Commonwealth Bank of Australia is launching the first Australian covered bond of the year, as Fitch yesterday (Tuesday) said that it expects the country’s banks to again use covered bonds as a significant source of funding in 2013, although smaller issuers could lean towards securitisation.

CBA’s issue is the first dollar benchmark covered bond of the year. The last dollar benchmark was for Australia’s Westpac, which sold a $2bn five year deal at 50bp over mid-swaps, equivalent to 61.9bp over Treasuries, on 12 December.

Barclays, CBA and RBC are lead managing CBA’s new issue, a three year that, according to a banker away from the leads, has been marketed at the 35bp over mid-swaps area. He said that he expected the deal to go very well at that level, with his bank having pitched for the deal at the 33bp area.

“There is strong demand across the board in dollars,” he added.

A syndicate official away from the leads said that the leads could probably price the deal inside 35bp over, and that the issuer will likely to be able to print a deal in excess of $1bn.

Australian banks issued A$41.2bn (US$43.2bn/Eu33.0bn) of covered bonds in 2012, according to Fitch, and the rating agency expects A$30bn-A$35bn of supply in 2013.

“We forecast slightly lower issuance in 2013 because banks often tend to issue at a greater rate when a new source of funding is opened up than we would expect in the longer term, and because we expect credit growth in Australia to be muted,” said Fitch.

“Last year was the first full year of covered bond issuance for Australian banks following the passing of covered bond legislation in November 2011. They took the opportunity to rebalance their liability structures by replacing unsecured debt with covered bonds, and to lengthen their maturity profiles.”

With Australian banks having launched their first deals at the tail-end of 2011 after legislation was passed, there are now A$44bn of Australian covered bonds outstanding, according to the rating agency.

Australian regulations cap the value of cover pools at 8% of total Australian assets on an issuing bank’s balance sheet, but Fitch said that despite the high level of issuance last year Australia’s Big Four banks are at less than one-third of their potential issuance volumes. It put ANZ at around 31%, CBA at 32%, Westpac at 29%, and National Australia Bank at 22%.

“We estimate total potential maximum covered bond issuance of AUD146bn, on the basis of current domestic assets held by the major four Australian banks, assuming overcollateralisation remains constant,” said Fitch. “This leaves considerable room for continued supply.”

It said that Suncorp-Metway, the only Australian issuer outside the Big Four, has issued up to 61% of the legal limit.

Fitch expects other Australian banks outside the Big Four to consider covered bond issuance this year, with the outcome of an upcoming revision to Australian Prudential Standard APS 120, which governs securitisation, potentially a deciding factor.

“The Australian Prudential Regulation Authority has mooted changes to the standard that will allow Australian banks to undertake ‘funding only securitisations’ and use Master Trust structures,” it said. “If forthcoming, these changes may tip the balance towards securitisation for smaller financial institutions.”