CBA launched an offer for CommBank PERLS XVI Capital Notes (ASX: CBAPM) to raise A$750m. The notes have a first call date of 17 June 2030 (7 years) with the margin guided at 3-3.20% pa above 3m BBSW. While the notes offer a healthy new issue to the CBA AT1 AUD curve, we believe there is better value in the Australian Bank AT1 USD space.
Source: BondAdviser, ASX. As at 15 May 2023
Our view is that the Australian banks will call these AT1 USD securities, subject to Australian-specific circumstances requiring equity conversion. The key is that the probability of these Australian-specific circumstances occurring is very low. The difference is that Australian banks are more regulated and more resilient than their overseas counterparts, and for a long period of time, have had strong profitability. Australian banks also have appropriate interest rate risk management practices and necessary hedging in place, and typically avoid running large outright trading books. Further, Australian banks assets tend to be variable rate linked (i.e., mortgages) which increase in value in a rising rate environment, therefore don’t face the same issues that the US regional banks faced with their loan and investment portfolio’s being predominantly fixed rate linked. The retail AT1 market has remained resilient in the face of the US regional banking issues and Credit Suisse as illustrated by CBA’s PERLS XVI Capital Note issue.
As outlined in the table below, the WSTP perps trade lower than the ANZ and MQG perps purely due to the reset levels of the securities and therefore the implied call risk which may eventuate. It’s very rare that an Australian bank will miss a call and therefore when the three options are compared, the relative value on offer from the MQG perps looks the most attractive at this stage. We also do not expect any wholesale AT1 issuance going forward.
Source: Bloomberg Bid Price/Yield to Call
