Australian companies are already feeling the sting of the European debt crisis, as banks move to push up interest rates they charge to reflect growing turmoil in global financial markets.
Outgoing Commonwealth bank boss Ralph Norris sounded the alarm recently, warning that the crunch in global financial markets threatened to choke off funding for banks around the world. ”This has potential to be significantly worse than the Lehman Brothers collapse and the subprime crisis because now we are talking about nation states,” he warned.
Westpac boss Gail Kelly has also expressed her fears about the deteriorating situation, saying that developments in Europe were “a major concern”.
Some analysts are fretting that the Australian banks will face sharply higher borrowing costs when they return to global capital markets next year, seeking to raise tens of billions of dollars. But others argue that the outlook for the banks isn’t nearly as gloomy as they’d have you believe.
They note that although the banks’ wholesale borrowing costs are edging up, wholesale funds now only account for around 40% of total bank funding. When it comes to retail deposits, which now represent a more important source of funding, the banks are doing extremely well.
Australians looking for a home for their money would be hard pressed to find a better option than the big local banks, which enjoy an enviable credit rating. And growing financial market stress means that Australian companies are increasingly opting for safety, and parking their surplus funds with the local banks. As a result of this strong inflow of retail funds, the banks’ overall funding costs are not rising nearly as sharply as some suggest.
Even if the European debt crisis caused global capital markets to shut down completely, local banks would not be starved of cash. The Reserve Bank would ensure that the local banking system remained liquid. Banks would be able to borrow from the Reserve Bank, pledging high quality assets as security.
In addition, they argue, the European debt crisis has enhanced the competitive position of the big four. The growing stampede of European banks from the market has left the big banks in a position where they can pretty much “cherry-pick” which new clients and new businesses they’d like to acquire.
The raging eurozone debt crisis has caused heavy losses for many European banks, eroding their capital reserves and forcing them to cut back their lending. At the same time, many European banks are finding it increasingly difficult to raise funds in global capital markets, due to concerns over their solvency. As a result, many European banks are now abandoning their global ambitions and retreating into their core home markets.
This is far from bad news for the big local banks. With many European banks lending less, putting their loan portfolios up for sale and laying off employees, the local banks can choose what new customers, and new staff, they’d like to pick up.
At the same time, many Australian corporates have become increasingly wary of the commitment of foreign lenders to this market, and are rebuilding ties with their trusty local banks. Not surprisingly, corporates are reporting that the local banks have also been quick to take advantage of the changing competitive landscape to charge fatter interest rate margins on their loans.
Of course, if the European debt crisis eventually plunges the global economy into a deep recession, Australian banks will inevitably suffer a sharp spike in their problem loans, which will dent their profits. But for the short-term at least, the outlook for the big banks isn’t nearly as dire as they’d have you believe.
*This article was originally published at Business Spectator
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