ALAC: NAB goes large offshore, long at home

National Australia Bank on 18 November extended the Australian domestic Tier 2 curve with the first 12 year non-call seven issue, after having on 29 July sold the equal-largest US dollar Basel III Tier 2 tranche from an Aussie bank, as it begins meeting an incremental A$12bn requirement following APRA’s ALAC announcement in early July. Andrew Ker, associate director, long term funding, NAB, discussed the bank’s issuance strategy with Bank+Insurance Hybrid Capital, in association with Crédit Agricole CIB.

Bank+Insurance Hybrid Capital: What were your increased issuance needs in light of the APRA announcement and how have you planned to meet these?

Andrew Ker, National Australia Bank: APRA’s requirement for three percentage points of additional loss absorbing capacity (ALAC) will for NAB represent an incremental capital requirement of just over A$12bn (€7.4bn, US$8.1bn). We expect to meet that requirement primarily through the issuance of Tier 2 instruments, with a corresponding decrease in the amount of senior unsecured debt that we have outstanding. The compliance date for this new requirement is January 2024, and so by that time we’d expect Tier 2 outstandings somewhere in the vicinity of A$20bn. There are a number of different ways we can reach that finish line, and I anticipate getting there at a comfortable cadence, bearing in mind factors like our growth in risk weighted assets and what sort of maturity profile we want to have after that commencement date in January 2024.

BIHC: Why did you opt to start with the 15 non-call 10 144A/Reg S US dollar trade? How was that received?

Ker, NAB: NAB did its first Basel III Tier 2 issuance at the end of 2014 and in the almost five year timeframe since then we hadn’t issued such an instrument in US dollars. The APRA announcement was as in early July and by the end of July the market had absorbed the announcement and demonstrated quite a clear appetite for that particular format. Market conditions were conducive, and we really just responded to those.

We were very pleased with the market’s response. Orders exceeded US$9bn for the single-tranche transaction and we issued US$1.5bn, which we understand to be the equal largest tranche size for a US dollar Basel III Tier 2 issuance by an Australian major.

BIHC: More recently you launched the first 12NC7 Tier 2 issuance in Australian dollars, extending beyond the typical 10NC5 format. We’ve tended to see your peers seek longer maturities in other currencies. Why did you decide to push the envelope a bit domestically?

Ker, NAB: We’ve seen increased depth in the Aussie dollar capital markets throughout the year and we’d seen that in successful capital issuances from international issuers in 2019. We’d done a 10NC5 issuance in May and we had confidence that the investor appetite would be there for a Basel III instrument with a longer tenor, and as one of the four major banks in Australia we felt it was important to take a leadership role in our domestic market and take that step out from a non-call five to a non-call seven.

BIHC: How did the outcome for this new point on the curve compare with your expectations?

Ker, NAB: Our expectations were anchored around the May Basel III Tier 2 trade, which was A$1bn in 10NC5, and it comfortably exceeded those expectations. The final book for our 12NC7 exceeded A$2.8bn, which is a 75% increase from the order book we achieved on the 10NC5, so it allowed us to print A$1.4bn, split into A$1.175bn floating and A$225bn fixed rate tranches. This points to the continued evolution and growing depth in the Aussie dollar market.

BIHC: You’ve got quite a bit more to do before 2024. How do you see yourselves acting across markets, such as euros, where you haven’t issued since July but we recently saw ANZ with its Tier 2 SDG bond?

Ker, NAB: In the more or less five years since we issued our first Basel III Tier 2 instrument, before July we’d issued in five currencies – Aussies, our debut trade was in euros, and within our own time zone we’ve also done Hong Kong dollars, Singaporean dollars, and Yen. Each of these currencies will provide individual issuers, including NAB, the opportunities to tailor their ALAC issuance to their respective objectives for diversification in terms of tenor, structure and investor. The timeframe that we are thinking about for ALAC compliance is really over the next four years, and currencies like euros will play a role in that. As an industry, it’s pleasing to see an Australian major bank successfully reopen that market.

BIHC: You mentioned in respect of the dollar transaction that you were pleased to see how the market was absorbing the news and initial supply. There had been concerns in the industry about the cost and way in which banks would have to meet the ALAC requirement. What are the takeaways in that respect from how things have developed?

Ker, NAB: Certainly this Tier 2 issuance is at an increased spread to instruments that have been used for loss absorption in other jurisdictions, but overall we have been pleased with the market response so far. But it’s only been four months since the clarification of the requirements, so it still is very much early days. But over the four months, the progress has been pleasing.

I suspect that prior to ALAC the idea of Aussie major bank Tier 2 would have been quite niche for investors, who probably would have thought that doing the due diligence on the Australian issuers for Tier 2 instruments wasn’t really worth the time. But now, with the increased supply, it will become a much more relevant asset class for investors. It is certainly pleasing to see a large number of them around the world having invested the time for that and showing that appetite exists for sub debt from well-rated issuers.