Australia's major banks may need to issue $36 billion of tier two bonds over the next three years to increase their loss-absorbing capacity in the event of a financial crisis.
This is the view of credit ratings firm Moody’s who said tier two bonds are set to play a prominent role in Australia's major banks' wholesale issuances over the next 12 to 18 months as the banks seek to meet the prudential regulator's requirements for additional 3 percentage points of total capital.
”We believe Australia's major banks will take advantage of the current favourable market conditions to prioritise the issuance of tier two securities, which are more cost-effective following a plunge in yields," said Moody’s analyst Tanya Tang,
“Spreads on tier two securities have declined even more than senior debt since the onset of the pandemic, reducing the cost of issuing such capital,” she added. At the same time, a high level of deposits and access to the Reserve Bank of Australia’s term funding facility have lowered the major banks’ funding needs and supported their funding costs.
Moody's estimates that the major banks may need to raise 36 billion in capital to achieve a minimum total capital ratio of 17 percent by 2024.
“While APRA has not specified how the banks must meet the new capital requirements, this will most likely be met by tier two capital because it is the most cost-effective.
This estimate of the required issuance amount is based on a few assumptions, including growth in banks' risk-weighted assets at 4 percent per year, in line with the average rate over the past four years. Another assumption is that banks will meet 5 percentage points of APRA's forthcoming total capital requirement entirely with tier two capital.
In a consultation paper released in 2019, APRA said the banks should raise additional tier two bonds that rank below deposits and senior unsecured bank bonds in the capital structure, but above common equity and hybrids.