CBA Still Sees Sovereign Funding Guarantee As Vital

Post by Sharat on September 14, 2009 · Under Australian Economy, Business News, Capital Markets, Company News, banking, interest rates, mortgages · Comment 

International investors have an increasing appetite for non guaranteed debt issued by Australian financial institutions; however issuers such as Commonwealth Bank of Australia believe that the sovereign guarantee still plays a vital role.

Despite the Big Four banking groups having increased the proportion of their funding raised through non guaranteed issues, in line with the unlocking of credit markets globally, CBA treasurer Lyn Cobley says that the guarantee is still extremely important, and her comments suggest that as a lobby, the major banking groups will not be pushing for the measure to be lifted any time soon.

As an asset class, Australian sovereign guaranteed issues are the fourth largest of their kind globally, with Australian financial institutions having raised more than $120 billion through the use of the guarantee since the introduction of the measure in December 2008. Only issuers from the US, UK and France have raised more.

“Until such time as we get more investors in the non-guaranteed format, and so long as there are other countries using the guarantee, then it is something which is very valuable to us,” Ms Cobley said in an interview with Dow Jones Newswires on Friday.

Domestic Australian investors however, have become increasingly comfortable with investing in non guaranteed issues, whilst the number of international investors also buying into non guaranteed issues is also rising.

“There’s certainly a growing acceptance of non-guaranteed product offshore,” CBA’s treasurer said.

One third of CBA’s funding has been through the issuance of non guaranteed bonds, since the sovereign guarantee was first introduced including a €1bn lower-tier II issue last month.

CBA is ahead of its $38 billion funding target for the financial year ending June 30th 2010, having raised $14 billion so far this fiscal.

Ms. Cobley did however say that financial institutions globally were making a concerted effort to reduce their dependence on government support.

“All of us are very focused on moving away from the guarantee in due course.” She said

The sovereign guarantee has enabled banks to plug the funding deficit caused by the cessation of the securitisation market. Despite the first signs of unfreezing occurring with the issuance of the first residential mortgage backed security last week, the primary market still remains largely closed.

“It’s not opened up to the extent that we would do anything about it,” Ms Cobley said.

The CBA treasurer also added that deposit growth has also slowed, as investors become more confident, and the panic that drove deposit growth at the end of last year subsides.

“We do expect deposits will move into other asset classes in the near future,” Ms Cobley said.

On the contentious issue of banks increasing their mortgage and business lending rates outside of any official tightening cycle by the central bank, Ms Cobley said funding pressures persist.

“There are continuing increases in our cost of funds. Even as the markets may improve, the fact is, we have cheaper term funding that is now maturing and rolling off, and we have to replace it with the more expensive term funding which has been around since the markets have been dislocated.”


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