RBA touts ‘robust’ financial system and banks' ability to refinance

The Reserve Bank says the nation’s banks will be able to refinance $188bn in cheap funding, provided markets are running smoothly.

The RBA review said the financial system remained “robust”, and was well-placed to continue supporting Australia’s economic expansion. Picture: Richard Dobson

The nation’s banks are likely to comfortably refinance the $188bn borrowed from the Reserve Bank under its term funding facility, provided wholesale markets are operating smoothly, according to the central bank.

The RBA said in its biannual Financial Stability Review that the banks would mostly issue wholesale debt, although there were other options.

“The TFF refinancing task, while sizeable, is not expected to pose a challenge for the banking sector, absent a dislocation in funding markets,” the review said.

“Their final funding decision will depend on a number of factors, including growth of their assets and deposits and the relative cost of funds.”

The TFF, which closed to new drawdowns in mid-2021, was part of a comprehensive set of measures to support the economy in the early stages of Covid-19.

It provided low-cost, three-year funding to the banks, reinforcing the benefits of the record-low cash rate.

The facility has two maturity dates – September 30, 2023 for funds drawn under the initial allowance, and June 30, 2024 for the second tranche.

Together with other bonds maturing, the sector’s refinancing task in the six months around each of the two maturity dates is expected to be about $130bn – equivalent to around three per cent of banks‘ total liabilities.

The RBA said bank issuance of wholesale debt had lifted since the TFF closed to new drawdowns, and some of this had been at longer maturities than in recent years.

“The lead time before the TFF funds need to be repaid allows banks to spread issuance over a longer period, adjusting their funding plans as appropriate,” it said.

The review said the financial system remained “robust”, and was well-placed to continue supporting Australia’s economic expansion.

The banks enjoyed strong capital positions and healthy profits from the recovery, enabling them to unwind about half the provisions set aside at the start of the pandemic and return capital to shareholders.

Liquidity was also strong.

On Tuesday, RBA governor Philip Lowe abandoned his guidance of “patience” after the April board meeting, signalling that the cash rate could be lifted from its record-low of 0.1 per cent as early as June depending on next month’s inflation and wages data.

Westpac brought forward its forecast for the first rate increase in the new cycle from August to June.

It now expects hikes in most months of the second half of 2022, with the cash rate peaking at 2 per cent in June 2023 instead of 1.75 per cent in February 2024.

While all the big four banks are now forecasting lift-off for the cash rate in June, they expect the cycle of increases to finish at different rates and varying times.

CBA believes the cash rate will reach 1.25 per cent by February 2023, with NAB forecasting a 2.25 per cent rate by August 2024 and ANZ anticipating a 3 per cent rate sometime after 2023.

The RBA noted in the bulletin that market participants were expecting large hikes in short-term interest rates, with market pricing implying an increase of about 300 basis points over the next couple of years.

Banks and financial institutions faced little direct risk to their balance sheets, although indirect exposures through their customers would still need to be managed.

In the meantime, the sector’s profits were supported by credit growth and low funding costs, but interest margins had narrowed because of tougher competition.

Banks until recently were offering lower rates on fixed-rate mortgages, resulting in customers switching to lower-margin fixed-rate products.

“Over the coming period, market analysts expect increased interest rates to support net interest margins and profitability,” the RBA said.

“While higher lending rates support profits, competition for funding will push the cost of these funds higher.

“The overall effect on net interest margins will depend on the extent of competition in lending and funding markets.”

Elsewhere, the RBA said that non-bank lending to households was growing “rapidly”, and was close to a decade-high of about 20 per cent on a six-month annualised basis.

However, there was no evidence that risks to financial stability were growing.

This was because the increase contributed less than a percentage point to the eight per cent growth in total housing credit – non-bank lenders’ share of housing credit increased, but its share of total lending was still small at less than five per cent.

In the insurance industry, firms were well-capitalised and profits had further recovered from the very low levels experienced in 2020.

“The rise in general insurers‘ profits mostly reflected a decline in the amount of claims and higher premiums, partly offset by lower investment income,” the RBA said.

“The number of claims has risen more recently due to the flooding in New South Wales and Queensland, but insurers do not expect this to materially change their outlook for natural disaster costs.

“Insurers continue to maintain their reinsurance cover, which will provide significant protection from natural disaster claims.”