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Greg Stock: There’s opportunity in bank debt for ‘risk aware’ investors

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A deep understanding of risk is tantamount to success in credit markets, even when investing in highly rated bank debt, says Perpetual’s GREG STOCK

VOLATILE, eventful years like 2023 – where we saw a run of US bank failures – can result in investment managers becoming very risk averse around assets such as bank debt.

But investors should not be put off bank credit as an asset class.

Instead they should look for managers who focus on understanding risk, argues Greg Stock, Perpetual’s head of credit research and a senior portfolio manager in the asset manager’s credit and fixed income team.

“Part of our philosophy around managing money is to be risk aware,” Stock says.

“Some investors are risk-seekers, others are risk averse. But if you are risk aware as an active manner, you have an edge in achieving strong risk-adjusted returns.”

Last year was a reminder of the risks in bank capital structures, Stock says.

A series of US bank failures such as Silicon Valley Bank and First Republic Bank unsettled markets and bank customers.

“Risk aversion towards bank debt was driven largely by overseas jurisdictions, particularly the United States with the regional banking crisis.

“That led people to think more about how banks should be regulated – and how extensively they actually are regulated.

“It emphasised the importance of understanding inherent risks in bank balance sheets, property exposures and interest rate risk management.

“The risk aversion culminated in the demise of Credit Suisse and the subsequent takeover by UBS.”

That meant some “tier one” securities – high-ranking, equity-like hybrid securities issued by banks to raise capital for lending activities and other operations – were written off.

“The rest of the debt securities within the Credit Suisse structure were assumed by UBS,” Stock says.

“That’s a reminder of the risks inherent in ‘tier one’ securities, and their place in the capital structure.

“It’s a reminder that where you are in the capital structure is important. You need to know your institution and its jurisdiction.

“Last year also showed us that diversification is important.”

With those lessons in mind, Greg says there’s opportunity for investors in bank debt.

“While spreads [between government bonds and bank debt] were wider last year, they are still decent on a historical basis,” Greg says. “There’s still potential for good, running yield”.

Neutral view on credit

Perpetual’s broad view on credit is neutral, Greg says, adding that the interest rate tightening cycle is at, or close, to an end.

“With higher base rates and spreads elevated, it’s a good opportunity for investors to gain exposure to capital-stable, investment-grade yield in their portfolios – and banks are a good way to do that.

“Australia’s banks are well regulated. They are well capitalised, and credit risk, funding ratios, and interest rate risk management are all sound.”

With the experience of 2023 in mind, Greg says he favours subordinated debt in the banks.

“It can be written off at a point of non-viability by the regulator, but beneath it you have the ‘tier one’ hybrid securities and all the equity,” Greg says.

“Both senior debt and subordinated debt in the major banks, and some of the other banks in the system, potentially offer good value.”


About Perpetual’s Credit and Fixed Income team

Perpetual offers a range of cash, credit and fixed-income solutions and are specialists in investing in quality debt.

We take a highly active approach to buying and selling credit and fixed income securities and invest extensively across industries, maturities and the capital structure.

Find out more about Perpetual’s Credit and Fixed Income capabilities

Want to find out more? Contact a Perpetual account manager


Greg Stock
Head of Credit Research
BCom (Acc & Fin), ICAA, SIA, AFMA
Greg Stock

Greg Stock

Head of Credit Research BCom (Acc & Fin), ICAA, SIA, AFMA

Years of experience: 31

Years at Perpetual: 19

Greg has over 30 years experience in investment management, accounting and risk management. He has researched and analysed credit markets on both the buy side and sell side for over a decade and through multiple cycle. His research role is broad, he covers the bank and financial sector and is a credit signatory.  Greg is also a senior portfolio manager responsible for trade execution and portfolio construction for Perpetual's bond fund, absolute return fixed interest fund and exact market cash funds.

Prior to working at Perpetual, Greg had a similar research and portfolio management role at Macquarie Funds Management. And while at Macquarie Bank for over six years he had roles in debt markets research, risk and accounting. Earlier, Greg worked at PriceWaterhouseCoopers as a chartered accountant over six years.

This article has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426, as the issuer of the Perpetual Diversified Income Fund ARSN 601 199 035 (Fund).

It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. It may contain information contributed by third parties. PIML does not warrant the accuracy or completeness of any information contributed by a third party.

Forward-looking statements and forecasts based on information available at the time of writing and may change without notice. No assurance is given that the forecast will prove to be accurate, as future events may impact actual results and these could differ materially from those anticipated. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act.

The product disclosure statement (PDS) for the Perpetual Diversified Income Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the Fund. The PDS and Target Market Determination can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au.

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor's capital. No allowance has been made for taxation and returns may differ due to different tax treatments. Past performance is not indicative of future performance.