Analysis: No dream market for Big Four's debt raisings

Philip Bayley
20110623_CDS_spreads_chart

20110623_CDS_spreads_chart

Debt markets appear to be betting Australian banks will suffer fallout from any European debt crisis.

A Bloomberg report earlier this week suggested that investors were moving into Australian bank bonds in an attempt to avoid fallout from Europe's problems.

But other signs suggest Australia and New Zealand are not being spared the debt markets' difficulties.

In a pointer to the state of the markets, ANZ National yesterday deferred its inaugural euro-denominated covered bond issue indefinitely, despite what it said had been a successful week-long European roadshow. A spokesman told Interest.co.nz that the deferral was because of "the current market volatility, and its limited funding needs". ANZ National's debt pricing is closely tied to the debt pricing of its parent, ANZ.

Market prices also fail to show the Big Four banks' debt being repriced against similarly-rated foreigners. Analysis by Banking Day suggests that the Big Four Australian banks' credit risk continues to be priced higher than the debt of other AA-rated banks.

Banking Day has compared five-year Australian bank CDS spreads for the year to date with those of AA-rated HSBC and BNP Paribas. These spreads, sourced from Markit, are a proxy for the major banks' cost of wholesale debt.

Of course, the absolute cost of debt for the major banks is well above that of most banks around the world because Australian interest rates are so much higher. But that does not matter for this analysis as those costs are passed on to all borrowers. When we want to assess investor perceptions of banks' credit risk, what matters is the spread paid by the banks over the base rate.

As can be seen from the chart, the Australian banks have been at a cost-of-debt disadvantage for most of the past five months. (The chart uses ANZ spreads, but spreads for other Australian banks are virtually identical.)

CDS spreads for AA-HSBC have remained around 80bps over the period and now sit some 40bps below those of the Australian banks.

AA-rated BNP Paribas is one of the banks considered most exposed to the Greek crisis. Ratings agency Moody's announced a week ago that it was considering cutting the bank's rating because of its exposure to Greek debt. Yet CDS spreads for BNP Paribas are no worse than those of the Australian banks, even though they have widened since early May, as the Greek crisis re-emerged.

Out of interest, also included in the chart are the five-year CDS spreads for A+-rated JPMorgan Chase & Co. While JPMorgan is rated two notches lower than the other banks shown, its CDS spreads align more closely with those of HSBC.

Clearly, investors consider HSBC and JPMorgan Chase to be far removed from any Greek crisis and not too reliant on wholesale debt markets for funding.

Banking Day also checked the five-year CDS spreads of other major global banks, all with lower credit ratings than Australia's banks. Those banks all had lower credit ratings and, for the most part, their closing CDS spreads were wider than those of the major Australian banks.

However, there were some exceptions: Credit Suisse at 100.9bps, Deutsche Bank at 99.97bps and UBS at 102.97bps. All three European banks are rated A+ by Standard & Poor's.