The biggest impact of the Reserve Bank’s Term Funding Facility was to allow the major banks to compete more aggressively in the mortgage market, rather than support the provision of credit to business, according to new analysis of the scheme.
Macquarie Securities has issued a note on TFF outcomes, saying the most obvious impact was that TFF allocations coincided with the introduction of attractive fixed rate mortgage offers from the big banks.
The flow of new mortgage business to fixed rates increased from 10 to 20 per cent before May 2020 to around 50 per cent currently.
Many smaller banks and non-bank lenders were not able to match the big bank’s fixed rate offers and three of the four majors were able to increase market share or arrest market share declines.
The exception was ANZ, which has continued to lose mortgage market share and had the smallest TFF allocation.
Macquarie said CBA borrowed A$51 billion under the scheme, NAB borrowed $32 billion, Westpac $29.8 billion and ANZ $20 billion.
The TFF, which was wound up in June, offered three-year funding at low rates – 25 basis points initially and then 10 bps after November last year. Compared with those rates, the RBA estimated that the cost of securing three-year unsecured funding in domestic wholesale debt markets for the major banks was 60 bps in June.
Macquarie estimates that as a result of this funding, CBA’s net interest margin improved by 2 bps in the 2020/21 financial year and will improve another 2 bps in the current financial year.
The other banks will get less of a margin impact. Westpac’s margin will increase by close to 1.5 bps in the year to September and NAB’s will increase by around 1.5 bps in 2021/22.
Macquarie estimates that CBA will get a total revenue benefit of $384 million from the TFF, NAB $239 million, Westpac $224 million and ANZ $150 million.
Smaller banks will get a much smaller revenue kick, with Bendigo and Adelaide Bank likely to get a total revenue benefit of $35 million and Bank of Queensland $23 million.
One of the stated aims of the TFF program was “to provide an incentive for lenders to support credit to business, especially small and medium sized businesses.” The RBA said this was “a priority area.”
This aim does not appear to have been realised. RBA figures show that lenders’ mortgage balances grew by 5.3 per cent in the year to June but business credit balances grew by just 0.6 per cent. This has been put down to a combination of businesses’ reluctance to borrow and tighter lending standards.
Macquarie said that by 2022/23 the margin benefits of the program will have worn off. “When these balances mature, banks are likely to experience funding cost headwinds in the form of deposit competition and higher wholesale term funding costs.”