There is a perennial idea that lending by Japanese banks into the Australian mortgage market is just around the corner. There were some pieces on this in the AFR this week. The idea is that because Japanese banks can raise deposits at such low cost, those banks can lend profitably into the Australian mortgage market. Is this idea credible?
$A mortgages funded by ¥ deposits create a very large foreign currency risk for the bank. If the $A depreciated against the ¥ then the value of the banks assets (mortgages) would fall and the bank’s equity would take a correspondingly large hit. Exchange rates are volatile and banks don’t have much equity, so there is absolutely no way that Japanese banks would be permitted by their regulators to leave the foreign currency exposure unhedged. To hedge the foreign currency risk Japanese banks would enter into swaps in which they would pay $A short term interbank rates (plus a basis) and receive ¥ short term interbank rates.
The basis of $A / ¥ swaps has averaged about 75 bps in recent times. That means that to hedge their foreign currency risk banks would to pay the 90 day bank bill swap rate (BBSW) plus 75 bps to get the ¥ payments they need to meet their ¥ payments to deposits. 90 day BBSW is about 3.60%, so Japanese banks would have to pay about 4.35% of their mortgage payments into the swaps. Mortgages are being written at about 6.00%. Therefore, the Japanese banks would have about 150 bps to pay for distribution (75 bps), servicing (25 bps) and the cost of equity capital on the mortgages and the swaps. It doesn’t look that compelling for Japanese banks.
It has also been suggested that Japanese banks can raise $A deposits in Japan for as little as 2%. If that is true then Japanese banks don’t need to enter the $A mortgage market to make money — they could just put the deposits into the $A money market and get 3.50% or more. If they were willing to use $A deposits to fund long term $A assets, and they wanted exposure to the Australian mortgage market, then why wouldn’t they just buy AAA rated $A securitisation bonds? Note that for a Japanese bank holding long term $A assets funded by short term $A deposits comes with liquidity risk because if there is a run on the $A deposits then the Bank of Japan cannot easily provide $A liquidity to those banks.
I don’t expect to see Japanese banks bringing Japanese deposits in $A or ¥ to the Australian mortgage market any time soon.