Westpac New Zealand is set to launch an intermediate maturity euro benchmark as early as tomorrow (Wednesday), just a fortnight after ASB sold the first New Zealand covered bond in over two years. Fitch expects Australian issuers to join their neighbours in returning to the market in the second half of 2021.

HSBC, JP Morgan, UBS and Westpac are holding European fixed income investor calls today (Tuesday), according to an announcement this morning, ahead of the planned euro benchmark for Westpac Securities NZ Ltd.

Earlier this month, ASB – the New Zealand subsidiary of Commonwealth Bank of Australia – issued its largest euro covered bond, a €750m (NZ$1.27bn) 10 year that is the longest euro benchmark from the country. That was the first international covered bond from New Zealand in over two years, with the last previous issue having been a €500m five year for Westpac NZ in January 2019.

Fitch said last Tuesday (18 May) that improving economic conditions resulting from the easing of pandemic curbs could lead to increased issuance of Australian and New Zealand covered bonds in the second half of 2021, as banks switch their focus to refinancing funding support provided by central banks.

It expects covered bond issuance to pick up around the middle to end of the second half of the year, after the region saw increased deposits and liquidity support in the wake of the pandemic, which in turn affected issuance of unsecured and covered bonds.

The last Australian benchmark covered bond was in January 2020, a $1.75bn (€1.43bn, A$2.26bn) five year from Westpac Banking Corporation.

Funding support from central banks has created a maturity concentration in banks’ liability profiles in 2023 and 2024, according to Fitch.

“We expect the issuing banks to target longer term funding, helping to rebuild the covered bond programme liability profiles,” the rating agency said.

Issuers will likely look for longer term funding of five years or more to benefit from tighter indicative market spreads since mid-2020, it added.

Fitch believes the easing of pandemic-related restrictions in neighbouring countries, coupled with improved economic conditions will spur banks’ residential loan growth and moderate deposit growth. This may result in banks facing a larger funding gap, and turn them towards issuing new bonds, including covered bonds.

“These developments, along with scarce bank debt issuance generally, should encourage interest in covered bond issuance from issuers and investors alike in the short to medium term,” Fitch said.

Australian housing prices appreciated at their fastest rate in over 30 years in the first quarter on the back of low interest rates, government support packages, low market inventory and a quick economic recovery. Loans to first-time owner occupiers also rose sharply, representing 39% of loan commitments, according to the Australia Bureau of Statistics.

Fitch said that notwithstanding such developments, the outlooks for Australian cover pools remain stable. The weighted average current loan to value (LTV) ratios of Australian cover pools have been mainly in the high 50s and low to mid-60s, reflecting the low volume of high LTV loans therein.

Weighted average LTV of Australian covered bond collateral

As at 31 March 2021; Source: Fitch Ratings, banks