TEXT-Fitch: Australian Banks Go Cold on MMFs

(The following was released by the rating agency)

June 25 (Fitch) Australian banks have reduced their reliance on US money market funds, aided by slow credit growth and an increase in deposits. The move is part of the banks' long-term strategy to replace wholesale funding with deposits to increase the stability of their funding profile and address the new Basel III liquidity requirements.

To this end, Reserve Bank of Australia data show deposits now account for more than 50% of funding compared with 40% in 2008. Money market funds' exposure to Australian banks fell 10% on a dollar basis to 7.6% during May, according to our latest report US Money Fund Exposure and European Banks report. This is driven by banks' reluctance to take a potentially volatile form of funding. Australian banks are selective about their funding sources at the moment because elevated saving levels and recently enacted covered bond legislation ensure ample funds in desirable forms.

We expect some retrenchment in the funding mix when demand for credit increases, but we do not foresee a return to the pre-2008 funding mix. The Fitch study of the 10 largest money market funds shows a wide disparity between different banks' use of money funds. National Australia Bank (NAB, 'AA-'/Stable) is by far the largest user and accounts for just under half of US money market funds' exposure to Australia. Additionally, of the 15 largest recipients of US money market funds, NAB is the most reliant, with 4.6% of its short-term funding coming from money markets.