The biggest talking point in the Australian major-bank funding market in mid-2019 is how the big four are adapting to a significantly increased tier-two requirement. The early signs have been positive but funders acknowledge that they have been assisted by generally supportive market conditions.
In partnership with KangaNews we hosted the annual roundtable for the heads of funding at ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. Each roundtable takes the tone of the bank sector seen through the lens of credit growth – and therefore the wholesale funding task – as well as the global market conditions into which the Australian majors are issuing.
This year’s discussion was held in mid-August – well timed, coming as it did barely a month after the Australian Prudential Regulation Authority confirmed its local version of total loss-absorbing capacity rules that will apply to the big four.
These rules mean that, in aggregate, the majors will need to find at least an additional A$50 billion of regulatory capital between now and the beginning of 2024 – most likely in tier-two format. The estimate is the minimum needed to meet the regulatory requirement based on current book size, so the final total could be significantly larger.
Building tier-two debt books
Early successes for the banks have come in the US and Australian dollar markets, which have provided ample demand for a pair of major-bank tier-two deals apiece in July and August. The issuers themselves are quick to point out, though, that the scale of the task facing them means they will be open to all benchmark markets as well as bespoke placements across currencies as they look to build tier-two curves.
For instance, Scott Mitchell, NAB’s acting head of funding, said he suspects the equilibrium state of the majors’ enhanced tier-two books – by currency and maturity spread – will be “relatively similar to our senior books in respect of it being reasonably well diversified”.
Demand for senior bonds in volatile markets
The issuers did, however, note in particular an evolution in the demand landscape for senior bonds in their domestic market. Senior benchmark transaction sizes have been notably larger in the past couple of years – regularly exceeding A$3 billion and on occasion surpassing A$4 billion – and the books have also become more granular.
Mitchell compared contemporary domestic books to what the big four are more used to seeing in the US dollar benchmark market. CommBank’s head of term funding, Fergus Blackstock, highlighted a noticeable increase in the depth of liquidity Australian real-money investors bring to books.
This is especially positive for the Australian banks because, as several funders pointed out, senior debt will continue to be the bulk of their wholesale issuance even with an enhanced tier-two requirement. In fact, they were keen to emphasise the fact that although the Australian regime will not feature a senior-nonpreferred asset class it does not make for a uniquely difficult funding challenge.
Westpac’s head of group funding, Alex Bischoff, said: “I don’t think the idea that it is going to be tougher for us in volatile markets than it is for banks selling senior non-preferred is necessarily correct. In fact, I think offering a product with spread in a low-rates environment could actually help with execution risk.”
Read the full article here.
