The significant increase in the money supply since February, reflecting strong growth in deposits, has given the banks an opportunity to take advantage of low funding costs and boost their margins.
But a Macquarie Securities review of the sector argues that aggressive competition for mortgage sales will offset much of the potential margin benefit.
According to the Reserve Bank’s latest Statement on Monetary Policy, there are several factors contributing to the growth in deposits.
The banking sector has extended more credit to the economy and this lending creates deposits as the funds made available to a borrower are placed on deposit until they are used.
The RBA says the majority of this lending was large companies drawing on lines of credit and holding the funds on deposit at the lending bank. New non-financial business deposits accounted for around one-quarter of the total increase in deposits in March.
“It appeared to have been motivated by precautionary reasons, as businesses looked to shore up liquidity positions at the onset of the pandemic.”
Another factor is the increased issuance of state government bonds. As with businesses, state governments put the borrowed funds on deposit until they are needed (the process of Australian government securities is different, with the borrowed funds being placed on deposit with the Reserve Bank).
A third factor is that the banking sector has repaid more debt than it has issued since February. As debt is repaid the deposits held by typical lenders, such as superannuation funds, has increased.
Banks have responded to the ready availability of low-cost funding by reducing deposit rates. Interest rate for new deposits have declined by between 40 and 70 basis points since the end of February, the RBA says.
Term deposit rates, which typically pay higher interest rates than at-call deposits, have declined by more than rates on other deposits.
Elevated liquidity in the system has also meant that short-term money rates have fallen to historically low levels. The rates on three-month bank bills remain at around 10 bps, a little below the cash rate.
Macquarie Securities has estimated that the big banks generated between A$15 billion and $27 billion of excess deposit funding over the past 12 months: $15 billion in ANZ’s case, $25 billion for Commonwealth Bank, $27 billion for NAB and $22 billion for Westpac.
“Lower deposit costs provide the potential to offset margin pressure, as long as they are not competed away in the form of lower lending spreads,” it said.
“In the short-term we expect lower funding costs to provide some margin support and offset pressure from lower interest rates on loans.
“We see scope for deposit cost optimisation. As cash rates have come down there is less for customers to gain by tying up their money in term deposits. Growth in transaction accounts has outstripped overall deposit growth.
“We estimate that a 10 per cent shift from TDs into at-call accounts contributes 2 to 4 bps to bank margins.”
Macquarie says the banks are also enjoying margin benefit from the lower spread between the bank bill swap rate and overnight indexed swaps, “which has