CBA AUD10nc5 T2

CBA AUD10nc5 T2

CBA are in the market today issuing a new AUD10nc5 T2. The notes will have rating of Baa1/BBB+/A- by Moody’s/S&P/Fitch. Price guidance is set at 3mBBSW/SQ ASW + 200bps. The new CBA T2 deal is a great time to advise clients to switch out of the AT1 bank hybrids into T2 securities. T2 is lower risk (higher up in the capital structure) and one almost gets the same return. The constant chase for yield/demand has seen the margins between AT1/T2 compress significantly and so now could be a good time to reallocate here.

Issuer/Capital Plans

CBA have been proactive versus the other three major banks in terms of managing their capital stack. CBA has for many years achieved superior returns through sound risk management while maintaining high profit margins. It is focused on the domestic retail market and has leading positions in both mortgages and deposits. It would be our preferred name amongst the Australian banks.

Capital levels remain comfortable with a CET1 ratio of 11.8% (18.4% on an internationally comparable basis). CBA needs an additional AUD4bn of T2 net issuance to meet TLAC requirements by 2024 and expects to issue AUD4-5bn over FY22. It currently has AUD18.5bn of T2 outstanding and T2 maturities between now and 2024 amount to AUD3.8bn.

Relative Value

Fair value is around 3mBBSW/SQ ASW + 185bps, which would account for a small new issuer premium (NIP) of 10-15bps. This equates to an overall yield of close to 5% based on ADSWAP5 currency. Interestingly, the spread between AT1/T2 has been reducing over the last six months, which is indicative of AT1 looking relatively more expensive than T2 (on a spread basis) – currently around 1.25x.

We have recently seen widening in the T2 market with the T2/senior ratio sitting at the 2x mark. T2 remains the best place in the capital structure given the risk/return characteristics and nature of these subordinated securities.

Chart 1. 5 Year Major Bank B3 T2 vs 5 Year Major Bank AT1

Source: Bloomberg

Chart 2. 5 Year Major Bank B3 T2 vs 5 Year Major Bank Senior

Source: Bloomberg

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