Friday, 14 December 2018

Everywhere at once

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National Australia Bank’s funding strategy over the last 12 months spanned a range of currencies and structures. Its focus on diversification was well rewarded when investors shrugged off a one-notch downgrade by Moody’s in May. Tanya Angerer reports.

Among the Australian majors, NAB has been the most opportunistic issuer over the last year. It pushed funding boundaries in terms of regions, types of investors and maturities, and was the first to embrace new products.

Bank of New Zealand, a NAB subsidiary, made a sparkling debut as the first Australasian lender to issue covered bonds last year in both euros and Kiwi dollars. The 3.125% €1bn deal in November was increased from an initial €750m after receiving €1.35bn of orders from 60 investors – thanks in no small part to the strength of the NAB brand.

The deal was a hit with the traditional European covered bond investor base, offering the first opportunity for many to diversify their portfolios.

Likewise, the Kiwi dollar covered bond also drew a crowd, with investors lapping up the deal. BNZ increased the size to NZ$425m (US$347m) from a launch of NZ$375m.

NAB’s opportunistic funding strategy was clearly on display when it launched a A$750m (US$806m) RMBS at the end of May. Despite fears that the market had softened since recording A$5.06bn of new issues in April, NAB braved the market and pressed ahead with the deal.

“We had not done RMBS in five years, and we were encouraged after seeing others re-enter the market,” said Eric Williamson, group treasurer at NAB. “We were pleased with the outcome, and the transaction was not significantly impacted by other supply or softer market conditions due to its Triple A nature.”

In the end, the deal was upsized to A$1bn, after an increase of A$250m above the original target size. Investors, however, had some concerns over the quality of the collateral, and the A2 tranche priced at the wide end of guidance.

NAB also reopened the Samurai market for Australian issuers after a six-month lull, with a ¥100bn (US$1.15bn) five-year deal in July 2010. It returned with a straightforward ¥56.3bn five-year issue in late January, underlining its credentials as a frequent issuer in the Japanese market.

A successful capital markets strategy is key for NAB. Despite being the smallest of Australia’s big four lenders by market capitalisation, it was the biggest issuer in 2010.

From October 2010 to March 2011, 33% of NAB’s funding was in Australian dollars, 23% each in US dollars and euros, 9% in sterling, 5% in yen and the balance in other currencies. 

The reliance on wholesale funding, however, was the chief reason behind the Moody’s decision to downgrade the Australian majors in May. Many Australians prefer to put their savings in superannuation funds, resulting in a lack of retail deposit growth, Moody’s said. “The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding,” it added.

Furthermore, NAB’s reliance on the international markets is more pronounced than that of its peers, with 14% of its revenue coming from the UK via Clydesdale Bank. In good times this provides a source of earnings diversification, but it also leaves NAB more exposed to the UK market.

NAB, however, has reduced its sensitivity to changes in the global capital markets by diversifying its funding base through a wide range of currencies and maturities.

As a result, barely a ripple was felt when Moody’s pushed National Australia Bank’s rating to Aa2 from Aa1 in mid-May. Spreads on the bank’s euro and US dollar-denominated structured and unsecured bonds were practically unchanged following the announcement. After looking at NAB’s funding strategy in the past year, it is easy to understand why investors did not flinch.

Back home, NAB priced its first seven-year fixed-rate bond in March. “Historically it has been hard to go beyond the five year mark in the domestic bond market,” said Williamson. “Our first seven-year senior transaction allowed us to extend the duration of our domestic funding.”

That is no mean feat in a market where interest rates are rising and investors are already swamped by bank paper.

NAB is already well on target to fulfil its total annual term funding requirement of A$25bn to A$30bn. Not content with this year’s achievements, however, Williamson already has clear ideas for the bank’s funding plans next year. Pushing out the bank’s domestic funding to 10 years is one goal; another is the issuance of covered bonds when Australian regulations are relaxed.

“Our strategy is to remain active,” said Williamson. “If the markets are open and investor appetite is there, then we will look to take advantage of the opportunity.”  

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