However, the flip does reflect banks are not paying the high prices for deposits they have in recent years and indeed the latest results show an improvement in margins on deposits, partially offsetting margin compression in lending where there is tighter competition.
According to PwC, business deposit growth over the past year was steady at 3.6 per cent while deposits from households – many of which experienced slowing wages growth – were also steady at 8.1 per cent on last year but down from the 9.3 per cent growth in the year to March.
So part of this story is opportunistic. Offshore capital markets, because of the low volatility and excess liquidity courtesy of central bank money printing, have been open and good value for banks. Regulators have also relaxed their view on the stability of corporate deposits and given corporate balances sheets still have lots of cash being hoarded rather than invested, banks have held on to this money.
Regulators, notably the Reserve Bank’s Guy Debelle have also made it known there was a certain irrationality in paying high margins for domestic deposits when long term wholesale funding was just as “sticky”. Indeed, often more so.
The latest data from the Australian Prudential Regulation Authority showed solid system deposit growth in September with both household and business deposits up on the previous month. But lending is starting to build greater momentum.
Household lending over 12 months grew 6.5 per cent, business lending 7.5 per cent (compared with 12 month growth of 6.6 per cent a month earlier). Total household deposit growth was up 9.1 per cent for the September year but business deposit growth was down to 4.4 per cent.
It is likely then that this particular watershed in funding represents more opportunistic factors. Absolute loan growth levels are still relatively low but banks have all grown deposits substantially over recent years.
Most banks are probably at or close to capacity given the need to have certain weightings in the funding book between deposits and short and long term wholesale funding. Meanwhile costs for wholesale have dropped significantly and the market has been pretty consistent, even with the impact of the US Federal Reserve’s decision to stop buying debt and creating liquidity through quantitative easing (QE). And Australian savings rates remain high but are now off a very high base and so absolute growth can't be as strong.
Nevertheless, the likely outlook over the mid term is for improving economies, more risk appetite and tighter funding markets as investors chance their arm for more return (and hence banks must pay more for their debt to compete with the higher returns investors are prepared to chase).
This wasn’t evident in the latest profit season. Indeed, one of the main themes was lower margins in lending as banks tried to win market share with tighter pricing in a low growth market. So the lower demand for deposits was an offsetting factor.
According to PwC, margins in the sector fell 2 basis points to 2.06 per cent in the second half amid strong competition for new lending – the lowest since the all-time low of 2.05 per cent in the first half of 2008.
The two dynamics at play in this watershed moment will continue into the future. Demand for safe assets like deposits will rise with anxiety and lending could be expected to ease in such times. And the opposite will occur in better times. Meanwhile banks will be opportunistic in choosing funding sources and influence markets with their pricing of loans and deposits. They actively manage the trade off between margin and volume.
Will then this current trend of lending exceeding deposits, if it continues, ultimately hit funding constraints? Coffey warned it could, particularly because bank boards won’t want too much wholesale market risk in their funding.
Many note domestic economies are in effect “closed” – that is deposits stay onshore but they go into different asset classes. Coffey says this is true but ultimately makes them more expensive in risk-on times. Superannuation already holds around 18 per cent of deposits.
But other bankers argue banks have enough choice to fund through alternative means if deposits are too expensive – via securitisation of loans for example. Maddock believes we’re entering a period when Australia will actually export rather than import capital.
That’s perhaps the most adventurous scenario. For most of its history Australia has imported capital to fund the investment of a growing economy for which there are not enough domestic savings. Hence Australia has a structural current account deficit which the banks historically have filled by borrowing offshore and on-lending the funds raised.
If the September results are a watershed, we are about to find out how the Australian economy will fund itself under new global bank regulation and more risk averse bank boards.