Wholesale credit spreads remain prohibitive for smaller banks

Suncorp-Metway has not availed itself of the government guarantee to the same extent as the big four, given that it is more expensive for it to do so with an annual fee of 100 basis points, and of course it does not have the same annual funding requirement. However, Suncorp-Metway did use the guarantee to raise US$2.5 billion in the US s144A market last week.

Suncorp issued US$1.0 billion of two-year floating rate notes at 125 bps over Libor and US$1.5 billion of FRNS with a July 2012 maturity at L+150 bps. With the Australian dollar basis swap being around the mid-teens, the three-year funds would swap back at around 165 bps over bank bills.

With or without the basis swap this is very expensive funding, but Suncorp has paid for volume, having raised the equivalent of $3.5 billion.

And perhaps to put the pricing into context, Suncorp priced Â¥36.5 billion (approximately $500 million) of five-year government-guaranteed Euro FRNs the week before last, at Libor plus 75 bps. Allowing for the basis swaps from Japanese yen to US dollars and then to Australian dollars, the pricing would equate to around 145 bps over bank bills.      

The prices that Suncorp is having to pay in wholesale markets for funding underlines the claims made by Bendigo & Adelaide Bank and Bank of Queensland last week, that as triple-B rated banks, they cannot afford to fund themselves in the wholesale markets. And they would have to add a further 150 bps for the guarantee fee.

According to our records, neither bank has raised funds offshore since early 2007 but in the domestic market Bank of Queensland raised $500 million for two years and nine months in January at 115 bps over bank bills. Both have also issued RMBS backed by AOFM.     

Bendigo and BOQ thus have a point, though Bendigo's management overplayed its hand last week.

Not having sold any wholesale liabilities that make use of the guarantee, and thus having not in fact paid the fee to the government, Bendigo can hardly allow the implication to stand - as it did in media on Thursday and Friday - that the divergent terms of the guarantee somehow bear on the bank's decision to withhold, in full, the benefit of last week's cut in the RBA cash interest rate from its home loan customers.