Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Monday, 7 November 2016

Funding costs keep falling

Funding costs fall again

Australia's banks are mostly funded by domestic deposit these days, at nearly 60 per cent of their funding composition.

Equity accounts for a fair share of the remainder too. 

But what about their debt funding costs?

Last week's Statement on Monetary Policy took a short look at this. 

And the answer is that debt funding costs have kept on falling in 2016.

And what's more they will continue to do so in the near future. 

After cuts to the cash rate May and August, the major banks’ debt funding costs also declined. 

The cost of short-term debt is now under 2 per cent (down from well above 6 per cent in 2007).

Meanwhile, the marginal cost of long-term debt is a bit above 3 per cent.

It is true that since the beginning of the year, these costs have declined by a little less than the cash rate.

This was mainly because of changes to term deposit rates. 

But overall the difference was not material.

And now funding costs are expected to fall further, since the cost of new wholesale debt remains below the cost of outstanding debt.