Sumitomo Mitsui Trust Bank is expected to become the second covered bond issuer from Japan soon, with non-deal European investor calls starting today (Thursday), while further Japanese banks could join it and SMBC next year should the Bank of Japan formalise issuance.

Goldman Sachs, BNP Paribas and Crédit Agricole are arranging the non-deal fixed income conference calls with European investors for Sumitomo Mitsui Trust Bank (SMTB) to provide a credit update as well as engage in preliminary discussion on potential inaugural covered bond issuance, which is expected to follow, subject to market conditions, according to an announcement. The calls run from today until Wednesday (16 September).

The only covered bond issuer yet from Japan is Sumitomo Mitsui Banking Corporation (SMBC), which debuted in October 2018 with a contractual issue and took its outstandings to around €6bn last Thursday (3 September) with a €1bn (¥125bn) five year deal.

SMBC’s first issue followed more than a decade of efforts to issue a Japanese covered bond. SMTB itself was in October 2015 involved in a structured transaction with Goldman Sachs, a $500m (€452m) five year deal for SumitG Guaranteed Secured Obligation Issuer DAC, that was a stepping stone towards the structure ultimately used by SMBC, which was arranged by Goldman Sachs and SMBC Nikko.

A banker said SMTB’s structure is “very similar, if not the same” as SMBC’s, with the issuer’s motivations also in line with its peer’s.

“Most of the Japanese banks are expanding abroad and they need foreign currency to do that,” he said. “Covered bonds for them really act as cheap foreign funding.”

He noted that like SMBC, SMTB’s programme does not allow for Japanese yen funding.

The order book for SMBC’s trade last week was, at around €1.8bn, bigger than those of its previous three euro benchmarks, and the banker said he expects any forthcoming SMTB transaction to be equally successful, particularly given that a premium for it being an inaugural issuer is likely to be on offer.

With SMBC’s five year priced at 24bp over mid-swaps, its covered bonds continue to trade wide of legislative Australian and Canadian issuance, and the lack of legislation or regulation is cited as a factor in this.

However, the banker said that leading Japanese banks, supported by the covered bond industry, have proposed covered bond regulation to the Bank of Japan, which it could implement as early as the first quarter of next year.

“We are very hopeful that this will happen in 2021,” he said. “And once we have that regulation, Japanese issuers will be on a level playing field with those who have regulation and legislation.

“Looking at its credit quality and the Japanese mortgage market, SMBC should really be well inside the Canadians and Australians.”

Any regulation introduced by the Bank of Japan is likely to encompass existing contractual issuance, according to the banker, akin to when the UK introduced legislation, rather than Canada, where issuers generally had to establish new programmes.

He said the development of Japanese issuance has been slowed by the Covid-19 pandemic, but that alongside regulation should come substantial growth.

“There is a big market to be had in Japan, especially after regulation,” he added. “The big five have something like $100bn-equivalent of mortgages on their balance sheet, and in normal times we could see them doing two deals a year.”