Presentations BY THE CURVE TEAM –

APRA Monthly Banking Statistics

August 12th 2016

Growth in banks’ balance sheets has slowed over the past six months, mainly reflecting a slowing in deposit growth.

Jonathan Shapiro has written an excellent article in the Weekend AFR titled “Banks Brace for Multi Year Deposits War” on the funding gap evident throughout the broad ADI community.

I have analysed the yoy data for 2015-16. A summary table of the funding gap across each of the 3 business silos (Institutional, Business and Retail) is as follows:

You will notice the significant funding gap within the Retail segment with CBA’s gap of $21 Billion the most significant.

Introduction of the Liquidity Coverage Ratio in 2015 reduced the attractiveness to banks of very short-term wholesale funding. Whilst the Basle III LCR framework depicts Retail Deposits as the “most sticky” with the lowest percentage of required HQLA, the reality of these deposits being quite volatile is occurring.

The stability of the last 7 years when term deposit rates were 4 – 7% has been replaced by earnings of between 2 – 3%. This is a clear and present danger for ADIs balance sheets. The behaviour characteristics of both borrowers and depositors are rapidly demonstrating a heightened level of uncertainty. At every upcoming maturity date depositors consider the yield offered in alternate asset classes to improve earnings. Retention statistics are deteriorating. Competition for deposits will be very dynamic.

Hence there is no surprise in last week’s announcement of 50-80 bpt increases in the 4 major bank’s term deposits for longer dated tenors. The previous tactical response early this year was to underpin stability in funding by influencing rollover to longer tenors. This effectively withdraws the option for depositors to make regular decisions on reinvestment. ADIs are on a campaign to term out their liability books in a wide variety of tactical approaches. Cooling the velocity of redemptions is a primary objective.

The deposits war is demonstrating its latest tactical moves. We can expect to see many more of these as we approach the implementation date of NSFR on 1/1/2018. There are numerous catalysts in close proximity to each other at the current time. The major banks re-pricing announcement of term deposits last week has been followed up by an A1 rated ADI offering 3.05% for 1 yr (+1.35% above swap). To follow up AMP announced on Friday a 7 month special on 2.95% (+1.00% above benchmark). I foresee an exponential rate of reaction to developing circumstances.

What will ADI’s offer on Term Deposits if the RBA OCR falls from 1.50% to 1.25% in November or even to 1.00% during 2017? It is not unrealistic to predict deposit rates may blow out to margins of 1.75 – 2.50% over the 1.00% cash rate. I will let you predict where the 3m BBSW benchmark rate will be at such low extremes. The principal catalyst for this would be accelerating asset growth that requires partial or substantial funding through term deposits. It may be prudent to stabilise the deposit book by aggressively retaining existing deposits or attracting new ones at higher rates and margins.

Game theorists would be modelling a wide array of scenarios as possible responses to extreme underlying tectonic forces. Funding markets are going to be the main game to watch for the remainder of this year and all of 2017. It will be a very exact science to determine the optimal and sustainable long term balance of asset size and liability support that the whole market is going to deliver to each ADI. Institutional, business and retails clients may choose to have more liberal investment policies given a potential sovereign and bank credit rating downgrade and a multiplicity of divergent credit curves from individual ADIs.

Peter Sheahan

Peter Sheahan

Director
Institutional Markets