Anz Bank

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GUEST OBSERVER
Funding markets have shown some stress in recent weeks as investors and borrowers prepare for imminent structural reforms and amid cyclical issues around banks.
We look at the recent moves in single currency and cross-currency basis markets, USD Libor and credit spreads.
With less than two weeks until US money market funds are required to comply with new liquidity and asset rules, we opine on the outlook for funding markets.
Funding markets have seen significant shifts in recent weeks as markets prepare for the upcoming new money market rules in the US. The rules, outlined in US money market reform 2a-7 primer, will come into force on 14 October.
In addition to money market reform, a confluence of factors has increased the cost of funding, namely quarter and year-end as well as concerns around European banks. There has been in recent weeks the usual pickup in funding stresses associated with quarter end – normally because of the need for 3 month funding which rolls over the ‘turn’ of the calendar year (or financial year end for US banks).
With banks now less willing to have significant balance sheet items over their year-end, the cost of USD funds will remain elevated. This quarter end has seen an escalation of this normal arrangement due to the money market reform being implemented at the same time.
Furthermore, as investments shift out of ‘prime’ funds (those who hold credit) to government only funds, the ability of both banks and corporate borrowers who access short-term funding has been diminished. This has forced borrowers out the term curve – or in the case of sectors of the bank market – to simply ‘pay up’ for alternate sources of funding.
<a href="/images/2016/10/04/Screen%20Shot%202016-10-04%20at%205.27.32%20PM.jpg" target="_blank">Click to enlarge</a>
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The demand for USD has shown up in the sharp moves in 3 month cross-currency basis swaps (Figure 1) which have lifted the cost of funding sharply in the last week. The JPY basis has been driven by the structural need for Japanese banks to find a new funding source given their large reliance on US MMFs. This issue has not been fully addressed despite an increase in USD funds available from the BoJ. That said, it has led to a wider ‘Japan premium’ (which is the cost of USD 3 month Libor for Japanese banks relative to other members of the Libor panel).
THE BASIS FOR OTHER MOVES
In comparison, the move higher in USD FRA/OIS and Libor/OIS, as well as a gradual but significant rise in 3 and 6 month USD Libor since mid-year, has been gentler. The move in EUR cross-currency basis (see Figure) 1 has come at a time when European banks have been under the spotlight. This unwanted introduction of a systemic threat has augmented the current demand for USD funding.
The basis has moved to the most negative level (highest cost for USD funds) since the European sovereign crisis period in 2012. Both prior to this period and since, central banks have introduced a number of measures to allow for USD liquidity in times of stress.
After a reasonably steady period, the basis has dropped from -25bp to -59bp since mid- September. The spread remains a long way from its historic lows of -210bp in 2008-09 and the -160bp level seen in 2011.
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The demand for USD via the ECB's 1 week funding mechanism has also seen a sharp rise. Last week’s auctions for 1 week USD funding saw just under USD6.4bn awarded to twelve banks. This was the largest amount requested since 2014.
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In the FRA markets, the modest move wider for EUR FRA/OIS has not been matched by the sharper USD move. This suggests that concerns over European banks have not yet shown up in funding for EUR. In fact, the 3 month Euribor/OIS spread is little moved and is at multi-year lows. We believe any stresses are likely to show up in the USD funding markets – rather than in EUR.
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A RISING TIDE
The single currency basis market, at least for USD, has steepened sharply in the last year and has risen significantly higher than the levels seen during the 2012 European crisis. Similarly the USD 3s/1s basis curve has steepened to the highest level since 2009. 3s/1s sits at 25bp, around 3bp higher than what it reached in the European crisis. In the last few weeks, domestic USD basis has stabilised at these elevated levels.
Looking at the forward curves for single currency basis, it would appear that the peak for the 1 year basis has been set and will begin to match the forwards. The risk to this view would be a sustained period of higher USD funding costs and increased market expectations for Fed hikes.
In time, such an outcome should narrow the 1 year 6s/3s and 5 year 6s/3s basis, driven by a rise in the latter.
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OUTLOOK FOR FUNDING POST US MONEY MARKET REFORM
US money market funds now have less than ten days to comply with the new rules governing their operations. As Figure 6 shows, total holdings in prime funds are around USD600bn. While we expect some balance to be retained in the funds that choose to hold credit assets, there is likely to be further reduction in the coming days. This should, all things being equal, push USD Libor and USD Libor/OIS higher and wider.
It is worth noting that while the larger shifts in Libor have reflected a replacement premium for USD bank funding, corporate borrowers are also affected as they will need to source alternate means of funding. These may come via bank revolver credit facilities or through the term market as borrowers.
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After the full implementation on 14 October, we expect markets to stabilise and for the Libor rate to reflect more cyclical news around the banking sector as well as the eventual addition of a premium or reflect market-based expectations of a Fed rate hike in December.
We also expect to see an increase in the issuance of term debt for banks as the ability to use short-term funding comes to an end. This more expensive method of borrowing also comes at a time when other regulatory requirements will be placed on the market.
WHAT TO WATCH
The key variables to watch will be the use of FX USD swap lines at the various central banks (primarily the BoJ and ECB). Domestic USD basis (6s/3s and 3s/1s) and 3 month JPY and EUR cross-currency basis are also important to gauge the demand for USD from non-US counterparties hedging loans, assets, and borrowings.
Bank credit spreads are an important gauge of the market’s perception of asset quality. While these have widened recently, they do not reflect significant concern. The CDS market, once a popular product in financial markets, has become an illiquid and poorly- traded instrument.
Lastly – and perhaps obviously – as the money market reforms are finalised, the USD Libor rate and spread to OIS are expected to rise a little further before stabilising and they represent a more realistic price for USD funding.
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Martin Whetton is senior rates strategist, ANZ. Katie Hill is strategist, ANZ. Both can be contacted <a href="https://www.anz.com/personal/" target="_blank">here.</a>
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What’s up in funding markets? ANZ's Martin Whetton and Katie Hill

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An ANZ retail banking facility in Mona Vale is set for October 23 auction.
Situated at 10-12 Bungan Street, the building is leased to ANZ for 10 years until 2025 with options to 2040.
The building recently underwent building upgrades as well as an ANZ fitout to bring it up to corporate standards.
Net income on the property is currently $260,549 with 3.5% annual rent increases.
The tenant pays all outgoings.
The listing notes there is proposed zoning uplift allowing future development potential (STCA).
<img src="https://www.urban.com.au/images/2018/10/15/ANZ%202.JPG" alt="">
Set on a 294 square metre block, the two storey building last sold for $2.02 million in 2000.
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ANZ premises in Mona Vale set for auction

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An ANZ retail banking facility in Mona Vale failed to sell at Burgess Rawson auction this morning.
It was passed in at $5.7 million
Situated at 10-12 Bungan Street, the building is leased to ANZ for 10 years until 2025 with options to 2040.
The building recently underwent building upgrades as well as an ANZ fitout to bring it up to corporate standards.
Net income on the property is currently $260,549 with 3.5% annual rent increases.
The tenant pays all outgoings.
The listing notes there is proposed zoning uplift allowing future development potential (STCA).
<img src="https://www.urban.com.au/images/2018/10/15/ANZ%202.JPG" alt="">
Set on a 294 square metre block, the two storey building last sold for $2.02 million in 2000.
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ANZ premises in Mona Vale fails to sell

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ANZ has returned to the heart of Sydney’s traditional banking district with the opening of its new flagship branch in Martin Place at the site of its former NSW headquarters.
ANZ Group executive Australia Fred Ohlsson said the opening a flagship branch in the heart of Sydney’s traditional finance district reinforced to its customers the importance they place on growing our presence here in NSW as well as supporting our customers and local businesses.
“It made sense to build a flagship branch on the site of our original headquarters in NSW given NSW remains the powerhouse of the Australian economy."
The new three-level branch in Martin Place is the largest in ANZ’s network.
It features the full range of ANZ digital functions, including mobile banking app goMoney, smart ATMs, Apple Pay and internet banking across 21 digital screens customers can use throughout the branch. There are spaces for educational seminars and community events, and a vertical digital wall that spans all three levels of the branch and responds to the environment.
Since 2015, ANZ in NSW has opened four new branches, a home loan centre, two business centres as well as refurbishing 18 branches and four business centres.
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ANZ opens flagship branch in Sydney's Martin Place

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An established ANZ bank in Narrabri, at the location for 35 years, is now up for auction.
The 668 square metre property located at <a href="https://www.burgessrawson.com.au/2P1282#.WAWS_txJtyw" target="_blank">137 Maitland Street </a>has a secure five year lease to ANZ until 2018 with the option to extend to 2023.
This property is in the heart of north-west NSW, with a shire population of around 14,000. It has high exposure to the main street corner site with ample off street parking at the rear.
Surrounding the property are businesses including Domino’s, Subway, Australia Post, Liquorland, Target and Coles.
The tenant is required to pay all outgoing according to the lease and it is an easily managed, single tenanted investment with a net income of $57,484 per annum plus GST.
The property is offered through Burgess Rawson agent Rhys Parker.
It last sold at $660,000 in 2009.
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Established ANZ bank in Narrabri up for auction

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ANZ Banking Group has issued a warning about shares being issued by developers to property investors that side-step planning laws and can’t be used as security for loans.
Calling these securities “unacceptable" the bank has issued a confidential memo to its banking and mortgage broker networks warning about the deals that are being detected around Sydney's inner suburbs, the Australian Financial Review reported.
The bank says the security structure, which is being used to sell multimillion share offer documents, could trap unwary buyers in hot property markets.
Buyers of the securities will not have title to a single property, will be unable to use them for a loan with most lenders and could have difficulty finding a buyer, the AFR said citing banking specialists.
The deals were likely detected when investors tried to use the shares as security for loans.
Copies of the contracts, which price individual shares at more than $1.6 million, appear to have been documented by lawyers and accountants. They have been issued and signed this year.
Lenders fear the security would place them behind other creditors in the event of a foreclosure, which makes the risk “unacceptable”.
"It has come to our attention that customers are offering unsuitable company share title securities for home loan applications," the ANZ memo told its broker network states.
An ANZ spokesman confirmed the arrangements but said it had so far only identified a handful of contracts around Waverley and Randwick, the AFR reported.
The issue stems from the fact that local councils will not issue strata titles for developing multiple residences on a property.
"Some councils, particularly in NSW, are not allowing newly established properties to be subdivided, so the customers/vendors are sometimes setting up a private company and issuing shares,” the memo continued.
"These tend to be duplex type arrangements, where a certain number of shares will equal one unit and a certain number equals the other unit."
A duplex property is effectively two conjoined properties occupying one block or plot of land and sharing at least one common wall. Both dwellings in a duplex are built at the same time.
If strata titled, each dwelling may be sold and owned separately. But if not strata-titled both dwellings within the duplex can only be sold together.
Under the arrangement, the ownership of the land stays in the name of the vendor. The vendor then sets up a company that issues shares for sale.
It effectively means the purchaser does not have exclusive use of the proposed unit. For example, a purchaser of a 25 per cent share in four apartments would own 25 per cent of all units, not a specific unit.
"These types of security properties are not deemed "company title and are unacceptable," the bank states.
"Any customers entering these arrangements should be informed that ANZ does not support this type of lending."
A spokesman for National Australia Bank was cited by the AFR as saying that it also does not accept company share titles or stratum titles as acceptable residential security for home loans.
Other lenders declined to comment on whether property investors are using similar sales methods, but mortgage brokers say they would be surprised if other lenders had not been approached.
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ANZ warns against developers issuing 'unacceptable' securities to property buyers

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ANZ said it has been increasing its owner-occupied home loans business much faster than the market while posting a cash profit increase of 5.3 percent to $1.79 billion for its third quarter ended June 30.  
In its third quarterly trading update, the bank said its lending growth in the owner occupied segment was 30 percent above the system average.
“We’ve said for some time as a strategy we want to be the best bank for people that want to buy and own a home and so we’ve been growing our business in owner occupied home loans much faster than the market,” ANZ CEO Shayne Elliott told the bank’s in-house news publication BlueNotes.
<a href="https://www.propertyobserver.com.au/images/2017/08/18/ANZmain.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/08/18/ANZmain.png" alt="">
He said the bank was re-weighting its portfolio towards that segment and “we’re really comfortable with that”. 
“The way we’re doing that is just really is focus and great product and distribution through our branch network,” added Elliot. 
<a href="https://www.propertyobserver.com.au/images/2017/08/18/ANZSummary.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/08/18/ANZSummary.png" alt="">
ANZ said it was also on course to meeting macro prudential requirements for mortgage growth.
Investment lending was at 80% of the combined industry average.
Its research arm recently said that the <a href="https://www.urban.com.au/news/73812-ytc-august-1-sentence-2-housing-investor-credit-continues-to-ease" target="_blank">slowdown in investor borrowing</a> was continuing, and quarterly annualised growth sits at 6%.
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ANZ's owner-occupier lending growing faster than rivals

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ANZ economists have suggested the slowdown in Canada’s extended property market boom could be a roadmap for future Australian housing market direction.
“Canada is arguably ahead of Australia in its economic and policy cycles, so watching developments there can be useful for those monitoring the Australian economy,” according to ANZ economists David Wilson and Jo Masters.
They noted house price growth in Canada has halved in the last year.
“Canada is nine months ahead in terms of monetary tightening,” Ms Masters told Fairfax's Domain, pointing to two recent interest rate hikes in Canada.
ANZ’s prediction since September has been that the Reserve Bank of Australia will hike twice in 2018. 
ANZ Bank predicts the Reserve Bank will raise official interest rates by 0.5 percentage points next year as the economy gradually improves, with the first hike tipped for May by ANZ economists David Plank and Felicity Emmett.
Canadian interest rates have come off a lower base than Australia, with hikes in July and September only taking the official cash rate to 1 per cent.
They forecast the Australian cash rate will be lifted by 0.25 percentage points in May, followed by another hike in the second half of the year, and then it will be be left unchanged over 2019 so as not to crunch spending of highly-indebted households.
Previously, ANZ was not forecasting any rate hikes in 2018.
“Canada recently released additional macro-prudential measures for the property sector," Ms Masters noted.
"These are likely to have a material impact on mortgage originations, housing affordability and property price growth in 2018.
"The hottest property markets in Canada – Vancouver and Toronto – are likely to be hit the hardest by these measures," Ms Masters said.
Already the data has signalled the downturn has set in.
Toronto’s monthly home sales - in Canada’s biggest city - have fallen by as much as 40 percent in volume, the largest annual decline since 2009. There have been four months of price declines in Toronto.
The price of the average home in Toronto fell 4.6 percent in July, the biggest monthly decline since at least 2000. From August to September, the city experienced a 2.7 percent drop. 
The monthly declines have not been enough to plunge annual gains into decline.
With Australian household debt sitting at record highs, the RBA faces uncertainty about how consumer spending will respond to slowing house-price growth, the ANZ said.
It recently advised about 38% of its home loan customers were repaying principal faster than required. 
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ANZ looks to Canada housing market as potential Australian roadmap

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Jo Masters, the senior economist at ANZ, has gone against no movement consensus with her big call that there will be two interest rate rises this year. 
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She forecasts the RBA will take the cash rate from 1.5 per cent to 2 per cent during 2018.
Masters, the Chatswood based tennis playing mother of two, tips the first central bank move is likely to be in May, with one more in the second half of the year. She sees none happening in 2019.
She concedes it does depend on the February wage growth data release.
It will be the first rate hike in eight years, coming at a time when household debt to disposable income is at record highs.
Master's wonders just how households will respond noting it will be critical for retail consumption and ofcourse the housing market.
Masters operates by the view that its always better to have a view and be wrong, than have no view at all.
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ANZ's Jo Masters makes non-consensus 2018 cash rate call

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The ANZ Bank has revised its forecast and now sees the bottoming of the housing market "in the coming months" following the policy turnaround. 
Economists Felicity Emmett and Adelaide Timbrell have forecasted prices will rise modestly through to the end of 2019.
They expect a three percent growth in 2020.
"After a period of significant weakness, house prices appear to be stabilising," their latest Australian Housing Update read.
"Sydney prices have fallen 15%, while Melbourne’s are down 11%," they advised.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/7/16/Monthly%20housing%20prices%20ANZ.jpg" alt="">
"Brisbane prices have fallen only modestly, while Adelaide prices have been broadly stable.
"Perth remains weak, but Hobart has been a standout.
They cite the election result, back the back RBA cash rate cuts and APRA loosening their lending serviceability have all contributed to the quickening of the end of the downturn.
"All of these factors have helped to shift sentiment from one of pervasive negativity to cautious optimism," Emmett and Timbrell said.
They warned however against a property boom that we saw from 2012 to 2017.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/7/16/Capital%20city%20prices%20v%20auction%20results%20ANZ.jpg" alt="">
"While the outlook definitely looks more positive, we do not expect a V-shaped recovery for prices," the report noted.
"Our view for some time has been that the tightening in credit has been the major driver of weakness, and while there has been some easing at the margin, changes to the use of Household Expenditure Measure (HEM) and the introduction of comprehensive credit reporting will offset some of the impact.
"Moreover, there is still a substantial amount of supply coming on stream, particularly in Sydney where the rental vacancy rate is at a 15-year high.
"This all suggests that the recovery is likely to be a fairly modest one.
 
 
 
 
 
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