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Fixed Income Quarterly—Banks
7% for RBC. In addition, the floor price would also be different for each NVCC instrument given it is based on the share price at time of issue compared to $5 for RBC. Finally, the ANZ instrument ranks behind all existing legacy subordinated debt instruments issued prior to January 1, 2013 upon a wind-up compared to ranking pari passu in Canada.
We estimate the ANZ subordinated debt deal would swap back to ~200 bps back of the 10-Year Government of Canada curve, which is ~60 bps back of indicative C$ 10-year subordinated debt without NVCC language. Based on the attractive pricing obtained by ANZ, we believe the Canadian banks may be able to issue NVCC subordinated debt at tighter levels than our original expectations of ~100 bps back of existing non-NVCC subordinated debt. That being said, we do not expect the first NVCC subordinated debt deal in Canada until we get clarity on the bail-in regime, which may be further delayed given the recent resignation of Jim Flaherty.
New Issuance – The big six Canadian banks have been active on the issuance front with C$21.2 billion of wholesale fund- ing across all currencies in YTD 2014 (deals greater than two years and greater than C$100 million) compared to C$23.0 billion in the year-ago period. However, domestic deposit note issuance is down 34% Y/Y to $8.5 billion compared to $12.9 billion in the year-ago period. We are not overly surprised by the decline in domestic issuance given the re-opening of the covered bond market in July 2013 and the attractive funding alternatives outside of Canada. Royal Bank and Scotiabank have been the most active in wholesale funding markets so far in 2014 with C$9.1 billion and C$6.4 billion of issuance, respectively. CIBC has been the least active with no wholesale term funding issued in 2014.
Chart 5: Big Six Banks Issuance (All Currencies - C$ equivalent)
Bail-in Debt – The 2014 Federal Budget did not include any
update on the bail-in regime in Canada. However, based on
the developments outside of Canada, we envision senior
bail-in debt will be implemented no earlier than 2015 and on statutory basis rather than contractual. We believe existing 100.0 deposit notes could be grandfathered given the regulators’ treatment towards existing capital securities. We also believe
that certain securities, such as covered deposits and secured 80.0 liabilities including covered bonds and credit card ABS, will
be excluded from bail-in. Finally, we believe the Canadian 60.0 banks could be required to hold a higher loss absorbency 46.5 (HLA) requirement under the bail-in regime similar to what is
(C$ billion) CAD 120.0
USD
EUR OTH
73.7
58.9
2010 2011
Expected
99.6
57.8
66.0
2008
64.5
2012
75.0
21.2
being considered in Europe and by U.S. regulators. However, we believe this HLA requirement will be able to be met with additional common equity, NVCC Tier 1 or Tier 2 capital, or wholesale term funding.
40.0
20.0
16.0
0.0
Overall, we believe the adoption of a bail-in regime could have 2006 2007
2009
2013 2014
the following effects:
1. The use of bail-in senior debt would be a divergence from current practices and would likely increase the cost of funding for Canadian banks;
2. Ratings on senior debt could be pressured to reflect lower uplift for government support;
3. Existing deposit notes outstanding could benefit from scarcity value if the bail-in regime is adopted on a prospective basis; and
4. We could see a greater use of secured funding such as covered bonds and NHA MBS if these securities remain outside the range of liabilities covered under the bail-in powers.
Note: Excludes issues less than C$100 mm, less than 2 years and extendibles As at April 9, 2014 settlement date
Source: BMO Capital Markets, Bloomberg
Overall, we are maintaining our new issuance estimate at ap- proximately C$75 billion across all currencies. Similar to the prior four years, we believe a large portion of this funding, at C$30–35 billion (C$9.6 billion YTD), will be completed outside of Canada in the form of senior debt. In addition, we expect the banks will issue C$15 billion (C$3.0 billion YTD) in covered bonds across all currencies, although issu- ance over the near term will likely be concentrated in Europe given the attractive funding. Finally, we expect the Canadian banks will issue C$25-$30 billion (C$8.5 billion YTD) in the domestic market.