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Bank debt issues could be raging buys

Depending on whether you can cope with some uncertainty, some of the NZX-listed bank debt issues look like raging buys at the moment.

Tuesday, 3 April 2012

by Jenny Ruth

That's because regulatory changes make it likely the banks will redeem them sooner or later.

The Reserve Bank plans to adopt new international banking rules, known as Basel lll, soon which will mean such bank debt will have to be able to be either written off or converted to equity in order to qualify as capital as they currently do.

Forsyth Barr analyst Matt Sturmer says he doesn't think any of the current issues will qualify.

Under the proposed new rules, the banks will have to phase them out by no later than January 1, 2015 but will no longer qualify as capital from the first available call, or redemption, date.

Take Bank of New Zealand's $449.7 million of perpetual non-cumulative securities, the first of these securities to reach its first call date on March 26 next year, which have a 9.89% coupon. Its coupon is reset every five years.

Currently trading at $98.30 per $100 face value, Sturmer estimates that, assuming they are redeemed next year, their current yield is 11.85%. No wonder he thinks they're worth buying.

What will happen to the one-year resets, such as ASB Bank's two issues of preference shares, is less certain because the bank may decide it's worth keeping such cheap debt.

One issue, the $200 million with a current 4% coupon, is trading at $72 per $100 face value, boosting its annual yield to 5.56%, while the other $350 million issue with a 3.8% coupon, is trading at $70 per $100 face value, putting its annual yield at 5.42%.

However, ASB will have to weigh up how its investors might react if it decides not to redeem these issues.

Rabobank is in quite a different position because, being a branch rather than a subsidiary as the other banks are, its capital position in New Zealand doesn't really matter.

Still, its $900 million of perpetual capital securities, which currently have a 3.7% coupon, are more than likely to be redeemed in October 2017, based on Rabobank's track record of keeping faith with its investors.

Sturmer estimates that with the Rabobank securities trading at $80.40 per $100 face value, assuming the coupon resets between now and 2017 remain at 3.7%, and assuming Rabobank does redeem them, their annual yield to maturity is currently 8.11%. For an "A" rated security.

While they are rated "AA," Rabobank's five-year term deposits are currently paying just 6%.


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