Hunger for Aussie bank paper shows few signs of slowing

[SYDNEY] The appetite for Australian banks to fund in the local bond market shows little sign of abating, with Commonwealth Bank of Australia selling A$2.65 billion (S$2.81 billion) of notes less than two weeks into the new year.

The deal is the earliest benchmark-sized local transaction from one of the country's four largest banks since 2009 and follows a record year of such fundraising, according to data compiled by Bloomberg. CBA's new five-year notes were priced to yield 111 basis points more than swaps.

Banks in Australia have embarked on their borrowing spree as they seek to lock in longer-term funding to meet new regulatory requirements and replace a slew of maturing debt. While a potential downgrade to Australia's sovereign credit rating may cool demand for paper sold by banks, investors are still comfortable with buying their debt for now, said Ken Hyman, a Sydney-based investment manager at Antares Capital.

"Demand will be similar to last year," Hyman said by telephone. "But the contingency is that the credit ratings are held at these levels." Westpac Banking Corp, Australia & New Zealand Banking Group Ltd, National Australia Bank Ltd. and CBA sold a record A$43.7 billion of notes domestically in 2016, Bloomberg-compiled data show. The nation's biggest lenders tapped the appetite of yield-starved buyers from Asia to Europe who are attracted by yields on Australian corporate notes that are 76 basis points more than global company bonds as of Jan 10, according to Bank of America Merrill Lynch indexes.

The average cost of insuring major Australian bank bonds against non-payment has fallen to around 64 basis points on Jan 11 from 142 basis points in February last year.

CBA sold the most paper in Australia among the four lenders last year, issuing A$13.3 billion of notes, Bloomberg-compiled data show. While private credit growth in Australia has slowed over the past year, it continues to tick along at 5.4 per cent.

"Australian credit growth has remained above 5 percent, adding to the funding task for local banks," said Vivek Prabhu, Sydney-based head of fixed income at Perpetual Ltd. "With February having the largest volume of bank debt maturing this calendar year - over A$8 billion in maturities - it's prudent for banks to start addressing this funding task early." Anthony Ip, Sydney-based credit sector specialist at Citigroup Inc, said the pricing on CBA's latest deal was "fair." Many of the "headwinds" buffeting Australian banks including weaker commodity prices and potential downturns in the housing market have abated, contributing to investors' appetite for bank debt, he said.

"We're entering 2017 on firmer ground in terms of investor sentiment," he said.

BLOOMBERG