The extent of the pull-back from issuance – and thus of supply removed from the Australian dollar credit market – is still noteworthy. Having issued comfortably more than A$30 billion (US$21.5 billion) domestically across formats in each of 2018 and 2019, and after a normal start to the year in 2020, the final three-quarters of last year saw just A$4.6 billion of big-four bank supply in Australia (see chart).

The vast majority – A$4 billion – of this was in tier-two format, where the banks retained a regulatory need to issue even as their wholesale funding requirement evaporated. With the exception of a single, one-year duration deal from ANZ Banking Group, senior and securitised deal flow from the big four disappeared for nearly a year and a half.

Whether the majors would return to wholesale issuance of similar scale to the pre-pandemic norm has been in some doubt. Indeed, at various points over the past 18 months the banks themselves suggested the post-TFF phase might include systemically less wholesale issuance than was previously the case.

For instance, speaking at a KangaNews Debt Capital Markets Summit webinar in December 2020, ANZ’s Melbourne-based group treasurer, Adrian Went, noted that deposit growth, rather than the TFF, was the single biggest driver of an estimated A$200 billion reduction in the system funding gap since the onset of COVID-19.

“We do a lot of thinking internally about these changes and we have concluded that they are structural,” Went continued. “The Australian system had a big funding gap and large issuance requirements offshore. Now it has flipped around and we are all looking for ways to deploy liquidity. We think it is going to stay this way for a while.”

Joanne Dawson, group treasurer at Westpac Banking Corporation in Sydney, agreed – adding Westpac’s expectation that its refinancing task should be “largely covered” by deposits. She concluded: “The amount of refinancing needed and the banks’ annual wholesale funding tasks should be lower than they have been historically.”

There have clearly been significant changes to the major banks’ balance-sheet dynamics in the COVID-19 era. Liquidity remains elevated, including banks’ own exchange-settlement balances, and this is providing significant ongoing flexibility in particular for short-term funding. For instance, KangaNews understands Westpac has reduced its commercial paper on issue by roughly A$20 billion, primarily foreign-currency issuance, and that this experience is representative of a sector-wide trend.

As recently as May, when Australian banks made their first foray into new senior wholesale term issuance since early 2020, the expectation appears still to have been that issuance volume would not immediately spring back to historical levels. Westpac issued US$2.75 billion of five- and 10-year bonds on 25 May, after which the bank’s Sydney-based managing director, balance sheet and funding, Alex Bischoff, told KangaNews the expectation was of a return to the previous frequency of issuance but likely with smaller volume in individual transactions.

“We are positive on the economic outlook and on growth. We expect we will return to more normal funding dynamics in the next financial year, although senior volume may not immediately return to pre-COVID-19 levels,” he revealed.

Westpac had no specific liquidity need ahead of the May deal, Bischoff added. Rather, the bank judged that market conditions represented a compelling opportunity to lengthen its maturity profile, which like all Australian banks has been altered by the TFF. “Beyond the structural reasons for executing in US dollars – which was the primary driver – the economics of the transaction were compelling,” Bischoff continued.

At the time, the Australian dollar market was showing strong pricing signals for the major banks, though Bischoff said the decision to execute in US dollars came down to a borderline decision based on relative value and the volume available at longer tenor in the US market.

Foreign currencies have accounted for the bulk of issuance by the big four since Westpac reopened the market with senior and tier-two transactions in May, adding a euro covered bond in September. Commonwealth Bank of Australia (CBA) has tapped the US dollar senior market twice and printed its own euro-denominated covered-bond transaction on 6 October, while ANZ and National Australia Bank (NAB) have issued tier-two securities in sterling (see table 1).

By the time CBA printed its US$2.5 billion senior deal in early September, the messaging from the major banks had shifted to an expectation that they will tap wholesale markets for a significant portion of their refinancing need.

Fergus Blackstock, head of term funding at CBA in Sydney, commented: “We are looking at our 2022 financial year and are conscious we have A$35 billion of group funding maturities. We are back in funding markets. What is unclear is exactly what the quantum of funding is, though it will be a function of deposits versus asset growth as it has been historically.”

TABLE 1. AUSTRALIAN BIG-FOUR BANK FOREIGN-CURRENCY BENCHMARK ISSUANCE, MAY-OCTOBER 2021

Source: KangaNews 6 October 2021

In CBA’s case, the decision to go to the US 144A market for a senior-funding return was not just a question of finding the best relative value. Blackstock says the bank contemplated issuing in the Australian dollar market but ultimately decided on US dollars due to a recent domestic tier-two print – of A$1.5 billion on 12 August. He added: “We were also conscious of there being a greater combination of duration and depth in the US market, and spreads competitive with Australian dollars.”

CBA wanted to get the right balance on pricing between taking advantage of where recent similar transactions had traded and the rarity value Australian bank paper offers in the US market, Blackstock explained.

The returning theme of funding diversification speaks to banks’ expectation of a larger draw on wholesale funding markets. ANZ and NAB both referred to the value of having a wide range of issuance options after pricing tier-two transactions in the sterling market – traditionally a less-used avenue for Australian banks.

ANZ has issued two tier-two deals in each of the Australian dollar, US dollar and euro markets, and now one in sterling, since the Australian Prudential Regulation Authority (APRA) announced the final form of Australia’s total-loss absorbing capacity (TLAC) regime.

Going into the June transaction, ANZ was already close to completing its stated A$4-5 billion equivalent range for tier-two issuance in the current financial year. Having established a presence in core markets, diversification of issuance was a key goal for the bank.

Simon Reid, director, group funding at ANZ in Melbourne, told KangaNews after pricing that the time was right to issue subordinated debt in sterling given conducive conditions. “Diversifying our tier-two capital base is a priority and we had the opportunity to do so at a pricing level that was flat to the Australian market,” he explained.

One of the attractions of sterling has historically been extended tenor, but a string of deals over recent months have favoured the 10-year non-call five (10NC5) structure – potentially providing Australian banks another currency diversifier for this popular point on the curve. ANZ’s June deal in the UK had 10.25NC5.25 tenor while NAB went for 10NC5.

Michael Johnson, Melbourne-based head of group funding at NAB, said after the tier-two deal that the bank is confident of being able to manage the tenor profile of its TLAC portfolio across various markets. “Sterling gives us another 10NC5 option, which fits well with our maturity profile and provides diversity of currency and investor base.”

Even so, sterling is likely to remain a complementary currency. “Once we approach the end of TLAC implementation in 2024, having sterling in the portfolio will be an important option to maintain – but it is rare, historically, to see the relative value that is there now,” Johnson told KangaNews. “Realistically, we expect to continue to see a significant portion of tier-two issuance coming from the US market, given its deep liquidity, as well as the Australian market.”

The major banks returned to domestic senior issuance in August, NAB going first in this case with a A$2.75 billion five-year deal. CBA issued a A$500 million green bond a month later, and Westpac added to the flow with a A$1.2 billion residential mortgage-backed securities (RMBS) transaction priced on 24 September (see table 2). Issuer commentary after domestic deals reinforces the impression that the return to pre-pandemic issuance norms is gathering pace.

In particular, after its RMBS return Westpac flagged a snap back to a business-as-usual issuance task that could be in the order of A$30-35 billion in the coming financial year. On this basis, the bank expects to be active across its core markets. Guy Volpicella, managing director and head of structured funding and capital at Westpac in Sydney, said the bank’s new issuance demonstrates normal service being resumed after the end of the TFF.

“Historically, secured funding has contributed up to around one-third of our term wholesale funding,” Volpicella explained. “This has typically comprised one or two domestic securitisation transactions a year and up to three benchmark covered-bond deals, typically focused on foreign-currency markets.”

TABLE 1. AUSTRALIAN BIG-FOUR BANK AUSTRALIAN DOLLAR BENCHMARK ISSUANCE, MAY-OCTOBER 2021

Source: KangaNews 6 October 2021

Although the latest deal’s volume was less than Westpac’s previous RMBS, Volpicella says he was pleased with the overall number and quality of investors. While acknowledging that Westpac has been out of the securitisation market during what may prove to be its peak of issuance conditions in 2021, he says there is no reason to think RMBS will not continue to be a regular funding option for the bank going forward.

Johnson, meanwhile, said NAB expects issuance activity progressively to return to a more normal pattern. For its mid-June domestic senior return, conditions in the Australian dollar market compelled it to issue locally.

“The Australian dollar market has looked very strong, with secondary spreads tightening and a relatively quiet period of deal flow in recent weeks. Meanwhile, the US market was busy [the prior] week but has slowed while Europe is quiet for the summer holiday period,” Johnson explained.

The absence of major-bank primary issuance meant it was always likely NAB’s print would attract strong demand. But Johnson said some uncertainty still surrounded the deal given all that has transpired in markets and the economy in the last 18 months.

He commented: “We were surprised on the upside with the demand we received. There was some uncertainty about how investors would respond given the long absence of major-bank senior supply, as well as other factors such as the reduced committed liquidity facility. We had some price and volume discovery to do but ultimately received good investor feedback and were very happy with the outcome.”

Diversification is relevant even within the domestic market, again based on growing issuance expectations. “With the TFF no longer available, we expect to return to a historically normal funding profile,” Blackstock said after CBA’s green-bond deal. “We had been looking for the right time to issue our next green bond and we identified a clean window to move ahead.”

Referencing the transaction’s relatively modest size, Blackstock said CBA has taken a conservative approach to its eligible-asset pool to ensure its legitimacy. Eligible assets include renewable energy, and low-carbon buildings and transport.

Blackstock added that CBA’s recent ramp-up in green lending is producing more assets for its green-bond pool, but stringent criteria mean sustainability-linked loans have to date been excluded from the eligible-asset register.

Despite any short-term growth limitations from CBA’s measured approach to eligible green assets, Blackstock expects CBA’s pool will continue to expand and create opportunities for issuance. “Ongoing product development at CBA will lend itself to continued growth in our ESG [environmental, social and governance] assets and our eligible asset pool,” he explained. “We expect this will continue to be a big engine for growth, providing ongoing opportunities for our customers and investors.”