Wholesale funding costs improve: JP Morgan

Australia's major banks are set to benefit from improved wholesale funding conditions, but consumers are unlikely to see out-of-cycle rate reductions in the near term, according to JP Morgan.

Its latest JP Morgan Australian Mortgage Industry Report, published in conjunction with Digital Finance Analytics, adds that funding constraints are likely to remain and are contingent on improvements in deposit pricing.

The report found that while whole funding costs have improved, the funding constraints that largely remain would impact on growth as banks maintained annual issuance of approximately $100 billion to meet refinancing obligations.

It added that loan growth would continue to be largely funded by deposits.

Scott Manning, banking analyst at JP Morgan, said that wholesale funding costs are now below the average cost of the wholesale portfolio for the first time since 2007.

He added that this places the major banks in a stronger competitive position, with the banks likely to be dealing with a modest net interest tailwind from an improved outlook for the cost of funds in coming years.

However, he added that funding constraints would continue to impact housing credit growth.

"Funding costs have been elevated for a sustained period of time, so it will take a sustained period of time for the average cost of funds to start to come down," he said.

"Moreover, out of cycle rate reductions are likely to be contingent on improvements in deposit pricing, which we are approaching with a degree of caution."

Martin North, principal at Digital Finance Analytics and co-author of the report, said there were signs of increasing demand for housing credit, but agreed that growth remained constrained.

"The household interest burden on disposable income has improved over the past 12 months, but indebtedness remains high an house prices in Australia remain at very high levels.

"despite improved wholesale funding conditions and the lower interest rate environment, it is unlikely we will see run away credit growth in the market any time soon," he said.

However, North added that borrower intentions have recently bottomed and are showing signs of improvement.

"In our view, down traders have ultimately provided a degree of blockage to the market by not being willing to sell due to the perception that market values for their current residence are too low.

"With down traders and up traders both now increasing their buying intentions, overall we expect a higher degree of churn to return to the existing pool of housing stock," he said.

Capital Markets,
JP Morgan, Martin North, Scott Manning
Angela Faherty, afaherty@financialpublications.com.au
Article Posted:
April 11, 2013

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