2020 challenges returned with interest
Toward the end of a tumultuous year, leaders of ANZ’s institutional business across a raft of sectors gathered at a KangaNews roundtable to discuss the impact of COVID-19, how they supported customers during this unprecedented period, how business has changed and the bank’s role in resetting investment and growth on a more positive trajectory.
Davison We have experienced the definition of a rollercoaster ride in 2020. What were the main inflection points for economic forecasting?
PLANK It has certainly been dramatic. We started the year in Australia with the bushfires – this was really the focus of attention in January. We were able to do some interesting analysis on ANZ’s card spending data, from which it was clear that there was a real impact on economic activity.
By February, we were starting to hear about a mysterious flu-like disease that was affecting China and which quickly shut down travel between China and Australia. Again, we used our own data to look at the impact initially on airports – which was quite dramatic.
Within a few weeks we could see what was happening in Europe and that this was becoming a pandemic, with consequent economic shutdowns beginning. When it became evident that we would be shutting down, the level of uncertainty was quite extreme and we had to contemplate worst-case scenarios.
Australia’s government initially rejected large-scale stimulus – it ruled out wage subsidies, for instance. Putting the absence of significant stimulus together with the pandemic and related shutdowns made for a really horrendous outlook. This included the largest-ever collapse in GDP, comfortably in double digits, and falling house prices.
The government effectively changed its mind on wage subsidies, quickly moving from rejecting them to implementing one of the biggest in the world. This, coupled with stimulus from the RBA [Reserve Bank of Australia], prompted a quite spectacular turn in sentiment that started around the middle of April.
Turning again to our own spending and confidence data, there was a collapse in consumer confidence and spending from late March to mid-April. Then the stimulus started to hit and, critically, health outcomes turned out not to be as bad as the worst-case scenario, or as the US or Europe.
As a result, the rebound in confidence was quite remarkable. It wasn’t enough to stop GDP falling by 7 per cent in the June quarter but it took household spending above the level of a year previously by the end of June.
The trend has continued. GDP fell a lot in Q2 and the effective under- and unemployment rate reached 20 per cent, but as things have opened up we have seen the economy rebound very quickly. We have regained three-quarters of the lost jobs and GDP is climbing again – it should have recovered all its losses some time in 2021, up to 12 months sooner than we initially expected.
There are still plenty of risks and business is clearly still reluctant to invest. But overall the outlook is very different from what we expected even a couple of months ago.
Davison How did coverage areas respond to the emerging impact of the pandemic? We will start in Asia, which was of course the first region to become aware of COVID-19.
CHOI There were already a lot of dynamics at play at the end of 2019, including the trade situation between the US and China – this was having an impact across the region. Once the pandemic broke out there was a lot of uncertainty and a flight to quality, with issuers and investors alike becoming very focused on the near term.
The change in sentiment really came down to the Fed [US Federal Reserve]’s actions. Its announcement toward the end of March prompted a dramatic shift in risk appetite and set a floor under the market.
It also provided issuers with confidence to come to market. Issuance volume is Asia was lagging at the beginning of the year, but once the market reopened companies were willing to move early to take advantage of better sentiment.
Year-on-year, Asian market volume is up by about 9 per cent. The theme has been risk-on for most of the year and local companies have taken advantage of it to pre-fund and refinance upcoming maturities including with larger, jumbo deals. There have been 45 deals of US$1 billion or more – which is up by about 30 per cent.
Davison When did awareness of the pandemic’s scale of impact start to spread among ANZ’s institutional clients in Australia?
MEDARD Multinationals based in the US and Europe were the first movers, starting from late February. Companies started to draw down on unused facilities and place the cash on deposit. There wasn’t any real need for them to do so – a committed facility is just that. But they were learning from the past, when there have been liquidity runs on banks, and getting on the front foot.
Rolling into March, when we first heard about border closures and airport traffic began to fall, we saw pretty much all our corporate clients thinking seriously about shoring up liquidity.
By the end of March, pretty much everyone realised this was not going to be a brief crisis but one that would likely go on for months. This is when clients started not just looking for liquidity but rethinking their approach to employees and other fixed costs.
I recall a client saying on a Monday that it needed A$100 million (US$73.8 million) in liquidity as a buffer, and by Friday the requirement had increased to A$500 million and it was contemplating standing down the majority of its staff. Things were changing that quickly – clients were having this sort of realisation over the course of five days.
What also caught some of our clients by surprise was the approach to dividends. March is very close to dividend declaration and payment, and some corporates had already declared – but not paid – dividends. They had to engage their boards to explore options, because paying dividends at that stage – even declared ones – could have been quite detrimental to companies’ ongoing viability.
HECTOR Going back to when COVID-19 first hit, some sectors felt the impact immediately – for instance hotels, student accommodation and retail. The latter was the result of the lockdowns themselves and new codes being brought in that meant landlords could not collect rent from materially affected SME tenants.
There was also a fairly immediate impact on some parts of the residential-property market: open houses were banned, the auction process shut down and of course there was a tremendous amount of uncertainty.
The dialogue we were having was all about liquidity issues, whether in the form of funding lines – we did about a year’s worth of lending in the space of three weeks at one stage – or an ongoing process of supporting customers with covenant waivers, valuation waivers and deferrals.
March was a pretty crazy month, especially as we and our customers were also adapting to working from home. Even requests for information were clunkier than they would usually be. But we got it all done, and I think we can look back on that period with great pride.
The vast majority of facilities we put in place at the time have now been repaid via capital markets or cancelled because they are no longer required, though we have seen some REITs hanging on to extra liquidity as an insurance policy.
However, I think the jury is still out on a return to normal at least in some areas of the property sector. History may show that the pandemic was the catalyst for change that had been coming for some time in discretionary retail, for instance. Some retailers that were struggling before COVID-19 have been unable to open and valuations in this area have been affected quite significantly in some cases.
On the other hand, there are green shoots in other areas. Some hotels are operating at close to full available capacity, on weekends in particular. We will need to see the return of corporate travel for CBD hotels to get anywhere close to normal, however – and it is not clear when this might happen. I expect it will still be quite challenged in Q1 2021.
The industrial and logistics markets have experienced a positive impact, by contrast, and banks and other investors have been keen to support this sector. The driver is the supercharging of online shopping and the consequent requirement for increased warehouse facilities.
A bit of money is coming into this sector and there may be some pain in the medium term, as the stronger players pull away and those without the same experience start to struggle. This is not unusual.
The big unknown is the office sector. There is no doubt that all companies with space coming up for renewal will be thinking carefully about their future requirements. We are watching closely to see what trends emerge.
Our office book is predominantly with REITs, which typically have strong liquidity support, low leverage and long WALE (weighted average lease expiry). They have time to work through this evolution, in other words. Personally, I believe premium office space will remain a very viable asset class in future even as companies and employees increasingly seek flexibility.
Davison The housing market seems to have surprised a lot of observers on the up side as we have moved through 2020.
PLANK The housing market has been buoyed by the employment recovery and lower interest rates, as well as the enormous fiscal stimulus and the support the banks have provided with mortgage deferrals.
Our house-price forecast has gone from being down by 10 per cent to up by something similar over the next 12 months. This will flow through into credit growth, which we now expect to be positive from a fairly pessimistic outlook. It’s not quite bust to boom but it is much more positive.
We are actually in the midst of what could be a quite remarkable structural change in the mortgage market. Because of the inversion of the mortgage curve, fixed rates are now at a record low – much lower than variable rates than has ever been the case in Australia.
The market is transforming from a variable-rate one to fixed rates as a result. Fixed-rate mortgages historically made up 15 per cent of total stock but have increased to more than 30 per cent in recent months – which of course means the flow is much greater than this. It wouldn’t surprise me if more than half of all mortgages are fixed rate within the next year.
What this means is that we haven’t yet seen the full impact of lower interest rates on the housing market. This is another reason for a more buoyant outlook.
HECTOR The combination of low interest rates and government-support programmes such as Homebuilder have certainly supported house and land development in particular. It is the incredible turnaround in sentiment – and, we suspect, to some degree the return of a number of Australian expats – that has supported the secondary housing market. This is reflected in ANZ revising its house-price forecast to a 9 per cent gain from a 10 per cent decline.
Apartments have had a tougher time, as a consequence of lower net migration and the absence of foreign students. Presales for high-rise apartments are still struggling while some luxury and ‘downsizer’ developments are still doing well. I think the recovery is going to be very selective in this space.
“There was a period of three or four weeks in 2020 when it looked like liquidity could become a real issue. The government and reserve bank acted much more quickly this time, and things like the RBA’s TFF alleviated a lot of concern very quickly – much faster than was the case in the financial crisis.”
Davison How did client needs play out in the loans and transaction-banking areas?
CHAPPELL There was a huge increase in demand for 6-8 weeks, almost exclusively from corporates looking for liquidity. There was some tightness of appetite from a few banks at the time, primarily because of the time needed to turn transactions around. I believe we did well in supporting customers and how responsive we managed to be.
At the same time, things like M&A and other discretionary financing activity stopped. From there, we moved on to waivers and consents being the main agenda item, as borrowers sought to get their covenants in place through the June reporting period. This is ongoing for some companies but has slowed since the end of June.
Things have been starting to return to normal in the second half. It is more a story of regular refinancing flows and borrowers seeking to take advantage of conducive market conditions to extend tenor. M&A and event-driven financing are also occurring on a more normal basis.
Davison Was liquidity always available to corporate borrowers? It seems that there might be a contrast with the financial crisis, where there was an extended period in which liquidity was all-but absent.
CHAPPELL There was a period of three or four weeks in 2020 when it looked like liquidity could become a real issue. The government and reserve bank acted much more quickly this time, and things like the RBA’s term funding facility (TFF) alleviated a lot of concern very quickly – much faster than was the case in the financial crisis, when it lasted for a couple of years.
MEDARD Banks and regulators learned a lot about capital and liquidity in the wake of the global financial crisis. As a result, banks were in a stronger liquidity and capital position to support clients this time around.
CHAPPELL One of the bigger challenges banks faced was the transition to working from home, especially around timeliness of response to client requests. Offshore banks in particular had to go through international channels to make decisions, and I think this as much as anything else was the challenge.
Promoting confidence to invest
Entering the last month of 2020, there is at least some reason for a more positive outlook in Australia than might have seemed likely a few months earlier. A robust recovery will depend on supporting confidence and willingness to invest within the private sector.
PLANK Everybody has a vaccine in their forecast already, I think, so the news really only confirms what we were already expecting. It might come a little earlier than expected and it is really important that the arrival of an effective vaccine has been confirmed, but it’s not really a game-changer.
For us, the game-changer has already happened: the combination of stimulus and health outcomes mean the economy has recovered much faster than we anticipated. The question we are thinking about for 2021 is whether the economy coming back leads to calls for a faster wind-back of stimulus. This question applies globally.
For instance, our forecasts currently expect the TFF [term funding facility] and QE to be extended beyond the middle of 2021 – perhaps in a slightly smaller form. If the economy is back to its pre-COVID-19 level by that point there could be calls for QE to come to an end. We don’t expect this, and the RBA [Reserve Bank of Australia] has made it clear that ending stimulus too early would be a mistake. The economy was performing well below trend even before the pandemic, with low wage growth in particular, so the RBA seems quite happy with the idea of letting it run hot.
Davison The move to home working must have been a big issue for the transaction banking space.
VASIC Absolutely. A few important factors really put what we were dealing with in context. The first is that we were actually the beneficiaries of the desire for liquidity and debt drawdowns we have been talking about. Then there were the operational considerations. Third is what I’d call ‘digital acceleration’ – a trend that was already going on and which got additional firepower in the pandemic. The final one is the impact on supply chains.
Going back to the liquidity story, customers were using muscle memory from the financial crisis – making sure to secure their liquidity very quickly. We saw significant flow through to customers’ operational accounts in the March-April period.
At the same time, rates were coming down at an accelerated pace. Operational accounts are traditionally a point of value for customers but here we saw an inflection between the need to have surplus liquidity on hand and the deteriorating rate environment.
The challenge was that liquidity was needed but it wasn’t earning a suitable return. Customers had to consider their approaches as they sought to get at least some value from their liquidity.
Even at the end of November, we are holding a roughly 20 per cent increment on what we’d consider to be a normal level of deposits. This is a significant volume, and it speaks to the conservative approach of our customers and their desire to maintain liquidity throughout this period.
Moving on to operational risk, this is never anyone’s favourite topic but it came to the top of the priority list in this period. The first order of business was moving to working from home. This was an unprecedented task: ANZ itself, for instance, moved 40,000 people to home working over the course of three weeks. If you’d asked us before the pandemic I doubt we would have thought it was possible in six months – we would have thought we’d need that time just to plan.
This transition, and the subsequent need to prioritise tasks under the new working environment, really exposed the way customers operate and the way the bank supports them. In many cases, the way we were supporting clients did not lend itself to the new working environment.
This could be as basic an issue as e-signatures. Again, it may not be an exciting topic. But we saw a queue forming around provision of documentation in some jurisdictions in our trade business, simply because some couriers were in lockdown and couldn’t get documents to the right places. This also had an impact on supply chains.
We have seen industry groups pivot very quickly to put in place business-continuity plans to accept e-signatures. This was originally on a three-year timeframe but has obviously moved much more quickly.
How customers think about liquidity management now things have started to normalise is the biggest area of interest for us at the moment. This includes a view on liquidity as businesses start to invest again, and also how they plan to leverage liquidity to get better returns in this environment of perennially low rates.
Davison Technology and data are playing an ever-growing role in transaction banking. What impact did the events of 2020 have on evolution in this respect and what are the focus areas moving forward?
VASIC Cyber is a huge topic. As a lot of our customers shifted to a home-working environment unfortunately it also became prime time for cyber-crime activity. We spent a lot of time focusing on ensuring customers had the cyber protection and awareness needed for the transition.
We did the same thing internally at ANZ, and it remains a key focus of our work with clients. We ran a cyber thought-leadership session just two weeks ago, and it was the second highest attendance we have had at any institutional event. This is a real change in awareness.
It’s also no surprise that digital acceleration was a hot topic in 2020. The first aspect here is use of data, and how important that was in responding to a changing environment.
David Plank has mentioned using things like our own retail data. We were able to provide some of this data to clients – to give them the best insights in almost real time and, hopefully, help their decision making. This will become part of our operating rhythm and customers’ expectations of us.
Payments is also relevant in this area. Australia has always been quite progressive in online payments, but the pandemic spurred another huge shift in this direction. We saw a 40 per cent drop in use of cash and a significant reduction in ATM usage. There will be some degree of reversion as things return to normal, but it has been a significant and at least semi-permanent change.
The last point I wanted to raise was the importance of supply chains. At the beginning of COVID-19, there was a lot of discussion about shifting supply chains. This isn’t easy to do in the short term, but we have seen increasing focus on concentration risk and – importantly – access to data to aid decision-making across the supply chain. We are watching this area as our customers adapt to the pandemic experience and to risks that perhaps they had not previously fully appreciated.
Davison How hard was it to keep sustainability on clients’ agendas in 2020? How has this market evolved over the course of the year, while market participants were also dealing with the pandemic?
TAPLEY With all the disruption that has been discussed from late February through to June, we certainly found that customers were focused on short-term liquidity. But at the same time, those that had already been pursuing sustainable-finance objectives generally kept them going in the background. We were quite surprised by this, actually.
From June onward, the pace of our workload returned to normal if not increased beyond it. We are certainly back to full capacity now in the volume of conversations and demand for transactions – on the buy and sell sides.
When it comes to how the conversation has changed, my view is that COVID-19 has been an accelerator for the ESG [environmental, social and governance] aspects of borrowers and investors.
I tend to agree with PIMCO’s view that it has been “the wake-up call needed”, certainly by investors, to understand the correlation between climate change, pandemic and pretty severe social consequences.
What we are experiencing now, as well as increased demand from issuers and investors, is an acceleration of regulatory conversations. A very big theme in 2021 is the regulatory freight train on mandatory disclosure. We have seen the UK and New Zealand introducing legislation covering mandatory TCFD [Task Force on Climate-related Financial Disclosures] reporting and I think Australia will also give serious consideration to this. This would become a major focus for us and our clients on the buy and sell sides, because it will affect how capital is allocated.
Another big theme is the broadening of instruments in the market to incorporate transition and sustainability linkage, including appetite from multiple customer types wanting to be involved in this aspect of the market.
SARIS CHOW It has been a similar story in Asia. We have had about US$75 billion in issuance to the end of Q3, dominated by China, Japan, Korea and Singapore. We definitely see north Asia as particularly strong in ESG uptake and we expect China, Japan and Korea will continue to be the biggest drivers of volume.
All three countries are making very public statements about net-zero emissions by 2050 or 2060. This will promote a focus on green transition projects in those jurisdictions, which aligns with the sustainable-finance theme of energy transition and investment in new technologies and renewable energy to support the transition.
We are seeing the same theme develop with our own clients. Companies are now actively investing in electric vehicles and battery plants in their supply chains, and have been able to finance this with green loans or bonds.
We are also seeing the emergence of new products including those supporting social issues and energy transition. The product suite is much broader, which is only going to make sustainable finance more mainstream in 2021.
To Katharine Tapley’s point about regulation, the regulatory machine is very important in Asia and there is a whole infrastructure of think tanks and organisations looking at standardisation of verification and guidelines on how products are treated.
There is a huge drive from government to grow sustainable finance – it is a national priority in many countries. This has led to things like the broadening of the MAS [Monetary Authority of Singapore] bond grant scheme, which had only been available to issuance of GSS [green, social and sustainability] bonds, to incorporate sustainability-linked and green loans. This should promote Asian borrowers’ willingness to engage third-party providers and issue in a manner consistent with international standards.
Davison ANZ was very optimistic about the level of interest in sustainability-linked loans (SLLs) in the wake of the first such transactions in Australia. Has the level of borrower interest been maintained or even grown in 2020?
CHAPPELL There was a small pause on the issuer side in the March-May period, primarily because everyone was too busy chasing down liquidity. But the interest was still there in the background.
My sense is that ESG will become increasingly integral to the process over the next year or two, to the point that issuing in some type of ESG format will become the norm and issuers may be excluded from some opportunities if they do not.
SARIS CHOW In the Asia-Pacific region, we are seeing much more revolving, core funding incorporating ESG metrics to drive pricing. This is very prominent in Europe and it is now becoming more common in Asia.
TAPLEY If we have noticed any change in the nature of conversations with borrowers post-COVID-19, it has been an evolution from ‘why should I do this’ to ‘I think I should do this because I am worried about long-term access to capital’. We see this particularly from borrowers in hard-to-abate sectors, and we have seen it emerging in availability of investor and bank capital.
Davison The domestic debt capital market rebounded quickly after the worst of the crisis. How did this unfold?
WHITE We were certainly surprised at the pace of recovery. Offshore markets revived fairly quickly after the Fed stepped in, as the concern had mainly been at the front end – the US CP market came under stress straight away but bond investors were prepared to buy at term to fund corporates that had previously been quite reliant on CP. This gave the whole market confidence, as did central-bank support.
We saw some forced selling of credit in Australia, particularly in the front end where liquidity was available. Selling of short-dated major-bank paper by superannuation funds actually led to an inverted curve for a period of time. But within a week or two of the RBA stepping in, the market regained confidence – helped by the improvement offshore – and we started to see new issuance from the public sector soon after.
This was followed in April by Australian dollar covered-bond issuance from Canadian banks, demand for which was also helped by TFF liquidity. Then in May we had new primary credit supply, from global banks like UBS followed by a large dual-tranche transaction from Woolworths.
The market has been functioning very well since June, with the key themes being the amount of liquidity in the system and investor demand for credit and tenor. The most successful credit deals we have seen in 2020 have been at 10-year tenor while public-sector issuers have been issuing at 10-30 years.
It was a fairly quick positive response and the market returned to good function in short order – though credit probably took a few months to see new issuance across the issuer spectrum.
“The market has been functioning very well since June, with the key themes being the amount of liquidity in the system, and investor demand for credit and tenor. The most successful credit deals we have seen this year have been at 10-year tenor while public-sector issuers have been issuing at 10-30 years.”
Davison With the big-four banks historically making up the largest single component of local credit supply, how has their absence affected market dynamics elsewhere?
WHITE This clearly will be a big theme in 2021 – we are not expecting much major-bank issuance in the domestic market, at least not in senior format. There is about A$65 billion of financial-institution redemptions due next year and our forecast is that we will be lucky to see half that volume refinanced domestically. This means A$30-35 billion of cash looking for a home, and I think it’s likely we will see more local corporate issuance as a result.
This should also mean continued support for duration – not just at 10 years but potentially at 12 and 15 years, too. We have seen some corporate hybrid issuance recently, from issuers seeking to protect their ratings and balance sheets. I think this will continue into 2021 especially given the rates and credit cycle we are in. This could also support more subinvestment-grade issuance domestically.
There should also be opportunities for offshore credit issuers in Australia. By this I mean financials in senior-nonpreferred or TLAC [total loss-absorbing capacity] format and corporates. This could help fill the supply gap to at least some extent.
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