are they in some trouble, page-6

Lets think this one through....

None of the local banks have a perfectly matched deposit base to fund their housing portfolios. All banks use a combination of deposit base (call/cheque/savings/TDs) and wholesale (bank bills/CDs/MTNs/RMBS) to fund their total funding requirements (including of course the most expensive form of funding of all - equity!) Each bank has different profiles that impacts pressure points in their funding make-up.

Due to recent credit market woes all of the banks have had various forms of wholesale funding either dry up and/or become significantly more expensive. Case in point, RMBS markets have almost fully dried up at present. WBC and ANZ raised 3-5 year money around November for 30-40 points over. Pre-August all banks were raising in the teens. Go no further than AFR articles in recent days as to where the 90 day bank bill swap rate (the rate that banks lend to each other wholesale) has been relative to the RBA cash rate. Very high historically!

The four majors in Australia have come through this period in a very strong position (earnings/capital/loan book quality). Credit ratings (S&P and Moodys) remain in the top sector of banks globally. Mainly because the Australian banks have not dabbled US sub-prime, SIVs, etc.

Exposures the banks have to the likes of Centro will be managed without too much trouble because the banks lend at a senior ranked position relative to equity holders. Any shortfall is typically absorbed by bank loan loss provisioning. All the banks are exposed to a greater or less degree, no one bank can typically bank large debt facilities due to APRA large exposure restrictions (the banks of course have their own internal exposure cap rules over and above the regulator).

Turning to interest rates being changed on housing loan portfolios. The banks are damned if they do and damned if they dont. If the do they risk erosion of market share to competitors but at least initially maintain interest margins. If they dont, borrower costs stay down but interest margins contract and if other competitors raise rates then they may win market share. But with higher funding costs, initial benefits can be limited.

Now overlay the shareholder perspective to the above argument. If NAB leaves rates unchanged and interest margins get squeezed the SP suffers further as future NPAT prospects deteriorate. If NAB increases rates margins are maintained and this should provide support to SP.

I suppose it just comes down to which side of the equation individuals are on. Perhaps a fixed rate housing loan with a rising share price is best outcome for punters still with a mortgage.

Just my thoughts - DYOR.

Uri