ISSUES THAT MATTER - ANZ
ISSUES THATMATTERFI NAN CIAL I N STITUTIO N S G RO U PISSUE 3 A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 0161
FOREWORD14 MARCH 201 6THE GLOBAL MARKETS CONTINUETO WADE THROUGH “CHOPPYFINANCIAL WATERS”, WITHCONCERNS AROUND CHINA ANDGLOBAL MACRO HEADWINDSIMPEDING GROWTH EXPECTATIONSAROUND THE WORLD.CONTENTS2Asia Pacific Currencies in aFed Tightening Cycle4 Painting the capitalmarkets green7 Aligning with investor clientexpectations in Asia Pacific10 Part 1 - TLAC traction inAsia Pacific: Application14 Part 2 - TLAC traction inAsia Pacific: IssuanceWelcome to 2016’s first issue of ANZ Financial Institutions Group’s (FIG)Issues that Matter publication.Heightened levels of volatility will likely remain a key feature of present marketreality, creating a challenge to generate returns for investor portfolios. Further,ongoing regulations for “Systemically Important Financial Institutions” (SIFIs)are driving up potential compliance and capital costs of doing business forFinancial Institutions. Combined with increasing expectations of investorclients driven by digitization of services, the current environment posesmany challenges for Financial Institutions.However, opportunities can arise when we try to understand the challengesand develop steps to tackle these. For example, ongoing bank regulatoryreforms point towards increasing capital requirements: bail-inable debt (TLAC)is a key initiative with far reaching implications for banks. This will likely resultin additional issuance requirements that expands the investment alternativesavailable to non-bank investors, e.g. insurance and funds, noting banksprobably can’t and won’t hold these securities due to regulatory penalties.Further, given nascent nature of such TLAC and emerging asset classes suchas Green Bonds, it will be important for investors to understand the benefitsand risks, and how such assets could benefit their investment strategyand portfolios.We are pleased to share a range of topical articles triggered by our discussionswith Financial Institution clients over the last six months, particularly aroundperformance of Asia Pacific currencies, emerging asset classes such as GreenBonds, evolving investor expectations and Bail-inable debt of SIFIs (TLAC).We sincerely hope you enjoy the read and welcome your feedback. SIMON IRELAND Global Head, Financial Institutions GroupE: Simon.Ireland@anz.com A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 0161
ASIA PACIFIC CURRENCIES IN A FEDTIGHTENING CYCLEBACKGROUNDIn December, the United States Federal Reserve (the ‘Fed’)raised interest rates 25 basis points, marking the first timein nine years the central bank has hiked rates. The movewas well-telegraphed and anticipated by the market leadingANZ Research to test a “buy-the-rumour, sell-the-fact”pattern around major currencies against the United StatesDollar (USD)1.They found that, looking at past Fed tightening cycles,major currencies tend to weaken against USD headinginto the start of a Fed hiking cycle, but rebound followingthe first rate increase. However, the pattern is more variedagainst a basket of Asian currencies.A CLOSER LOOKANZ’s financial institutions clients predominantly haveoperations in Asia Pacific (APAC) countries with exposureto local currencies, as well as the USD and Euro (EUR).Anecdotally, the FIG team saw large payments flowsin AUD, USD, SGD from Malaysia and Indonesia ascorporates and sophisticated retail clients alike anticipatedlocal currency depreciation and sought to prepay futureexpenses in those currencies.It seems intuitive and most Asian currencies haveindeed weakened significantly in the lead up to the Fed’stightening cycle, but how they will perform now thatthe cycle is underway remains uncertain. Further, ANZacknowledges that volatility stemming from China’srebalancing creates a whole new environment this timeround for currencies, particularly those in the APAC region.However, with many clients reconsidering their hedgingstrategies in this time of heightened volatility, ANZ hassought to provide the historic performance context of APACcurrencies over the course of the four longest tighteningand easing cycles from the past 25 years.FIGURE 1Fed Funds Target Rate time series with cycles 620102015Feb‘94 – Feb’95 ( 300bp)Jan‘01 – Jun’03 (-550bp)Jun’04 – Jun’06 ( 425bp)Sep’07 – Dec’08 (-500bp)Sources: Bloomberg, ANZ AnalysisIn the two most recent prolonged rate hiking cycles,many currencies actually strengthened against USDContrary to expectations, most of the currencies shownstrengthened vs. USD while the Fed was raising U.S.interest rates.1 “How Will Asia FX Fare Following a Fed Rate Hike?” (ANZ Research, 8-Dec-2015)2A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 016
From Jan 2001 – June 2003, when the Fed loweredrates by 550bp over 2.5 years, the Australian Dollar(AUD), IDR, Korean Won (KRW) and EUR appreciatedagainst USD, while the Singapore Dollar (SGD),Philippine Peso (PHP) and JPY depreciated.FIGURE 2Currency Movements in Rate Hiking Cycles21.83.69.4 8.56.17.53.31.55.64.8NA(3.3)8.17.4 7.1NA 0.0 NANA(5.5)AUD IDRSGD KRW PHP EURJPYINRTHB MYRFeb‘94 – Feb’95Jun‘04 – Jun’06Sources: Bloomberg, ANZ AnalysisSHARING OUR INDUSTRYINTELLIGENCE WITH CLIENTS For the Feb 1994 – Feb 1995 cycle, the soleexception was Indonesian Rupiah (IDR), whichdepreciated by 3.3% From June 2004 – June 2006, the only currencyto weaken against USD was the Japanese Yen (JPY),which generally tends to behave differently fromother Asian currencies because of its role as a“safe haven” currencyAlthough these results should not be taken as conclusiveevidence that currencies strengthen against the USD whileU.S. rates are rising, they do suggest that the relationshipis not always as straightforward as commonly assumed.USD has appreciated significantly against most currenciesin recent months in anticipation of the Fed’s eventualmove, so it is possible that the rate increase is alreadylargely priced in.Results during the two easing cycles are fairly mixed,with no clear trendConversely, USD is generally expected to weaken whenthe Fed begins loosening monetary policy, as lower U.S.rates make investments in other currencies relativelymore attractive.FIGURE 3Currency Movements in Rate Easing Cycles22.922.3 In the easing cycle that began in Sep 2007, everycurrency except the JPY and SGD weakened, withthe Global Financial Crisis creating a broad “risk-off”mentality that hurt most currencies, and benefitedJPY because of its safe haven status.26.7The analysis suggests that the relationshipbetween U.S. interest rate cycles and APACcurrency performance is not as clear ascommonly believed.Currency movements are driven by manyfactors besides Fed policy or interest ratedifferentials, and since markets are forwardlooking, it could be the case that theexpected USD appreciation has largely takenplace before the Fed began raising rates.ANZ FIG have had a number of FX hedgingconversations with investor clients, particularlythose with assets in APAC, in particular Chinaand Indonesia, where currency fluctuationscan have material impacts on returns as wellas loan to value (LTV) covenants on USDdenominated bank facilities.Please reach out to your FIG banker if youwould like to discuss terms relevant toloan document hedging requirements;best practice approaches to currency riskmanagement; and/or structuring andassessment of various FX hedging alternativesto achieve specific objectives, including forexample, target returns, accounting and cashflow impacts.14.13.9 5.4(1.0)(20.9)NA NA(5.2)(8.4)(2.1) (2.7)(0.2)(1.4)NA(1.7)(17.7)GLOBAL MARKETSNick AngoveE: Nick.Angove@anz.com(27.3)AUD IDRSGD KRW PHP EURJPYJan’01 – Jun’03Sep’07 – Dec’08Sources: Bloomberg, ANZ Analysis A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 016INRTHB MYRFINANCIAL INSTITUTIONS GROUPPeter SzekelyE: Peter.Szekely@anz.comFor further detail or any questions, please contactGlobalFIGInsights@anz.com or call your ANZ relationshipbanker directly.3
PAINTING THE CAPITALMARKETS GREENBACKGROUNDIn December 2015, the participating 195 countries of the2015 United Nations Climate Change Conference agreed,by consensus, in ‘the Paris Agreement’ to reduce emissionwith the aim of keeping global warming below 2 C.However, in the years preceding this conference, we haveseen the fallout from the Global Financial Crisis (GFC),Euro Crisis and ongoing market uncertainty making itmore difficult for governments to budget for infrastructureinvestment, green or otherwise. Likewise utilities stockshave been hit hard by falling equity valuations, while bankasset financing has shifted away from long-dated capitalintensive infrastructure exposures.FIGURE 1New Investment in Clean Energy – falling short ofrequirements318318295273268274272Over 2014, roughly US 318bn flowed tonew clean energy investment (US 188bnto asset finance)2, falling well short of theincremental investment needs of 1trn perannum estimated by the InternationalEnergy Agency3.WHO IS PLUGGING THE SHORTFALL?In our last edition of Issues that Matter, ANZ’s FinancialInstitutions Group highlighted that infrastructure as anasset class is best suited to multigenerational investors,such as pension funds and sovereign wealth funds. Theseinvestors have the long term mandate and financialwherewithal to withstand intermittent periods ofturbulence as well as regulatory, accounting or restrictiveinvestment policies that can disincentivise long-terminvestment. However, to encourage a broader range ofinvestors and fill the near US 700m shortfall, financialinnovation is vital with all eyes on capital ew Investment in Clean Energy (excluding corp & govtR&D and spending for digital energy & storage projects)New Investment in Clean Energy (including corp & govtR&D and spending for digital energy & storage projects)Source: Bloomberg New Energy Finance (Q3, 2015)42 Bloomberg New Energy Finance (Oct 2015 ‘Global Trends in Clean Energy Investment)3 International Energy Agency (www.iea.org)A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 016
FIGURE 2Green Bond IssuanceGreen bonds represent a new hope for clean energy infrastructure funding, with 5 year CAGRover 60% in this burgeoning new market.42.136.62502005yr CAGR 61%15010011.00.80.40.93.92007200820092010Amount Issued (USD bn Equiv.)503.11.2201120122013201420150Number of Issues (RHS)Source: Climate Bonds Initiative (www.climatebonds.net)WHAT ARE GREEN BONDS?SUITABILITY FOR COMMERCIAL BANKSIn simple terms, Green Bonds are bonds whose proceedsare used to finance or refinance climate-friendly orenvironmentally-friendly projects. There are three broadguidelines which most Issuers have relied on:Initially the domain of development banks only, GreenBonds have become a staple of ANZ DCM discussionswith commercial banks. Net proceeds are used tofinance projects with environmental benefits such asrenewable energy, energy efficiency, sustainable transport,sustainable water management, sustainable wastemanagement and sustainable land use. Such projects maynot typically be prioritised by the bank due to the longterm and capital intensive nature of infrastructure funding,which has been disincentivised under Basel Committee ofBanking Supervision’s (BCBS) regulatory reforms.1. W orld Bank – World Bank Green Bond Project SelectionCriteria with projects to be selected by World Bankenvironmental specialists2. C limate Bonds Initiative (CBI) – Climate BondsStandard3. International Capital Markets Association (ICMA) –Green Bonds Principles A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 0165
FIGURE 32015 Green Bonds by Issuer Type“Green bonds allow banks to sell bondsbeyond their traditional investor base. Wehaven’t seen lower borrowing costs, butthere is certainly an increase in volume as abroader investor set participates”, says BhavikPandya, Director, DCM.5.8%15.1%36.9%diverged. ANZ’s green bond was certified pre-issuanceby the Climate Bonds Initiative, following successfulverification by Ernst & Young, while IDBI issued on thebasis of a Green Framework developed using Green BondPrinciples with the intention to seek third party verificationfor their reports on use of proceeds going forward.“Using the Climate Bonds criteria enabled us to leverageour position as a leading financier to the renewablesand commercial buildings sector in Australia in orderto successfully issue a green bond. Not only was feedbackpositive during our roadshow particularly with regardsto use of criteria and the disclosure obligations that flowfrom that, but also our customers, whose assets areincluded in the bond were very supportive” says KatharineTapley, Director, Sustainable Finance Solutions at ANZ.US 42.1bn16.8%SHARING OUR INDUSTRYINTELLIGENCE WITH CLIENTSANZ’s Financial Institutions Group, togetherwith the Capital Markets team, works withbank issuers to structure green bonds thatmeet the high standards demanded bygreen bond investors. “One of the positiveimpacts of both green bond issuances wasthe visibility and press for both IDBI and ANZ.I think demonstrating being able to deliverinto the green agenda by issuing green bondshas really added to their reputations globally”,comments Arshad Khan, Director, FIG India.25.4%Development/EXIM BanksCorporateBanksMunicipalABSSource: Climate Bonds Initiative (www.climatebonds.net)FIGURE 42015 Green Bonds by Investor TypeAsset managers have been the core buyersof recent Asian green 8%55%58%50%ANZ’s Group Treasurer, Rick Moscaticommented at the time of ANZ’s issuancethat “We have developed the bond inresponse to investor demand and to deliveron our commitment to deploy capital for thetransition to a low-carbon economy”. ANZ’sorder book attracted investors who had neverbefore participated in bond issues from ANZ,resulting in a highly successful, oversubscribedand granular order book.52%17%KEXIMEXIM IndiaASMIDBIXinjiangUSD500mn USD500mn USD300mn Goldwind USD350mn5Y5Y3YUSD300mn5Y3YAsset ManagersBanksAverageIns / PFs / OfficialOthersDEBT CAPITAL MARKETSBhavik PandyaE: Bhavik.Pandya@anz.comSource: DealogicIn 2015, ANZ self-led an AUD600m 5 year green bondin Australian domestic markets as well as a USD350m5 year green bond debut issue for IDBI – the first USDgreen bond from an Indian commercial bank.Both issuers developed a framework using the Green BondPrinciples, developed by ICMA, although the approach6FINANCIAL INSTITUTIONS GROUPArshad KhanE: Arshad.Khan@anz.comFor further detail or any questions, please contactGlobalFIGInsights@anz.com or call your ANZ relationshipbanker directly.A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 016
ALIGNING WITH INVESTOR CLIENTEXPECTATIONS IN ASIA PACIFICBACKGROUNDIn consumer banking, a prominent university experimentconcluded that if your retail bank is arms-length with strongservices, consumers are not bothered by paying for help withbanking needs. However, if the bank uses a friendship-basedsales model, it is supposed to help you out when you need itwithout expecting direct compensation4.ANZ FIG, as part of the broader Institutional business,subscribes to several client surveys, but unlike consumerindustries, we have no specialist teams of behaviouralpsychologists analysing the human experience around theservices offered. While our team are not ‘jumping’ on just anysocial occasions and face-to-face meetings with clients, asthe broader industry grapples with cost pressures, regulatoryreforms, computer modelling, disintermediation and slowinggrowth, it is clear that product commoditisation is wellunderway and clientsare increasingly favouring a ‘self-serve’ approach, withless face time, for all but the most strategic discussions.HIGH EXPECTATIONS FOR CUSTOMEREXPERIENCEFIG Investor clients have a sophisticated, commercial mindset and for many years, the major focus of innovation effortshas been on the product side. However, global competition,regulations and technology diffusionmake it easy for competitors to quickly match mostimprovements and marginalise incremental gains.More and more of our investor customers are interactingdirectly through platforms and back office, conductingtransactions through a ‘self-serve’ model. The keypoint of differentiation for ANZ in our Asia Pacific (APAC) homemarkets is increasingly customer experience innovation viastraight through processing (STP) and enhanced operations.“Digitisation has transformed much of the volume drivenproducts transacted in the Financial Institution segment intoflow business and, as a result, most of our FIG customers aredriven not just by price, but timely execution and delivery” saysPeter Murray, Head of Customer Engagement, Global MarketsOperations. “Our FIG customers can be the most complexsegment to service – and they have the highest expectationsfor customer platform STP and service experience. Thischallenge has driven ANZ to invest in and improve ouroperational platforms and implement our Global Client Servicemodel to ensure our FIG customers are receiving the bestexecution and service they deserve.”REGIONAL DIFFERENCES IN ASSETMANAGER SERVICE OPERATIONSIn North America, Europe, Japan and Australia where thefunds and insurance market is mature, ANZ‘s asset manager(AM) clients, or the custodians servicing their operations, haveinvested substantially in their back office platforms and STP.When empanelling banks, these sophisticated, global clientsmay have a ‘no fail’ policy, while others will have operationalcapabilities comprising up to 30% of their decision-making.Meanwhile in Asia, less investment in STP and back officeoperations is evident; however the expectations of ANZ’s Asianinvestor clients are no lower. Exhibit 1 highlights some keyoutputs from PwC’s 2015 COO survey5.4 The Effects of Brand Relationship Norms on Consumer Attitudes and Behavior; Pankaj Aggarwal; Journal of Consumer Research;Issue: 31 (June); 2004; Pages: 87-1015 Asia Investment Management COO Survey 2015 (PriceWaterhouse Coopers and Stradegi) A N Z F I N A N C I A L I N S T I T U T I O N S N E W S L E T T E R 1/ 2 0167
FIGURE 1Best Practices Adoption Rate –Asian Asset Managers vs Global Asset Managers“.Asian players have a tendency to lag behind their global counterparts in best practice adoption.”5“.A majority of asset managers scored their operations higher than what is borne out by the actualadoption of best practices.”“.Asian asset managers are still trying to establish the performance and risk functions, whereas globalplayers are moving up the value chain and are looking to offer good fixed income attribution androbust reporting.”“.Cost seems to be the main driver for Asian asset managers. whereas global players consideredstrategic significance of the function as the key driver.”Technical development governance framework71%40%Internal service levels documented, regularly measured and reportedProcess to define fund jurisdictional structures60%71%86%30%Data management governance process65%Pricing error accountability and escalation process79%Valuation and performance error reporting process85%Compliance with the Global Investment Performance Standards50%Transaction cost analysis process to validate best execution50%Global AMs93%80%93%79%86%Asian AMsCHANGING RELATIONSHIPS AS LOCALCAPABILITIES DEMANDED“ANZ FIG has to be fully aligned with our customer-facingservice operation teams. These teams are increasinglyseen as a critical contact point for FIG clients, satisfyinghigh expectations and building long-term trust throughconsistently smooth customer experiences and timelyresponses”, says Mark Harding, Financial Institutions Group,South East Asia.Anecdotally, ANZ is witnessing a changing relationshipbetween asset mana
ANZ FINANCIAL INSTITUTIONS NEWSLETTER 1/2016 1 CONTENTS Welcome to 2016’s first issue of ANZ Financial Institutions Group’s (FIG) Issues that Matter publication. Heightened levels of vola
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