Banks in a race to refinance their pandemic loans ahead of roll-off

Australia’s banks are running out of time to refinance almost $188bn of pandemic loans picked up from the RBA.

Australia’s major banks and their smaller rivals are racing to lock in funding – expected to be at a vastly higher costs – as the Reserve Bank’s pandemic-era facility is due to all but expire next year.

But analysts warn that the expiry of the $188bn ultra-low rate Term Funding Facility may cause a margin squeeze for banks if they are unable to secure attractive, alternative financing.

S&P Global Ratings financial institution ratings director Sharad Jain said banks were looking at “big numbers in the context of balance sheets” as the RBA’s pandemic funding rolled off from their balance sheets this year.

“This is about a half of the term funding the major banks have done in any peak years,” he said. “The highest they’ve previously each done is $40bn each year.”

He said the banks would be going from “essentially free” funding to a far higher-rate environment.

Between them, banks and non banks issued almost $500bn in fixed-interest loans – offering rates as low as 1.67 per cent – over the course of the pandemic.

The $188bn TFF, which came after the central bank moved to support lending in March 2020 as the Covid-19 pandemic intensified in Australia, resulted in lenders accessing funding for as little as 0.1 per cent, which was in line with the record low cash rate.

These loans, offered on terms up to three years, will all come due by the end of 2024.

As borrowers come off fixed-rate mortgages to much higher variable rates, banks will also need to find new funding.

The TFF was closed to new drawdowns in mid-2021 before the cash rate soared as the RBA sought to combat rising inflation. The central bank lifted the cash rate from 0.1 per cent in April 2022 to 3.1 per cent in December and analysts expect it to go higher in the coming months.

Some banks have been active in securing funding ahead of time.

Bank of Queensland entered the market on Thursday with a $650m four-year loan priced at 135 basis points above the bank bill swap rate, alongside a $150m note yielding at 4.7 per cent semi-annually. Westpac also launched a bid for finance with a €1bn ($1.5bn) three-year note at 60bp above the mid-swap benchmark.

Mr Jain said there was still “quite significant” investor appetite to meet the funding needs of the banks and non-bank lenders after several years of muted market rises, but warned the funding demands were “a bigger task” than what has been previously been the case.

S&P Global Ratings’ structured finance director Erin Kitson said funding costs were going up “across the board” but non-banks were further exposed to the rise in funding costs as they didn’t have household and business deposits to draw from.

“As overall lending volumes start to slow we also think that non-banks will have to do more, particularly as they don’t have the funding costs advantage of the banks,” she said.

MyState chief executive Brett Morgan said the bank had been active in securing refinancing of its TFF loans. Picture: John Feder

“The banks can pick up the very prime borrowers; non-banks will pivot to very niche type lenders.”

Bank have historically funded much of their lending from customer deposits. But unlike the rapid run-up in the cash rate, which banks passed through to borrowers with gusto, there has been little appetite to give savers a boost. The spread between low deposit rates and booming loan rates has led brokers at Goldman Sachs to forecast a 20 per cent rise in bank earnings this year.

The investment bank also warns that a headwind to that scenario would occur if lenders competed more fiercely to secure customer deposits and savings.

Commonwealth Bank, Australia’s largest lender, increased its NetBank Saver rate to 4 per cent on Thursday, the highest rate from the four big banks according to a RateCity. However, that savings rate reverts to 1.6 per cent after 5 months. BOQ is still leading the pack with savings rates of up to 4.75 per cent.

Fitch Ratings financial institution director Jack Do said banks were locking in funding early because there was continued uncertainty about the rates environment later in the year.

“We’re thinking about cost and around the type they opt for, whether it‘s shorter term issuance to refinance the TFF immediately, or whether they opt for longer term funding, that’s yet to be seen,” he said. “The non banks will bear the rising cost of wholesale funding, they don’t have the low cost deposit base.”

Tasmania’s MyState, which made inroads into the mainland home-lending market on the back of $184m in TFF funding, has been making several bids to tie up its funding needs ahead of the roll off. MyState priced $65m in capital notes to wholesale investors in August at 5.5 per cent above the three month bank bill swap rate, after picking up $25m in November 2021. The lender also went to market in a $400m residential mortgage-backed security deal in December – the first time the bank had issued an RMBS since September 2019.

MyState chief executive Brett Morgan said the bank had been “really conscious” of its TFF repayment schedule, with its recent raises reducing the total exposure of its funding book from 5 per cent to just 2.5 per cent. “It’s all part of the funding plan, we look at our funding plan many years out and all our expected ins and outs, predominantly we raise from customer deposits,” he said.

Mr Morgan said MyState had increased its deposits by $1.1bn in the 12 months to September 30. It offers savers 4 per cent interest.