Nikko AM NZ head of bonds and currencies Fergus McDonald said banks would get their funding from a range of sources to repay their FLP loans, the first port of call being retail deposits.
They can also turn to the wholesale markets - onshore or offshore.
“Whether they do or don’t will probably come back down to how effective their retail deposit base is holding up,” McDonald said.
He said much would also depend on the lending market.
“We know the housing market hasn’t been particularly buoyant, and that’s probably the first place where New Zealand banks like to lend.
“If there isn’t that lending growth, then that too comes into the equation about whether the $9 billion needs to be refinanced or not.
“There’s been a little bit of a [lending] resurgence over the spring and summer but we are moving into winter, which tends to be slower for the housing market.
“Potentially, there isn’t going to be a need to expand balance sheets, but we would expect at least part of that $9b to be financed in the local bond market.”
If and when the big banks - Kiwibank, BNZ, Westpac, ANZ and ASB - go to the bond market, they will be faced with paying much higher interest rates.
Bond yields have risen as credit margins have widened over the past two or three months, partly due to US tariff uncertainty.
Such borrowing would tend to be for a five-year term, at about 100 basis points over the equivalent five-year swap rate, or 4.5%.
The market now expects the Reserve Bank’s Official Cash Rate - currently at 3.5% - to soon fall to 3% or below.
Markets expect the low point, or terminal rate, to stay low for between nine and 18 months, McDonald said.
Simon Pannett, senior credit analyst at Harbour Asset Management, said term deposits and call accounts make up about 75-80% of debt funding, so they will likely be part of banks’ replacement funding.
“Deposits don’t move the needle quickly, so bonds will do a disproportionate amount of work,” he said.
“However, there are several offsets which culminate to mean we don’t foresee major consequences for the bond market,” he said.
He said the banks are relying less on covered bonds - debt instruments secured by a specific pool of assets - than they were before FLP, but they remained a source of “rainy day” funding for them.
Likewise the portion of commercial paper funding had declined.
“This is also a relatively easy market for them to tap – it is very deep and can be accessed quickly," he said.
Bond issuance had also fallen as a portion of funding, so there should be capacity for more issues, he said.
Pannett noted that credit growth had been relatively subdued, and this would influence the size of the funding task.
He also noted FLP was well past its $19b peak.
“Treasurers typically pre-fund well in advance; they will have well-thought-out strategies for this task,” he said.
Hindsight
Funding For Lending was just one of a suite of drastic measures implemented to keep the economy afloat during Covid lockdowns, but was it all worth it?
“With the benefit of hindsight, probably not,” Nikko’s McDonald said.
He noted FLP was just one of many measures undertaken to soften the blow of Covid-19, which put big parts of the economy on ice.
There was fiscal stimulus from the Government, wage subsidies, and the Reserve Bank undertook a large bond-buying programme to keep the bond market functioning.
“Putting everything into a package, in hindsight, was too much over too short a time period,” McDonald said.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
