Bank bond offer pays up to secure long-term funding

ANZ New Zealand has raised NZ$350 million, including NZ$250 million of over subscriptions, in a five year bond issue that will pay investors annual interest priced at 165 basis points over the swap rate.

The NZ$100 million offer, which closed on Friday, was open to unlimited over subscriptions. The mixture of largely domestic institutional and retail investors will receive 6.51% in annual interest payments being 165 basis points over the five year swap rate. ANZ offers 6.75% for its 5 year retail term deposits, but limits those to NZ$1 million each. See all bank term deposit rates here.

This unusual situation of retail deposit rates yielding more than wholesale bonds has developed since the Global Financial Crisis and since the Reserve Bank has been pushing banks hard to raise more funds from local retail depositors. The European Financial Crisis has also boosted wholesale funding costs since March.

ANZ's latest five year bond issue was priced 30 basis points higher than the bank paid in its last five-year offer in March, when it raised NZ$250 million at 135 basis points over the swap rate.

The latest ANZ offer led to a BNZ offer, of bonds of just over six years in duration, being pulled last week because BNZ was offering interest payments at 155 basis points over the swap rate and decided not to compete with ANZ on price.

The latest price action reinforces a trend towards higher funding costs for banks in the wake of the Global Financial Crisis. Before the crisis, margins to swaps for longer term New Zealand bank debt ranged from 25-30 basis points. They blew out to over 250 basis points over swaps in the months after the crisis, but had appeared to be headed under 100 basis points earlier this year. The European sovereign debt crisis has reversed that move.

The ANZ-BNZ pricing stand-off also comes as major banks look for sources of long-term funding to help meet the Reserve Bank’s core funding ratio (CFR) which was introduced in April. The CFR requires banks to fund 65% of their loans from either retail deposits or from wholesale funding sources with maturities of more than one year.

Introduced in the wake of the Global Financial Crisis amid Reserve Bank concerns the banks are vulnerable if ‘hot’ international wholesale money markets freeze as they did when Lehman Brothers collapsed, the CFR could be increased to 75% by mid-2012.

* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.