Banks' Cost Of Cash Points To Strain Behind The Scenes

The Age

Friday March 28, 2008

Vanessa Burrow

CREDIT markets are still showing signs of stress in Australia and overseas, even though equity markets have risen from their recent lows.

The S&P/ASX 200 Index lost 9.8 points yesterday, after two positive days, closing at 5371.6.

But the yield on three-month Australian bank bills, which indicate the rate at which banks are lending to each other, has risen to 7.76% (see graph below).

St George treasury economist Amanda Tan said short-term lending rates were usually within 10 to 15 basis points of the RBA's official cash rate. But they were now almost 50 basis points higher, she said.

Earlier this month, the spread between the RBA's target rate of 7.25% and three-month Australian bank bills pushed out to 86.3 basis points.

"Financial intermediaries are hoarding cash just because of the riskier financial environment," Ms Tan said. "That means there's a very high premium attached to liquidity and hence high funding costs for banks."

Those higher funding costs have led to increases in the banks' standard variable lending rates to maintain profits. But at the same time their shares have lost value.

Yesterday, Commonwealth Bank lost 80? to $42.31, ANZ fell 27? to $23.85 and Westpac was down 22? at $24.58 while National Australia Bank gained 40? to $30.75. St George lost 9? to $26.82.

However, speaking in Sydney, Reserve Bank governor Glenn Stevens said the Australian financial sector had very little exposure to the US subprime problems.

"The local financial community has certainly been affected by the global turmoil, but on the whole, as the Reserve Bank's Financial Stability Review being released later this morning sets out, is weathering the storm well."

The review says the Australian financial system is in "sound shape", with the five largest banks collectively recording pre-tax profit of $27 billion over the past year.

This week, Deutsche Bank said it had removed its "underweight" rating on the banks after five years. It now rates them "neutral" with a "buy" recommendation on NAB.

More signs of an economic slowdown in the US were negative for Westfield Group, which lost 5.5%, or $1.02, closing at $17.58. Spotless Group fell 30?, or 8.3%, to $3.31 after making a bid for property maintenance company Programmed Maintenance Services.

But there were also big gains on the market, with Sundance Resources climbing 23.3%, or 5?, to 26.5?. This was on top of Wednesday's 16.2% rise.

Responding to an ASX query, the company said it was unaware of any reason why the stock should be climbing so dramatically. However, it said Concord Capital had recently become a substantial shareholder, and that Sundance Resources had presented at a Goldman Sachs JBWere investor conference in New York this month.

Among companies included in the 500-member All Ordinaries Index, Horizon Oil jumped 16.7% and Programmed Maintenance gained 14.8% to $5.21 on the news of the Spotless offer.

E-commerce technology provider Customers rose 14.1% to 7.3? a share, and biotechnology stock Acrux, which will soon launch its Evamist hormone replacement product in the US, gained 12.5?, or 13.9%, to $1.025.

PricewaterhouseCoopers partner Tony Stephen said Acrux was one of several Australian biotech companies that had successfully negotiated the world of clinical trials to come to market.

© 2008 The Age

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