keep high profit margins.
While Australian banks remain well funded, senior bank executives privately concede a slowing housing market, as well as pressures across Australia's east coast economy, has meant home loan customers now are taking longer than expected to pay off mortgages.
The latest accounts for CBA show its average funding book is currently running at 3.6 years, down from 3.8 years in fiscal 2010.
Through a complex process used to fund home loans, banks generally calculate that most mortgages will be paid down in five to eight years, rather than the 25 to 30-year time frame in which most borrowers take out a loan.
This is due to several factors such as owners selling properties part way through the loan period and paying off the entire debt. Some borrowers often pay off more than the minimum mortgage rate, speeding up the sell-down.
But a cooling property market has led more owners to stay in existing property.
The first two months of the calendar year are traditionally the busiest time for banks raising wholesale funds. But global concerns over Europe's sovereign debt problems have pushed up pricing, causing wholesale raisings to slow sharply. Since the start of January, banks have raised A$12.8 billion here and offshore, figures compiled by Deutsche Bank show. This time a year ago raisings were running at A$23.9 billion, the figures show.
Deposits now comprise about 50 percent of bank funding, but banks must raise the shortfall through a combination of short-term and long-term wholesale funding.
Australian banks need to borrow as much as A$80 billion over the next year to replace maturing funds, analysts say. Much of this will be covered bonds, which are bonds secured by assets such as home loans.
This month, ANZ raised A$1.2 billion in 10-year funds from European investors in the most expensive raising so far this year. The bank is also planning to sell four-year bonds to Japanese investors over the next month.
This high cost is adding to pressure to push through additional interest rate rises on home loans as banks seek to keep high profit margins.
While Australian banks remain well funded, senior bank executives privately concede a slowing housing market, as well as pressures across Australia's east coast economy, has meant home loan customers now are taking longer than expected to pay off mortgages.
The latest accounts for CBA show its average funding book is currently running at 3.6 years, down from 3.8 years in fiscal 2010.
Through a complex process used to fund home loans, banks generally calculate that most mortgages will be paid down in five to eight years, rather than the 25 to 30-year time frame in which most borrowers take out a loan.
This is due to several factors such as owners selling properties part way through the loan period and paying off the entire debt. Some borrowers often pay off more than the minimum mortgage rate, speeding up the sell-down.
But a cooling property market has led more owners to stay in existing property.
The first two months of the calendar year are traditionally the busiest time for banks raising wholesale funds. But global concerns over Europe's sovereign debt problems have pushed up pricing, causing wholesale raisings to slow sharply. Since the start of January, banks have raised A$12.8 billion here and offshore, figures compiled by Deutsche Bank show. This time a year ago raisings were running at A$23.9 billion, the figures show.
Deposits now comprise about 50 percent of bank funding, but banks must raise the shortfall through a combination of short-term and long-term wholesale funding.
Australian banks need to borrow as much as A$80 billion over the next year to replace maturing funds, analysts say. Much of this will be covered bonds, which are bonds secured by assets such as home loans.
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