roundtable discussion Australian major funders stay the course n Melbourne in February 2013, KangaNews and RBC Capital Markets hosted their roundtable with ’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 BANKING CORPORATION n Christian Joannidis Head of Group Funding n Simon Maidment Head of Group Funding and Liquidity 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 . 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

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“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. As quotes that include a margin to swap, a margin to Treasuries a result, one of the things that has benefited the Australian and a margin to Canadian names. This highlights the additional banks is the general forgetfulness of investors around lack of spread investors have been receiving for Australian major bank good news and crisis in the preceding five years. Whereas the risk, which has been pretty generous given the differential in Canadian banks in particular have enjoyed that status for the fundamentals. last five years and have never had the same level of dislocation n Dawson We saw the difference when we did our recent US some of the other banks have had. dollar trade, as Royal Bank of Canada priced a deal at the same For north American investors, especially in the US dollar time. The difference was only 8 basis points – whereas a year space, there has been a willingness to examine some of the ago it would have been much wider. other countries that are considered safe havens, where they n Davidson That’s definitely a positive development. potentially get paid well for taking a bit of time and effort to n Perrignon It’s also a good trend for investors – who will do the credit work. We’ve seen this benefit the Scandinavian always attempt to judge relative value and push an agenda, jurisdictions in both senior unsecured and covered bond particularly if there is a peer group comparison they can make format, as well as Australian banks. And if the UK banks ever which is favourable to their aims.

26|kanganews MARCH 2013 DERIVATIVES AND FUNDING COSTS Having large quantities of financial assets makes collateralising derivatives trades easier for banks than for non-financial corporates. But new capital costs are still having an effect on the cross-currency funding environment.

Davison Are changes differences in cost depending currency swaps or using back to a BBSW base and in derivative markets on what a CSA will allow us mortgages for covered bond then consider our options. having any impact on the to post in terms of collateral. collateral, you have to fully marginal economics of load the cost when you make Joannidis I agree. From international currency We have all become more an assessment of what kind a market perspective there issuance? Obviously sophisticated at looking of trade you want to execute. is now greater difference it is easier for banks at this, as well as how we between the various pricing to collateralise using charge for the embedded Putting aside the level of levels that are quoted across financial assets than liquidity that is part of the basis, people are aware different counterparts. But it is for corporate collateral posting under the of the various funding ultimately we also bring borrowers. But what derivatives requirements. valuation adjustment everything back to BBSW. does it cost the banks We have all had to manage charges and non-resettable to fund two-way credit substantial cross-currency cross-currency swaps. Maidment There are also support annexes (CSAs) and liquidity postings with People are now pricing for hidden costs – such as Dodd- for their own borrowing? a strong currency. It’s a risks that five years ago the Frank compliance, or the risk we well understand. market didn’t talk about. cost of central counterparty Maidment At the end of clearing on cross-currency the day we are bank bill When you look at some of Dawson From Westpac swaps – which will eventually swap rate (BBSW) funders the Basel III rules you start to Banking Corporation’s apply. This is already applied so we look at an all-in cost see additional considerations perspective we still value to some interest rate swaps back to BBSW and we given to collateral issues, and diversity – of currencies, in some single-currency will fully load the cost of it all boils back to the cost of products and investors. markets. The derivatives part swaps in that process. So wholesale funding. Whether Similar to the other banks, of funding activity is more whatever the collateral it’s collateral on cross- we fully load all costs complex than it used to be. terms of a swap are, we will take that into account. “There is now greater difference between Clearly we don’t have the various pricing levels that are quoted the same extremes as across different counterparts. But ultimately corporates have, in terms of doing uncollateralised we also bring everything back to BBSW.” transactions. But there are Christian Joannidis National Australia Bank

INTERNATIONAL DEMAND n Dawson I’d say across all products a general theme is an increase of offshore interest in Australian dollars. However, as Davison How prominent have international Luke Davidson says, it varies depending on the product and investors been in banks’ AUD deals in recent where on the curve that product is being pitched. Investors months? From where – in terms of geography look at the margins of various products relative to what they and sector – are new investors coming, and might buy in other markets. how sustainable do funders believe the wider In terms of where we are planning our trades these days, we interest in AUD will be, especially if cash rates don’t expect an entirely domestic book. Regardless of whether fall further? it’s domestic or offshore funding, we also take into account n Davidson In our experience the level of international the various regions across the globe which have interest in investor participation fluctuates from deal to deal and product Australian bank deals. to product. It’s difficult to say if you do an AUD deal you n Joannidis And as we have said, there is now more product expect ‘X’ amount of participation – the range is quite wide. available in terms of the different asset classes. Offering a For example, when we first issued covered bonds in our broader range of product appeals to more investors offshore. home currency around 40 per cent went to offshore investors. However, on domestic transactions the primary focus is on Admittedly this was driven by a couple of large investors. local investors with incremental demand coming from offshore However, increasingly more international investors are looking regions. This fluctuates depending on the deal, the product and at Aussie dollars. the market backdrop.

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US REGISTRATION SITUATION The Australian have taken different approaches to US dollar issuance, with Westpac Banking Corporation the only one of the majors to use SEC registration. Whether more will follow that approach for covered bonds remains to be seen.

Perrignon The US reporting requirements to tier of the more traditional unsecured space. All the market is evolving quite go down this route. From 144A access. It’s fair to say non-SEC registered banks quickly in terms of our perspective, we are investors are still taking have 3a2 capability now, for documentation, allowing continuing to see more the time to understand senior unsecured, and this issuers to access the investor interest in the how this tiering works has been of benefit. We’re market via different current format, and at this and what it means from a seeing new investors in our forms of securities stage we don’t see investors relative value perspective. books and bigger tickets registration. How will demanding a change. from some existing investors this market evolve in Colice We haven’t yet as a result of issuing under 2013 with the prospect Perrignon It is a very reached the boundaries of 3a2 documentation. of a divide between young market and will the existing 144A investor SEC-registered and likely evolve in terms of a base. That being said, we Colice Index eligibility – 144A-exempt issuance natural tiering of access believe there is a clear benefit whether it’s unsecured or for investors to choose? mechanisms that issuers to come from the broader covereds – for SEC and 3a2 around the world might use distribution offered by SEC- deals is a very big driver Dawson To look at SEC to issue in covered format. registered and 3a2 issuance. of incremental liquidity. registration for covereds, The very deepest is the we would need to see SEC-registered market, we Davidson We have spoken Dawson From a senior either a benefit in terms potentially could see the about how covered bonds unsecured perspective SEC of price or distribution of evolution of 3a2-exempt have helped bring in new registration and 3a2 have a reasonable size. There covered issuance in the investors. The other side some value, and I think it’s is a lot more in terms of US, followed by the third of this is 3a2 in the senior possible they would do the same in the covered space. But I think there is still plenty “I think there is still plenty of demand for of demand for 144A covereds. 144A covereds. While this remains the case we While this remains the case will continue to do our covered bonds in 144A we will continue to do our format, particularly due to the more onerous covered bonds in 144A format, reporting requirements for covered bonds in particularly due to the more onerous reporting requirements SEC-registered format.” for covered bonds in SEC- Joanne Dawson Westpac Banking Corporation registered format.

Perrignon Have you seen, or do you expect Australian RMBS market, but it still really only makes sense to to see, more positive signs from offshore issue in AUD, which limits offshore investor participation. investors with regards to RMBS product? n Joannidis Our experience with RMBS is that there is n Dawson In our recent RMBS deal the book was still very definitely an offshore bid for other currencies. In our last much supported by domestic investors. We were encouraged by deal, at the back end of 2012, we included a sterling tranche, the interest from offshore, from a variety of regions. It was very recognising the demand we were seeing out of that jurisdiction. positive – in terms of the book it was the broadest distribution we have seen for an RMBS deal in some time. Perrignon Are master trusts a viable way n Maidment We had a similarly positive response to the latest forward for the Australian asset-backed Medallion deal. Around one third was sold offshore, one third securities market to expand the investor base to domestic bank balance sheets and one third to domestic real offshore? money. At A$2.5 billion (US$2.6 billion) the deal looked a lot n Maidment The RMBS market is looking reasonable at this more like the A$3 billion RMBS deal we did in 2011 than the point in time. But in the last couple of years we’ve gone through A$1 billion trade we did last year. This is encouraging for the periods when it has looked reasonable and then disappeared. For RMBS market going forward. example, through our Medallion programme we did a A$3 billion Offshore investors have been somewhat starved of secured deal in 2011, then in 2012 we did A$1 billion. bond supply given northern hemisphere bank deleveraging I don’t think we can take it for granted that RMBS is and cheap funding. Investors know and like the coming back in a consistent fashion – certainly not in the

28|kanganews MARCH 2013 way we saw prior to the crisis. However, I think master trusts Australian banks but also more broadly – has been well received. could further help the market to develop. At the end of the This was further evidenced last year with the longer-dated day they take away some of the issues around the complexity issuance we saw by international peers. of the secondary market, in terms of providing a single, In Europe the trades have gone well too, but that’s what we homogenous pool of collateral on which people can have a were expecting considering the depth in those markets. credit view, and for which they can make a credit assessment. Then they can make a separate investment decision as to what Perrignon Would you have thought the US transaction they want to own. market would have performed as well and The master trust structure gets us faster to the point where developed as quickly as it has – into a core there will be greater offshore participation in the RMBS strategic sector – back when you were market, because you can do soft bullet foreign currency deals planning your strategies for covered bond with cheaper cross-currency swaps. issuance? We have all heard there is a lot of appetite for Australian n Dawson As the US market has matured, the biggest thing RMBS. But the problem is to deliver that to investors in US is that execution risk has reduced quite significantly. In the dollars is just ludicrously expensive. Master trusts would help early days this risk was quite high due to both the number of in this regard. participants that wanted to access the market and the newness of the product. The maturity of the market and the product COVERED BONDS means there is now a good understanding and confidence of the execution of a covered bond deal. This has increased Davison How have investors in various significantly over the last 12 months – as we would have hoped markets responded to Australian covered when the market first opened. bonds? How have funders perceived the n Joannidis The US dollar market is definitely a core one in evolution of relative value conversations with terms of covered bonds. The point I was making earlier is that investors in global markets for their covered the number of investors that can participate in these deals has bond product? increased significantly. This leads to better execution and more n Colice International markets have been very receptive to confidence around looking at the market as a viable option. Australian covereds across currencies, tenors, public and private n Maidment The other thing that has stood out to us is that, issuance, and fixed and floating rates. probably even more so than the senior unsecured product, US There are a couple of reasons for this. Different asset dollar covered bonds are a true global product rather than a US classes have different utilities for investors and the covered domestic product. So for example, on our US$2 billion three- product has really helped Australian issuers access some of year covered bond deal in January two-thirds of the distribution these different investors. One of the things we have seen, in was outside the US, to habitual USD investors. Normally you particular in the US and Europe and in both major currencies would see some participation out of non-US accounts on a and non-core currencies, is investors being keen and happy senior unsecured deal, but not to that extent. to hear information on the Australian story. This has been the This is good from our perspective in terms of the breadth case both in the context of the banks themselves and also with of investors we are getting into the product. And it also helps regard to the mortgage market. domestic US investors understand that they are not the only bid The expectation is certainly for that interest to continue, in a for deals and there will be better secondary market liquidity. range of currencies. This will help to further compress spreads n Davidson Also, the fact that spreads contracted so much for the Australian banks in international markets. during the early days of a new product’s life helps. Investors n Joannidis One of the most impressive aspects for Australian have made money, which is good for the product and banks with regard to covered bonds has been the increased depth ultimately good for issuers as well. and investor distribution in the US. The speed with which that n Maidment That’s right. The compression of Australian bank market has embraced the covered bond product – not only from covered bonds in Europe, to bellwether European bank issuers,

“In north America it’s still quite a regular occurrence for a new investor to gain approval for the covered bond product. In Europe it’s different – I can’t imagine there are many investors who still need to develop lines for covered bonds.”

Ben Colice RBC Capital Markets

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government-guaranteed work in strong markets when BUY IT BACK securities, plus a few out there are good replacement of . We have sources of funding, and of All four of the majors have now completed done a few buybacks and course the pricing in terms government-guaranteed buybacks. In now we have around A$6 of where we are buying billion outstanding across them back needs to work. fact, most of their domestic government- Australia and New Zealand. We also need to be able guaranteed issuance is no longer outstanding. Some of these securities to access those bonds – are privately-held and which isn’t always possible Davison Where does the securities roll into the short- will likely mature, rather when they were issued recent clutch of buybacks term bucket – with less than than be bought back. as private placements. leave the banks in terms of 12 months until maturity guaranteed outstandings, – there are alternatives and In terms of the bigger Maidment At and are there plans for we will look to the most cost- picture, being able to Commonwealth Bank of further buybacks? effective and efficient way to buy back these bonds Australia we have done manage those securities. contributes to the picture one AUD buyback of Joannidis At National of the overall health of our government-guaranteed Australia Bank we have In terms of our overall sector. Investors like the bonds. We haven’t yet bought back quite a lot strategy with regard to fact that an issuer has the done any buybacks of our of our public and private buying back government- capability to repurchase offshore currency securities. government-guaranteed guaranteed debt, we look bonds prior to maturity, We continue to monitor bonds. We had a take- of at where the market is, so if it makes sense from the opportunities and put around 65 per cent on our alternative funding sources a pricing perspective the idea of buybacks into global public government and how the balance we will buy back these the mix of other liability guarantee tender in October sheet is positioned. bonds when we can. and liquidity management 2012, which leaves us with issues we are dealing with. approximately A$5 billion Davidson ANZ Banking Dawson For Westpac We have close to A$16 (US$5.2 billion) outstanding. Group issued about Banking Corporation, billion outstanding after As government-guaranteed A$18 billion of Australian buybacks generally tend to the recent AUD buyback. “Being able to buy back these bonds contributes to the picture of the overall health of our sector. Investors like the fact that an issuer has the capability to repurchase bonds prior to maturity.”

Luke Davidson ANZ Banking Group

has been a surprise. We all expected there to be a new-issue covered bond market is new. It is still a young, small market premium followed by a convergence of spreads. That has been compared with Europe. And the Australians, like the Canadian a standout from my perspective. banks, have benefited from the newness of the market, being Looking back, it’s clear that we developed a really good, able to compete on the basis of credit quality, mortgage quality, clean, homogenous product. Europe is on the verge of debating consistency of the programmes, and so on. Whereas in the whether SME loans should be included in covered bond European market you are also competing with some local pools. We have seen this movie before, and in Australia we peculiarities which might lead to some investors favouring have avoided polluting the covered bond product by using the other products, irrespective of the underlying credit of the bank product solely for prime residential mortgages. I think investors or the cover pool. have appreciated this. n Colice One of the other things that has benefited Australian Davison Has the disparate investor base issuers in the US more than other jurisdictions is that the USD available for USD covereds surprised?

“Although markets have come a long way, underlying risks still remain and we can’t predict how or when any of these might come about. As a result, from an execution standpoint we still have to deliver and the last thing we want to do is back end a significant portion of funding.”

Christian Joannidis National Australia Bank

30|kanganews MARCH 2013 n Dawson The US market for covered bonds is very new and perspective, all things being equal, I would expect our use it’s developing all the time. At the same time, our product has of covered bonds to be where we are getting more value for been a relatively new one for that market. Now what we are collateral. Maybe this will mean bank investors will extend seeing is both the US market and our product maturing, and along the curve. as a result more investors are coming online. As we continue Right now, though, from my perspective the three-year to offer a jurisdiction and a product which has performed covered bond is the exception rather than the rule. relatively well, the investor base has continued to grow. n Dawson It’s a little different when you are in the first few n Colice I would add that in north America it’s still quite a years of a programme, compared with when you are in a more regular occurrence for a new investor to gain approval for established and mature programme. the covered bond product. In Europe it’s different – I can’t n Colice One of the things we have seen, in Europe as well as imagine there are many investors who still need to develop lines the global US dollar market, is that the value of the collateral for covered bonds or obtain approval to invest in them, given also goes up as you go out the curve. The question is whether, the history of the product there. by going further out the curve, you lose the bank bid, and to Year to date there hasn’t been much supply in US covered what degree. This is a more significant issue in the US where bonds, as banks have started the year focusing on unsecured you are getting different investors to step up – and they might funding. This is a positive for the continued development of be natural seven-, 10- or 12-year buyers. But in euros the the market. longer-dated market is very deep and liquid. n Davidson The size of the bank bid for the USD covered n Davidson The use of collateral is an interesting issue. It bond market has been larger than most people anticipated. makes sense that if you have a limited capacity to use covered Ideally you want to see strong demand among fund managers, bonds you would like to do so by taking out the most expensive not just demand driven by other banks. But given how much alternative funding – which is generally the long-dated offshore liquidity there is in the US banking system at the moment, we funding. Yet we have found that there are also times when it are getting a lot of reverse enquiry from other banks to issue makes sense to issue shorter-dated covered deals or deals in USD covered bonds. AUD. It all depends on your funding requirement and market n Perrignon That bank bid is driven by the views taken around conditions at the time. potential liquidity coverage ratio (LCR) treatment going forward, as much as by spreads. It’s almost as if the north American Davison Given the various factors driving treasury bid has overtaken some of the more traditional buyers it, is the bank bid for USD covered bonds who we would have expected to be cornerstoning USD sustainable? covereds. A year ago these traditional investors were providing n Colice As Luke Davidson has mentioned, there is a great the cornerstone bids for Australian bank covered bonds in US deal of liquidity in the banking system globally, and especially dollars, but they are now not necessarily the investors we would in north America. Whether or not down the road banks will go to as the backbone of the books. be correct in treating these securities as liquid is a question that n Joannidis That’s correct. I also agree with Ben Colice’s point won’t be resolved any time soon. However, irrespective of this – that investors in the US continue to establish new lines. It liquidity, books have correctly taken the view that the covered was difficult to anticipate how many of these investors would product has been less volatile to secondary pricing swings and have interest in our covered bonds and then how long it would has been easier to buy and sell in larger size, certainly over the take to establish limits and do the credit work. last six to 24 months. Also, from an investor perspective, I suspect additional Therefore, irrespective of the final LCR rules, the covered work was required to determine in which portfolios the bond product has a utility that means it will still be a natural bid covered bond asset class would sit. But there’s no doubt there for bank treasuries. Given the duration discussion we had earlier, are still pockets of demand that are emerging. I don’t see this changing – certainly for the foreseeable future. n Maidment There’s also a natural tension between what is the n Maidment One of the outliers we individually, collectively, right duration for a bank investor for a liquid security – three and along with other jurisdictions, see is the inconsistent to five years – versus what we think is the best use of our covered bond collateral, which probably starts at five “The north American treasury bid has years and goes a bit longer. overtaken some of the more traditional We have all taken buyers who we would have expected to advantage of the bank be cornerstoning USD covereds.” liquidity bid in the shorter Gerard Perrignon RBC Capital Markets to intermediate part of the curve. But from our

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Dawson When you look CAPITAL CONSIDERATIONS at the Australian banks relative to our global peers, Old-style lower tier two (LT2) issuance ended as 2012 closed, with we are at the top end of ANZ Banking Group the last of the majors to issue before Basel III the spectrum in terms of where our capital ratios rules changed the framework for tier two from the new year. Plans sit on a fully-harmonised for future issuance are in their infancy. Basel III measure.

Davison How and price discovery, but should continue. On the sub Perrignon In a world progressed are the over time we expect the debt piece there needs to be where the Australian majors banks in their thinking market will get there. more work around what the are all very well capitalised on what form future structure will look like and and their retained earnings sub debt will take and Davison The banks where pricing makes sense. are themselves very where it will be sold? took advantage of strong capital-additive, is there demand to issue substantial Maidment You also need a significant amount of Davidson Ultimately, quantities of subordinated to step back and look at the imperative to come up with wherever we end up and hybrid paper in 2012. bigger picture. We are all an immediate solution for selling these bonds, the What need do they have carrying a lot more core equity what a LT2-style instrument distribution pattern will for more capital-type tier one capital than we did will look like? Possibly not. be similar to the old-style issuance this year? historically. So when you take tier two. In terms of what core equity tier one and add Davison All the we will be issuing, it will Joannidis We were in the the hybrids to get a total tier Australian banks are be Basel III-compliant. market with a sub debt retail one ratio, and then look at the now used to reporting But we’re not yet sure deal midway through last total capital ratio – without using the internationally what form that will take. year and followed up with having done any tier two – we harmonised Basel III a domestic institutionally- have to look at how sensible metrics as well as those Maidment We placed transaction in this is. We’re not saying it’s that are compliant with understand the investor November. That has met not sensible, it’s just that Australian Prudential perspective that what our immediate needs. We there’s still some analysis to Regulation Authority they would like is old- are in the market now with a be done around these issues. rules. How do offshore school LT2. But that’s not tier one Basel III-compliant investors respond to happening anymore. There instrument. So from our If you look at what all the the fact that you are will be different terms and perspective in the short term banks have done over the reporting both levels? Is conditions around the these deals will tide us over. last three or four years, we this well understood? new style of securities. have all reduced LT2 as it But in terms of the risk There have been a number of has come due and replaced Joannidis It’s well investors are taking, it tier one Basel III-compliant a lot of it with core equity understood because won’t really be materially deals issued into the domestic tier one. Certainly from a we’ve been highlighting different from the risk retail market, so investors Commonwealth Bank of this for a number of years. investors were taking have a good understanding Australia perspective we Historically, providing previously. There will be of the product. These deals are feeling incredibly well international investors a process of education have gone well so appetite capitalised at the moment. visibility on both local and an internationally- standardised basis “We understand the investor perspective that has made sense. what they would like is old-school lower tier two. But that’s not happening anymore. Davidson We’ve certainly There will be different terms and conditions found making it easier for investors to compare around the new style of securities.” us with other banks has Simon Maidment Commonwealth Bank of Australia been well received.

treatment of covered bonds in the US for repo. covered bonds are repo eligible with the European Central Bank It’s a little bit inconsistent that our senior unsecured bonds, because the criteria require that the issuer is a Eurozone bank. rated AA-, are repo eligible but our triple-A covered bonds are n Davidson This will happen in time in the US, whereas it’s not. There’s a case to be made for the widening of the repo not likely to happen any time soon in Europe. eligibility rules in the US to a level that would include Australian n Colice There have been efforts to address this in the US, covered bonds. both from industry associations and individual issuers and In Europe it’s very different – we see very little momentum investors. So I think it’s just a matter of time before this or tolerance to consider this. Neither our senior bonds or inconsistency is resolved. •

32|kanganews MARCH 2013