Issuance diversity still a focus

Domestic market growth, and competitive pricing and liquidity across global senior and tier-two markets might be expected to narrow the range of funding avenues the big-four banks access. To some extent this is true – but the value of diversification remains front of mind nonetheless.

PERRIGNON We observed an issuance decline of something like 50-60 per of big-four bank issuance in covered-bond format from 2023 to 2024. The compression of senior-covered spreads and the capacity senior markets have displayed, as well as the ability to fulfil duration requirements with tier-two issuance, presumably played a significant role. But what are the banks’ plans with regard to the ongoing maintenance of their covered-bond programmes? Is issuance entirely dependent on the senior-covered delta?

JOHNSON Covered bonds is still an important part of the stack for us. It is just that, as we have discussed, in a very constructive market with senior spreads where they are it is harder to justify deploying the required collateral into the product. Lucy mentioned that the RMBS [residential mortgage-backed securities] market has been very well supported over the past year, and this also offers us access to secured funding in Australian dollars – an opportunity we have taken.

I don’t expect covered bonds to significantly change as a proportion of our total funding over time, though it will ebb and flow. More volatile markets should mean a little more covered-bond issuance, typically, while there will be a bit more on the on the senior side when conditions are as they are now. We saw as recently as 2023 how important covered bonds can be for our overall funding needs.

GIFFORD Covered bonds is also core funding for us and we were really, really pleased to see some more positive signs from the covered-bond market in Europe at the start of the new year. I’m sure this is heartening to us all. It is certainly a contrast. We were in Europe in late November and, universally, euro covered-bond market participants told us not to bring a deal but instead expressed a preference for new issuance in 2025.

We have a couple of euro covered-bond maturities in March, so we are pretty open to issuing this year – one of our objectives is to do a euro covered bond. However, we are in no rush and remain happy to wait for the right time to access the market.

It is a question of supply, though. We gave guidance that we are seeking wholesale funding volume of A$35 billion (US$21.9 billion) this year, of which A$4-6 billion will come from Suncorp and A$3 billion from New Zealand. We gave further guidance of A$6-7 billion of tier-two. This leaves an approximate total of A$20 billion of senior and covered-bond issuance requirement.

Let’s say we do half of this domestically; it leaves A$10 billion equivalent for offshore. This task can be comfortably achieved in senior though we would like to do a covered bond in 2025 if conditions in the covered-bond market continue to improve.

CARROLL The first couple of covered-bond trades in the euro market this year certainly demonstrated that there is demand. But the pricing differential and the compression to senior spreads is always important – in other words, covered bonds have to stack up from a relative-value perspective, much as the asset class is an important part of our funding portfolio.

Picking up on Scott’s point, it depends a little on how much funding we have to do. We are expecting to fund at the lower end of our typical A$30-40 billion range this year so, as we think about incremental issuance, we have the ability to be more disciplined on price.

Overall, the covered-bond market is incredibly important but it is maybe a bit more of a marginal trade right now – depending on how the sector evolves in the coming months.

DAVISON Issuers’ tone seems to be more on the side of whether there is enough supply to satisfy demand across markets and products, rather than finding capacity. Does the weaker Australian dollar play into this, in the sense that you need to raise fewer – in particular – US dollars to achieve volume targets in landed Australian dollars?

JOHNSON Absolutely it does. There is also an interesting connection to tier-two here, because our foreign-currency denominated tier-two can move around.

This is something we have to be mindful of because we can find the total tier-two number in the overall portfolio mix can differ from what’s on our balance sheet.

We will have to look at this and manage it more closely over the next few years, as we transition to more tier-two and, especially, more in foreign currencies.

DAVISON Does the point about the value of using collateral in bond issuance apply in the same way to banks' use of residential mortgage-backed securities (RMBS)?

JOHNSON Not necessarily. We consider collateral value among a range of other factors for RMBS. It is a pretty unique market, with an investor base that wouldn’t necessarily buy covered bonds.

DAVISON Another segment that has been quiet for Australian banks for a while is labelled sustainability issuance, including green bonds. The main reason the Australian banks don’t have much activity in this space is reasonably well established – it is primarily due to limited supply of qualifying assets. What issuance there is typically goes to the euro market, where its value can be maximised. Is there anything on the horizon that could bring about a change in supply dynamics, though?

GIFFORD There is a lot going on in the sustainable finance space but I should preface this by saying there are no significant changes to our philosophy of getting the most value from the collateral – which generally involves offering it to European investors.

The election of the Trump administration seems likely to prompt some fairly interesting changes in this space, including for global investors. We will be watching closely but it does not immediately mean anything for our own commitments: we recently restated our A$100 billion sustainable financing target, for instance.

What it probably means is Europe doubles down on its importance in this sector. When we were over there in November, European investors were still very interested in this product – while noting the changed global dynamic and some of the political changes within Europe as well.