The nation's smaller lenders are lining up to join the big four banks in tapping the wholesale bond markets to fund their expanding home loan books.
On Tuesday, Bank of Queensland launched a residential mortgage-backed bond sale seeking to raise at least $500 million. The regional lender was marketing its main tranche of AAA-rated notes at a margin of 1.15 to 1.20 percentage points over the bank rate.
The RMBS market has proved a dependable source of non-deposit funding for regional and non-bank lenders that have limited access to traditional wholesale bond markets.
However, 2016 was a turbulent one for RMBS issuers, with the cost of new funding rising sharply in the middle of the year before moderating to levels that were about 30 basis points higher than the start of the year.
These conditions discouraged the non-major banks such as Suncorp, Macquarie and Bank of Queensland from issuing RMBS, reducing sales by non-major banks from $10.3 billion in 2015 to $6.5 billion, according to National Australia Bank data.
A key motivation for the non-major banks to issue RMBS in 2017 is to gain "capital relief" by effectively shifting the default risk of a pool of home loans to third party investors through the sale of junior notes.
Meanwhile, non-bank lender Pepper Group appointed Citigroup, Commonwealth Bank, National Australia Bank and Westpac to arrange meetings with global securitisation investors, with a view to a transaction in March this year.
Non-bank lenders, in contrast to banks, have been ramping up their sales of mortgage bonds, having issued $7.4 billion of RMBS in 2016, up from $4.6 billion in 2015, according to National Australia Bank analysis.
These lenders, which do not take retail deposits, are largely reliant on wholesale markets, and have benefited from an improvement in conditions since mid-2016 when costs spiked, although overall costs are slightly elevated compared with 12 months ago.
These lenders are increasingly targeting foreign investors to fund home loan growth. While the cost of hedging non-Australian dollar funding has discouraged non-bank lenders from selling mortgage backed bonds in foreign currencies, bankers say there is demand for high yielding fixed income and, should housing credit growth continue, they expect foreign currency bond sales to pick up.
Australia's major banks are also active issuers in the local RMBS market, accounting for 40 per cent of total issuance. The big four banks were prolific issuers in the capital markets over the last 12 months as they refinanced maturing debt, funded loan growth in excess of deposits and prepared for new regulatory rules that rewards longer term funding over short term debt.
The big four banks issued $120 billion of senior unsecured bonds throughout 2016, $42 billion more than the amount raised in 2015, according to NAB.
In the first six weeks of the year, the big four banks have already raised $5.2 billion in the domestic bond market and $7.5 billion in the foreign bond markets, according to Thomson Reuters data. So far, the heavy issuance by Australia's banks appears not to have weighed materially on funding costs. In January of this year, Commonwealth Bank paid a margin of 1.11 percentage points over the bank rate, or 3.48 per cent in a five year bond issue to domestic investors.
That compares with a sale exactly 12 months prior at a margin of 1.15 percentage points over the bank rate, or 3.52 per cent.
