BRANCH LINES EDITORIAL ROUNDTABLE

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1 BRANCH LINES Local bond issuance by Australian branches of international banks has become an increasingly significant contributor to Australia s domestic market (see charts on facing page), while the same banks liquidity books have become an important part of the local investor base. KangaNews spoke to a range of treasury managers responsible for local-branch activity including some based in New York and Toronto for their market insights. PARTICIPANTS n Russell Brown Treasurer UBS AUSTRALIA BRANCH n Will Farrant Director, Global Markets Solutions Group CREDIT SUISSE SYDNEY BRANCH n Matthew Heddou Senior Vice President, Head of Australian Funding SUMITOMO MITSUI BANKING CORPORATION SYDNEY BRANCH n Joe Ivanovski Head of Treasury MIZUHO BANK SYDNEY BRANCH n Paul Lamb Director, Treasury Oversight Australia, Treasury CREDIT SUISSE SYDNEY BRANCH n Ken Mason Managing Director, Capital and Term Funding ROYAL BANK OF CANADA n Gina Orlins Managing Director and Global Head of Long-Term Funding, Treasury CREDIT SUISSE n Rajneesh Sharma Managing Director, Capital and Term Funding ROYAL BANK OF CANADA n Ben Sivyer Head of ALM and Treasury BNP PARIBAS AUSTRALIA BRANCH MODERATOR n Samantha Menzies Staff Writer KANGANEWS FUNDING STRATEGY Menzies What is your local branch s annual funding requirement in Australian dollars? How has this evolved over time, and what do you expect it to do in the years ahead? n HEDDOU Since 2006, when Sumitomo Mitsui Banking Corporation Sydney Branch (SMBC Sydney) was granted a wholesale foreign-bank branch licence, we have had a compound annual growth rate of 24 per cent in Australian dollar assets to currently total around A$23 billion (US$16.2 billion). Shorter-term SMBC Sydney liabilities include repoeligible negotiable certificates of deposit (CDs) and corporate deposits, which have increased significantly in recent years. More recently, SMBC Sydney s funding mix has diversified, with our debut repo-eligible Australian dollar senior debt issuance occurring in February This was a A$500 million, three-year transaction. Since then we have issued a total of A$1.95 billion in floating-rate format, with our most recent issue being an A$850 million, five-year deal which we priced in March this year. n BROWN We have a centralised funding model but we are also interested in having a presence in all the markets in which we have significant businesses, including Australia. We see a lot of Asian interest in all our bond deals a factor which is becoming more and more apparent in Australian dollar deals. Naturally we also have a strong following in Switzerland, the UK and Europe, where our global clients are interested in access to Australian dollar issuance. RUSSELL BROWN UBS AUSTRALIA BRANCH 70 KANGANEWS OCT/NOV 2015

2 I ve been at UBS Australia Branch (UBS Australia) for six years, and in that time we have issued two MTN deals out of the Australian branch. In 2010 we issued a three-year MTN for A$1.25 billion, followed by another A$1.1 billion in We have had more than A$1 billion of outstandings in the market most of the time, which leaves us with capacity to do more if we needed to I am quite comfortable with having extra capacity. The Australian market is of ongoing interest to us, both locally and globally, because it offers genuine investor diversification and also, with the basis swap, it can offer attractive pricing relative to where UBS can can issue offshore. Our funding requirement is generally broadly stable, but we can certainly look to do more if ever we need to. We like to maintain the ability to to issue bonds at relatively short notice as well. n ORLINS We don t have a fixed number for our funding requirement in Australian dollars, but we know what we can generally achieve given the trades we have historically done. We have had success with trades in the A$600 million to A$1 billion volume range, so when we think about the market this is the volume we usually have in mind. Credit Suisse issues in many different currencies and we consider the Australian market to be an important one for us. We don t think about it so much in terms of having a regimented amount we have to issue every year but we consider it a market which we would like to visit once or twice each year. We have been able to do this in recent times. n IVANOVSKI As a top-five foreign-bank lender which is involved in most of Australia s key corporate and projectfinance deals, Mizuho Bank Sydney Branch (Mizuho Sydney) s funding requirement has been growing commensurate with its appetite for quality loan assets. We expect this growth in loan assets to continue given our corporate strategy, and hence our Australian dollar funding requirement will remain strong. n SIVYER BNP Paribas Australia Branch (BNP Paribas Australia) is not able to disclose its annual funding requirements but we expect it to continue to evolve over time in line with the needs of our clients. n MASON Royal Bank of Canada (RBC) has a centralised termfunding model so we target total funding volume across all currencies rather than a funding volume in each currency. We plan issuance in each currency based on investor demand and its relative attractiveness from a cost perspective. Of course, FOREIGN-BANK BOND ISSUANCE IN AUSTRALIA VOLUME (A$M) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 SOURCE: KANGANEWS SEPTEMBER ,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Via local branch 11,724 6,700 Kangaroo FOREIGN-BANK BRANCH ISSUANCE BY ORIGIN VOLUME (A$M) 2011 Eurozone UK Switzerland Asia ex Japan 1,750 6,174 3, ,828 SOURCE: KANGANEWS SEPTEMBER YTD 300 3,000 2,450 1,633 3,445 Japan YTD diversification is very important to us so ideally we target one or two annual benchmark issuances in each major currency, including Australian dollars. Canada Menzies Are the institutions you represent programmatic or opportunistic issuers in the domestic Australian dollar market? In other words, to what extent can other means of wholesale funding including from the bank s parent substitute for issuance in the Australian bond market should conditions not be conducive? n ORLINS Credit Suisse is a programmatic issuer in Australia by virtue of the fact that potential issuance is always under 10,425 6,425 1,500 1,650 3,600 3,675 9,125 9,925 1,500 1,650 3,100 1,300 1,575 11,100 6,015 2,300 2,300 2,400 2,000 2,100 The Australian economy is stuck in a state of declining leverage and reduced capex which is being reflected in the GDP numbers. Although this does not look likely to change in the near future, SMBC projects sustainable local asset growth in the medium term. MATTHEW HEDDOU SUMITOMO MITSUI BANKING CORPORATION SYDNEY BRANCH 71

3 LIQUID ASSETS PROVE SLIPPERY In late 2014, the Australian Prudential Regulation Authority (APRA) reviewed its liquiditycoverage ratio (LCR) rules for branches of foreign banks registered as authorised deposit-taking institutions in Australia. The key change was the removal of the committed-liquidity facility (CLF) as a means for these banks to make up any shortfall in their high-quality liquid-asset (HQLA) holdings. Sources in the sector talk to KangaNews about how this has affected their activity. n MENZIES There has been a lot of talk around the market in recent years about the liquidassets strategies being deployed by internationalbank branches active in Australia, specifically how their dynamic demand has influenced issuance patterns. It seems that the situation has now settled to some extent, but what do you see as the key elements of liquid-asset strategy at present? HEDDOU Foreign-bank branches were not granted a CLF in Australia. Sumitomo Mitsui Banking Corporation Sydney Branch (SMBC Sydney) complies fully with APRA regulation by holding a minimum of 40 per cent of its net cash outflows in tier-one Australian-dollar HQLAs. IVANOVSKI HQLA is narrowly defined as Australian government and semigovernment securities and cash which is what we all hold in our liquidity books. Given the preclusion of CLF for foreign branches, holding other types of securities does not provide a formal liquidity benefit as there is no need for holding CLF collateral. However, we still hold other types of securities for shortterm liquidity needs outside of regulatory requirements. This could all change dependent upon what APRA decides for the next chapter of the LCR for foreign branches. SIVYER We manage our liquidity book in line with regulators expectations. As a foreign-bank branch we have both home and host regulators and, as an APRA-regulated entity, we will hold HQLAs that meet APRA s definition. As the industry knows, foreignbank branches are not eligible for CLFs and the regulators expectation is for us to have an LCR of 40 per cent. n MENZIES APRA revised the LCR rules for foreignbank branches in late How, if at all, did this revision, and specifically the removal of CLF provision for offshore branches, influence your liquidity-book behaviour? LAMB We were preparing for an LCR of 100 per cent in Australia, in line with a global Basel III benchmark. This reduced to a regulatory minimum of 40 per cent in late 2014 when APRA revisited the liquidity rules for foreign-bank branches. However, there wasn t a material change to our behaviour given we were preparing for the new liquidity regime terming out our liquidity profile, smoothing the funding profile and reassessing the levels of HQLA to be held for local liquidity purposes. Whether the LCR ended up being 100 per cent or 40 per cent, the behavioural change we had set upon implementing during 2014 applied equally. SIVYER We actively engaged with APRA and industry bodies such as the Australian Financial Markets Association, and were able to continue to meet and maintain our regulatory obligations while optimising our risk exposures. The final result was basically as anticipated, with further consultation with APRA expected in Q IVANOVSKI There were a number of drafts of APS 210 before APRA released the current and final version in late The biggest impact was APRA precluding access to the CLF by foreign branches and disqualifying other bank securities as HQLAs. Given the current, narrower, definition of HQLA, these decisions changed the composition of liquidity books for all foreignbranch ADIs. As foreign branches do not now need to hold collateral against a CLF, or other bank paper as HQLA, the appetite we have for holding other non-hqla securities has been dampened. This has affected the shorter end of the market. We await potential further changes to LCR rules for foreign branches in n MENZIES Do you believe APRA s new approach is appropriate to offshore branches? BROWN Overall the result of the changes was reasonable, however the short timeline for implementation was not ideal. Naturally the behaviour of any liquidity book is affected by such material changes. However, the way we manage liquidity means our internal metrics and requirements are always more stringent than the regulatory ones, so we were well positioned to adapt to the changes. From a timing perspective it was still challenging, though particularly because as a branch we have a lot of dialogue and communications globally which, from a practical perspective, take time. n MENZIES Are local liquidasset books managed autonomously from headoffice positions? HEDDOU If it was possible, foreign-bank branches would manage total LCR at a headoffice level. As a full branch, consolidated outflows and inflows at the head-office level would be the most efficient way to manage HQLA liquids. SMBC Sydney has enhanced asset and liability management to address the revised LCR by setting up regional supervisory organisations. consideration as part of our overall funding programme. But our issuance expectations are so rigid that we would persevere with the execution of an Australian dollar deal if we did not think doing so was the most appropriate market backdrop at the time. n SHARMA RBC is also a global issuer, which means we have the ability to substitute issuance in Australian dollars with issuance in another currency according to market circumstances. However, I would not call RBC an opportunistic issuer. Our goal is to be a programmatic issuer 72 KANGANEWS OCT/NOV 2015

4 in Australian dollars, but we may skip certain periods if levels or investor demand deviate too much from what we can achieve in other currencies. n HEDDOU SMBC projects sustainable local-asset growth and detailed funding plans on a regular basis. Issuance is consistent with these plans, market conditions allowing. n BROWN Globally, UBS maintains a very strong and diversified funding position. We have also been reducing our group balance sheet over the last few years, which means the group s overall long-term funding volumes have been declining. Given this context, there has to be a compelling reason to add more term funding. Being a branch, we can rely on centralised funding from related parties. So although we maintain an active presence in Australia, we are an infrequent issuer. n IVANOVSKI We are flexible, not programmatic. We have multiple sources of Australian dollar funding, both domestically and offshore, and we are always looking at the relative values of these. However, I would not define Mizuho Sydney as purely opportunistic, either while we are sensitive to our internal needs around cost and availability, we are also cognisant of our commitment to the local Australian investor base. We want to support this relationship-driven investor model. We have always said that our intent with our Australian dollar programme is to become a regular issuer and to establish some kind of a curve. We hold true to this intent, but market conditions obviously have to be conducive. n SIVYER BNP Paribas Australia has a local funding strategy that combines the best of both approaches the bank is able to use both local and international resources. Menzies What other sources of funds are available to your local branch such as deposits, funding from the offshore parent and other asset classes? n SIVYER We take deposits, issue debt securities and our clients provide us with a diversified funding base. n IVANOVSKI We are truly a global bank, with a deep presence in all major international markets, and so we have good access to channels of funds globally. Our operation in Australia directly issues a range of CDs and bonds, and takes corporate deposits we do not have a retail operation in Australia. While we always have funds available through the group s network, we are in fact mostly independently funded through our own operations in Australia. n SHARMA RBC has a very big deposit base, and we have access to wholesale funding in all major debt markets and in many different products such as senior-unsecured and covered bonds, and asset-backed securities. We can support our Australian branch s funding needs with offshore issuance if the domestic market is not conducive for any reason. n HEDDOU SMBC Tokyo issues Australian-dollar Uridashi bonds to Japanese retail clients, the proceeds of which directly come to SMBC Sydney. n ORLINS We have a global funding programme so we issue in all the major currencies US dollars, euros, Swiss francs, sterling, yen and others. We use senior and also structured notes on a global basis. We also have a covered-bond programme and issue in capital format. This term funding supplements deposit funding generated via our private bank. n BROWN We don t do retail deposit funding in Australia. As a foreign branch we are purely a wholesale counterparty so we are active in all the interbank funding markets each day. The FX swap market is important to us, and we are active in the repo funding market as well as issuing CDs out of the Australian branch. ISSUANCE STRATEGY Menzies What type of investors do you see in your Australian-dollar bond books? Do you want to develop your local investor base, either domestically or offshore? n ORLINS We have been very pleased with the granularity of the transactions we have executed. We have seen a good number of investors and diversity across regions and investor types both balance-sheet investors and asset managers, with interest from Europe and Asia in addition to domestic interest. n FARRANT The general trend we have seen is pleasing. Domestic investor participation in terms of both the number and the overall quality of Australian accounts has improved steadily. We have a much broader domestic investor base now compared with a few years ago. n HEDDOU Investors in SMBC Sydney s Australian dollar issuance are almost equally split between domestic and offshore. SMBC s global reach means we attract investors with Australian dollar appetite from all around the world. Wholesale investors today are sophisticated and have global coverage of all issuance on a 24-hour basis. SMBC s ambition is to develop We have a long-term view of the world and our strategy has not changed with recent volatility. As such, we do not see a change in our Australian risk appetite. JOE IVANOVSKI MIZUHO BANK SYDNEY BRANCH 73

5 LENDING EVOLUTION With 2015 looking set to be the largest post-crisis year in terms of Australian bond-issuance volume from foreign-bank branches, players in the sector give their insight into how they have seen the market evolve for the sector. n Can you tell us a little about your banks history in the Australian dollar market? Specifically, how have you seen it develop in terms of liquidity, pricing and accessibility for foreignbank branches? SIVYER As Australia s oldest major foreign bank, BNP Paribas Australia Branch first helped finance the wool trade and later the resources sector. Today we offer a range of financial services to corporate and institutional clients. We expect foreign-bank branches will continue to have a role in financing and servicing the Australian economy. While there can be cycles in investor appetite, BNP Paribas continues to bring the best of the world to Australia and vice versa. We are seeing increased demand for our offerings and services as local corporates and financial institutions realise the value of partnering with global institutions to access capital markets and financial services. This could be advisory, cash management, trade finance, debt capital markets, rates and FX markets, derivatives or custody. BROWN UBS has been in Australia since the 1930s in various guises. We became a branch in 2004 and I joined in We have always found the Australian market to be very receptive and we have a big business here. In many ways it is a home market and one in which we have been the number-one investment bank for the last decade. We are well known and well established. In funding terms, the volumes you can issue and available tenor have both increased. It is a good market for UBS the investors are sophisticated in how they look at names and we have always been committed to the market. We do investor updates periodically with both deal and nondeal roadshows. We have always had a good relationship with the Australian market, albeit thus far we have not been a particularly frequent issuer. It is important to maintain a presence and a profile regardless. The investment community in Australia welcomes this and seems to appreciate the updates. ORLINS We did our first term issuance of Australian dollars in 2010, after which we were quiet for a while during a period of reduced funding need before becoming more active again in 2014 and into Our behaviour generally reflects our funding need and we have been very pleased with what we have been able to achieve in the last 18 months. FARRANT We have seen some changes to the composition of order books, particularly in response to changing liquidity requirements for bank balance sheets. But the accessibility and execution risk for a foreignbank branch, if anything, has improved during the time in which Credit Suisse Sydney Branch has been an issuer in the domestic market. We have noted that there is currently more leadership from domestic accounts than we used to see deals were previously predominantly driven by offshore investors with domestic investors coming in later. This development has made the market much more competitive. The investors showing this leadership are making the market more attractive for high-quality foreign issuers such as Credit Suisse. HEDDOU Constant benchmarking against the Australian banks could be holding back the development of the Australian-dollar debt capital markets from having a clear advantage in the Asia-Pacific region. Increased foreign-bank issuance would help drive liquidity, pricing and depth but the market can, at times, seem to reflect lesser demand for foreign-bank issuers thus discouraging this positive pricing and liquidity dynamic. WE EXPECT FOREIGN BANK BRANCHES WILL CONTINUE TO HAVE A ROLE IN FINANCING AND SERVICING THE AUSTRALIAN ECONOMY. WHILE THERE CAN BE CYCLES IN INVESTOR APPETITE, BNP PARIBAS CONTINUES TO BRING THE BEST OF THE WORLD TO AUSTRALIA AND VICE VERSA. BEN SIVYER BNP PARIBAS AUSTRALIA BRANCH long-term investor relationships which are beneficial to all in terms of price and liquidity. n BROWN We see a whole range of investors, both real money and bank balance sheets. The investor universe in Australia is relatively well known, but we see different investors in Australia than we do offshore. We cover all the investor sectors locally and our name is generally very well received especially as a lot of the investors in Australia are part of global institutions so our credit is well understood. We don t issue all the time so there is also something of a scarcity value when we come to market. UBS also has a big presence in Asia including the largest wealth-management business in the region, so we see a lot of Asian interest in all our bond deals a factor which is becoming more and more apparent in Australian dollar deals. Naturally we also have a strong following in Switzerland, the UK and Europe, where our global clients are interested in access to Australian dollar issuance. 74 KANGANEWS OCT/NOV 2015

6 n SIVYER BNP Paribas has a domestic funding strategy across a range of investor segments. Australian dollar bond buyers can be domestic or internationally based, they may be asset owners, asset managers, insurance companies, private banks, sovereign wealth funds, and potentially other commercial banks. n IVANOVSKI Mizuho Sydney sees a broad range of investors in its Australian dollar books fund managers, insurers, sovereigns and agencies, and assorted banks. One of the prime drivers of establishing and using an Australian programme was to grow and diversify our local investor base. Though we have direct access to offshore Australian dollars through other channels, we are keen to deepen our relationship with local investors via use of our domestic programme. We have a relationship-driven model, and this applies to both the asset and funding sides of our balance sheet. We will continue to look to local asset managers to grow this base, n BROWN The deals we have executed have had three- and fiveyear tenors. We can be quite open to what the market wants and locally, because we haven t got a huge amount of issuance, we tend not to find any concerns around concentration. Investor demand is generally for 3-5 years, but if there was particular interest from clients for any particular tenor we could certainly consider it. What might change our funding profile locally would be any further legal-structure change within the organisation. As we are a branch, the centralised model continues to be most efficient and we will continue with a central global funding strategy taking into account opportunities and the constraints of each entity and available sources. UBS has already undergone some legal-structure changes for example, UBS Switzerland has recently been established and an intermediate holding company will be designated in the US by July We have been very pleased with the granularity of the transactions we have executed. We have seen a good number of investors and diversity across regions and investor types both balance-sheet investors and asset managers, with interest from Europe, Asia and Australia. GINA ORLINS CREDIT SUISSE especially as Australia has the third-largest pool of investable funds in the world a testament to the introduction of superannuation. In fact it was our strong investor relationships that allowed Mizuho Sydney to launch its debut, A$700 million, five-year, senior-unsecured deal in May this year the largest inaugural domestic issuance by a Japanese bank. n MASON We see a mix of domestic bank balance sheets, asset managers and insurance companies as well as many Asian accounts in our books. We plan to continue to develop our investor base through investor marketing and programmatic issuance. Menzies What tenor preferences do you have for the domestic Australian-dollar issuance your banks conduct? n SIVYER This depends on the needs of our clients and end investors, and pricing. n SHARMA RBC s sweet spot is five years, but we are open to longer-dated opportunities when levels are attractive. n IVANOVSKI Tenor preference is driven by investor appetite and overall relative value to other channels. We always listen to what the market prefers, but generally liquidity seems to oscillate between the three-, four- and five-year terms. We balance investor preference with duration measures on our asset side. n HEDDOU Issuance tenor depends on balance-sheet asset tenor, and the upcoming Basel III net stable-funding ratio will, again, affect cost and tenor for all banks. Theoretically, tenor is driven by demand and, as an issuer, supply must generally meet such demand in order to achieve a price which correctly reflects risks and liquidity. Menzies Do you solely issue locally in senior-unsecured format or do you have interest in other asset classes? Would you consider issuing locally in tier-two format, for example? n HEDDOU SMBC Sydney would not consider issuing locally in tier-two format. n ORLINS We are watching the market. We have seen other banks come to Australia with subordinated-type debt but we are still assessing whether this is something which would make sense for Credit Suisse. n SIVYER BNP Paribas Australia considers opportunities on a case-by-case basis. n BROWN We look at related-party activity offshore so we can be quite opportunistic in day-to-day funding regarding secured or unsecured. We don t have any requirement for regulatory capital in Australia so there are no immediate plans to issue in tier-two format. I think the market here would be receptive to it, but 75

7 I would not call RBC an opportunistic issuer. Our goal is to be a programmatic issuer in Australian dollars, but we may skip certain periods if levels or investor demand deviate too much from what we can achieve in other currencies. RAJNEESH SHARMA ROYAL BANK OF CANADA given the scale of UBS s requirement and the markets in which the bank has big footprints the US, Switzerland, Europe and the UK I think other jurisdictions are more suited to this type of issuance than Australia at this time. We also adopt a single point-of-entry resolution framework, so it would be a consideration that we would be looking at a group holdingcompany transaction in the Australian market. There is benefit for us in letting this market develop a little more in Australia and there is no real reason for us to be a front-runner for capital issuance locally. n MASON RBC has already issued in senior-unsecured and covered-bond format in Australian dollars. We could also look at tier-two issuance if funding levels become compelling compared with our domestic market. LENDING-BOOK ACTIVITY Menzies Could you provide an overview of the shape and direction of your banks Australian-dollar lending books, specificallt their key priorities? n BROWN We have recently announced that we are divesting our wealth-management business in Australia will result in a reduction in overall lending. On the corporate side, we lend to clients with which we have established good relationships. As previously mentioned, UBS has been reducing its global balance sheet since about 2012 although this hasn t had too much of an impact locally. We have a core group of clients to which we lend. Directionally, the trend is downwards, but it is chiefly driven by client needs. n HEDDOU SMBC s conservative approach to credit means that the Australian balance sheet is dominated by high-quality corporate and lower-risk structured and project-finance loans. n IVANOVSKI We actively participate in project, corporate and trade finance in the Australian market. We have a welldiversified Australian dollar lending book, though we do not do retail lending. Menzies What are you ambitions for the shape of your Australian lending book going forward? Does your have plans to grow domestic lending volume, or do you expect this to maintain relatively stable or even to fall? n SIVYER We expect our lending book to continue to evolve as the needs of our clients do. n IVANOVSKI We still expect strong growth in loan assets to continue given our corporate strategy. As a top-five foreignbank lender to non-retail customers in Australia, our local strategic plans show a strong appetite for continued growth. We do not grow for growth s sake, but still see quality opportunities in Australia which we can continue to support. Mizuho Sydney has strong corporate and project-finance teams which are looking at pending privatisations and infrastructure projects slated over the medium term, giving ample opportunity for these growth aspirations to be achieved. n HEDDOU SMBC Sydney projects sustainable local asset growth from a mid-term perspective. n BROWN As I mentioned, lending-book activity will likely be quite stable. The clients we lend to are important franchise clients and we take a strategic view as to how we can best service them. Menzies Do you expect the recent volatility caused by concerns about the Chinese economy, and the consequent impact on Australia, to affect risk appetite in your local lending book? n HEDDOU The Australian economy is stuck in a state of declining leverage and reduced capex, which is being reflected in its GDP numbers. Although this does not look likely to change in the near future, SMBC Sydney projects sustainable local asset growth in the medium term. n IVANOVSKI We have a long-term view of the world and our strategy has not changed with recent volatility. Such volatility, as will also occur once the Federal Reserve begins its tightening cycle, will have broader impacts but our asset selection process is quite robust. As such, we do not see a change in our Australian risk appetite. n BROWN We tend to be long term in how we look at things. What might affect our business would be if clients were to become less inclined towards risk, to the extent that they repay or do not draw down debt. But we would not change availability on the basis of this. We might see some short-term moves but overall, as things settle down, it tends to normalise. 76 KANGANEWS OCT/NOV 2015