Issuance capacity but no strategic shift for big-four funders

Australia’s big-four bank funders have enjoyed a notable uplift in domestic capacity for their wholesale issuance that became even more pronounced in 2023. Speaking at a KangaNews-RBC Capital Markets roundtable in Sydney in December, the issuers emphasised the value of a consistent issuance approach even in changeable conditions.

  • Alex Bischoff Managing Director, Balance Sheet, Liquidity and Funding WESTPAC BANKING CORPORATION
  • Fergus Blackstock Head of Term Funding COMMONWEALTH BANK OF AUSTRALA
  • Scott Gifford Head of Group Funding ANZ BANKING GROUP
  • Michael Johnson Executive, Funding and Liquidity NATIONAL AUSTRALIA BANK
  • Laurence Davison Head of Content KANGANEWS
  • Gerard Perrignon Managing Director and Head of APAC FIG

Perrignon There has been a consistent stream of risk events, volatility and data prints for bank funders to navigate this year. Despite this, it has been a reasonably successful year from an execution perspective. For instance, in September, Commonwealth Bank of Australia (CBA) was in the US market in what ended up being the biggest post-Labor Day execution day in the history of the US investment-grade market, achieving a successful outcome despite the congestion. How have conditions influenced issuance strategy?

BLACKSTOCK There has been no real change in our strategy compared with previous years. We are conscious that volatility narrows execution windows, but it feels like volatility has become almost routine and often needs to be navigated. We know when the most likely funding windows are and plan for these while trying to be as nimble as possible.

We knew the post-Labor Day period would be busy, but the market has been deep enough and strong enough to support multiple trades. That day turned out to be particularly busy and in this context it was great to have Asian demand to help us get good momentum.

BISCHOFF There is always volatility. The year started with the collapse of Silicon Valley Bank (SVB), yet we experienced very strong levels of liquidity throughout our 2023 financial year. High yields have been a net positive for fixed-income allocations and Asian demand has returned to be a much more material part of Australian bank deals, which has been good for Australian dollar credit and also US dollar trades. Like CBA, this is something we experienced in our most recent US dollar trade.

Offshore supply from Australian banks has been less than usual. Westpac Banking Corporation did its first senior and tier-two trades of the calendar year in US dollars in November. In a normal market, when we have A$30-40 billion of funding to do, it would be surprising for our first US dollar deal to be so late in the year. That it was speaks to the depth of liquidity available in Australian dollars and other products if execution windows are picked appropriately.

The euro covered-bond market saw more challenging conditions this year, due to rates coming off and QE unwind. Liquidity was still available but at shorter tenors, of 2-5 years as opposed to five years and longer. Picking the right window was extremely important.

JOHNSON As a cohort, I actually think we benefited to some extent from the volatility in March from SVB then Credit Suisse, because it emphasised that Australian banks are a high-quality sector. We are well supported, as evidenced by our credit spreads being tight relative to a lot of our global peers. This supports our access to global markets – we all receive a lot of support when we choose to issue.

“When it comes to execution, we have been pricing well inside comparable peers. Yet our execution dynamics have remained strong. This validates the idea that investors are willing to buy good credit at lower relative spreads than where we used to price versus some global peers.”

Davison Australian banks have communicated the message of the strength and resilience of the local banking sector for a long time. Does it feel like global investors have finally taken this on board to the extent that you are now viewed as a safe-haven asset?

BISCHOFF This was certainly our experience in the US dollar market after our full-year results and also after the SVB collapse. Post-SVB, investors were very interested in aspects of banks’ risk management, for instance interest-rate risk in the banking book. Australian banks were able to confidently address all these concerns. This further reinforces the message we have given investors for well over a decade.

When it comes to execution, we have been pricing well inside comparable peers – including the Canadian banks. Yet our execution dynamics have remained strong. We have met our pricing objectives and continued to enjoy strong orderbooks. This validates the idea that investors are willing to buy good credit at lower relative spreads than where we used to price versus some global peers.

GIFFORD There is no doubt the Australian banks have been well received by investors globally. The return to full funding programmes has been welcomed by investors and they are glad to see us back. It speaks to the relative strength and fundamentals of Australia and the place Australia can occupy in global and domestic portfolios. We have been met with strong demand across products and regions, and the domestic story is certainly a part of our dialogue with offshore investors.

To Alex’s point and with regard to domestic capacity, there has been a change in offshore funding dynamics. For instance, in November 2022 we told investors we would likely only issue one tier-two transaction per year in US dollars. At the time, there was perhaps a degree of scepticism from US dollar investors on this. Here we are a year later and our most recent US dollar tier-two issuance was the transaction a year ago.

Australia has a federal budget in balance, is a net exporter of food and energy, and has strong population growth. There are good fundamentals in the Australian banking system and APRA [the Australian Prudential Regulation Authority] is a highly respected regulator. It is well-regarded system and an attractive investment proposition for global investors.

Perrignon Central banks have focused on the upside risks to inflation for two years. This narrative appears to be changing, though. If terminal rates are close, does this put issuers in a positive frame of mind for how capital markets execution should play out in 2024?

BLACKSTOCK I am cautiously optimistic about funding conditions in 2024. However, the market is pricing in 100 basis points of rate cuts, a soft landing and a rising share market – which would be extremely unusual from a historical perspective – so we are conscious there is still risk out there that might not be priced in.

The market has performed extremely well so far and Australian bank credit should continue to be well supported, for the structural reasons we have discussed. Still, we are prepared for the prospect of further bouts of volatility next year.

GIFFORD We are all conscious of likely funding windows. The market is pricing in terminal interest rates, but looking back over the year the points when there were dislocations came when the market violently adjusted its expectations for terminal rates – to the upside. We have been assertive about our access to market and we will continue to use tools such as pre-funding to take advantage of conditions when they are strong.

JOHNSON Since we did not do much issuance during COVID-19, the volatility has not been as much of a concern so long as we have had flexibility to fund in the front end to fill maturity buckets. We are now optimistic about the return of duration in some markets – particularly euro covered bonds, which has been challenged for any long tenors. We have filled a lot of buckets in shorter tenors and a more normalised or upward-sloping curve will help us extend further as and when it eventually materialises.

BISCHOFF The market started 2023 with a very bearish outlook for the global economy off the back of rising inflation and large rate rises. Heading into next year, the market is pricing a soft landing, stronger equity and divergence in how market participants believe credit will perform in such an environment. As we saw in 2023, these outlooks can change quickly so, as issuers, we will continue to target funding when conditions are good and run liquidity in a way that we can stay out of markets when they are tough.

Looking at the latest major bank pillar-three disclosures, it is evident that we are all still running higher levels of liquidity. I do not think these themes will change in the near term: we all have the flexibility to be nimbler during bouts of volatility than we could historically and a balanced approach is always the way.

Perrignon How significant is the migration from at-call to term deposits given where we are in the rates cycle?

GIFFORD There is good competition for deposits across the system – it is a good time to be a saver. Over the coming months I expect savers will see some pretty sharp rates to attract them, especially in the run-up to the final term funding facility (TFF) maturities.

We can contrast this with deposit rates offered by European banks, which are still effectively zero or slightly better. In comparison with offshore markets, there has been a very good pass through of deposit rates to savers in the Australian system and I expect this to continue.

JOHNSON My observation is that the transition to term deposits has occurred and the rate of change is slowing down.

BLACKSTOCK The move to term deposits is in large part a reaction to changing yields. There was a move to at-call during a low-yield environment and this is largely reversing.

BISCHOFF With some of the fallout from Credit Suisse and SVB, we have heard banking regulators effectively talking to the fact that – and this is a good narrative for Australian banks – term wholesale, even one-year term, is a valuable product to have within a more sound liquidity platform. This is something we have always talked about. When we do a five-year deal, it is there for five years – as opposed to at-call.

“The tone of investors in the US market regarding Australian tier-two has changed a bit in the past 12 months. Investors have seen the lack of supply and recent tailwind in credit spreads, so the narrative of potential oversupply has tempered.”

TFF ‘tower’ overplayed as a funding spike

There continues to be commentary around the Australian credit market about the volume of bank issuance that will be required in 2024 to refinance the second spike of term-funding facility (TFF) maturities. Bank funders say there is some factual basis for this challenge but suggest its impact is likely overplayed.

DAVISON There is clearly still a perception in some quarters that there is a massive maturity tower coming and that calendar year 2024 will be huge for new issuance, because the majors all have massive TFF stacks. What have the banks done so far to manage and smooth the maturity profile and to address this perception?

BLACKSTOCK How much of the TFF is still to be repaid by June 2024 is public. From the outset, our strategy has been extremely clear: a combination of pre-funding through our last financial year and growth in our short-term funding, though only back to historical levels. This and the deposits in the system will get us to where we need to be without any real change in our issuance volume.

We expect a relatively consistent volume of funding in 2024 and, thus far, it is playing out as we expected – and we don’t envision this will change. The due date for the TFF is very clear and we have all had strategies in place to accommodate it. So far, it seems to be working really well.

GIFFORD ANZ [Banking Group] only has A$8 billion (US$5.3 billion) of TFF to deal with so it is very much business as usual for us. We have total maturities of A$28 billion this financial year, of which the TFF comprises A$8 billion. We have provided funding guidance of A$30-35 billion for the year.

We think a lot about maturity buckets. As financial year 2027 is wide open for ANZ maturities, it will not be surprising to see a reasonable number of three-year deals from us in 2024. In sum, it is a normal issuance year for ANZ with standard maturities and a very low level of TFF to deal with.

JOHNSON NAB [National Australia Bank] has a larger amount of TFF but, similar to what Fergus said, we have known it is coming for a long time and have issued a lot more than we have had maturing over the past couple of years to help prepare. We don’t consider the task to be just a TFF replacement exercise – it is an overall funding stack exercise. Our balance sheets are changing from a liquidity viewpoint as well. There is the impact of the increase in term deposits, which supports the liquidity profile. We are also running relatively high liquidity coverage ratios (LCRs), which shows that we are going into this period very conservatively positioned.

The August-September 2023 period of repayment went through the system efficiently and this cannot be underestimated. There was a bit of movement in the short end at the time, but it was a really smooth process given a lot of liquidity was being repaid to the central bank. It presents a good example of where we hope 2024 ends up.

BISCHOFF From our perspective, the next financial year is business as usual. But I will mention one factor we are watching: what the reduction in excess cash might mean for the banking system in aggregate.

Outside the majors, there were some unique outcomes among the smaller banks regarding the TFF. Specifically, some of these banks got materially larger TFF drawdowns relative to their size as part of the additional allowance for SME lending.

If there is a period of market volatility as we head into the final three months of the TFF next year, these institutions may find it more challenging to refinance. This shouldn’t be a concern if current market conditions hold but it will be one to watch closely.

I should add that I don’t believe this is a banking sector issue. For some of the smaller banks, I suspect it is more to do with cost of funds, and pressure on margin and returns.

The bottom line is that, as a sector, market capacity – in particular offshore – would have supported a higher volume of funding this year than we all executed. We are still all doing about the same amount of issuance, or at least within the range we have done for over a decade. Yet absolute capacity in the system has grown substantially.

This indicates that we still take a very conservative approach to how we think about long-­term funding, as a sector, despite the growth in absolute capacity. This is a good thing in the long term as it means there should be issuance capacity when we need it.


We expect a relatively consistent volume of funding in 2024 and, thus far, it is playing out as we expected – and we don't envision this will change. The due date for the TFF is very clear and we have all had strategies in place to accommodate it. So far, it seems to be working really well.


Davison Volume in the Australian dollar market – overall and individual deal sizes – has really grown in the past 18 months. What is issuers’ level of confidence that benchmark deals of A$5 billion (US$3.3 billion) or more area new norm?

GIFFORD We are all in close dialogue with the domestic investor base and we continue to enjoy strong reverse enquiry. While our August A$5.5 billion transaction is the current holder of the largest domestic deal, I am not confident we will hold the record for very long. In fact, it wouldn’t surprise me if there is a A$6 billion transaction from one of us before the end of the current financial year.

I do not see any reason to think volume will not continue to grow in the near term. Ongoing inflows to superannuation combined with increased allocations to fixed income continue to support the direction of travel.

One question might be what happens if the RBA [Reserve Bank of Australia] cuts interest rates by 200-250 basis points. We would need to face this when and if it comes. But the fundamental drivers of greater volume are in place and we have a degree of confidence about these structural forces.

BLACKSTOCK It is hard to keep being surprised given the consistency of large benchmark volume. There are certainly structural features at play – for instance, the compounding effect of compulsory superannuation means there is more money in the system – but also some temporary ones, such as the relatively low supply of attractive-yielding credit over the last 3-4 years.

There is a supply component, too. Even if demand persists, it does not mean we will always print A$5 billion deals. Fundamentally, we will fund according to balance-sheet requirements.

Davison Are the banks telling global investors reliance on offshore capital might not be as great going forward?

BISCHOFF Structurally, if we can shift to more than 50 per cent of our funding coming from the domestic market it would be very good for the system. This will depend on a range of factors, such as allocations to fixed income, the rates cycle and the ongoing prevalence of fixed-rate demand, and regulation.

Offshore investors have observed the reduction in our international supply. However, it is also important to keep in mind that some long-term factors – such as Australian dollar versus US dollar senior differentials – have been wider in the last 12-18 months than has been the case historically. This has made offshore senior issuance less attractive. We have been through a unique year in which we have seen risk events affect offshore credit markets more materially than Australia.

My sense is that the percentage allocation to domestic issuance is likely to stay higher in the near term but the offshore mix could shift. There could easily be a dynamic in the next 12­24 months where there starts to be more relative value in using unsecured rather than covered product offshore.

Perrignon Has there been a lag in US investors’ expectations about the volume of tier-two supply they might expect?

BISCHOFF The absolute numbers have not changed: we are still in the A$4-5 billion range for annual tier-two issuance that we have been telling the market the whole time. The change in issuance dynamics simply comes down to the domestic market offering duration. A 7 per cent coupon on a 15-non-call 10­year tier-two transaction is highly attractive and has brought a different type of investor into the fixed-income market. It is a net positive.

JOHNSON The tone of investors in the US market regarding Australian tier-two has changed a bit in the past 12 months. Investors have seen the lack of supply and recent tailwind for credit spreads, so the narrative of potential oversupply has tempered.

GIFFORD When we were building our tier-two stacks, one of the four of us was going to the US market every few months. It created a dynamic whereby US investors did not need to chase securities in the secondary market because they could easily wait for the next primary deal.

Now we are well advanced in the build out of our tier-two stacks, we think there is room for Australian tier-two spreads to converge toward the senior-nonpreferred levels of international banks. The level of capital below tier-two combined with the credit ratings of Australian tier-two mean comparing Australian bank versus global bank TLAC [total loss-absorbing capacity] issuance, or our tier-two versus international tier-three capital such as senior nonpreferred, makes a lot of sense.

Davison The Asian bid has helped support Australian dollar liquidity in 2023. Where is this demand coming from and how strong is it?

BISCHOFF When the CLF [committed liquidity facility] was coming to an end, there was a lot of talk that it would affect domestic liquidity. Clearly, this has proven to be incorrect.

It does not take big shifts for demand to materially change, and the structural shifts in superannuation and higher rates demonstrate this. I say this because I would not say we have seen a dramatically different investor base out of Asia. It is just that, at the margin, the allocation to Australian dollars has increased. This could mean bigger allocations from individual accounts or perhaps local Asian bank balance sheets have grown.

When this is added to the demand from new domestic investors and ones from which demand has increased, we get the growth of capacity we have experienced.

This is not just for the major banks. I have found it encouraging that foreign ADIs [authorised deposit-taking institutions] have come to the domestic market and consistently enjoyed good demand and secondary outcomes without hitting saturation point. Historically, this would have led to volatility in domestic spreads – but we have not seen an oversupply issue play out. The increase in demand feels structural.

JOHNSON At the margin, Asia has also had an undersupply of US dollars that has acted to support interest in Australian dollars. Investors need to buy something, and some consider the Australian market a good place to park cash. Some accounts have not had a lot of alternatives.

BLACKSTOCK I agree that Asian demand has been an important factor in the Australian dollar market. There have been changes in Asian issuance dynamics over the last 12 months as well as structural changes – such as inclusion in the new JACI Asia Pacific Index – that have been supportive of Australian credit.

Regulatory changes to watch in 2024

Australia’s banking sector regulatory agenda for 2024 features at least one item that could have a material impact on demand patterns. The big-four banks seem set to advocate for an expanded range of regulatory liquid assets.

DAVISON The Australian Prudential Regulatory Authority (APRA) will re­examine the high-quality liquid assets (HQLA) regime during 2024. Is there a case for expanding the range of instruments that count as high-quality liquid assets, for instance by populating the level two list?

BLACKSTOCK I definitely think there is a case for it. Having HQLA level two assets would bring us into line with most of the other banking regimes. Our view is that the current HQLA stack lacks diversity.
As the TFF is repaid and as exchange settlement account balances likely fall, I think there is certainly an argument that the timing is appropriate for a reappraisal – especially when aligned with the MLH [minimum liquidity holdings] changes that are being put in place.

DAVISON Is the most compelling argument in favour of level two HQLAs the one market participants took to the Reserve Bank of New Zealand (RBNZ) – that it is important not to regulate liquidity out of existence and thus a pragmatic approach to market liquidity is best? Or is it that securities like covered bonds and high-quality Kangaroos simply are more liquid than they were when the regime was originally established?

JOHNSON When we look at the Basel rules and the RBNZ announcements, while not a direct comparison, there is a macro case to do with the overall financial system. We are not the only covered-bond issuer or the only RMBS [residential mortgage-backed securities] issuer. From a funding tool perspective, additional liquidity is somewhat self-fulfilling: if it is an HQLA product, liquidity will come.
There is not one angle on what makes an asset suitable. But adding all the reasons together may make a fairly strong case for the inclusion of certain assets in the stack, with appropriate haircuts, volume or percentage limits.

BISCHOFF We have talked about domestic deals getting up toward A$5.5 billion (US$3.7 billion). There aren’t comparable volumes available in many offshore markets, even on a currency-converted basis, and it is hard on a comparative basis to suggest there is not substantial liquidity in these transactions.

Defining secondary-market liquidity can be more subjective, to be fair. But the fact of the matter is that, at an absolute level, we are equal to or even beyond any other significant global market
on a proportional basis.

GIFFORD I certainly hope APRA will look at this issue with an open mind. All we can ask is that we get a fair hearing and that the regulator considers level two assets in other regions. I think the development of the Australian dollar covered-bond market has been significant since APRA last looked at this issue. There is much greater diversity and depth of Australian dollar covered-bond investors than there was, say, five years ago.

DAVISON APRA has also proposed changes to liquidity rules for smaller banks, with the expectation that part of the sector may be less active in other ADI paper because it will not be able to hold these bonds specifically for liquid asset purposes. How significant is this bid in your books?

BLACKSTOCK We have looked at it and quantified it. It would certainly mean some reduction in demand
– but it is not material. 

GIFFORD This type of account represents around the 5 per cent mark of our domestic books. It is definitely a component but it is not something we are worried about.


I certainly hope APRA will look at this issue with an open mind. All we can ask is that we get a fair hearing and that the regulator considers level two assets in other regions. I think the development of the Australian dollar covered-bond market has been significant since APRA last looked at the issue.


Perrignon There has been large growth – about 35 per cent – of big-four bank covered bonds outstanding today, compared with the back end of COVID-19. To some extent we could almost say covered bonds have effectively replaced senior funding in offshore markets. What is driving this and what role will covered bonds play in the funding mix in the period ahead?

JOHNSON We expect our funding mix to be pretty consistent so I don’t anticipate the overall contribution of covered bonds changing a lot. A contributing factor that has led to more covered bonds being issued has been volatility. Balance-sheet dynamics mean we have been less constrained by factors like the net stable funding ratio, which allows us to deploy collateral to get sizeable funding in the door at an efficient level.

We have also witnessed a fair amount of shorter-dated covered deals. When thinking about deploying collateral, this means issuers have greater flexibility to manage how much is outstanding in the near term.

GIFFORD We have accessed sterling, US dollars and euros this year, which was partly strategic on our side. Several of our covered-bond lines had matured by the end of COVID-19­related stimuli, so we were in a situation where we didn’t have a bond line outstanding in a couple of these markets. We strategically wanted to rectify this.

Covered bonds serve their purpose really well. In volatile times they are the go-to product – for issuers and investors. As an example, we were the second bank to reopen the euro covered-bond market – following BMO – after SVB collapsed. Covered bonds do their job very well in volatile times.

The euro covered-bond market is currently adjusting to big moves by the European Central Bank. It feels like there is an adjustment for the market to go through but it remains a really important diversification play, with a significant set of investors. When markets are in risk-averse mode, we have a triple-A product to offer.

BLACKSTOCK Covered bonds are absolutely core for us and this hasn’t changed significantly, certainly not in the last 12 months. The asset class has provided investor diversification and we are keen to use it through the cycle, to access the demand.

BISCHOFF We are, and must be, rational issuers. We are rolling off the low funding costs of the TFF, with collateral freeing up and a product that prices inside senior in all markets. It is a perfectly rational economic decision to issue covereds.

Two big things changed for us this year, that led us to leverage the product more. First, as Scott mentioned, is the use of two-year covered bonds. This had not really happened before and it was a useful tool during periods of volatility.

Second is the absolute growth of the sterling market. It is a fundamentally different market from what it was, with a far more diverse investor base than it had even two years ago. This is a big net positive. Typically, duration buyers – such as insurance and other core investors in Europe – have offered seven-,10- and 15­year tenor, which enabled us to put duration into our books with something other than tier-two. As Michael mentioned, if duration demand starts to materialise I expect this investor base will provide a more robust bid in the covered-bond market.

“There has been large growth – about 35 per cent – of big-four bank covered bonds outstanding today, compared with the back end of COVID-19. To some extent we could almost say that covered bonds have effectively replaced senior funding in offshore markets.”

Davison Issuers have a cap on how much covered-bond supply they can bring to market and there has always been the idea of holding back some of this capacity for a rainy day. Can banks keep offering covered bonds?

JOHNSON Collateral availability isn’t necessarily a big factor. We all have lots of collateral, particularly post-COVID-19, when we had the TFF and APRA’s guidance on how much available collateral we should always hold.

BISCHOFF I don’t think capacity is an issue. We have many maturities rolling through our books so our overall net issuance is still relatively low.

BLACKSTOCK At the cadence we’re issuing at, capacity does not look like it will be an issue.

GIFFORD I agree. There is plenty of capacity across the sector.

Davison We have discussed demand for shorter-tenor covered bonds but, overall, how does weighted average tenor look at the moment?

BISCHOFF Tier-two has offered duration and we have been doing more of it, which has largely offset the lack of duration in covered bonds. I suspect if you asked all of us whether we would do a 10-year senior deal, the answer would be no – because there is no need to pay for it at current spreads. The desire for duration does not go that far.

BLACKSTOCK We all manage our maturity profiles to make sure we have capacity in different areas. Then it is a function of the cost of the credit curve and, importantly, where demand is at any time. Investor demand has been shorter in the past 12-18 months and we give consideration to what investors want to buy.


Davison The other aspect to expected funding volume is credit growth. What is the outlook here? Presumably it is not epic for 2024.

GIFFORD Our economists are around the 3-4 per cent mark, but it depends on the wider environment. We have all been surprised at how resilient the Australian economy is. Perhaps it surprises a touch on the upside, but credit growth is likely to be fairly modest.

Perrignon This time last year we would all have agreed that 2023 would be pivotal when it comes to credit quality, given the stack of borrowers with expiring fixed-rate mortgages. Yet banks’ arrears profiles show good credit performance – a reversion to historical means but the potential problems of borrowers struggling to cope with the transition to variable loans simply not transpiring. Are we at a point where we can say the fixed-rate mortgage cliff never happened?

BLACKSTOCK We are more than half-way through the CBA fixed-rate mortgage expiry. The phenomenon is well understood, well documented and is being managed extremely well. On the whole, we are seeing evidence of a very resilient Australian consumer so far. There are certainly pockets of stress in the market but, on a portfolio level, the resilience to date has been very impressive.

BISCHOFF I would add that banks are well capitalised, very liquid and they continue to lend. The property market has also been dynamic. Although turnover is down and auction clearance rates have come off a little from their recent peak, liquidity is available.

We understand there will be borrowers who will be challenged during this period, and the banks as a collective continue to work proactively under the frameworks we have to try to support them through such challenges. But overall it has been much smoother than anybody anticipated.

GIFFORD Speaking on behalf of ANZ – although I am sure the other banks will have experienced the same thing – we prepared ourselves to support borrowers by beefing up the hardship teams that provide support to customers, in anticipation of these needs coming through. But we have not actually seen a great uptick in hardship requests as yet.

We are cautiously optimistic. We are more than half-way through the transition to variable rates and data for 30-days arrears are in line with the portfolio – this cohort has shown itself able to withstand the rises that have come through.

I think Alex’s point is important, too. If our hardship team is having a conversation with a borrower and there is no clear way out for them, in a very strong property market they have the option to sell the house and preserve their equity. This may explain why arrears have not picked up.

Davison It is one thing for a borrower to be resilient to the immediate impact of a step-up from a low fixed-rate to a higher variable repayment rate – to manage the first payment – but how prepared will borrowers be for higher payments for a protracted period?

JOHNSON As customers convert from fixed to variable rate, we have noticed a trend of bringing cash to the bank where they have their mortgage. Offset accounts are a unique feature of our system and they work very effectively to support borrowers’ management of their financial position. Overall, the concentration of savings into a single bank is a trend – and I would say a rational one – that is playing out quite positively across the system.

The other point to remember is that, while rates have gone up a lot, customers are stress-tested and many of those who moved to fixed rates were existing customers who took the opportunity to have a sharp rate when it was available. There is a cohort that is just moving back from fixed to variable. 

BLACKSTOCK Savings continue to be higher than they were before the pandemic: deposits are still in a strong position, even though the savings rate has fallen. The majority of the buildup of excess savings is still around.

The other key element is unemployment. If the jobless rate stays at a relatively low level, customers’ ability and appetite to service a mortgage will stay strong. We have been waiting for a second-order effect of higher rates on retail spending. But there are plenty of consumers out there who remain in a stronger position than they were before COVID-19.

BISCHOFF We operated from 2009 to 2019 with an unemployment rate of 5-6 per cent. The last print was still less than 4 per cent. The narrative we continue to point to is that while 5 per cent might not have been full employment, it was a normal range – and our credit portfolios performed strongly.

What we are dealing with now is an adjustment period but one that always had to happen. Banks need to understand and to work with their customers closely through such periods. The Australian economy has lots of levers that have offset ups and downs over time, including downturns in China, high rates and the business cycle. I think of these as natural stabilisers.

It feels like a period where there will be pockets of concern that we will have to work through but, overall, it is better described as a normalisation. What we have been through over the last few years is not the norm.

GIFFORD There have been wage rises in some parts of the economy and an average earnings rise across households. There are also other dynamics, such as second earners increasing part-time work. This shows there is some flexibility in income for at least some people.

There is no doubt consumption patterns have also changed, but a confluence of factors means that, overall, things are pretty resilient. We hope this continues. Australian households have demonstrated a degree of dynamism and flexibility that has contributed to the resilience we continue to observe.