Credit markets remained resilient last week and the major banks took advantage of strong market conditions to issue significant amounts of senior unsecured debt. The offshore primary market activity was dominated by Westpac’s bumper multi-tranche USD $5 billion offering but ANZ also stepped into support the local market to issue $2.7 billion. To us this suggests that institutional demand for all credit assets (but especially quality non-financial names) is strong. If you want a bid in an investment grade corporate bond, liquidity is probably as good as it gets but if you want an offer in a corporate bond, liquidity is ordinary. Nobody wants to sell. This theme is driven by foreign central banks looking to purchase almost all bonds no matter the price. This means institutional asset managers are short assets and they have got to a point where they are just not selling. This technical theme is complemented by the low level of inventory held by traders in over the counter bond market. As consequently the daily trading activity is being set by the marginal seller of bonds. In effect this makes for perfect conditions for companies to issue into primary markets. So we expect to see a pickup in issuance over the coming weeks. The problem with this build up in demand for the major banks is that they are arguably already ahead of their annual funding targets. It is our opinion that this pre-funding is a function of two things: concerns about the stability of deposit funding (as % of loans) and APRA’s Net Stable Funding Ratio requirement due to start in 2018. Is it a concern? No, their liquidity buffers are there to manage funding risks and this transition will be well managed. Reporting season kicked off for the banks (i.e. CBA, ANZ, NAB, BEN) last week. Ultimately the results were stable but confirmed a number of our sector thesis; maintaining sufficient organic capital generation (while maintaining current payout ratios) to offset loan growth continues to be difficult and asset quality having peaked. The new floor on APRA’s risk weighted assets also came in effect on 1 July 2016 and all banks will now report core, Tier 1 and total capital ratios lower than their 30 June 2016 reported levels. This is well known with the major banks raising capital in 2015 to offset this change but it will reduce their reported capital buffers. Property companies are a focus this week (GPT, Mirvac, Dexus, Stockland, Vicinity and Lend Lease) and we expect strong results. There is an increasing amount of activity in this sector and we will focus our analysis on ensuring the companies under coverage have strong risk management policies in place at this point in the cycle. In other results last week from AGL and Telstra were stable from a credit perspective. Please check our research for updates.
