New on Bond Express – 5.6% yield to call for this USD Tier 2 from the Bank of New Zealand

BZLNZ 5.698% 28Jan2035 Corp (USD) is a new issuance by the Bank of New Zealand (“BNZ”), with the paper being a 10NC5 Tier 2 subordinated bond. It is expected to be rated A by S&P, two notches down from the issuer’s rating owing to the loss absorption feature. The Tier 2 note has a call date of 28 January 2030 and a maturity date of 28 January 2035. If uncalled, the coupon will reset based on the prevailing 5-year UST yields plus an initial spread of 1.30%.

BNZ is a wholly owned subsidiary of National Australia Bank (“NAB”), which primarily offers a variety of banking and financial services for customers in New Zealand. BNZ is rated AA- by S&P, A+ by Fitch and A1 by Moody’s respectively, which compares well against NAB’s rating of AA- by S&P, AA- by Fitch and Aa2 by Moody’s. All three major rating agencies hold a “Stable” outlook for both banks at the moment.

For the full year ended 30 September 2024 (“FY24”), BNZ’s net profit stood largely flat at NZD 1,506m, marginally unchanged from FY23’s NZD 1,509m figure. Net profit continues to be high against the past years’ results, with FY22 at NZD 1,414m and FY21 at NZD 1,322m. Total operating income rose slightly by +3% for BNZ across FY24 from NZD 3,497m (FY23) to NZD 3,616m (FY24), primarily due to (1) larger gains on financial instruments (+11% YoY) and (2) other operating income (+22% YoY). Specifically, within other operating income, net fees and commissions income stood mostly flat (FY24: 331m vs FY23: 352m) but saw NZD +103m gain from the divestment of BNZ Investment Services Limited across the year.

Despite this, we noted that the higher total operating income was offset by the increase in operating expenses (+14% YoY) from NZD 1,222m (FY23) to NZD 1,392m (FY24). While there was an increase across most expense items, other expenses (including related expenditure for the divestment of BNZ Investment Services Limited) contributed a significant proportion of NZD +88m. This resulted in the overall marginal drop in net profit, offset by a slightly lower tax expense for FY24.

For BNZ’s capital and solvency profile, its Common Equity Tier 1 (“CET1”) ratio stands at 13.9% as of 30 September 2024 – up from 13.3% as of 30 September 2023 and well above the regulatory requirement of 4.5%. BNZ does not report its Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) at the subsidiary level, but NAB reports LCR and NSFR at 137% and 117% respectively at the Group level. On top of this, we expect NAB to be able to provide funding support for BNZ should it be required.

Regarding BNZ’s asset quality, credit impairment decreased slightly across the year, with impaired loans (i.e. Stage 3 loans) to total loans ratio decreasing from ~1.0% (FY23) to ~0.6% (FY24). Overall, we believe BNZ’s lending portfolio is relatively low in risk. The majority of its loan exposure is residential mortgage lending (~57%), followed by corporate lending (~41%) which is highly diversified across numerous industries.

BZLNZ 5.698% 28Jan2035 Corp (USD) compares relatively well against the likes of similarly-rated Australian/New Zealand banking bonds – i.e. ANZ 5.731% 18Sep2034 Corp (USD) and ANZNZ 5.898% 10Jul2034 Corp (USD) at about 5.5% yield to call with ~4.5 years remaining to call. BNZ’s Tier 2 bond at a yield to call of ~5.6% will provide an attractive alternative for investors, with some yield compensation owing to the smaller structure of the bank – albeit still being able to receive support from its parent company, NAB, one of the bigger banks in Australia, if necessary.

We expect a strong likelihood of BNZ’s Tier 2 subordinated bond being redeemed earlier on the call date, owing to the amortisation of Tier 2 capital past the initial call date. Separately, given the loss absorption feature on the Tier 2 subordinated bond, we note that this might not be suitable for all investors, particularly risk-averse investors.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in BZLNZ 5.698% 28Jan2035 Corp (USD) and the analyst who produced this report holds a NIL position in the abovementioned securities.

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