CBA

CBA announced a new 10-year non-call 5, fixed + floating tier 2 transaction with an IPT of +217bps.

We see fair value at +200bps and would recommend investors add within portfolios in either fixed or floating format.

We have a strong conviction in the credit profile of CBA. CBA has market leading profit-margins and a sound risk management framework. It has a leading position in mortgages and deposits, whilst is also challenging NAB in business banking. The bank has sold several of its non-bank businesses and equity investments to simplify and focus on its core businesses within Australian and New Zealand. Strong mortgage market competition and higher deposit costs / wholesale funding have capped net interest margins (NIMs) despite the cash rate increasing. The business banking segment growth has been above system and highly profitable to the bank. While declining somewhat, asset quality and capital are still in the higher pillar given the overall economic environment. We would see it as our preferred major bank exposure and have reiterated value remains in tier 2.

The relative value looks appealing at +217bps. We would normally view a 2x subordinated/senior ratio as fair and at +217, it equates to around 2.2x versus the CBA senior curve. It also is pricing around +20bps back of the AUD tier 2 curve – however, we would expect the deal to tighten to +200bps.

Source: BondAdviser – 16/10/2023

Source: BondAdviser – 16/10/2023

The Australian majors – ANZ, CBA, NAB, and WSTP – are regular issuers of tier 2 and have signalled they would need to issue AUD4-5bn each over the next couple of years to meet their TLAC requirement of 18.25% by 1 January 2026.

As can be seen below, considering a buffer of 0.75% over the minimum 18.25% TLAC requirement from 1 January 2026, and the refinancing of tier 2 maturing or callable till 1 January 2026, we see the overall issuance requirement over 2024-25, assuming the capital ratios and RWAs remain the same, of AUD8-12bn for the banks. CBA – is at the lower end of this AUD8-12bn range, and so, this should help with maintaining spread compression within their tier 2 curve.