GC: What have been the main market developments for Aussie bonds in 2024?
Holian: The backdrop for issuers has been highly supportive. Australia’s central bank is one of the few that has not yet reduced rates. The fact that rates have been at 4.35% for some time, combined with solid liquidity and macroeconomic stability, has made investors very receptive to new transactions. We have seen very strong book-to-cover ratios throughout the year, regardless of whether that’s financial institution (FI) or corporate deals.
In terms of FI supply, at one point we were ahead of the run rate from 2023, which was a record year with A$112bn issued. In Q3 this year we had A$87bn, just ahead of the A$86bn in the same quarter of 2023. The FI market then slowed slightly ahead of the US election, but we’re seeing the pipeline build strongly towards year end and this has been supported by recent deals for CBA and Barclays in Tier 2 and ING in covered, all with very large books.
GC: How will the Australian Prudential Regulation Authority (APRA) proposals for AT1 affect issuers?
Holian: APRA is seeking to phase out AT1 capital for domestic banks over five years with the current proposal suggesting a January 2027 start date. One of the motivations behind this move is that AT1 in Australia is a retail dominated market, and in the event of a crisis, these investors may end up taking a significant amount of any AT1 losses, as was seen in other markets such as Switzerland.
Australian banks will likely refinance a large portion of existing AT1 in the Aussie dollar T2 market. But they will also look for attractive pricing, longer tenors and diversification opportunities in offshore markets. At the same time, that could create an opportunity for institutionally-placed offshore banks to tap the Australian market. On the buy side, we estimate that between 2025 and 2032 A$42bn of cash will be returned to AT1 investors, who will be looking to deploy cash to comparable yielding securities. Wholesale AT1, T2 and corporate hybrids are the most obvious choice.
GC: What are you hoping to see across different asset classes in 2025?
Holian: If FI supply reaches north of A$100bn this year, that will exceed all previous years with the exception of the record 2023. The maturities for the major banks in FY25 are lower than in FY24. Deposit growth remains strong. If rates stay higher for longer that is supportive for the banks raising funding for new lending through deposits. However, if credit growth picks up, we expect the banks to raise more wholesale funding in addition to the maturities. I would hope that in 2025, with no run-rate slowdown due to the US election, we would be in the 2023-2024 issuance range. What we have missed in 2024 is Aussie dollar covered bond supply. The first deal of 2024 only appeared in November with ING, followed by Bendigo and Adelaide Bank. This is partly because the secured-unsecured price differential has not been as beneficial to issuers as it has been in other currencies. From speaking to various issuers, their balance sheets have not necessarily grown as much as they were expecting and deposits have been stickier so covered supply has been lower as a result. Furthermore, the Aussie majors have tended to keep their covered issuance for markets such as euros to ensure they have issuance headroom to maintain a curve that satisfies those markets’ investors. That said, recent swap spread movements have made the euro covered bond market less appealing for some issuers, so there might be an opportunity for the Aussie dollar market to step up and fill in the gap in 2025.
GC: How has the use of ESG-themed deals varied across asset classes, and will this change in 2025?
Holian: Over the last 12 months, AUD ESG issuance has largely seen high-grade issuers leading from the front. We’ve seen the SSAs leverage their ESG frameworks to enter the market. Supras like the ADB, IADB, IBRD continued to issue well received ESG deals. We’ve also seen AOFM and the semi-governments issue in green and sustainability. The AOFM issued its inaugural green bond earlier this year, which was a key milestone in the Australian Government’s Sustainable Finance Strategy.
What we have not seen quite as much of in the ESG space is financials. There is untapped demand for labelled financial and corporate paper amongst domestic investors seeking portfolio diversification. Offshore banks have an opportunity to diversify funding and achieve attractive volume and pricing outcomes, potentially inside of their vanilla curve.