ANZ’s market return from all angles

ANZ Banking Group’s capital-markets return, on 19 August, marked the first major-bank domestic tier-two deal since late 2019 and the sector’s first Australian dollar green, social and sustainability (GSS) bond since 2017. It is ANZ’s third transaction under its SDG framework, which aligns use of proceeds with the UN Sustainable Development Goals, having previously only issued in the euro market.

ANZ’s group treasurer, Adrian Went, global head of capital markets, Paul White, head of sustainable finance, Katharine Tapley, and head of debt investor relations, Scott Gifford, discuss the deal with KangaNews.

This deal came on the same day as ANZ’s third-quarter results. What were the main messages ANZ wanted to communicate to investors ahead of the deal?

WENT There is naturally a lot interest around our financial results due to the COVID-19 pandemic and related economic stress. One of the main points worth highlighting is the strength of our capital position. We increased our capital ratio by around 37 basis points over the quarter. This increases to 47 basis points including the sale of UDC Finance in New Zealand, which is expected to settle shortly.

The other key piece of our results is the dividend for shareholders. [ANZ chief executive] Shayne Elliott spoke about the need to keep equilibrium between a strong balance sheet and delivering some return to shareholders. The dividend is smaller than it was pre-crisis, but we considered this a very important message that speaks to the confidence we have in our balance sheet and our ongoing performance.

Capital is likely to be the only substantial call from major banks on capital markets in the near term. What plans do you have for this type of issuance and has the strategy changed since last year given the lack of need for senior-unsecured funding?

WENT Our plans regarding the capital raise have not changed from last year, but it is correct that our need for capital markets is quite different to what it was pre-COVID-19. The Reserve Bank of Australia (RBA)’s term funding facility is obviously a big driver of this as a substantial provider of funding to the banks. We have begun drawing on this for term funding.

The other big factor is the deposit flows we have seen. We think this will continue as the amount of money in the system increases with various actions from the RBA and the federal government.

We have reiterated that our approach to TLAC [total loss-absorbing capacity] and tier-two issuance is unchanged from what it was 12 months’ ago. We still need to get to 5 per cent of risk-weighted assets by January 2024 and the Australian major banks will need to do a significant amount of issuance to get there. We need to diversify across markets, tenors and currencies and we will be looking at private placements and public transactions.

What was the rationale for coming to the Australian dollar market for this deal?

WENT The domestic market remains important to us. We executed a tier-two deal in July 2019 and we expect to come to the market once or twice per year. There may be some different tenors developed over time, but the 10NC5 structure remains dominant in the domestic market.

We have reiterated that our approach to TLAC and tier-two issuance is unchanged from what it was 12 months’ ago. We still need to get to 5 per cent of risk-weighted assets by January 2024 and the Australian major banks will need to do a significant amount of issuance to get there.

This is the first labelled GSS bond issued by a major bank in Australian dollars since 2017. It is also the first time ANZ has issued under its SDG framework in Australian dollars. What were the factors behind this decision?

TAPLEY We have been a GSS bond issuer since 2015 when we did our first green bond and have also been a prolific arranger since then. The motivation behind the SDG label comes from our commitment to the SDGs themselves – we have been a signatory to them since 2016.

Creating a framework that links to the SDGs allows us to demonstrate to investors how our lending activities are deriving impact. They can then demonstrate this to their constituents.

We had not been in the local GSS bond market since our inaugural green bond in 2015 so felt it was time to return. The transaction was well received, with crossover interest into this deal from our green-bond transaction.

The support for what we are doing was very evident in the investor call where most of the questions were focused on the format of the deal rather than ANZ’s trading update, which had only been delivered an hour before.

There were many detailed questions around our framework, what we are doing and how we retain a robust approach through impact reporting and independent reviews. The call definitely demonstrated to us a maturing of ESG [environmental, social and governance] approach among domestic investors since our first GSS deal in 2015.

Exactly what sort of information did investors request on the SDG framework and use of proceeds?

TAPLEY Our approach to independent review was a focus. For this transaction, we had an opinion from Sustainalytics on our refreshed SDG bond framework. We also had assurance given by EY on the underlying asset pool.

There were also questions on our approach to reporting. We explained that we are not only focused on how we use proceeds but also how we measure impact. One of the benefits of issuing an SDG bond is that the SDGs provide a framework for measuring impact.

Investors are traditionally focused on issues such as reducing emissions intensity and other environmental outcomes, because these are measurable. However, we also explained how we are measuring impact in socially-oriented asset classes such as healthcare, for example beds provided in hospitals and availability of aged care to vulnerable cohorts.

This feeds into the narrative of a sustainable recovery from COVID-19. Do you get a sense the pandemic has provided an inflection point for investors looking at GSS issuance, and is the domestic market catching up to Europe?

TAPLEY I think the Australian market has been endeavouring to catch up for some time now. When I was in London last year an investor commented on the sophistication and granular ESG requirements of their investor clients in Australia, for instance.

COVID-19 is certainly an inflection point, though. Coupled with the extensive bushfires and flooding we saw in Australia last summer, I think we will only see greater focus on environmental and social issues.

One of the motivations we had for refreshing our SDG bond framework was to add two more SDGs which have become increasingly relevant as a result of these events. These are SDG8 – decent work and economic growth, and SDG15 – life on land.

We are very focused on supporting our customer base through recovery from the pandemic and the economic fallout as well as investing in resilience and adaptation activities in anticipation of further extreme weather events caused by climate change.

What is the outlook for ANZ’s SDG issuance? Can the bank maintain supply even though overall issuance is subdued?

WENT I hope so. Our capital raise will be our primary focus in capital markets and we would like to apply the framework to as much capital issuance as the asset pool allows.

GIFFORD One thing we are outlining with investors is that there is strong alignment between ANZ’s A$50 billion sustainable financing target and its funding. SDG alignment is also in the target so, as those assets are generated between now and 2025, they will map with our SDG funding and capital platform. There is tremendous opportunity for investors to partner with ANZ in driving positive impact in Australia and New Zealand.

We are committed to being a regular and leading issuer in SDG format. We have now executed SDG transactions in 2018, 2019 and 2020 and there is no reason this frequency could not continue.

Until this week there had been very little tier-two issuance in Australian dollars since the start of the COVID-19 crisis. How did this affect the execution process?

WHITE There was a lot of supply in the domestic market concurrent to ANZ’s deal and a lot of information to digest with it being results season. Bringing in the SDG overlay and executing the deal on the same day as ANZ’s results made it a busy process of investor engagement, but it was smooth.

What is the background for supply and demand drivers for major banks at the moment, and how do these affect the wider market?

WHITE There is obviously a lack of issuance, as Adrian Went outlined. This will not change in the near term. The domestic major-bank senior market is very technical and trading at historically tight levels, although spread tightening has slowed recently.

We are seeing a general shift into higher-yielding assets. This means other financial institutions and corporates are benefiting from the lack of major-bank supply. For example, Goodman’s A$400 million deal on 19 August saw more than A$2 billion of demand, and Coles saw more than A$3 billion of demand for its deal on the following day.

Investors are looking to invest in different asset classes, longer tenor and lower credit ratings to get yield in this environment.