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Australian banks blitz debt markets for $9 billion as funding costs fall

Australia's big four banks have raised $9 billion in the first 10 days of the year, taking advantage of the most favourable conditions in capital markets since the financial crisis.

The frantic pace of issuance exceeds the $5.25 billion raised by the major banks in January 2017 as they lock in lower funding costs and further reduce the need to compete aggressively for deposit funding.

On Tuesday, ANZ Banking Group issued $3 billion of three-year and five-year debt in the Australian market, paying a rate of 3.13 per cent for the five-year tranche. The margin ANZ paid for the five-year of 77 basis points over the bank rate is a 30 per cent decline from the 111 basis points paid by the Commonwealth Bank when it sold five-year bonds to Australian investors in January 2017.

The ANZ raising kicked off activity in the Australian bond market for 2018 and offshore deals from National Australia Bank, Westpac and Commonwealth Bank of Australia.

National Australia Bank raised $US2.5 billion of three-year and five-year bonds in the US, which according to credit analysts represented cheaper or equivalent funding compared to pricing in the Australian bond market.

In the first week of 2018,Westpac raised €1.75 billion of long term debt via a covered bond issue while the Commonwealth Bank raised $US1.25 billion of 30-year junior ranking debt that shored up its regulatory capital requirements.

The CBA raising took advantage of several favourable factors such as low ultra-long-term interest rates fuelled by demand from life insurance companies and a decline in credit spreads for long-term junior ranking debt.

The favourable state of the capital markets should help ease net interest margin pressures for the Australian banks that had until now been focused on raising more expensive long-term debt to comply with Net Stable Funding Ratio requirements, which came into effect this month.

The NSFR forms part of the so-called Basel III global banking reforms and require banks to better match their funding terms with that of the loans they extend.

While the banks source most of their funding via deposits from households and corporations, they are reliant on the capital markets to plug the so-called funding gap.

Favourable conditions in capital markets typically reduce the need for the major banks to chase deposits by offering attractive rates to savers.

Australia's banks are typically active in the first month of the year when international bond investors are keen to put their money to work. The major banks raised about $100 billion in domestic and international bond markets in 2017 but are expected to reduce their activity in 2018.

The banks annual funding requirements are a function of maturities that need to be refinanced, but also the gap in loan growth relative to deposits. With Australian Prudential Regulatory Authority data showing major bank loan growth slowing to five per cent as limits on investor lending have an impact, their need for additional wholesale funding is expected to decline.

The raising also comes as global bond markets finally respond to the improved global economic growth outlook and strong sentiment as equity markets hit new highs.

On Wednesday, the US 10-year bond rate rose above the key 2.5 per cent level for the first time since March 2017. It came as reduced bond purchases by the Bank of Japan prompted traders to price in the prospect that global central banks will speed up the "normalisation" process of winding back their accommodative policies.

Australian banks, however, typically hedge the interest rate component of their wholesale funding and are more concerned about the credit spread, or premium, they pay above the risk-free rate, rather than outright borrowing rates.