Bank bond issuance is expected to pick up this year according to research by Morgan Stanley analysts. With deposits proving less attractive as a source of funding, the MS team can see a path for larger sized banks to begin returning to markets as a source of funding.
It noted that as banks “steadily underperformed the benchmark” through 2021 and 22 due to the excessive levels of issuance “Supply persistently exceeded expectations throughout last year, and against a backdrop of fund outflows, weighed on the relative value of banks vs. corporates.”
By contrast in early 2023 the top six sell side firms had reduced issuance by 75% relative to the previous year, issuing just $10 billion of bonds, while smaller regional banks increased issuance by 200% in part response to a need for total loss-absorbing capacity (TLAC) “On the back of recent events, banks should look to shift their funding away from deposits and toward wholesale in an accelerated manner, per our banking analysts,” noted MS. “Furthermore, within some of the mid-tier names, there may even be an incentive to issue debt for the purpose of shoring up liquidity. Following earnings over the next few weeks, we will be watching issuance dynamics very closely both in terms of deal size, and investor appetite.”
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