Australia and New Zealand Banking Group Limited (“ANZ”) intends to issue a new 10NC5 SGD Tier 2 subordinated paper at the initial price guidance of 4.10%. The new issuance is expected to be issued on 15 November 2024, with a call date and a maturity date of 15 November 2029 and 15 November 2034 respectively. If uncalled, the coupon will reset based on the prevailing 5-year SGD SORA-OIS and the initial margin to be determined upon issuance. Note that the new issue will be made available to accredited and institutional investors only.
Headquartered in Australia, ANZ primarily serves retail consumers across the Australia and New Zealand region, while its footprint can be found globally in 29 markets. ANZ is one of the four major banks in Australia and the largest in New Zealand by total assets. Banking comprises the bulk of ANZ’s operations and revenue at ~90%, with the remaining 10% coming from its market activities.
For the full year ended 30 September 2024 (“FY24”), ANZ recorded a -8% year-on-year (“YoY”) drop in its statutory profit after tax from AUD 7,106m in FY23 to AUD 6,535m in FY24. Profits fell owing to the combination of a (1) decline in revenue, (2) higher expenses and (3) higher credit impairment charges.
The decline in revenue was largely attributed to the fall in net interest income, partially offset by a rise in other operating income across the Group. ANZ observed a -3% YoY decline in net interest income from AUD 16,574m (FY23) to AUD 16,069m (FY24). This was due to increased funding costs across the year, which similarly impacted ANZ’s net interest margin and resulted in its compression from 1.70% as of September 2023 to 1.57% as of September 2024. Meanwhile, other operating income increased +9% YoY from AUD 4,331m in FY23 to AUD 4,740m in FY24, with growth observed in net fee and commission income, markets income and also other income.
Expenses increased +4% YoY due to wage & vendor inflation and spending on strategic initiatives, offset by savings through productivity growth. The expenses also include the one-off Suncorp Bank integration costs, after the completion of its acquisition earlier in the year. On the other hand, credit impairment charges rose substantially owing to an AUD 244m one-off charge for the expected credit losses on Suncorp Bank’s loan portfolio. Excluding Suncorp Bank’s contribution to credit impairment charges, ANZ’s standalone credit impairment charge is at AUD 163m in FY24, down from AUD 245m observed in FY23.
ANZ’s performance for FY24 stood reasonably resilient, especially after accounting for the one-off impact arising from the Suncorp Bank acquisition. We expect the bank’s earnings to remain stable for the time being, with growth in non-interest income to offset the reduction in net interest income – as the bank’s net interest margin continues to get compressed. At the same time, existing initiatives towards managing the bank’s costs should help to minimize the impact of rising expenses.
ANZ reflected that its APRA Level 2 Common Equity Tier 1 Ratio (“CET1 Ratio”) stands at 12.2% as of September 2024, above Australia Prudential Regulatory Authority’s (“APRA”) expectation of an 11.0% to 11.5% operating range. The APRA CET1 Ratio fell from 13.5% as of March 2024, owing to a 109 basis points decline from the Suncorp Bank acquisition and a 46 basis points decline from share buybacks. With that said, on a harmonised (internationally comparable) basis against other major banks’ CET1 ratio, ANZ’s CET1 ratio stands at 17.6% - substantially higher than most major banks.
The Group indicated that its liquidity coverage ratio and net stable funding ratio are at 133% and 116% respectively, above the regulatory requirements of 100%. Additionally, ANZ stated it holds total liquid assets of AUD 266.2b as of September 2024 (with AUD 250.6b in highest-quality liquid assets), which covers approximately ~37% of the bank’s total deposits.’
Table 1: Banking SGD Tier 2 subordinated papers
Issue | Ask Price | Yield to Call/ Maturity | Years to Call/ Maturity | Bond Credit Rating (S&P/Fitch) |
109.00 | 4.14% / 4.93% | 4.20 / 9.45 | BBB- (S&P)/ | |
105.05 | 4.01% / 4.85% | 3.23 / 8.48 | ||
100.24 | 3.90% / 3.92% | 5.43 / 10.43 | BBB+/ A- | |
103.50 | 3.85% / 4.60% | 4.26 / 9.27 | ||
103.75 | 3.89% / 4.14% | 4.84 / 9.84 | BBB/ A- | |
105.80 | 3.84% / 4.23% | 4.37 / 9.37 | ||
103.40 | 3.32% / 3.95% | 3.06 / 8.06 | A- / A- | |
ANZ 15Nov2034 Corp (SGD)* | 100.00 | 4.10%*/4.10%* | 5.00 / 10.00 | |
Sources: Bondsupermart, iFAST Compilations. Data as of 11 November 2024. | ||||
ANZ is rated AA-/ AA-/ Aa2 by S&P, Fitch and Moody’s respectively with a Stable outlook across the three rating agencies. For the new issue, it is expected to be rated A-/ A-/ A3(hyb) by S&P, Fitch and Moody’s respectively. We wish to highlight that the new issuance comes with loss absorption clauses, which might not be suitable for risk-averse investors.
Accounting for a potential downward adjustment in its final pricing, we believe the ANZ new Tier 2 issuance will be fairly priced against similarly rated peers, i.e. Tier 2 subordinated papers from HSBC and BNP Paribas. Tier 2 papers from Commerzbank offer slightly higher yields in exchange for the lower credit rating on the bonds. Nonetheless, the ANZ new issuance would still be a good option for investors looking at bank bonds, given the bank’s strong credit rating alongside its stable earnings outlook.
Lastly, we note that issuers are incentivised to redeem their Tier 2 issuances on their first call date, as Tier 2 capital would have to be amortised past the first call date.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in CMZB 6.500% 24Apr2034 Corp (SGD), CMZB 5.700% 03May2033 Corp (SGD), BNP 4.750% 15Feb2034 Corp (SGD), HSBC 5.300% 14Mar2033 Corp (SGD), ANZ 4.500% 02Dec2032 Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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