Cost of funds headaches worsen for banks

Getting a read on the Australian effects of the European-induced stress to credit markets can be difficult.

Banks by and large have sold little debt offshore since markets become much more complicated in August. And other pricing indicators, such as credit default swaps, leave a lot to be desired.

Banks have not sold much term debt in the domestic market either, with a three-week lull since ANZ dabbled in the floating rate note market in late October with a A$1 billion, four-year deal priced at 135 basis points over bank bills.

So the sequence of pricing on the mortgage-backed securities sold by mostly smaller banks over the last month or so is a key measure of market dynamics.

And for banks the pricing on these securities have taken an adverse turn.

ING Bank (Australia) on Friday priced $750 million of mortgage-backed securities at a spread that was 25 basis points higher than the spread available to the bank in the market for mortgage securities in the middle of the year.

The spread is also 35 basis points more than the pricing available to major banks early in 2011.

ING will pay 135 basis points over the one month bank bill swap rate for its top tranche that comprises $598 million (or 80 per cent) of the issue. ING sold the bonds through the IDOL Trust Series 2011-2.

ING Direct's pricing continues the steady increase in the cost of RMBS issuance by banks.

Last month Bendigo and Adelaide Bank paid 130 basis points over the one-month bank bill swap rate for the top tranche of its Torrens Series 2011-2 Trust.

Two other RMBS deals were done in October. Bankwest (a subsidiary of Commonwealth Bank) paid 125 basis points over the one-month swap rate for the $365 million A1 tranche of its Series 2011-1 Swan Trust. The tranche had a weighted average life of 2.2 years.

ME Bank paid 125 basis points over swap for the $622 million A tranche of SMHL Securitisation Fund 2011-2, which had a weighted average life of three years.

In early October National Australia Bank and Westpac sold the primary tranche of RMBS securitisations at 120 bps and 125 bps respectively over swap.

Earlier in the year these issuers were paying 100 or 105 basis points over swap for securitisation deals. For example, Westpac in February sold more than $900 million of a $1 billion RMBS deal at 100 basis points over one-month swap.

This trend in pricing on structured bank debt appears to have nothing to do with the quality of the underlying credit pools. Rather, they're an Australian result of the European crisis.

It is also noteworthy that some banks have said they will look to structured debt issues to support their wholesale funding plans.

Speaking at the NAB's investor briefing at the end of October, finance director Mark Joiner said that "you can see the importance of secured funding starting to come back. I expect secured to play a more significant role for a while."

Australian Prudential Regulation Authority chairman John Laker told a Senate committee around the same time that the Euro-crisis had effectively closed the global markets for long-term unsecured debt, an analysis unlikely to be modified by the turbulent politics of Europe over the three weeks since.

ANZ at its results earlier this month produced a handy picture (above right) of the consequence of the dislocation in funding markets these last few months.

Back in May ANZ put its "forecast portfolio funding cost", relative to the three-month swap rate, at around 120 bps and projected it to settle around that level for a couple of years before falling.

An updated projection shows this cost rising to 160 bps over the three years to 2014, and this forecast must have worsened since the bank's treasury time pulled that data together.