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Crisis Talk — with ANZ’s head of group funding, Mostyn Kau

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By Bill Thornhill
18 May 2020

Unlike many other banks, ANZ has had no need to draw on central bank emergency liquidity lines during the coronavirus pandemic. Its risk-weighted assets have grown but this has been offset by greater retail deposits. And, as head of funding Mostyn Kau revealed, what subordinated debt issuance it does have to do will be for regulatory reasons rather than to do with Covid-19 crisis funding.

GlobalCapital: How has your funding changed since March 1?

Mostyn Kau, ANZ: We were well advanced with our funding plans and well ahead on our TLAC and tier two funding, so we’ve been under no pressure. 

But what has changed since then is the Term Funding Facility (TFF) that the Reserve Bank of Australia has provided. For ANZ that’s initially worth A$12bn, and potentially more, dependent on lending growth, which is available over the course of the next 10 months or so, for a term of three years, should we require it. 

The RBA also injected a lot of cash into the system via repo and government bond purchases which has increased liquidity flows to the Australian banking sector.

We haven’t drawn any of that because we were well funded and have become even more so, as corporate and retail customer deposits have gone up significantly as a result of this crisis. 

This flight to quality inflow of deposits is consistent with what you would expect to see in a crisis for a highly rated institution that is financially secure. 

On the lending side, activity is starting to pick up, having been pretty muted going into the crisis. The economy was doing OK but loan growth was modest beforehand, so that was a contributing factor to our meagre funding gap, which has translated to minimal wholesale funding need.

From a funding perspective we are in a very comfortable situation, which is why you haven’t seen the Australian banks enter the market. We wouldn’t have immediately accessed the market even without the TFF because we were very well prepared and markets have been very volatile. 

We weren’t forced to issue for TLAC reasons and that will continue to be the case over the remainder of this year.

How helpful is central bank funding?

Extraordinary monetary policy has become more conventional around the world since the global financial crisis and the global financial system generally has never properly managed to wean itself off these measures, with global central bank balance sheets continuing to grow. 

But until now the RBA never embarked on that course. This is the first time that they’ve bought government bonds.

Unlike the Fed, the RBA followed a similar concept as the Bank of Japan and targeted a rate rather than a quantity. They’ve bought about A$50bn government bonds, which will initially find its way to banks in deposit form in one form or another. 

The Australian banking network is effectively a closed system, as all the Australian dollars have to come back to the major clearing banks, who each have an account with the RBA. That’s addressed liquidity concerns, along with the open repo that the RBA does on a daily basis. These liquidity facilities and the TFF that we have not drawn on have definitely helped. 

But I would stress that, going into the crisis, ANZ’s balance sheet was in great shape.

Other than central bank funding, do you anticipate a change in the mix of the instruments that make up your market funding?

No, we are still going to need tier two for TLAC purposes. We anticipate A$4bn-A$5bn of tier two issuance annually to meet our TLAC requirement but nothing has changed there as a result of this crisis. 

This need is as a result of a change in the regulations last July when TLAC was introduced by the banking regulator, the Australian Prudential Regulation Authority (Apra). Increased tier two issuance is expected to be offset by a reduction in senior unsecured funding.

How has your balance sheet changed in Q1? Has it grown?

There was some institutional lending to corporate customers with an increase in the first quarter, which along with the increase in deposits, has been largely self-funded.

What does this means in terms of RWA growth?

There was A$26bn of RWA growth in the institutional bank but that’s been more than offset by deposits. 

In the previous few years we’d reduced risk-weights by more than A$50bn, so while there’s been an increase in the last quarter, RWA is well down from the highs in the overall scheme of things and, importantly, not expected to continue to grow further in the near term.

Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?

It’s impossible to know. The Australian banks, including ANZ, have made large provisions. We announced an increase in collective provisions by over A$1bn in our first half results based on how economic models suggest impairments will go, but we are in a period of uncertainty. We don’t know exactly how things are going to play out and that’s why Australian banks have provided for losses down the track. 

What will help the situation is that the Australian government has provided various packages to help the economy worth around 10% of GDP, the second highest globally and far larger than it has for any of the other downturns in the last 30 years. 

What have national regulators and supervisors done to help alleviate potential problems? 

Apart from all the central bank facilities that have been provided, Apra also said, very publicly early on, that they are comfortable with banks going below core equity of 10.5%, the level that they consider is unquestionably strong versus our global peers. 

In essence that means we will remain well above the minimum core equity, however will be able to utilise some of our buffers if required.

How have you found working from home?

It’s going pretty well. We’ve mainly used the Bloomberg chat system to communicate with team members as it’s approved by our internal compliance and it’s also very easy to use, as well as regular telephone dial-ins. For the last six weeks or so, I’ve spent about 80% of my time in the home office.  

As a critical function, if we really need to, we can go into the office, but the reality is that there are not too many people there, so there’s not much point. But it’s good to catch up with the odd person every now and again.

I had my home office set up long before the crisis set in as part of our business continuity plan. Initially, with so many people working remotely, the systems weren’t available to everyone outside critical functions, so it proved to be a very good exercise to force the bank to get all required IT systems working, which happened with surprising speed and effectiveness. 

The only thing you can’t really do is print documents due to the closed secure network, but it didn’t take long to realise you can get by quite well without actually having to do that.

We are now developing plans for a more widespread return to the office when the government allows. 

By Bill Thornhill
18 May 2020