Australian banks' domestic funding gap diminishing

This is good news for the banks.

Moody's Investors Service has noted that Australian banks' domestic funding gap -- namely, the proportion of loans at their domestic operations not funded by customer deposits -- continues to narrow.

According to a release from Moody's Investors Service, this is credit positive for Australian banks, as a key credit
weakness is their structural reliance on wholesale funding, in particular from abroad, to fill the funding gap.

Moody's analysis is contained in its just-published report "Australian Bank Funding and Liquidity: Domestic Funding Gap Continues to Narrow."

Here's more from Moody's Investors Service:

The average year-on-year rate of customer deposit growth continued at 9% in the half year to 31 March 2015, while loan growth rebounded to 8% Within the lending segments, investor housing loans grew most rapidly, driving the Australian regulator to impose a 10% cap.

"We view the imposition of regulatory restrictions on investor housing to be credit positive, in light of growing housing market imbalances in inner Sydney and Melbourne," says Tang. The business segment recorded the greatest improvement in loan growth.

"However, while business growth rebounded over the period due to lower interest rates and increased competition amongst banks, its sustainability is questionable, given that business confidence remains patchy and the capital expenditure outlook is weak," notes Tang.

The narrowing domestic funding gap has stabilized wholesale debt issuance by Australia's major banks. Importantly from a credit perspective, short-term debt, issued both domestically and overseas, remains well below previous peaks, says Moody's.

Moody's says that overall deposit quality has improved as banks have focused on gathering more stable deposits, following the full implementation of the Liquidity Coverage Ratio (LCR) regime in Australia on 1 January 2015.

Banks' traditional liquid assets — such as cash and government bonds — continued to grow, but given that the major banks' LCRs now comfortably exceed 100%, Moody's expects the growth in liquid assets and stable deposits to normalize in the second half of 2015.

The implementation of the LCR regime has been supported by the Reserve Bank of Australia's Committed Liquidity Facility (CLF). Due to Australia's low sovereign debt, the stock of government bonds on issue is insufficient for the banks to meet their liquid asset requirements under the LCR regime, and so the creation of the CLF bridges the gap.