U.S. banks fallout will intensify margin headwinds for Aussie lenders, UBS says

(Reuters) - Australian banks are well-positioned to deal with the pressures emanating from the recent bank runs in the United States, but their margins could be squeezed by the fierce competition for deposits, increased cost of funding and higher bad debts, brokerage UBS said.

The brokerage prefers diversely funded banks, specifically with a larger share of retail lending amid tighter banking regulations and rising deposit costs, it said in a note to clients on Tuesday.

Australian banks are "well regulated" and carry strong liquidity coverage ratios, UBS said.

However, it slashed the net interest margin forecasts for the major lenders amid increasing risk of global contagion and a weakening credit environment in the country.

Regulators and bankers insist the country's banks, bolstered by post-global financial crisis reforms, are well placed to handle the solvency and liquidity shocks that rocked lenders overseas like Silicon Valley Bank in the United States.

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 fiercer," with some banks "sub-economically" pricing new business, UBS said.

Corporate lender 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 brokerage said.

Still, the brokerage expects the bank to report strong first half earnings on sustained operational momentum.

It believes ANZ Group Holdings was "closer to the eye of the unfolding storm being more institutionally focused and wholesale funded".

Three of the "Big Four" banks barring CBA lost between 1% and 5% from March 10 when the first signs of trouble surfaced at the tech-focused lender Silicon Valley Bank. CBA gained about 1% during this period.

(Reporting by Savyata Mishra in Bengaluru; Editing by Dhanya Ann Thoppil)