In two separate speeches last week, APRA chairman Wayne Byres said banks will need to fund themselves with more long-term debt and adapt to reviewed mortgage risk weights.
In light of the speeches, UBS banking analyst Jonathan Mott told the investment bank’s clients that the medium outlook for banks “remains challenging”, as these changes would mean funding costs will rise “potentially significantly”, Fairfax has reported.
“The speeches seem to suggest that the market may be underestimating the degree of regulatory change and the impact it may have on the banks,” Mott said.
According to the Fairfax report, an additional $15.5 billion of equity capital has been raised by the big Australian banks since May in response to the Murray Inquiry’s recommendation to ensure our financial system remains “unquestionably strong”.
Whilst Mott said it is difficult to predict the exact impact these changes may have on the banks, he did say that investors can expect the banks to pass on the cost in the form of higher interest rates, even if the cash rate is cut further.
“Additional re-pricing may be necessary just to offset the additional funding costs the banks may face,” Mott said, according to Fairfax.
“…the vast majority, or even all, of any future rate cuts are now unlikely to be passed onto borrowers,” he added.
