Big banks preparing for $180 million refi ‘cliff’

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    Major banks are crafting plans to combat a $180 billion refinancing “cliff” to avoid a spike in the cost of borrowing.

    The term funding facility (TFF), introduced last year during the COVID-19 crisis by the Reserve Bank of Australia, offers bank loans at o.1% for up to three years. The TFF was introduced to help extend cheap credit to the economy.

    However, the TFF is likely to expire in June, meaning banks will have to replace the funding with more expensive wholesale borrowing in 2023 and 2024, according to a report by The Australian Financial Review.

    Speaking at the AFR Banking Summit, Westpac treasurer Jo Dawson said the bank wanted to avoid “a big cliff to refinance back in three years’ time,” and was building up its deposits and staggering the maturity of future wholesale borrowing in international bond markets in anticipation of the cliff.

    “I don’t expect there to be a massive cliff effect to come to the market at that point,” she said.

    Westpac increased its deposit-to-funding ration from 73% to 80% prior to the pandemic, Dawson said.

    “One of the important considerations is the amount of deposits that we’ve also grown over this period of time, and the flexibility that has allowed us in terms of the overall balance sheet,” Dawson said.

    The major banks have seen a sharp spike in deposits since the advent of COVID-19, driven by government stimulus payments, lower interest rates and precautionary savings by consumers, AFR reported.

    Kylie Robb, general manager of funding and liquidity for Commonwealth Bank, said the bank may repay some of the RBA funding early.

    “That’s all three-year funding; we certainly can repay it early, which I think will be one of the mechanisms to avoid the cliff, your maturity management,” she said.

    Read more: Non-banks head to Canberra over loan funding

    Robb told AFR that CBA – which will need to replace about $40 million borrowed from the Reserve Bank – would likely issue longer-term bonds to international debt investors for between seven and 12 years to avoid being over-exposed to the three-year deadline. She said the bank was likely to “lean a little bit more into international markets” to raise long-term funding from debt investors in the second half of 2021.

    Australia’s management of the pandemic has enhanced the international reputation of the country’s institutions. It’s also caught the eye of debt investors in Europe and the United States.

    “The Australian response to both the COVID health crisis as well as the economic crisis was seen as being world’s best practice, and certainly we’re seeing that that is reflected in terms of investor attitudes toward our issuance that we bring to market,” Dawson said.

    “There continues to be a very strong bid for Australian credit,” Robb said. “The credit profile and the overwhelming response from international investors is that the ‘Team Australia’ solution is here, and really, the coordination between federal government, state governments, regulatory bodies, industry was just absolutely world-class, and I think it highlighted the resilience of the Australian economy in response and credit profile.”

    Ryan SmithRyan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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