why has westpac tanked?, page-7

More pain as banks prepare to pass on costs.
Danny John June 29, 2010
BORROWERS are unlikely to get any relief through lower costs in the forseeable future as the big banks face replacing tens of billions of dollars of cheaper-priced debt at much higher rates.

That was the message underlined by ANZ yesterday when it disclosed that its long-term debt was now costing 20 per cent more across its $90 billion portfolio of borrowings, extending to the 2014 financial year.

ANZ told investors in London that, while funding costs had fallen since the peak of the global financial crisis, pricing remained high and would continue to rise as the bank looked to replace another quarter of its long-term loan book.

Like its major counterparts, ANZ has been paying as much as one full percentage point more than its debt was costing in the economic boom years before 2007.

At the height of the financial crisis, when the federal government's AAA credit rating was required to guarantee new bank lending, the industry was paying as much as double that to keep wholesale financing sources open.

That situation has eased and the big banks have been able to cut their reliance on government-guaranteed debt - and the price they pay to use it - by using their own AA credit ratings to obtain replacement funding as their borrowings have matured.

Banks have typically borrowed from domestic and overseas sources for two to three years, but have been extending these periods to about five years to lock in secured funding at fixed rates.

ANZ said yesterday that five years was now the average, compared with 3.9 years in 2009.

It also announced it had raised 70 per cent of its target of $25 billion for the 2010 financial year, which it estimated it would need to meet customers' loan requirements in the next year or so.

But the high price of the debt will feed through to interest rates on commercial loans such as mortgages, business and personal loans and credit cards, market watchers say.

According to figures compiled by BusinessDay, between now and September next year the banks need to replace long-term funding of the equivalent of $125 billion in pre-financial crisis terms.

This means little chance of lower loan rates as the banks pass on higher funding costs to customers.

Source: The Age