NAB shrugs off market volatility to raise $5.4bn in US bond market

National Australia Bank raised $5.4bn in the US bond market, paying 100bps above the existing US Treasury rate for 5-year bonds and a 140bp premium on the 10-year note to attract investors in the current volatile market. The sale is one of the bigger offshore debt issues and is seen as a bold move by a major bank in the post-Brexit landscape, and possibly evidence of prudent "stacking of the acorns before the winter sets in."

NAB paid less than 1.5 per cent for three-year debt, less than 2 per cent of interest for the five-year bonds and less than 2.60 per cent for 10-year bonds.

Concern over credit spread

However, Australian bank treasurers are more concerned about the credit spread – or premium above the risk-free rate – they pay for funding, which influences their net interest margins, rather than the absolute borrowing rates.

In this instance, NAB paid 100 basis points over the US Treasury rate for five-year bonds, and a 122-basis-point premium for the 10-year debt.

That, sources said, equated to about 128 basis points over the Australian bank rate for the five-year debt and about 165 basis points for the 10-year debt. They estimated this was about 10 basis points above existing comparable bonds.

Australian bank credit spreads are far from their wides while bond rates fall to new lows AFR

Advertisement

These levels do represent a widening of funding costs: Westpac raised five-year debt last May in the US at a rate cheaper by 20 basis points. But the spreads are some way off the margins coughed up in the period that followed the 2008 financial turmoil and at the height of the European sovereign debt crisis

Australian bank credit spreads have proven relatively resilient to last month's Brexit market shock and more recently the political uncertainty and increased talk of a sovereign credit rating downgrade. On Monday, the agencies warned that failure to stem a widening budgetary deficit could lead them to eventually cut the credit rating.

Shares of big banks, however, came under some selling pressure this week as the election stalemate raised the prospect of a royal commission on banking and the prudential regulator flagged the need for banks to raise more capital to remain among the best capitalised in the world.

Bond issue

Meanwhile, Commonwealth Bank is said to be lining up a five-year Australian bond issue at a margin of about 120 basis points over the bank rate. While margins are off their recent lows – CBA paid a rate of 90 basis points a year ago for the same funding – the decline in base rates means it may pay a fixed interest rate on the bonds of just 3.10 per cent.

So far, according to CBA credit analysts, Australia's banks have raised the equivalent of $43 billion in offshore markets and about $21.2 billion in domestic markets, as they remain reliant on the bond market to finance their loan books.