It's not a good time to be invested in US financials. For more than two weeks, investors in that sector have suffered sequential losses, and Australian bank shareholders are looking over their shoulders.
According to Bloomberg, American banks are suffering from what the boffins like to call a 'flattening yield curve': essentially margins are being squeezed because the usual difference between lower-cost short-term borrowing and higher-priced long-term lending is smaller than they've become used to expecting. And, as Bloomberg notes, the next round of 'stress tests' isn't far away.
Australia's banks know all about the US pain. Only this week, Bank of Queensland Limited (ASX: BOQ) raised rates for most borrowers, citing growing funding costs. The general opinion, including from yours truly, is that rates for borrowers have likely bottomed, even if the RBA keeps its powder dry for the rest of the year.
The reason, as BOQ knows only too well, is that the banks get portions of their funding from depositors like you and I, but also from local and international (mostly the latter) wholesale debt markets. A recent RBA study suggested that 60% of Australian bank funding comes from domestic deposits. The remaining 40% — split between long-term debt, short-term debt, securitisation and equity — is, as if I have to tell you, a very, very large amount of cash.
And, as if you didn't know, the US Federal Reserve is in the middle of a pretty aggressive series of rate increases.
The net result is that the proportion of funding that comes from overseas — and the US in particular — gets more expensive, and the banks have a difficult choice: either make less money or pass on those increasing costs to customers. If you haven't noticed, Australian banks aren't exactly fond of making less money, so BOQ's move was unsurprising.
Of course, BOQ isn't on its Pat Malone when it comes to international funding. And you can bet, almost London-to-a-brick-on, that, despite pressure from the Royal Commission, and the predictable outcries from politicians looking to the next election, that Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) will follow. Because the choice between an angry politician and angry dividend-loving shareholders is an easy one!
The next six months will be a test for the banks (and, perhaps, the ACCC). If they're to avoid the pessimism that's confronting their US brethren, they'd better hope there's enough pricing power… and Commissioner Hayne is kind in his report.
Those could be long odds.
