APAC bank debt issuance set to cool off after seasonal spike in September

Capital raising activity by banks in Asia-Pacific is likely to cool off after aggregate bond issuance spiked in September, as rising interest rates and slowing economic growth drag market sentiment.

Banks in the region raised $25.28 billion of debt in September, driven by Japanese banks' increased issuance of U.S. dollar bonds and Agricultural Bank of China Ltd.'s $9.93 billion Tier 2 bond offering, data compiled by S&P Global Market Intelligence shows. The September bond sales were higher than August's total of $10.52 billion but lower than the $35.04 billion raised in September 2021. It was also the highest monthly total since March when banks raised nearly $30 billion in bonds.

"Asia-Pacific banks stepped up their issuance because rates are bound to increase further and this is a way to control their funding costs," said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis Corporate & Investment Banking. "This should not last very long as Asian central banks are expected to reach their peak rates by early 2023. There will then be a pause until rates start to come down."

A rapid rise in corporate bond spreads in Asia, and the need for banks to lower their budgets as activity slows down with the rapid deceleration in the region, could also affect issuance, Herrero said.

Most central banks in Asia-Pacific have raised interest rates to head off inflation risks, keep their currencies stable against a strengthening U.S. dollar and protect their banking systems. Still, more hikes are likely as macro headwinds continue to cloud the growth outlook. The IMF on Oct. 27 said further tightening of monetary policy in Asia-Pacific is necessary to keep inflation on target and inflation expectations well anchored.

The IMF cut growth forecasts for Asia-Pacific to 4% for 2022 and 4.3% for 2023, down 0.9 and 0.8 percentage point, respectively, citing the global financial tightening, the war in Ukraine and the sharp and uncharacteristic slowdown of the Chinese economy.

Seasonal uptick

In September, Japanese banks, including Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., raised more than $10 billion in U.S. dollar-denominated bonds, according to Market Intelligence data. It was a reversal from the past few months when Asia-Pacific banks preferred issuing local-currency bonds due to the high cost of issuing bonds denominated in the greenback.

Hiroki Tsuji, senior credit analyst at Mizuho Securities Co., said the increased bond issuance by Japanese banks in September was seasonal, as banks tend to raise more funds in July or September, creating a void in the August summer break.

Looking ahead, Tsuji, however, does not expect the strong momentum to continue after October, as rising U.S. interest rates impact the markets. Tsuji also said the Japanese megabanks' issuances are not for regulatory purposes as they have already met the minimum total loss-absorbing capacity requirement of 18% of risk-weighted assets ahead of the March 2022 deadline.

Another reason behind Japanese banks' increased issuance of U.S. dollar-denominated bonds is their large U.S. dollar loan books, which creates demand to rollover existing debts, according to Gary Ng, senior economist at Natixis Corporate & Investment Banking.

Tepid equity market

Asia-Pacific banks raised a total of $1.66 billion in equity offerings in September, driven by Australia and New Zealand Banking Group Ltd.'s $1.46 billion convertible notes and Tamilnad Mercantile Bank Ltd.'s $101.3 million initial public offering, Market Intelligence data shows.

Still, analysts expect banks to remain cautious in tapping the volatile equity markets.

"The global sentiment is simply not great for equities, and therefore it will not make too much sense unless there is urgent liquidity need," Natixis' Ng said. "We need to wait until bond yields peaking to improve market sentiment, and hence equity financing by banks."