After an initial surge in NCD issuances by banks during the early part of the “Lockdown Crisis” there now appears to be a clear and steep downward trend.
The latest monthly issuance of just R5b, which reflects data to 20 October 2020, is just a fraction of the normal activity.
This tells us that banks are not desperately looking for funding, which in turn implies that they are not lending (i.e. there is no loan book growth at the banks) or have other sources of funding. This also means that banks foresee subdued economic growth.
Low bank spreads currently reflect the banks’ lack of appetite for funding as well as the poor economic outlook. They are simply not willing to pay up for deposits.
Asset Managers, Corporates and Financial Institutions that would usually be buyers of bank-issued NCDs, see little value from current bank spreads, and have looked to other assets that provide better risk-adjusted yields such as SA Government Treasury Bills. (We will release a more detailed note about bank versus government paper next week)
The market is currently not accepting the NCD spreads banks are willing to pay for funding, which could imply that the bottom of the bank spread-tightening-cycle has been reached. When economic activity picks up, and banks start looking for funding, banks would need to increase spreads in order to attract investor interest. This would take some pressure off short-term fixed income fund yields which reflect the low spreads.