Australia's banking sector is set to be more competitive as Asian and European lenders race to grab market share in a high-margin lending market, helped by new tax relief and a more onerous regulatory regime for domestic banks.
Foreign players are lining up for trade finance, cross-border takeover funding and infrastructure lending deals, with many following companies from their home countries.
Loan margins in Australia are significantly higher than in other parts of Asia, in part held up by the high funding costs of Australia's major banks -- Commonwealth Bank of Australia
Local lenders are being hampered by tough new global capital and liquidity rules that could force them to cut lending, rules that don't apply to offshore banks in many cases. Local lenders are also skewed to the retail sector.
The foreign banks are driven by the fact that local banks don't have the capacity to fund all the new investments, said David Clifford, a partner at law firm Allens Arthur Robinson, which works with several Australian and foreign lenders.
This is part of a trend where money is just pouring into Australia from the banks' home jurisdictions.
About 10 banks are awaiting regulatory clearance, among them the Agricultural Bank of China <601288.SS>, China's Bank of Communications <601328.SS>, Spain's Banco Bilbao Vizcaya Argentaria
Australia is not over-banked in wholesale and investment banking, said Jonathan Grosvenor, BBVA's managing director and head of corporate clients Asia Pacific in Hong Kong. We seek to develop four main product areas - lending, transaction banking, treasury and hedging products.
Offshore banks are also being aided by a government move to cut withholding tax by half by 2015 for banks seeking funding offshore. The tax relief makes funding from their parent's or offshore branches cheaper.
There are about A$430 billion ($455 billion) worth of resources investments either underway or on the drawing boards in Australia with about half of that figure aimed at the oil and gas sector, according to the Australian government.
In addition, companies from around the globe including China and India are lining up to buy into the iron ore, coal and LNG sectors.
Obtaining a branch license will let offshore banks increase lending and borrow through the Australian branch in a high-margin market.
The margin for a three-year loan for a BBB flat-rated company in Australia is around 175 basis point over the base lending rate, at least 70-100 basis point higher than for a similar company elsewhere in Asia, banking sources said.
The incoming banks are targeting trade finance, syndicated loans and project finance because many of the key clients at home are investing in resources in Australia.
Indian-listed GVK Power and Infrastructure
India's Adani Group has submitted a proposal to construct two new coal terminals in Queensland after acquiring the state's Abbot Point coal terminal in May for about $2 billion.
We would like to look at all the trade opportunities that we can and M&A funding for mine assets could be one of them, said S.C. Kalia, executive director, at Union bank of India.
Loan volumes so far in 2011 are up marginally to $24 billion from $22.7 billion in the corresponding period last year, Thomson Reuters Loan Pricing Corp data shows. With mining back to normal after the floods, bankers say their deal pipelines are full.
Australia's pressing infrastructure needs are another big draw for the banks because the country needs to invest up to A$400 billion in the next 10 years according to Infrastructure Australia, a federal government advisory body.
LACK OF FUNDS
Complicating the situation for local heavyweight banks are tougher global banking rules that exacerbate their deposit deficiency and reliance on wholesale debt.
Deposits only make up 60 percent of Australian banks' annual funding needs and the banks together borrow around $110 billion a year in term debt. New global rules under the Basel III regime call for better quality of capital, a stronger stable funding ratio and more liquidity.
While the rules will be gradually phased in from 2013, Australian banks are expected to meet them faster than others thus crimping their lending ability. The financial regulator Australian Prudential Regulatory Authority is very conservative and both analysts and Australian banks have said APRA has indicated an accelerated implementation.
The banks seeking entry are those that emerged out of the global crisis better and as such they have a competitive advantage. Australia is a compelling and good place to be in now, said Andrew Dickinson, head of banking practice at KPMG.
($1 = 0.944 Australian dollars)
(Additional reporting by Swati Pandey in MUMBAI, Terrill Jones in BEIJING and Soo Ai Peng in SHANGHAI; Editing by Balazs Koranyi and Matt Driskill)