Crunch To Continue On Borrowing Costs

The Age

Tuesday June 10, 2008

Danny John

BUSINESS and personal borrowers will continue to put pressure on banks' lending abilities.

The latest attempts by banks and lenders to lock in longer-term funding requirements indicate that while financing costs may have eased since the high point of the crisis, they are still significantly ahead of pre-crunch levels last August.

In the corporate market, where lending is already slowing because of the weakening economy, banking analysts at JPMorgan see no let-up soon.

"With banks now locking in expensive funding for considerable duration, we expect ongoing (higher) repricing of the business (loan) book as corporate customers' facilities fall due and the banks look to pass on the sustained higher funding costs," they said in a note to clients.

ANZ tested the five-year bond market last week as part of a $975 million financing move in which the bank paid 94 basis points over the short-term cash rate.

This was a major improvement on ANZ's previous effort in the same market on April 16 when a $1.35 billion funding round cost it 128 basis points.

But the pricing of longer-term debt that banks use to help fund loans to companies and individuals continues to run well ahead of what was considered normal before the credit markets dried up 10 months ago.

ANZ was paying just 16 basis points over cash rates in May last year when it was tapping the five-year bond markets. Shorter-term funding between one and four years was even cheaper.

But that all changed when the US subprime housing loan crisis spread to wider credit markets.

Since then, Australian lenders that have raised money internationally have been passing on much higher rates of interest.

This has been most publicly obvious in two areas: "top-up" home loan rates that are on average 40 basis points higher than the Reserve Bank charges and in the business sector, where large companies have disclosed a huge blow-out in borrowing fees.

In the area of housing finance, there are equally few signs of relief.

© 2008 The Age

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