Westpac taps bond market

Jenna Labib

Westpac recently issued a $1.5bn tier 2 transaction with a fixed coupon of 7.199% callable in 10 years. We saw heavy demand into this deal being a major bank coming in above 7%. Westpac had released their FY23 result earlier in Nov reporting a 12% increase in FY23 NPAT driven by average balance sheet growth, core net interest margin expansion and higher non-interest income. Considering the >7% handle on the new Tier 2, the credit remains in tip-top shape.

Westpac’s mortgage delinquencies are below pre-Covid levels, despite interest rates rising sharply in the background.
Westpac’s capital (or CET1 ratio) has risen above 12%, which provides a long distance to the CET1 trigger for AT1s of 5.125%.
The bank is still generating a 2% NIM, which is ample profitability to support their dividend.
Cost to income ratio has fallen below 50%, evidence of the bank ensuring they’re maintaining their cost structure.

While the outlook is tricky, the bank has ample defenses to protect against any deterioration in the current environment. The bank needs to continue issuing Tier 2 to meet Total Loss Absorption Capacity (TLAC) requirements.

Pricing on the new Tier 2 came in at +240bps, which with a 10-year call we saw as quite cheap versus the respective fixed rate Tier 2 comps – evident of market conditions right now as well as the need to raise debt heading into the end of the calendar year.

We are presently able to pick this up in the secondary market north of 7%, which still looks like good relative value. It’s currently trading about 20bps wider than the next tier 2 bond of a similar tenor and above 7% this still presents an attractive entry point for investors to top-up allocations.

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