Morgan Stanley has foreseen that Australia's four largest bank institutions are about to flood the market with bond sales as they seek to refinance notes and fund lending initiatives, which in turn will push costs for the most indebted.

Commonwealth Bank, Westpac Banking Corp., National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. need to borrow about A$140 billion ($122 billion) in the year to Sept. 30 and A$162 billion in the following 12 months, said Morgan Stanley in an emailed report to Bloomberg.

Morgan Stanley's strategists said: Investors will "increasingly differentiate between banks on the basis of funding requirements,noting that most sales will have to be done "at a higher cost offshore due to limited onshore absorption capacity of new bank issuance."

Australia's top four banks are now facing tougher capital rules requiring them to hold more liquid assets and less of bank debt papers. They are are seeking funds offshore in an effort to cut borrowing costs.

The extra yield investors demand to hold Australian financial company debt instead of government bonds has jumped 22 basis points since the start of June, a Bank of America Merrill Lynch index shows.

Westpac, Australia's second-biggest bank by market value, raised A$800 million from five-year bonds on June 29, according to data compiled by Bloomberg.