Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

Australia Banks / Thematic (Sector/Industry)

Stay Underweight Banks. One of the key areas of push-back from clients to our call for Australian equity market outperformance is concerns about the Banks.  We agree sentiment towards the Aussie Banks is being impacted by the Banking Royal Commission and there are still unanswered questions about fines and the prospect of even tougher lending standards.  However, valuations are not stretched and the earnings outlook is only modest.  We expect there will be an opportunity to move back to neutral on the sector in the months ahead.Higher funding costs have emerged. Repatriation of offshore cash holdings by US corporates and several other factors have contributed to the recent tightening in offshore US dollar lending markets.  Cash repatriation, resulting from changes to tax law in the US, has occurred during a surge of T-Bill issuance, the end of the Japanese fiscal year.  A more structural underlying pressure has come from the reduction of Reserve deposits with the Fed, which began in 2014. Tightness in US Dollar Libor Markets Should Ease. Funding pressures in offshore US dollar markets are probably close to their peak as several of the one-off factors abate.  The forward rate agreement (FRA) curve suggests these funding pressures should ease in coming months and return to more normal levels.  The corporate paper markets have also seen an increase in the cost of funding and these cost pressures should also ease in the months ahead. Australian Banks Have Seen an Increase in Funding Costs.  Tightening of conditions in short-term US dollar inter-bank lending markets has led to wider spreads in similar Australian dollar markets and this has added to concerns about the sector.  However, the funding mix for Australian Banks became more skewed towards deposits following the Global Financial Crisis and deposit rates have fallen recently. Indeed, this has been a timely offset to the pressures on funding in short-term inter-bank lending markets because it means the impact on the overall funding mix has been relatively muted.  We estimate the overall mix of funding costs has increased by around 3bp to 1.81%, but this increase is coming off a record low at the end of last year of around 1.78%.

Stay Underweight Banks. One of the key areas of push-back from clients to our call for Australian equity market outperformance is concerns about the Banks.  We agree sentiment towards the Aussie Banks is being impacted by the Banking Royal Commission and there are still unanswered questions about fines and the prospect of even tougher lending standards.  However, valuations are not stretched and the earnings outlook is only modest.  We expect there will be an opportunity to move back to neutral on the sector in the months ahead.Higher funding costs have emerged. Repatriation of offshore cash holdings by US corporates and several other factors have contributed to the recent tightening in offshore US dollar lending markets.  Cash repatriation, resulting from changes to tax law in the US, has occurred during a surge of T-Bill issuance, the end of the Japanese fiscal year.  A more structural underlying pressure has come from the reduction of Reserve deposits with the Fed, which began in 2014. Tightness in US Dollar Libor Markets Should Ease. Funding pressures in offshore US dollar markets are probably close to their peak as several of the one-off factors abate.  The forward rate agreement (FRA) curve suggests these funding pressures should ease in coming months and return to more normal levels.  The corporate paper markets have also seen an increase in the cost of funding and these cost pressures should also ease in the months ahead. Australian Banks Have Seen an Increase in Funding Costs.  Tightening of conditions in short-term US dollar inter-bank lending markets has led to wider spreads in similar Australian dollar markets and this has added to concerns about the sector.  However, the funding mix for Australian Banks became more skewed towards deposits following the Global Financial Crisis and deposit rates have fallen recently. Indeed, this has been a timely offset to the pressures on funding in short-term inter-bank lending markets because it means the impact on the overall funding mix has been relatively muted.  We estimate the overall mix of funding costs has increased by around 3bp to 1.81%, but this increase is coming off a record low at the end of last year of around 1.78%.

Higher Funding Costs No Big Deal for Aussie Banks