Australian regional lender Bendigo & Adelaide Bank Ltd. praised the government's US$15.84 billion effort to foster competition in the residential mortgage-underwriting business, even as investors wonder what might happen to the world's fourth-largest securitization market when the program runs out.
Richard Fennell, the lender's chief financial officer, said Tuesday that Bendigo & Adelaide plans to offer two residential mortgaged-backed securities issues in the current fiscal year, which ends June 30. The bank is debating whether it will offer one of the issues by Christmas, he said.
"We're still finding plenty of investors wanting to be in on these deals," Mr. Fennell said at a Citigroup investor conference in Sydney.
Bendigo & Adelaide is one of many Australian banks that have benefited from the government's program to buy residential mortgage-backed securities at tighter spreads than current market pricing in an effort to increase the flow of deals and to help smaller lenders better compete with the big banks on home-loan origination. Currently, Australia's big four banks—Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd.—hold dominant positions in the market.
Banking competition has been a hot-button topic of late in Australia. The country's four largest banks, which typically follow the Reserve Bank of Australia when it raises rates, posted solid profits this fiscal year, yet are likely to pre-emptively raise their mortgage rates soon. When competition is weakest, the country's large banks have typically faced few restrictions from raising rates beyond matching central-bank moves.
While Australian home prices fell during the 2008 global financial crisis, the country was spared the worst, due in part to demand for its natural resources from fast-growing Asia. Home prices have since surged, making home prices and affordability closely watched issues.
So far, the Australian Office of Financial Management has invested roughly 11 billion Australian dollars (US$10.89 billion) out of a total allocation of A$16 billion for residential mortgage-backed securities. Australia has had about A$15 billion in residential mortgage-backed securities deals this year, down from the A$60 billion priced at the market's peak in the previous decade.
Bendigo & Adelaide was helped by the program in July, when the government purchased almost A$500 million of the Victoria-based bank's A$1.5 billion in securities. That offer marked the bank's second residential mortgage-backed deal this year.
Still, concern has grown in recent months from investors that the government-purchase mortgage program has pushed pricing beyond the market's appetite, which could prove costly for investors and, eventually, issuers when the allocation runs out.
"Some sort of repricing is certainly in the cards," said James Hayes, head of fixed income for BNP Paribas in Sydney. "If there was a whole lot of private-sector demand, we'd see a lot more deals. And if these investors are not there today, what says they will be there past the [Australian Office of Financial Management] using its firepower?"
Mr. Fennell agreed that pricing had been moved by the government's help. The top tranche of several recent deals that priced about one percentage point over Australia's rough equivalent of the London interbank rate would probably be at 1.3 percentage points over that level without the program, he said.
But Mr. Fennell said he believes the program has proven successful and will help banking competition over time.
In a question-and-answer session following his speech, Mr. Fennell said he expected the government's purchases of these type of securities would extend beyond the end of this year, given the amount still available for investing.
But it isn't clear how long the program might continue. Jim Murphy, executive director of the markets group for Australia's Treasury, said Tuesday that the government's uptake of second tranches may expire by the end of this year. From there, he expects Treasury to update what it will do next "in the near future."
Earlier Tuesday, Bendigo & Adelaide said it has agreed to buy the 40% of Rural Bank it doesn't already own from Elders Ltd. for A$165 million.
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