Borrowers could face higher borrowing costs as the big banks’ high proportion of loans to deposits puts their credit ratings at risk of a downgrade.
The major banks have enjoyed increasing demand for their loans in recent months as a result of the exit of a number of lenders from the market and the so-called ‘flight to safety’ in the face of the financial crisis. Their share of the mortgage market has exceeded 90 per cent.
But this surge in demand for the big banks’ loans could have a less than positive impact on their funding costs.
According to an analysis by Citi, Australia’s major lenders could lose their coveted AA credit rating – which enables them to access lower wholesale funding costs – if they do not curb their high proportion of loans to deposits.
The average loan to deposit ratio across Australia’s big four banks is 153 per cent, compared to 144 per cent in the UK, 110 per cent in the US and 74 per cent in Canada, The Sydney Morning Herald reported this week.
Unless this ratio is pared back, the big four may face downgrades to a single A credit rating, Citi said, and higher wholesale funding costs.