Australian Major Bank Funders Stay the Course
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roundtable discussion AustrAliAn mAjor bAnk funders stAy the course n Melbourne in February 2013, KangaNews and RBC Capital Markets hosted their roundtable with Australia’s biggest bank funders i for the fourth time. In this year’s discussion, the majors agreed that market conditions have eased significantly since the worst of the crisis period – but they also insist now is not the time to take off conservative funding settings. PartICIPantS n Ben Colice Managing Director, Debt Capital Markets RBC CAPITAL MARKETS n Luke Davidson Head of Group Funding ANZ BANKING GROUP n Joanne Dawson Deputy Group Treasurer WESTPAC BANKING CORPORATION n Christian Joannidis Head of Group Funding NATIONAL AUSTRALIA BANK n Simon Maidment Head of Group Funding and Liquidity COMMONWEALTH BANK OF AUSTRALIA ModeratorS n Laurence Davison Managing Editor KANGANEWS n Gerard Perrignon Managing Director, Debt Capital Markets RBC CAPITAL MARKETS THE FUNDING ENVIRONMENT n MaIdMent I agree – and the thing that jumps out most is the breadth of deals we have all been able to do. Six weeks into the Perrignon How would funders characterise year and we have issued a wide range of products – covered global markets at the start of 2013 in terms bonds, senior unsecured, residential mortgage-backed securities of pricing and execution conditions? (RMBS); and domestic, euros, and US dollars. Last year it was n davIdSon Year on year there has been pretty significant pretty narrow in terms of the scope of products and markets improvement. If you look at senior unsecured, spreads are 100 we could look at or that made sense from a pricing perspective. basis points tighter in the domestic market and 170-180 basis points tighter offshore. Covered bond spreads have come in by Perrignon How do your execution strategies about 120 basis points in both the local and offshore markets. change in markets as constructive as they So conditions are much better at the start of 2013 in terms of are today, relative to a year ago? access to markets and funding costs. n JoannIdIS We have more choice and options available in Also, investors still love Australia, and they have confidence terms of product as well as markets. One thing we are mindful in the banking system. If we had a wish list for a set of optimal of, particularly looking at the strong start we have seen in 2013, conditions to execute our funding plan, we are a lot closer to is ensuring that we are in a position to be ahead of our funding them now than we were a year ago. task. This is something we’ve been keeping an eye on in the “Europe is on the verge of debating whether SME loans should be included in covered bond pools. We have seen this movie before, and in Australia we have avoided polluting the covered bond product by using the product solely for prime residential mortgages.” SIMon MaIdMent coMMonwealtH Bank of austRalia 24|kanganews MaRcH 2013 last couple of years, notwithstanding the volatility we have So from a funding perspective, although markets have seen. Having that flexibility and additional optionality around come a long way, underlying risks still remain and we can’t markets we can issue into has been a differentiator at the start predict how or when any of these might come about. As a of this year. result, from an execution standpoint we still have to deliver and n dawSon It’s definitely a less crowded space in terms of the last thing we want to do is back end a significant portion of execution because there is a range of transactions and options funding at the end of the financial year. in which to fund. From an issuer perspective this is beneficial n davIdSon That’s exactly right. Our thoughts on prefunding as we’re not all looking to execute the same benchmark trades haven’t changed. It would be foolish to sit here and think that one after another. The range of options in terms of currencies, because conditions are pretty strong right now all the volatility products and investors we are seeing this year is a definite has gone. At some point it will come back and when it does we positive differentiator. want to be in a position where we can tell our investors we are in a comfortable position with regard to funding, and we’re not davison are we reaching a point where some forced to do trades which are not optimal from a funding cost of the conservatism that has been applied or execution perspective. to funding strategies – especially in terms of willingness to prefund or to accept current Perrignon australian bank spreads have spreads even in a tightening environment – enjoyed an incredibly strong rally so far this can be eased in the anticipation of continued year, both on an outright basis and relative improvement in cost outcomes? to some of your funding peer groups such as n JoannIdIS Over the last 12 months markets have improved the canadian banks. what messages have and spreads have come in. However, the ultimate position is you heard from investors globally to explain that you still fund through the cycle. The largest shift over the their increased comfort with the australian last few years has been positioning to refinance term wholesale banks from a relative value perspective? maturities, more than to fund asset growth. n MaIdMent One of the things that has been a factor in the US “For a while now when we do US dollar deals I’ve been asking for quotes that include a margin to swap, a margin to Treasuries and a margin to Canadian names. This highlights the additional spread investors have been receiving for Australian major bank risk, which has been pretty generous.” luke davIdSon anZ Banking gRoup 25 roundtable discussion “The amount of funding in total that the Australian banks are looking at is smaller than it was two or three years ago, and the number of products and investors for those products is broader. As a result, there’s not such a reliance on senior unsecured in the US.” Joanne dawSon westpac Banking coRpoRation dollar market – and it’s a story we began talking about two years came back to issue in the public markets we would probably see ago – is the reduced supply. The Australian banks have always the same trend for them. been large issuers in the US market and there was a perspective Compression will be an interesting theme going forward. in the past that if you didn’t buy this week’s deal there would be At the forefront of investors’ minds is looking at how much another one a couple of weeks down the track. That certainly compression there can be in both absolute and relative levels. wasn’t the kind of reputation the Canadians had. Now we are n dawSon I think having the covered bond product has also seeing a better alignment in terms of reduced supply from assisted senior unsecured pricing. It goes back to the point Australian banks and a little bit more supply from some of the Simon Maidment made – the amount of funding in total that the other jurisdictions. Australian banks are looking at is smaller than it was two or three At the same time, there’s always the tyranny of distance. years ago, and in addition the number of products and investors People like the Australian story but there’s always a level of for those products is broader. As a result, there’s not such a scepticism when the country you are investing in is 12,000 miles reliance on senior unsecured in the US and investors are more away, compared with Canadian banks that are seen as quasi-US. understanding of this reduced supply dynamic. n davIdSon In terms of investor perception of Australia versus n JoannIdIS Regarding the covered bond product, at the Canada and other jurisdictions, on the Australian front we are time this product was launched conditions were extremely seeing a continuation of themes we have seen over the last challenging and thus to an extent relative value was distorted. two or three years. There has been a gradual acceptance of In other words, in a volatile market when spreads are highly Australia’s economic position and the strength of the financial elevated, determining appropriate levels of relative value across system. Investors don’t expect Australia to fall off a cliff products and jurisdictions may have been a factor in the early and have a much better understanding of how Australia has days of the covered bond product. managed to perform differently. But when you look at some other markets – and I’ll pick on davison How important is relative value Canada as an example – the recent Moody’s Investors Service for the australian majors versus global downgrade and the focus on the recent performance of the peers, in comparison with outright spread Canadian housing market has probably driven the tightening of compression? spread relativities for Australian major banks, rather than any n davIdSon Ultimately our cost of funds in Australian dollars significant change regarding Australia or Australian banks. is the most important factor for us. But historically our pricing n ColICe In general Australia, Canada and Scandinavia have relative to Canadian banks has been well back and, I think, enjoyed safe-haven status over the last few years. But, as Simon unjustified. This is annoying more than anything else. For a Maidment has said, it’s easier for investors to be familiar and while now when we do US dollar deals I’ve been asking for comfortable with a jurisdiction that is closer to home.