Australian Banks: Issuer Calls Apr-24

EXECUTIVE SUMMARY

RELATIVE VALUE

Aussie senior paper now trades relatively tight but understandably so – the recent ANZ 01/27 is at G+43 bp, the NAB 01/29 is at G+63 bp, and the NAB 01/34 at G+75 bp. Given the 3-5Y curve is about 10 bp at the moment (using Korean banks and SUMITR as an example), we see the ANZ as trading tight, while there is more variation in the 5-10Y part of the curve. The recent SUMITR have a 10 bp differential, MUFG’s recent TLAC has a 20 bp differential, while the difference is in the 25-30 bp range for KEXIM, Metrobank, Bangkok Bank and the recent SMBCAC. In all cases, the 12 bp difference for the 5-10Y NAB is at the tighter end of the spectrum.

There is better value in Tier 2. The recent CBAAU 10Y bullet has tightened ~12 bp in the last few weeks to G+150 bp, while the recent ANZ 10.5NC5.5 has tightened 7 bp from a month ago to G+158 bp. We see the Tier 2 / senior multiples at 2.1x for both CBA and ANZ (adjusting 20 bp for the call feature). We would expect the Tier 2s to trade at a 1.8x multiple for high quality names. AIA’s recent 10Y T2 bullet is at G+123, while its 03/33 snr is at G+77 bp, a particularly tight multiple of 1.6x – but that’s more the ballpark multiple where we would expect very high-quality names to trade. We disregard a PONV factor for the Aussie banks as their capital stack is so strong that PONV doesn’t come into the picture. So with a 1.8x multiple, we see the CBA having the capacity to tighten 15 bp to G+135 bp, and the ANZ has the capacity to tighten ~40 bp to G+115-120 bp. Another way to look at ANZ is to ascribe 25 bp to the 5-10Y Tier 2 curve and deduct 25 bp from the CBA, and add 20 bp for callability, which takes it to G+145 bp, 13 bp tighter than its current level, but still 5 bp wider than where its 12/32 10Y bullet trades at G+140 bp. We would put a 2029 callable Tier 2 inside a 2032 bullet Tier 2 from the same name, given low call risk; that shows ~20 bp of upside from current levels. The old ANZ NC25 Tier 2 trades at G+144 bp, but that is also because it has a low off-market coupon.

We like the AT1s of the Australian banks given that we expect the bonds to be called on the first call date, as APRA is considering changing the structure of these instruments. There is less value in the ANZ AT1 given its G+186 bp spread (YTC: 6.8%) is not far from the ANZ NC25 Tier 2, but the WSTP AT1 is at G+256 bp (YTC:7.4%) which has better value.