Australian banks set to deal with rising deposits

Australian banks are well prepared to deal with the pressures of the recent bank runs in the United States, but their margins could be squeezed by the fierce competition for deposits, increased costs of funding and higher bad debts, according to the brokerage UBS.

The brokerage prefers to invest in diverse banks, with a larger share of retail lending amid tighter banking regulations and rising deposit costs, according to a note to clients on Tuesday.

Australian banks are well regulated and have strong liquidity coverage ratios, according to UBS.

It slashed the net interest margin forecasts for the major lenders, due to the increased risk of global contagion and a weaker credit environment in the country.

The country's banks, bolstered by post-global financial crisis reforms, are well placed to deal with the solvency and liquidity shocks that have rocked banks overseas like Silicon Valley Bank in the United States, according to regulators and bankers.

Banks are likely to compete more aggressively for market share for loans and deposits, dominated by the Commonwealth Bank of Australia CBA and Westpac Banking Corp.

Competition for mortgages, accounting for anywhere between 45% and 65% of net interest income of banks, has never been more fierce, with some banks sub-economically pricing new business, according to UBS.

The brokerage said that National Australia Bank would likely face slower relative loan volume growth compared to peers as it allocates capital selectively and targets pockets of growth within business banking.

The bank will report strong first half earnings on sustained operational momentum, according to the brokerage.

Three of the Big Four banks including CBA lost between 1% and 5% from March 10 when the first signs of trouble surfaced at the tech-focused lender Silicon Valley Bank, according to ANZ Group Holdings. During this period, the CBA gained 1%.