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Reduced funding costs prop up profits

07 March 2012 5:35PM
Lower funding costs in the wholesale and retail market may lift profits for major banks by as much as three per cent compared with recent estimates, new estimates prepared by RBS Equities (Australia) show.Andrew Lyons and John Buonaccorsi, analysts at RBS Equities, published research yesterday that put the "upside" in the new earnings estimates for the banks at between two per cent and three per cent over the remainder of the banks' financial year.The RBS analysts used improvements in the pricing of term debt implied by secondary market indicators, such as in the rate sheets compiled by various banks. For example, five-year covered bonds now trade at 45 basis points tighter than six weeks ago when the banks opened up this market.RBS's last prepared earnings estimates for the banking sector were based on an overall cost of funds in the wholesale market that was 20 basis points higher than Lyons and Buonaccorsi now consider appropriate based on the recent shifts in pricing.The analysts have also taken into account the reduced demand for term funding arising from subdued asset growth (a factor highlighted in separate research by credit analysts).They wrote: "If we assume [the fall in spreads] can be sustained for the remainder of 2012 and then… in 2013 and beyond, the increase in average term wholesale funding costs would be 20 basis points less than our current expectation. "All else being equal, this would add approximately five basis points to our current margin forecasts, which would increase earnings by three per cent."

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