The Australian bank story and investor relations

The Australian big-four banks say their investor-relations task has matured significantly over the years. They are telling a relatively simple and increasingly well understood story to global investors that, in most cases, have now been following them for some time.

PERRIGNON The April 2019 financial stability report from the Reserve Bank of Australia (RBA) pointed to the continued resilience of the Australian banking complex. This includes capital ratios that have become significantly higher over the past decade, simplified banking models, extensive culture and governance reviews, strengthened lending practices and essentially robust credit quality – albeit with a few pockets of stress.

It feels like it ought to be an incredibly solid investor-relations story for the sector. What are the banks hearing from investors domestically and globally?

REID International investors tend to have a broader perspective than we do domestically – we are ‘in the bubble’, so to speak, and of course the banking sector has been going through a tough time in Australia.

By contrast, offshore investors have witnessed the global banking community going through similar challenges over a long period of time. When we get past the obvious talking points of the royal commission and the housing market, we find that the conversations move on to the kinds of positive dynamics discussed by the RBA.

Most debt investors globally are certainly very happy to buy our bonds and are comfortable with how we stack up relative to our international peers. If anything, offshore investors would like to see more issuance from us. Luckily for them, they’re going to get quite a bit more subordinated issuance.

BLACKSTOCK Commonwealth Bank of Australia (CommBank) published its results last week, and the feedback we have been getting from investors is that they are conscious that we are dealing with some headwinds on earnings but our balance sheet looks very solid. The Australian banks all continue to score well on our funding and capital positions.

If anything, reliance on wholesale markets has reduced somewhat as deposit growth has been good. We also certainly feel we are in good shape on the capital front, both to meet “unquestionably strong” requirements and for total loss-absorbing capacity. Obviously there is a task still to be done on the latter, but it feels that we are in good shape to do so and have got off to a reasonable start.

MITCHELL My sense is that the story we are telling about the drivers of our business gets simpler to explain as the years go by. National Australia Bank has rationalised its business and our operating model is a lot simpler nowadays. This means we have a ‘cleaner’ set of numbers to show investors, which has been fairly well received.

I think it’s worth discussing the housing market specifically. Two or three years ago, I think some investors might have been surprised to see how resilient the market and the banks were to a 10-15 per cent housing-market decline. The questions we were getting about asset bubbles and Australian house prices have dissipated quite significantly. There is much greater understanding of the idiosyncratic nature of the Australian property market.

The capital story is another topical issue on the regulatory side. We get a lot of questions about the natural level of capital, when we stop accumulating and the fact that we are moving into the top handful of banks on an international basis. This has been positive from a debt-investor perspective, obviously.

DAVISON Picking up on the point about housing, it seems that going back two years everyone would have been delighted to see a gradual 10-15 per cent decline in prices without major impact on bank balance sheets or other knock-on economic impact. Are investors now saying they do not want to see the price decline go any further?

BISCHOFF The response varies by investor jurisdiction to some extent. But over the last few years I think all the banks have stuck pretty consistently to the message that continued price growth would be more concerning than a correction of the scale we have seen, all else being equal.

I liken what we have experienced recently to a stress test. The banks as a whole have seen 10-20 per cent of their mortgage portfolios switch from an interest-only to a principal-and-interest basis and at the same time we have seen a roughly 10 per cent house-price decline. Yet our 90-day delinquencies and loss rates speak to the quality of bank underwriting. Investors recognise this.

On one hand, I think it’s fair to say investors are paying close attention to the impact of the regulatory environment on credit and system growth, and how these influence portfolio performance in future. But this is more of an equity-investor story than a credit one.

Of course, some investors are just naturally inclined to take a negative view. If we present all the things we are talking about – a better portfolio mix, lower house-price growth and recent rate cuts – and an investor continues to have a negative outlook, there’s probably not much we can do about it. I think the past 10 years or more of history prove that our books are pretty resilient.

DAVISON Scott Mitchell mentioned that telling the Australian bank story has become easier over the years. Part of this, as he said, is about simplified banking models – but is there also an element of investor saturation? In other words, that the investor-relations task has evolved from meeting new investors, especially offshore, to updating existing ones?

BISCHOFF Thinking about the journey the major banks have been on since 2007 – especially the volume we are funding and the quantity of investor work done not just by the big four but also other names that are now issuing offshore – it has reached a mature stage from our point of view.

We have a pretty good understanding of who our core investors are – the ones that need to be updated continuously. Then there is the ongoing question of where we can find value-add in our books in any given year.

I think this component of the overall investor-relations task is smaller than it used to be, although there is always an element of building capacity in our name in every roadshow. There is a balance, but it favours the investors we see in our books consistently.

MITCHELL The days of uncovering hidden pockets of liquidity are largely gone – there aren’t big pools of new liquidity that we don’t already have access to.

The new, increased capital requirements we are all looking at probably pivot our attention in favour of some of the more sub-debt-focused investors that we might not have been as engaged with previously. But overall I agree that investor relations is largely in a mature phase.

On the mechanics of investor marketing, I think we have reached a point where we are comfortable with our cadence of visits to the major centres. However, we continue to look at regional centres where we have historically done less as an area we can grow our activity.

BLACKSTOCK We will always make ourselves available to investors, whether that be via calls or periodic visits. I agree that the focus of visits will continue to be on the major centres but that we will also be able to supplement this by seeing investors we might not have been face-to-face with for a while. I also think there is good scope for using conferences, especially when they’re in centres we might not often be getting to.