- Australian banks deploying funding in strong volumes across the capital structure.
- Changing nature of Australian deposit funding in a rising rate environment.
- Strong domestic market capacity, real money funds support return of banks to normal course funding.
A Brisk Start to the Funding Year
Gerard Perrignon, Managing Director, Head of APAC Financial Institutions Debt Capital Markets recently moderated a panel at the KangaNews Debt Capital Markets Summit, discussing the domestic banking environment and the outlook for debt markets in 2023. Participants included treasurers and heads of funding at the Australian banks.
The panel shared their views on funding strategies, discussed key trends and upcoming challenges and agreed that Australian banks are in a good position to navigate the continued challenges around broader market volatility, and escalated credit pricing, by continuing to utilize the full toolkit of funding products available to them across their global currency stack.
The conversation began with unanimous agreement that the activity seen at the start of the financial year for bank borrowers was well timed to coincide with more benign conditions framing fixed income markets at the time.
“The major Australian banking cohort has been extremely active in term markets across the capital structure since the last quarter of 2022 – A$ 75bn of term funding across all four majors in a five month period - with core global currencies (A$/US$/EUR) delivering size and optionality”- Perrignon
Removal of Central Bank Funding and Liquidity Architecture, Continued Ramp Up of Tier 2
Following the removal of two key pieces of Reserve Bank of Australia bank funding and liquidity architecture in 2022, namely the Term Funding Facility (TFF) and the Committed Liquidity Facility (CLF), the banks are nonetheless very well positioned halfway through their 2023 financial year. There has been a significant amount of market focus on how the Australian banking system manages the structural realities of the maturity of over A$ 187bn in TFF debt drawn down during the COVID era, but the panellists agreed that the banks are already actively looking to smooth out these maturities through the deployment of pre-funding as and when conditions allow.
The panel agreed that banks were able to take advantage of a very constructive start to the calendar year in primary issuance markets, with some expecting to do between 30 and 40 billion of term wholesale funding this year, representing a return to typical pre COVID volumes.
Panellists discussed their continued holistic funding focus across curves and currencies. A balance between duration and cost effectiveness is currently being achieved via the issuance of Tier 2 product (for duration), and shorter dated senior and covered bonds (for cost efficiency) as an effective way to manage volatility and steepness of credit curves. Funding mixes have undergone significant changes, as covered bonds have featured more prominently, credit curves have steepened, and Tier 2 requirements have remained elevated in the ramp up to the Australian D-SIBs targeted regulatory minimum requirement threshold point of 6.5% of Risk Weighted Assets in Tier 2 Capital by 2026.
“Australian banks have increased their usage of covered bond funding, as this product has represented both the type of defensive instrument investors value during periods of volatility, as well as a tool to allow banks to tackle the margin pressures inherent in a rising credit spread environment”- Perrignon
Deposit Liquidity
The deposit liquidity environment was a focus of the discussion, with panellists noting an expectation that the building of deposit buffers that occurred during the pandemic, is beginning to taper from the A$250bn[1] in surge savings witnessed across the entire system. Panellists noted that customers who have built up quite substantial savings are likely to use a component of these funds to weather the storm against rising cost of living pressures, however whilst net deposit growth in the system is expected to slow, the banks still pointed to very strong overall deposit positions.
Customers are returning to term deposits as a switch out of at-call, lower yielding products as the underlying cash rate has risen. Additionally, despite the increasing challenges of cost-of-living pressures, many Australians have the ability to use savings buffers reserved during COVID to optimise their savings. This is especially true among the growing cohort of retiring Australians who are being helped by rising rates and maximising returns through term deposits.
Domestic Market Capacity – What’s changed?
Turning to domestic A$ market capacity, Perrignon reflected “We look back at the course of last year and we were contemplating the removal of the CLF and the implications on the funding requirements from the refinancing of the TFF. There were concerns regarding the implications for domestic A$ funding capacity, particularly given the removal of the domestic bank liquidity bid for CLF assets, and yet right now the domestic market has proven to be the growth component of the banks’ overall funding stack.”
The panel discussed the steady growth of bank senior benchmark sizing since the TFF public market hiatus – standard senior unsecured deal volumes can now be expected to reach A$5bn, at least A$1bn more than the pre-pandemic average, with the demand for fixed rate issuance in particular a notable feature of the reallocation trend back into fixed income as rates have readjusted out of the emergency settings logged during the pandemic. The absence of bank funding during the pandemic created a natural build up in demand and capacity which has also been a strong supporting factor for local issuance. Encouraging trends have also been witnessed regarding Tier 2 capacity with panellists in general viewing the developments in the market as a genuine indication of system growth in capacity.
[1] June 2022, ABC 730, https://www.rba.gov.au/publications/podcast/pdf/transcript-philip-lowe-abc-730-2022-14-june-2022.pdf
