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Tier-two build-up continues

Most big-four bank issuance in wholesale capital markets since the pandemic began has been tier-two additional capital – even as the local regulator has eased capital requirements to facilitate credit supply.

PERRIGNON To what extent have the banks taken advantage of eased capital requirements? How useful a tool has this been for facilitating ongoing lending to the economy?

WENT APRA [the Australian Prudential Regulation Authority]’s position on capital-buffer use was very sensible and it was the right thing to do at that point in time. In reality, we all have stronger capital positions than we anticipated thanks to some of the drivers we have been talking about.

Migration has been lower, overall credit growth has been lower, dividends have been lower and, in our case, our capital ratio is the same as it was 12 months ago despite everything. We have not done an equity raising, which has been pleasing.

It was the right thing for APRA to do, but because economic conditions and credit performance have been better than we anticipated we haven’t had to consider using the ‘unquestionably strong’ buffers. It has been a good outcome.

MEHARRY In March, we discussed with the board what we wanted to do – which was to be strong coming through this period given the enormous uncertainty ahead. The capital raise we did was absolutely the right thing to do at the time. We have the strength of our capital ratio to continue to lend to our customers.

But every bank had to deal with it differently. Determining how quickly we were going to have to rebuild, considering the buffers and what the right level would be, was an important conversation internally. For us, the decision was to be strong and get through it.

PERRIGNON We are 18 months into Australian major-bank TLAC [total loss-absorbing capacity] build up. Since July 2019, we have seen roughly A$30 billion (US$22.1 billion)equivalent benchmark of tier-two issuance. Where are the banks with regard to the ramp up and what has investor reception to the issuance been so far?

DAWSON We are all well progressed with the TLAC transition. Westpac’s tier-two ratio was 3.1 per cent at the end of September and our plan for this financial year is A$5-7 billion of issuance, including refinancing and some management buffer. It is manageable and reasonable based on what we have seen in the market.

Our early November tier-two deal in US dollars raised US$2.5 billion across two tranches and was very well supported. There was a good market backdrop at the time and we were overwhelmed by the support. The peak orderbook was more than US$16 billion. The number of participants we saw across the deal was as good as we have seen: more than 300 investors from all parts of the world. For us, it was a good signal that there is support for the product and Australian bank issuance in this format.

ROBB From July 2019, we have issued a little over A$6 billion equivalent of tier-two. Considering maturities and the growth trajectory, we estimate about A$4-5 billion per year of issuance to meet the 2024 requirements. We certainly feel this is very manageable.

It is probably worth highlighting that we have done about 20 per cent of the A$6 billion through private placements, which has also been a very strong and attractive option. It provides relatively long-dated, cost-effective Australian dollar funding in the tier-two product.

The note of caution I’d throw out here is that we had been planning on issuing a tier-two deal in the first half of 2020, and obviously with the backdrop of crazy volatility it made perfect sense to sit out in that period. There are periods when markets will absorb these deals well but it is a high-beta product and we want to have enough flexibility in our preparation schedule to allow the organisation to step back from markets when need be.

The US investor community has been very supportive and I think the low interest-rate environment will continue to support Australian major bank tier-two paper.

But it is also worth saying that while we were delighted with the domestic tier-two transaction we did in September 2020, it was a good reminder that there isn’t unlimited depth locally.

Our transaction went well with a lot of investors waiting for our return and keen to support us. But there were a number of deals in relatively close succession, which then required some time for the market to digest.

The nature of tier-two means we have to be cautious about timing – we do not want to saturate the market, particularly when it does not have appetite. We have done well collectively in the last 18 months but there is still a long way to go. We will manage it appropriately but being careful with timing will be important.

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