Today’s Opportunities in Global Banks
Text on screen: Kanish Chugh, Head of ETF Sales
Chugh: Australian bank hybrids, or AT1 bank capital, have often been a key component of Australian portfolios. But with the recent regulatory change to the hybrid market and seeing a phase out of the $40 billion hybrid industry by 2032, it's meant that Australian investors are currently being faced with many challenges and opportunities as they look to replace and find alternative sources of income.
It's great to welcome Philippe Bodereau, lead PM for global financials and lead PM for the PIMCO Capital Securities Fund, which has close to $5 billion U.S. under management.
Now Philippe, from your position, are these similar changes and challenges that we're seeing at a global level, and what are the global trends and opportunities that Australian investors should be aware of?
Text on screen: Philippe Bodereau, Portfolio Manager and Head of Credit Research, Europe
Bodereau: No. So the APRA decision was very much a local decision to discontinue the AT1 asset class. Each asset class is an important complement of the regulatory capital structure of all the banks operating under Basel III. So all of the Basel III banks, which is dominantly across Europe, the U.S. and in a few emerging countries as well, will continue to issue the instruments
There are regular debates about suitability but I think one key difference between Europe, for instance, and Australia is that the AT1 market has developed much more towards the institutional targeted market and less of a retail focus like has been the case here.
Chugh: And as lead portfolio manager of the PIMCO Capital Securities Fund, what are the current changes or opportunities that you're seeing from a portfolio perspective that Australian investors should be aware of?
Bodereau: Yes, there's lots of opportunities in that space. I mean, it's a space with complex banks with complex capital structures, various needs, a lot of relative value opportunities across the capital structure.
So in my particular fund, we’re actually not purely dedicated to AT1’s. We invest across the globe, but also across the capital structure. So it's a very rich environment to harvest relative value dislocations.
I would say, as an example, that going away from Australia, for instance, investors will be able to get access to a portfolio, like in the fund that I manage, which has 7.5% yield in Aussie dollars and has a very high underlying quality of BBB+ at the security level.
And with a lot of names that many people will be familiar with like UBS, Rabobank, Lloyds in the UK. So very high-quality banks that give you very significantly higher returns than you can expect from the Aussie retail market.
Chugh: I’d just like to hone in on one point.
I get a lot of questions from clients around global hybrids. And obviously with the recent changes to our Australian hybrid market, they’re now having to look beyond the local market. What would you say to any Australian client of what the features are of the global hybrid sector?
Bodereau: Well, I think they are very, very similar instruments to what they will be accustomed to in Australia. Obviously, the big difference, they don't come with tax benefits like you have here, but I would say that there are other opportunities in that space in the form of typically much more attractive level of spreads, as well as companies that are have ability to build a portfolio, that’s going to be a lot more diversified across the globe.
So, in the portfolio that I manage, for instance, we have about 70 different issuers,
across Canada, UK, Germany, Holland, Japan. So there are many, many areas where we can go and have, I think a high yielding portfolio, with very strong fundamentals because bank fundamentals across the Western world have been improving pretty sharply over the past 2 or 3 years in particular. Europe had been lagging at some points of the previous decade, but is catching up, on the back of high interest rates and profitability has been on the rise.
So I think we can really build a portfolio that's high quality, around BBB+, that's invested across the capital structure, not just in hybrids, there are opportunities as well in senior parts of the capital structure into tier 2 parts of the capital structure as well as across the AT1 space with, again, yields around 7.5%. And we feel that that's a very attractive, alternative to the local market here.
Chugh: Really appreciate your insights Philippe. And to access those insights and to find out more about the PIMCO Capital Securities Fund, you can visit our website, pimco.com/au