CBA eyes bond market return in a test after AUSTRAC case

Australian Financial ReviewSep 10 2017 10:00 PM

Jonathan Shapiro

Commonwealth Bank of Australia may return to global funding markets as early as this week with its first foreign bond issue since details of the AUSTRAC money laundering saga emerged.

The bank's treasury team was in Europe last week updating debt investors and market participants said it may be in a position to issue bonds this week.

A potential deal would allay any concerns that the bank's access to, or cost of, financing has been impacted by the money laundering debacle, which has hit the share price, prompted the prudential regulator to initiate an independent inquiry and put global credit rating agencies on alert.

A CBA debt deal would also come in a busy period of debt sales for Australian companies as Westpac Banking Corp prepares to embark on a global roadshow ahead of a potential US-dollar Tier 1 capital raising.

CBA has in the past conducted large bond sales shortly after releasing its full-year financial results, taking advantage of the end of the issuance "blackout" period and regulations requiring publication of updated financial statements. As frequent issuers, banks monitor various markets to selectively raise debt at the best achievable price.

There have been suggestions that the investment banks appointed to underwrite CBA's debt sales have had to undertake extensive due diligence to get approval to sell the bonds to its offshore clients, pushing out the timing of a bond sale. However, sources said it was business as usual for CBA, which has remained active in raising funds in the domestic and international short-term money markets since the AUSTRAC case was lodged in early August.

Australia's big banks are heavily reliant on wholesale funding because the amount of loans they have extended exceeds the value of deposits. The funding "gap" is therefore closed by selling long and short-term debt offshore.

In the 2017 financial year, CBA raised about $40 billion of long-term wholesale debt but is likely to have a reduced funding target over the next 12 months as it has less debt maturing. In July, the CBA raised almost $2 billion via a rare 30-year US dollar bond issue.

Credit risk levels

Any deal, should the bank decided to conduct one, will provide a vital test of the debt market's faith in CBA and the price at which it is prepared to finance the lender.

If credit market prices are any indication, there are no concerns. So far, debt traders say there has been no meaningful impact on the bond spreads of the Commonwealth Bank, which should serve to encourage the lender.

While the equity markets have punished CBA by removing its long held premium over the other banks, bond markets have tended to charge all of the big four banks an identical funding cost. This, credit experts say, reflects the fact that systemic importance of all of the big four banks overrides any differences in credit profile.

At present, the cost of insuring five-year CBA debt is about 49 basis points, only a single basis point wider than Westpac debt. Those spreads are down from about 60 basis points at the end of June, implying an improvement in the market's perception of the bank's credit risk over that period.

On Friday, Westpac announced to the stock exchange that it was planning to raise Tier 1 "hybrid" capital from international wholesale investors via a US dollar issue. The banks have typically sourced their Tier 1 capital from domestic investors via the hybrid market and a raising would mark only the second time since the 2008 financial crisis that this type of funding has been sourced from foreign investors.

However, the AUSTRAC issue is forcing investors to consider the idiosyncratic risk of the Commonwealth Bank, particularly after the Australian Prudential Regulation Authority announced an independent review of the bank's culture and management in light of the AUSTRAC debacle.

Credit investors are also speculating how large the ultimate penalty relating to the AUSTRAC case may be after the financial intelligence agency launched a civil case against the lender to an alleged failure to prevent potential money laundering.

CBA concerns

After the APRA inquiry was announced, the three credit rating agencies which assignratings to the bank's senior bonds warned of negative credit implications.

"In addition to potential fines imposed domestically, CBA is also potentially exposed to further action from offshore regulatory bodies, given that a number of these suspicious transactions involved a transfer of funds to overseas accounts," Daniel Yu of rating agency Moody's Investors Service said.

The AUSTRAC case was the latest in a string of scandals, which had prompted Sydney bond fund Altius to screen out CBA bonds from the Altius Sustainable Bond Fund.

"We requested information on the plan for improving bank ethics that was announced but no detail was forthcoming," said Altius Asset Management chief investment officer Bill Bovingdon.

"The focus certainly seems to have changed now and we are encouraged by the comments from the new chair about cultural change. Hopefully we can reinvest before too long."

The big four banks collectively issue about $100 billion of wholesale debt to domestic and international bond funds every year. Increased funding costs can filter through directly to net interest margins, but reduced access to debt funding can also impact funding costs by forcing the banks to pay more for additional deposits.

US "primary" bond markets burst back into life after the Northern Hemisphere lull, allowing Santos and Woodside to each raise $US800 million ($988 million).

Meanwhile, toll road operator Transurban tapped the European bond market for €500 million ($744 million) of funding.