ANZ CEO says prefers Asian deposit funding to covered bonds, which are 'an enriched form of securitisation' and a 'drug of last resort'

By Bernard Hickey

ANZ Group CEO Mike Smith has acknowledged New Zealand and Australian banks rely too much on 'hot' wholesale market funding and should raise more stable deposits elsewhere.

Speaking in an interview with Interest.co.nz, Smith said ANZ was successfully using its Asian networks to raise deposits. He said ANZ would look at using covered bonds to raise funds, but they were a drug of last resort he was wary of.

"The fact that the banks in Australia and New Zealand are still reliant on international wholesale funding is an issue," Smith said.

Earlier this month the IMF pointed out that New Zealand's short term wholesale funding requirement was still equivalent to 50% of GDP and it recommended the Reserve Bank increase its Core Funding Ratio higher than planned to force the banks to find more stable funding. See Alex Tarrant's article on the IMF comments here. See the full IMF report here.

"There has been quite a lot of talk about changing the tax system to encourage deposits. In Australia you're encouraged to borrow through the tax system and discouraged to save, which is ludicrous," he said.

"In terms of ANZ, we've decided to control our own destiny in this and we have moved to raising deposits in Asia. This is where the big liquidity pools are so we are trying to reduce our reliance on that wholesale borrowing element, and so far that's been quite successful."

Smith's comments follow those from ANZ New Zealand CEO David Hisco who said last November the ANZ Group could shuffle money from its Asian deposits to New Zealand to bolster its local funding base if required.

Asked if covered bond issuance was an option for ANZ, Smith said it is, but he was cautious about using them.

"Covered bonds are basically an enriched type of securitisation. I actually think that that's a drug that you don't go on unless you seriously need to," he said.

"Whilst I would test the market with an issue, I wouldn't necessarily rely on it."

The Reserve Bank of New Zealand has said New Zealand's banks can issue covered bonds up to a maximum of 10% of assets. See Gareth Vaughan's article here.

So far NAB's BNZ is the only New Zealand bank to have issued covered bonds raising NZ$425 million from domestic institutional investors and 1 billion euros in Europe. Westpac last month delayed a planned 1 billion euros issue in Europe.

Aside from being a source of cheap funding, the banks say they want to issue covered bonds to help meet the Reserve Bank's core funding ratio (CFR). Introduced on April 1 last year, the CFR sets out that banks must secure 65% of their funding from retail deposits and wholesale sources with maturities of more than one year.

The central bank aims to lift the CFR, designed to reduce New Zealand banks reliance on short-term offshore wholesale funding, to 70% this July and 75% on July 1, 2012.

The Australian government has said it will allow banks there to issue covered bonds up to a maximum of 8% of net assets, higher than initial indications of a 5% limit.

Westpac's Gail Kelly and CBA's Ralph Norris have supported the higher limit for covered bond issuance and described them as a positive way to deal with the reliance on short term wholesale funding. See more here in The Australian.

'Financial crisis far from over'

Meanwhile, Smith said the Global Financial Crisis was far from over.

"We've moved from a banking crisis to a sovereign debt crisis. Europe is the issue," he said.

"I think it's going to spill over into the banks in Europe because they will be holding a lot of this debt. What happens if that is restructured and if there is a massive haircut on this debt?," he asked.

"Already under Basel III in terms of the requirement for capital the European banks are less capitalised than many in the world. The best capitalised banks are actually in the Asia Pacific. Therefore they're going to have to raise capital anyway and if they have to take a hit for all this sovereign debt they hold, that's even more capital," he said.

"We're not out of this yet."

Smith has been the architect of ANZ's Super Regional strategy of building out ANZ's network of banks throughout Asia, including through Southeast Asia, the Indian subcontinent and through North Asia, including China.

He has previously said ANZ is ready to pick up Asian assets being sold by cash-strapped European banks as the debt crisis in Europe deepens.

He acknowledged that Australian bank funding costs may increase as financial market conditions worsen.

"It doesn't even have to be a Lehman style problem. We've got this problem in Japan which is creating huge concern and uncertainty and the effect is that credit spreads in credit markets widen. That increases the cost of funding which flows through."

Bernard Hickey traveled to Sydney to attend an ANZ conference on Renminbi reform courtesy of ANZ.

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