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H1 2021 Updates

ANZ, NAB and WBC‘s half year results reveal an awkward truth; that the Australian Government and Reserve Bank of Australia’s (RBA) intervention including JobKeeper stimulus and Term Funding Facility has contributed to stable (and increasing) net interest margins (NIM). First half 2021 updates highlight these lower funding costs and excess liquidity funding ‘tailwinds’ as it is good news for shareholder profitability.

Savvy CFOs and business owners with sizable lending can capitalise on these disclosures to counter bank pricing narratives. It helps support the case for a pass through in benefit as was intended by our government and the RBA.

Peppered throughout the recent half-year results announced by ANZ, NAB and WBC are numerous references to the benefits provided by the RBA Term Funding Facility and reduction in deposit competition.

NAB disclosed the combined impact from lower deposit and funding cost as +4pts on Group NIM. ANZ came in at +2pts. WBC appear to have outperformed their Melbourne based peers with their ability to elicit +6pts from their depositors and +2pts from the RBA for a combined cost-of-funding benefit of 8pts. This is an extraordinary feat given the low rate environment has persisted now since mid-2020.

Westpac NIM breakdown

NAB NIM breakdown

NAB decided the impact was worth a slide title “NET INTEREST MARGIN BENEFITING FROM LOWER FUNDING COSTS” and lists a key consideration that “Lower funding costs and deposit mix expected to provide modest tail wind in 2H21.” We could go on.

What does this all mean?

Notwithstanding other impacts, banks have oceans of cheap money. And this doesn’t include undrawn TFF allowances to be drawn pre-30Jun.

Low cost funding was meant to flow through to customers via the provision of low priced credit aka lower margins not just through base rate reductions. Instead the tailwind benefits have helped offset credit and capital headwinds for a net impact of near steady NIM.

What can you do?

Join the group of those aware of the macro drivers of margin pricing to engage your bank. Gazing into the future when the liquidity taps are shut, funding costs will promptly revert to more normal levels. What lever will be pulled to preserve bank NIMs when that occurs? Margin repricing.

Daniel Chalmers

About Daniel Chalmers

Dan is the Managing Director at BankEdge. He has a unique end-to-end combination of banking technical valuation skills and client-sales-advisory experience gained over nearly two decades of managing client accounts whilst working in a major Australian bank followed by as an independent banking consultant.

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