With the perfect storm of geopolitical and economic events experienced in 2022, there are still no clear horizons but rather some clearly known challenges to prepare for on the radar.

Heading into 2023, repayments to the RBA’s Term Funding Facility (TFF) are coming up, as well as large volumes of medium-term note (MTN) maturities due, both of which have key implications for the funding landscape.

The combination of factors is likely to see a constant amount of supply from bank issuers and knock-on pricing pressures in coming months, with this trend being more pronounced for the non-majors given their singular reliance on AUD debt markets.

The scale of the funding challenge will require additional flexibility and fleet-footedness to manage, but there is room for optimism for issuers who take a considered and pragmatic approach to clearing the way ahead.

Managing maturity

The TFF as a COVID-stimulus measure provided $A188 billion in aggregate funding for authorised deposit taking institutions (ADIs) in Australia, before closing on June 2021, with the corresponding final repayments in June 2024.

The key maturity towers are the June and September quarters in 2023 and the June quarter 2024. In effect these see about A$85 billion maturing in the 2023 and about A$100 billion maturing the following calendar year.

Looking at the aggregate maturities for the financial institution (FI) names in 2023, we see that there is some A$67 billion coming due, with the peak quarters being March (A$18.8 billion) and September (A$16.8 billion). In 2024 there are maturities away from the TFF of A$44 billion, with the September quarter representing A$16.0 billion of that.

Financial

Source: NAB Syndicate and Bloomberg December 6, 2022.

Scheduled TFF maturities (only those banks that have previously issued bonds*)

Source: Reserve Bank of Australia.

Issuers have been quick to communicate to investors that the refinance of the TFF will not be done entirely in the term markets and will likely reflect the broader composition of their balance sheets – from deposits to short term funding and an amount in the term markets.

This intuitively makes sense, and we continue to see deposits in ADIs climb. However, the need to access term markets to lengthen maturity profiles and reduce the near-term refinancing risks is apparent.

The RBA views the incremental funding requirement that the refinance of the TFF has on the banking sector as only a moderate imposition. The view is banks will in effect reverse the trend of reduced public market issuance, and they will seek numerous sources to meet the refinancing requirements¹.

In addition, the RBA points to the fact that banks will commence the refinancing of these maturity towers well in advance of the final maturity. The central bank notes that the bulk of the refinance falls due in September 2023 and June 2024².

Given banks can cancel the TFF at any of the stages without cost, there is an option to raise term funding and reduce the facility. However, the implied cost of carry for this is significant and in a challenging market environment there will be a balance between preserving the net interest margin (NIM) and securing term funding.

New dynamics

We have seen several issuers move to get ahead of these impending maturities. Recent issuance in the mutual sector would appear to be a refinance of securities that have matured in recent months, with any incremental funds being directed at the TFF towers. What is apparent as we see these transactions come to market is the new dynamic in pricing and the lower-than-expected transaction volumes being achieved.

The Australian repayment of the TFF is not out of step with global efforts to reduce liquidity in the banking system and to contain inflation. However, with the current market backdrop, our initial view is that there will be some potential potholes to keep an eye on moving through the next 18 months.

• APRA implementation: While well-telegraphed, the finalisation of the RBA’s Committed Liquidity Facility (CLF) is scheduled to take place in 2023. We have seen a gradual pull back from balance sheets supporting non-high quality liquid asset (HQLA) transactions and the final step of this will see a less supportive environment for bank debt issuance (including RMBS). In addition, we have seen APRA roll out the new risk weighting (RW) standards under APS 112 for capital adequacy.
• Pricing pressures: As we look to 2023, pricing is likely to hover around these current elevated levels, with investors remaining conscious of continuing supply, and are pricing in elevated New Issue Concession (NIC) to provide a buffer. Larger borrowers with access to the offshore markets are able to manage this supply dynamic by pivoting when the domestic supply becomes too heavy. For the single A and BBB issuers, the lack of market diversity requires pricing transactions to meet the incremental bid from the domestic asset managers. Generally five-year major bank paper trades in a range of between 80 and 120 basis points. If we take this as a base case, going forward we would expect to see a retracement of spreads into the end of 2022 given we have seen the majority of issuance completed by the domestic FIs.
• Investor trends: We have seen some subtle changes in investor behaviours in the past six to 12 months. ADI balance sheets have become less prevalent in ADI transactions, which is a combination of the wind-back of the CLF and the overlay of the impending changes to risk weights as outlined in APS 112. For the ADI issuers, this is leading to transactions now being more targeted at the asset manager community, which is leading to more tiered pricing points and a steeper credit curve.

Five year – new issue spread

Source: NAB Syndicate.

Despite these challenges, there are reasons for optimism as we turn the corner into 2023 and think about appropriate funding approaches.

Go large, go early

 The need to pre-fund the larger towers in early to mid-2023, will see issuers active in markets year-round, with many issuers debating whether to either proactively get ahead of the task by printing larger transactions and paying up or looking to pick optimal windows and make numerous visits. The debate around negative carry versus surety of funding is likely to be a key discussion point.

One observation is that the investors tend to have visibility on the issuer’s progress against the refinancing task. In the past they have used this to extract additional margin and NIC as they assess relative value on deals coming to market.

From the NAB perspective, we would encourage issuers to pre-fund earlier in the cycle and, where possible, pay the required margin to secure larger volume and reduce the number of visits to market. We feel that long term this will deliver more stable funding and reduce the cost of funds to allow greater business certainty into FY23/24.

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¹ An Assessment of the Term Funding Facility | Bulletin – September 2021 | RBA
² Ibid