With TFF funding set to expire by mid-year, banks' funding costs are set to rise
Australian banks are expected to face higher funding costs as $104 billion of ultra-cheap term funding from the nation's central bank is set to expire by mid-year.
This funding, provided by the Reserve Bank of Australia, was a reprieve for banks during the worst of the COVID-19 pandemic in 2020.
The Term Funding Facility (TFF) provided $188 billion of cheap loans to banks, with interest rates as low as 0.1% and terms of up to three years, The Australian reported. This facility, which closed on June 30, 2021, helped level the playing field between small and large lenders and contributed to bumper profits for banks across the board.
However, with $104 billion of these loans expiring by June 30, banks, especially smaller regional lenders, will face squeezed margins and profits. Funding costs are expected to rise as banks replace the TFF with conventional sources of funding, according to The Australian. Smaller regional banks may face greater pressure due to their inferior credit ratings.
Impact on bank profitability and lending rates
The expiration of the TFF is expected to impact bank profitability and lending rates. As banks replace the cheap funding with conventional sources, their funding costs are likely to rise. This could lead to higher lending rates for customers.
The major banks, such as Commonwealth Bank, have already started raising funds through other means, The Australian reported. For example, Commonwealth Bank raised $1.5 billion in three-year bonds in August last year, paying rates 0.75 percentage points above the bank bill swap rate.
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The increase in funding costs is expected to be higher for smaller banks, particularly in wholesale debt markets. Commonwealth Bank, being the largest lender, demands the cheapest pricing among Australian lenders. However, even Commonwealth Bank has experienced margin pressure due to a competitive deposit market.
Funding disadvantage for regional banks
The credit ratings of banks play a significant role in determining their funding costs. The major banks, including Commonwealth Bank, Westpac, ANZ, and NAB, have higher credit ratings compared to smaller regional banks like Bendigo and Adelaide Bank, Suncorp Bank, and Bank of Queensland, The Australian reported.
The TFF had somewhat levelled the funding playing field between major and regional banks, as the cost to access the TFF was the same for all. However, with the expiration of the TFF, regional banks will go back to their natural funding disadvantage relative to the major banks.
Repayment of TFF and competition for deposits
While $104 billion of the TFF loans are set to expire by June 2024, there is still about $100 billion of TFF to be repaid back to the RBA by that time, according to The Australian. Banks are expected to repay these loans with the assistance of wholesale markets, which could slow credit growth and reduce liquidity to the private sector.
The repayment of the TFF loans is also expected to keep competition for deposits intense, as banks rush to repay their loans to the RBA. This competition for deposits could further impact banks' profitability and lending rates.
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