BBSW-OIS spread improved in August: Deposit spreads benign

Short-term funding pressures eased a touch in August with the spread between the three-month bank bill swap rate and the overnight index swap rate improving 2 basis points to 44 basis points.

However, this slight relief wasn’t enough to help Westpac which will reprice its home loans by 14 basis points this month to offset some of these funding costs.

The rate hike was foreshadowed by its recently-released third quarter trading update which saw the bank's net interest margin decline 7 basis points in the first half, excluding the treasury business.

Despite showing some signs of improvement, the BBSW-OIS spread for the second half of 2018 still remains well above the average for the first six months of the year, according to JP Morgan banking analyst Andrew Triggs.

The analyst estimates that the average spread for banks with a September balance date-  like ANZ, Westpac and National Australia Bank -  will be 22 basis points higher than for the previous year.

What remains to be seen at this stage is whether the other major banks will follow suit. Ultimately, Triggs thinks they will but says timing is relatively uncertain.

“Given Westpac’s decision to reprice, and the prevailing view that this is a structural (as opposed to cyclical) shift, we think it is inevitable that the other majors will reprice mortgages over coming weeks/months,” he said.

Mixed picture

While is not hard to make a convincing case that the other big three banks will lift rates, predictions are difficult because the broader funding cost picture looks mixed.

According to Triggs, the funding cost picture appears solid enough to prevent further loan repricing unless deposit growth deteriorates from here.

And at this stage however, it would appear to him that deposit growth is sufficient to fund growth and prevent the need for further asset repricing.

Meanwhile, he wrote clients that deposit spread trends continued to appear benign in August, with base online saver rates trending lower, and term deposit spreads mixed with no clear trajectory.

“While in recent months we had been concerned about weakening deposit growth, July APRA stats pointed to a strong pickup,” he added.

“Combined with the banks’ strong net stable funding ratio and declining credit growth, this should provide ample scope to manage these pressures over the short to medium term assuming this strength continues.”

However, Triggs argued while the banks strong NSFRs and declining loan growth has provided him with some comfort they could drive further improvement in deposit spreads, deposit growth had been fairly weak for a number of months this year.

“Although there was a noticeable improvement in July 18, should the banks be unable to sustain this level of growth, we believe it will likely become more difficult for them to extract much benefit from deposit spreads, thereby increasing the necessity for the banks to reprice mortgages.”

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