JOHNSON It was a very strong year for credit globally. Indices reached multi-year tights, which certainly supported execution across all currencies. This strength was clearly reflected in the Australian dollar market, too.

Last year, we did our highest proportion of Australian dollar funding as a portion of our total issuance for a long time – supported in particular by the volume of tier-two issuance we completed domestically. We continue to witness strong flows into Australian dollar credit – not just from domestic asset managers but also out of Asia, where ongoing lack of supply through the region has supported Australian dollar books.

Another factor I would call out is the domestic aggregator channel. High-net-worth-type investors have really supported growth in this sector and, overall, in the Australian dollar market across multiple products – most notably tier-two and senior.

Overall, the Australian dollar market continues to go from strength to strength – including ongoing inflows into local superannuation funds – which is a structural benefit for us.

The reality or the consequence of this has been a relative decrease in our issuance in some offshore currencies. Euro senior has been a case in point: we are still regular issuers in this space, but probably not for the same volume or number of transactions as we used to be. We haven’t been active in sterling senior for a long time.

A further factor I want to mention is that, as the year evolved, the value of deploying collateral fell a little. This meant we did more senior issuance and a bit less covered-bond issuance.

GIFFORD While the Australian dollar market continues to go from strength to strength as Michael has outlined, we have also enjoyed very strong offshore funding market conditions, which is pleasing.

For example Australian dollar spreads in the three-year part of the curve are actually slightly wider than euros and US dollars. This is a relatively unusual occurrence and is a signal to all four of the majors, generally, to issue offshore. This is a positive tailwind for domestic levels as supply will naturally be tempered.

Another thing to keep in mind is that we are now at a point where some of the bonds we issued 3-5 years ago are starting to mature. For example, we have a A$2.4 billion (US$1.5 billion) domestic maturity in January. This means some money is going back into Australian dollar investors’ hands as well as the continued inflows to Australian dollar fixed income we are witnessing.

CARROLL I agree that the compression of offshore spreads, particularly in the front end of the curve, has given us more flexibility to consider offshore senior transactions at levels that are attractive versus where we can issue domestically.

I also echo the comments about the depth and breadth we have seen across markets, and particularly in Australian dollars. The theme of enhanced liquidity underpinned by increased allocations to fixed income and demand out of Asia emerged in 2023. But throughout 2024 there was growing evidence that this perhaps has a medium-to-longer term structural basis and that larger Australian dollar deals are here to stay.

The other thing I would call out is the tier-two market – not only the volume of demand but also the extension of duration. Benchmark size in noncall10-year (NC10) format has been consistently available in this market for a couple of years. Prior to 2023, a public bookbuild approach to NC10 would have been unheard of. Now, in addition to ongoing reverse enquiry, there is sufficient secondary liquidity to support confidence in new trades.

WALLER The only thing I can really add is that domestic market growth does not seem to be temporary. The five-year senior trade we did at the start of the year was for A$3 billion but the book was A$6.4 billion – which shows how deep demand really is, whatever the final print volume.

JOHNSON The main development has been an interesting evolution in that the majors have all moved primarily from dual-tenor transactions to single-tenor trades in the last period. This means comparing where we were 12-18 months ago to where we are now is a little more difficult.

We all have larger term funding portfolios and we are actively managing maturity profiles and the shape of the balance sheet, so I am confident that deal size is not reflective of weakness in the market. It probably just highlights that opportunities continue to present themselves and this has reduced the need to do less frequent, but larger, multi-tranche deals.

JOHNSON It has been an evolution for us. It started earlier this [financial] year when we had a large TFF [term funding facility] re-fi to do and we didn’t particularly want to have to rely on a few, very large transactions with multiple maturities.

We are also placing more emphasis on managing our maturity profile effectively. We are all typically busy in capital markets following results and we want to manage the profile – the maturity towers – more effectively given we are all issuing more domestically.

GIFFORD We are certainly still open to exploring dual-tranche issuance at the right time and in the right market conditions. In particular, if we have strong reverse enquiry for three- and five-year tenors it becomes a slightly different story and supports dual-tranche issuance.

At the moment, three-year spreads are flat across markets so we are likely to be focused offshore for three years and to prioritise five years domestically.

At the same time, I completely agree that there is an enhanced focus on managing our maturity profile. The background is that APRA [the Australian Prudential Regulation Authority] has had an increased focus on stress testing over the past year that has driven some behavioral change from the banks.

As a general statement, I would say we are more focused on maturity management. This is influenced by the sequencing of offshore and onshore trades. Rather than doing a dual-tranche domestically, it may make sense to do the three-year domestically and five-year offshore, or vice-versa. I wouldn’t read too much into dual-tranche versus single-tranche strategies.

GIFFORD I think we all have to acknowledge that the intra-Asian flows we have enjoyed are partly related some of the recent economic challenges in China. Global investment-grade funds have reallocated some capital away from China, with Japan, Australia and Singapore being the main beneficiaries. This has been a very strong tailwind.

Whether this is structural or temporary – and, if the latter, just how long ‘temporary’ means – is certainly something we consider. One of the things we watch closely, specifically in the context of what it means for the Australian market, is whether the recent fixed-income flows away from Chinese exposure begin to reverse.

On the other hand, you touched on some tailwinds that are clearly structural, the biggest of which is the fact that superannuation accumulation continues unabated and contributions have been increased over time.

Another key point is Australian dollar liquidity for Asian-based investors. There is a natural advantage from being in the Asian time zone. Traditionally, the domestic banks provided the bulk of trading capacity in Australian dollars, but a growing number of global banks are trading Australian dollar product and overall trading volume has grown substantially – including in tier-two product. I’d argue that this is a structural move and very supportive for ongoing issuance.

I have no doubt there is an element of growth that is temporary and a portion that is structural. But I am reasonably confident that the structural aspect is sufficiently large that it will continue to provide an uplift to our funding, including tier-two.

On the other hand, we are certainly not complacent about it. All of us continue to invest heavily in our engagement with offshore tier-two buyers on all our roadshows, and in diversification of issuance.

CARROLL Absolutely – we are all very measured in the extent to which we use our domestic market, which we do by delivering into demand as opposed to running over the natural capacity. This, to Scott’s point, is why we continue to invest in our access to offshore markets. As well as supporting the access we know we will need through the cycle, this also helps maintain positive technical support in our domestic market.

WALLER Because it is an ongoing trend, the superannuation pool factor might even be underestimated as a structural development. Allocation into fixed-income funds certainly isn’t just about higher rates – it relates to the ageing population, too. The baby boomer generation is moving into income assets and this appears to be a consistent, ongoing development rather than a temporary one.

This goes hand-in-hand with the nature of Australian credit. We have become something of a safe haven in the context of growing geopolitical concerns. It is a good match with what an ageing population wants from its investments.

PERRIGNON We did some work with domestic investors in Sydney and Melbourne just before Christmas, and one of the things I took away from this was a strong sense of improving secondary liquidity in the tier-two market. A number of investors told us they have increased confidence to trade tier-two product from a secondary perspective – by which I mean trading A$50-100 million clips – with relative ease. The tier-two market seems to have undergone an exponential change in this respect.

CARROLL Although the major banks are not as large a proportion of this market I would like to call out RMBS [residential mortgage-backed securities] as an asset class that clearly digested a huge amount of issuance in 2024. It produced record supply levels versus 2023 and even pre-financial-crisis highs. We leveraged this market a little more in calendar 2024.

As well as the robust headline demand we have seen in the primary market, we understand that, while not as liquid as senior-unsecured, there is a higher degree of secondary market liquidity than there used to be. This further supports participation in RMBS product.

JOHNSON I’ll take the last part first. We have come from a super-low rate environment and rates falling even as much as the market is pricing in now would still leave them at a level well above where they were in the period before and during COVID-19. There is some risk of reallocation in a lower rates environment but, ultimately, these customers and investors are invested in and allocated to the product, and rates are not priced to fall back to their lowest levels. There will still be some yield on offer.

On execution, our perspective is that these investors typically require one-and-a-half day transaction processes – just given the way they are set up to get feedback from their clients to relay it to us and to process bids. This has elongated the deal process to some degree.

But this was already happening, just by virtue of the way time zones work. One-and-a-half day execution for tier-two trades wasn’t unheard of, given the reach we have into Asia and the time zone differences there. The aggregator piece has just underpinned the fact that this is a sensible approach to execution.

It also doesn’t rule out intraday execution, either. There will be times when intraday makes sense, such as a more difficult market we want to get in and out of or a transaction where we have confidence in the level of interest.

Even so, the aggregator sector has become a really important part of the tier-two market in particular. What is especially pleasing is the way its bid has consolidated as a core part of the investor base over the last 12 months or so.

GIFFORD I think a good example of what Michael is talking about is our tier-two deal in early January. The book was a little smaller this time around, which was a product of the aggregators being less active – which we expected, given the time of year. This shows two things: the growing influence of this investor cohort and, at the same time, that we can still price good deals even when it is less involved.

It is also worth defining what we are talking about when we discuss the aggregator sector. Its client set runs all the way from institutional and middle market investors through to private-bank-style clients, including in Asia.

GIFFORD That’s right. To be precise, the advisers are typically there but they often can’t get hold of underlying clients to firm up and aggregate bids. We anticipated this going into our early January tier-two trade but it still made sense for us to go ahead for various reasons.

GIFFORD I certainly think that if we are going to highlight aggregators we should also be discussing ETF [exchange-traded funds] providers. This is a sector that is experiencing strong growth in Australia, which we expect to continue. It’s a really interesting cohort.

When we understand how it operates and the fund rules, it provides a great degree of confidence when we are bringing a primary deal that there will be a certain volume we know will come into the book. It gives an extra degree of confidence on Australian dollar execution.

WALLER Relative value between primary markets is very close and this provides us with lots of options. All markets are open and most are also cost-effective. But we are still very disciplined in our approach: we set a funding plan at the beginning of the year and we try to stick to it. The way I would characterise it is to say we are flexible rather than opportunistic on market access: we have an underlying cadence of issuance based on the balance sheet and, on the other side, we want to issue into demand.

The reality is that cost of pre-funding – cost of carry – is still meaningful, even in a positive market environment. We are also very disciplined about balance-sheet management and what it means for timing in the post-TFF environment. We aren’t going to do funding just because it is cheap.

CARROLL I will preface this by saying that our fundamental approach to execution does not change. What constructive market conditions – in particular competitive pricing dynamics – provide is the opportunity to diversify our issuance. We will always consider doing so.

It works both ways, too. For instance, even during volatile periods where we might lean on something like covered-bond issuance more than senior-unsecured, we would still be conservative in our use of collateral. We are not going to max out our issuance of any product or in any market, because we are conservative funders and we want to make sure we use markets appropriately for the long term.

The other point here relates to what we have talked about with secondary-market liquidity, and the development and maturation of the domestic market in duration and volume. When new opportunities arise and we issue into them, it also sets a foundation for a more solid base in the longer term. In other words, liquidity begets liquidity.

What this means is that while some of the factors we have discussed might have temporary aspects to them, taking advantage of strong conditions to build out capability in any market is, I think, a really effective thing to do ahead of the inevitable time when market dynamics change.

CARROLL It is a balanced approach. We are in the TLAC [total loss-absorbing capacity] build phase at present, and this has been extended – so we are conscious of building out our curve and we have a very forward-minded view of what our profile looks like.

Meanwhile, when we think about relative-value dynamics there might be a bit of a bias to issue into demand while it is there given how constructive the market is. But, again, we are very conscious of issuing into robust demand across our funding options.

GIFFORD What we tend to do in stronger market conditions is add diversification when it is less costly to do so. We did a Samurai deal last year, for instance, and more recently we went back to the Singapore dollar market after the US election. These are good examples of the cost of diversification falling when conditions are strong.

JOHNSON It’s a bit of both. Like David said, we all have funding plans that sketch out what we would like to do during the year. Then, when we get to execution, it depends on what is working at the time as well as what we have already done.

It’s possible to argue that we are almost spoiled for choice in some regards – decision-making is certainly more interesting when there are more options available than has been the case historically. But ultimately we base what we do on the core fundamentals of a funding strategy.

WALLER Tier-two remains one of the most prominent questions we get from investors, domestically and globally. But what they are asking is when we are coming back to their market and how much they can buy. There is no concern about meeting the requirements for tier-two.

CARROLL I agree. The reason we have done the majority of our tier-two tasks so far in Australian and US dollars is more about pricing than capacity. There is quite clearly demand in other markets and we have, if anything, under-used capacity in some of them, such as euros. We also have a high degree of confidence that there is capacity – having a larger task is likely ultimately more a question of cost rather than whether or not the volume is there.

Tier-two is certainly a high-demand product but we are similarly conscious that market dynamics have been quite supportive since the introduction of the TLAC task given the strong credit environment and the compression in spreads. Even so, I am confident that the measured approach to the build out of our tier-two curve means there is ongoing support as we manage the task – and that this would be the case even with a change in the rates dynamic.

JOHNSON I agree that the tier-two build out is a very manageable task. We have also been very focused on Australian and US dollars but there are clearly opportunities offshore for our incremental tier-two requirement, if needed.

JOHNSON The only thing I would say is that, with AT1 being phased out, a fair proportion of investors in that product may redeploy funds into tier-two. The funds in AT1 currently will look for a home elsewhere, whether it’s through aggregation, ETFs or direct investment into tier-two. We have an incremental need but we are in a pretty good spot with the phase-in period. There is also a fairly long runway for us to move to the new levels post-AT1.

GIFFORD I would just highlight the very manageable uptick in tier-two issuance implied by the end of AT1, because we have taken a lot of questions from offshore investors on this – and I’m sure it is the same for our peers.

Importantly, though, these questions are less around demand and capacity for Australian tier-two – rather, investors are more than anything keen to understand any look-through from APRA to their home regulators. Specifically, they are thinking about whether other regulators are going to eliminate AT1 – so they want to understand APRA’s thinking about the AT1 product.

Our recent full-year results gave guidance that we anticipate issuing A$6-7 billion of tier-two annually. The range reflects an AT1 call we have coming up in March. If we replace it with tier-two the need will be A$7 billion; if we use AT1, it will be A$6 billion of tier-two supply.

In other words, we’re talking about roughly A$1 billion a year of alternative issuance requirement to replace AT1. The point is that this is very manageable especially as we have plenty of time – out to 2032.

In aggregate, there is A$43 billion of AT1 outstanding in Australia and, as Michael said, this money is going to have to go somewhere. When we talk with the aggregators and the like, they tell us it’s unlikely that the majority of this pool goes to equities – it’s more of a fixed-income, retirement-style pool of money seeking this type of return profile.

We have been sharing with investors that we estimate 50 per cent of AT1 funds will come into the tier-two product via various channels, whether it’s ETFs, direct fund managers or the aggregators.

Ultimately, the call on offshore markets isn’t going to be that great. When we run these factors in front of our offshore investors there is a level of comfort that the additional needs are very manageable. There is certainly no concern.

WALLER That’s exactly right, and it’s how we looked at it internally. The end of AT1 is a big change in the structure of the market but it’s a very manageable one for us as a funder.

CARROLL I would use the same term: very manageable.

WALLER We have touched on this already but it bears repeating that the viability of longer-dated tier-two issuance – particularly 11NC10 in the US and 15NC10 in Australia – is proving to be very welcome. It’s good for us as an issuer, for the banks collectively and also for investors because it provides a new opportunity and adds depth in particular to the domestic market.

WALLER It’s the latter. It is more about having options for the portfolio than it is about lengthening portfolio WAM. You’re absolutely right that it provides us a longer-tenor option but to the extent this has an impact elsewhere in our issuance profile it is likely to be a – very marginal – shortening up of senior issuance. There might be a slight barbell effect whereby we issue some shorter senior bonds offset by longer-dated tier-two.

CARROLL This is certainly what we have experienced: long-dated issuance conducted as part of the build-out of the tier-two curve has replaced some duration we might otherwise have considered in senior or covered-bond format.