Gerard Perrignon, along with Laurence Davison, Managing Editor at KangaNews sat down with the heads of funding from the big-four Australian banks at the 10th anniversary of the annual KangaNews RBC Capital Markets (RBC) Roundtable. A fascinating discussion was held around the Australian banking sector royal-commission era, base-rate elevation, new regulatory rules, sustainable funding and the capital outlook. Here are the key takeaways from this roundtable.
Flexible Funding Strategies in Times of Volatility
Debt issuance conditions are not as conducive as they were as recently as January this year. In an environment in which equity markets have been testing new highs and credit periodically rallying, the majors say they are aware that markets may be at an inflection point during which a relatively innocuous event could set in motion an unwind. However, the funders were quick to point out that the market in mid-2018 is closer to a normal state of affairs than what has been experienced over the past couple of years. It was the absence of volatility that was abnormal. Increased volatility is leading the majors to adopt more flexible funding strategies. This means offering multi-tranche deals to maximise investor interest, being prepared to green-light deals in narrower execution windows, seeking diversification by jurisdiction and asset class, and accepting that the gradual retreat of QE liquidity will likely make deal sizes smaller.
Easing of Overall Funding Task
In this context, it is helpful that the overall funding task the majors are facing has eased in recent years. Having responded to new regulatory rules by increasing long-term funding, longer duration in the big four’s books – combined with lower credit growth – means the refinancing task is smaller going forward.
Roundtable Attendees from the Big-Four Australian Banks
Alexander Bischoff
Executive Director and Head of Global Funding,
Westpac
Kylie Robb
Head of Group Funding,
Commonwealth Bank
Mostyn Kau
Head of Group Funding,
ANZ
Eva Zileli
Head of Funding,
National Australia Bank
Timing has worked well for the banks when it comes to preparation for the liquidity-coverage ratio and net stable-funding ratio, Perrignon believes that it’s a good time for the Australian banking sector as a whole to be funding around A$110 billion (US$80.1 billion) in term markets annually rather than A$140-150 billion.
The funders said global investors are broadly comfortable with the credit quality of the Australian banking sector, and in fact buy-side concern about the housing market appear to have eased as the market has slowed without crashing in the past year. Conduct risk is on the agenda as the banking royal commission continues, however, while the trade war between the US and China may be bringing Australia’s regional economic ties back onto the radar.
Funders suggested that China had disappeared from investor agendas, but during the most recent roadshows - in June - European investors had questions specifically about the China-US trade war, tariffs and potential impacts on Australia.