Director - Research, Consulting and Advisory, BondAdviser

Nicholas Yaxley

Director - Research, Consulting and Advisory

Australian bonds & fixed income research

BondAdviser

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Thematic (Sector/Industry)

Australia Banks / Thematic (Sector/Industry)

Domestically, 2017 is shaping up as a low-level issuance year in the ASX listed AT1 market but there is a reasonably high probability that the banks issue out of cycle (potentially to raise additional loss absorbing capital ahead of TLAC implementation). Of the major banks, Only the $1.3 billion ANZ Convertible Preference Shares 3 (ASX: ANZPC) are expected to be called on 1 September (Figure 3). Similarly, among the regional banks only the $268.9 million Bendigo Convertible Preference Shares (ASX: BENPD) and $560 million Suncorp Convertible preference Shares II (ASX: SUNPC) are due to be called on 13 and 17 December 2017.If the four major Australian banks were to comply with the proposed comparable standards under a Total Loss-Absorbing Capacity (TLAC) scenario, additional loss absorbing capital of ~$15 billion would have to be raised by each of the four major banks annually to be compliant by the start of 2019. This is mathematically within reach considering the major banks currently issue around $30 billion of debt p.a. What is not clear, at the moment, is how the banks would (either be required by APRA or determined internally) ‘tweak’ their funding requirements to make up for this shortfall.At present, the four major banks have a combined loss absorbing AT1 hybrid and Tier 2 capital amount of ~$60 billion, so it is unlikely capital markets would be able to absorb the required additional TLAC issuance solely via the AT1 &amp; Tier 2 markets over the next 3-5 years. With its US$1 billion issue in May 2016, ANZ opened up the offshore AT1 market for Australian banks.Another source of funding may also present itself to the major banks if APRA were to follow the lead of France &amp; Spain by opening up the Tier 3 debt class option.

Domestically, 2017 is shaping up as a low-level issuance year in the ASX listed AT1 market but there is a reasonably high probability that the banks issue out of cycle (potentially to raise additional loss absorbing capital ahead of TLAC implementation). Of the major banks, Only the $1.3 billion ANZ Convertible Preference Shares 3 (ASX: ANZPC) are expected to be called on 1 September (Figure 3). Similarly, among the regional banks only the $268.9 million Bendigo Convertible Preference Shares (ASX: BENPD) and $560 million Suncorp Convertible preference Shares II (ASX: SUNPC) are due to be called on 13 and 17 December 2017.If the four major Australian banks were to comply with the proposed comparable standards under a Total Loss-Absorbing Capacity (TLAC) scenario, additional loss absorbing capital of ~$15 billion would have to be raised by each of the four major banks annually to be compliant by the start of 2019. This is mathematically within reach considering the major banks currently issue around $30 billion of debt p.a. What is not clear, at the moment, is how the banks would (either be required by APRA or determined internally) ‘tweak’ their funding requirements to make up for this shortfall.At present, the four major banks have a combined loss absorbing AT1 hybrid and Tier 2 capital amount of ~$60 billion, so it is unlikely capital markets would be able to absorb the required additional TLAC issuance solely via the AT1 &amp; Tier 2 markets over the next 3-5 years. With its US$1 billion issue in May 2016, ANZ opened up the offshore AT1 market for Australian banks.Another source of funding may also present itself to the major banks if APRA were to follow the lead of France &amp; Spain by opening up the Tier 3 debt class option.

Will We See Tier 3 in Australia?