NAB trumps ANZ

Our headline in late January, when ANZ surprised the market by launching the first Additional Tier 1 capital issue of 2015, was "ANZ gazumps NAB". (To recap, in mid-December NAB had flagged an issue of Additional Tier 1 capital for early February and was expected to be the first Aussie bank to market this year).

Well, ANZ may have been first but it is now looking a little silly. And it holds the record for the smallest Additional Tier 1 capital issue seen so far.

It seems that, while ANZ recognised the price blow-out that comparable issues had caused in the last quarter of 2014, it expected that a suitably adjusted margin would still attract strong demand from retail investors.

Apart from offering a wider credit margin, ANZ did not change what had become the standard eight year term to call with mandatory conversion schedule for two years later.

The market response appears to have been more subdued than ANZ was expecting. It launched a minimum A$750 million Capital Notes 3 issue and in the bookbuild attracted orders for just $100 million more.

(This may well be a factor in ANZ New Zealand announcing a capital note issue on Monday. See yesterday's edition of Banking Day.)

Just over a week ago, NAB launched the issue it had flagged back in mid-December. The NAB Capital Notes were launched at $750 million and in the bookbuild completed earlier this week, the issue size was increased to $1.25 billion.

By coming to the market with both a wider credit margin and a different term to call and mandatory conversion, NAB found a sweet spot that well and truly trumped ANZ. With an order book that is nearly 50 per cent larger than that for ANZ's Capital Notes 3, NAB has demonstrated that there is still an appetite among retail investors for hybrid notes.

However, as noted last week, NAB also created a rod for its own back, with more than $4 billion of Additional Tier 1 capital to be refinanced over the course of 2019 and 2020. Moreover, NAB has shown that retail investors are looking for new taste sensations and this will prove expensive.

There is no doubt that NAB has had to pay up to attract the level of investor participation that it has achieved.

The credit margin on the NAB Capital Notes has been set at 350 basis points, compared with the 360 bps ANZ will pay on the Capital Notes 3. Sure, NAB is paying ten bps less, but its Capital Notes will be called three years earlier.

And, as the palates of retail investors develop, the pricing of hybrid notes in the retail market can be expected to move closer to the levels seen in international markets.

A little over a week ago, UBS Group sold US$1.15 billion of hybrid notes with a five year call date. In Australian dollar terms, the hybrid notes will pay a credit margin of more than 570 bps, at least 220 bps above what NAB will pay.

There are some technical differences in the credit quality of the two issues and NAB is superior, but the differences are just technical.