EMEA Credit Comment 29 March 2019
European Banks – Credit Update
A tiered deposit rate system from the ECB would be welcomed by the banking system. But the Israel Da Costa, CFA benefits would be unevenly distributed. Credit Analyst +44 20 7597 8355 The spread tightening trend seen since the start of the year started to reverse in the past week [email protected] in both EUR and USD markets, particularly for lower-rated paper. The Yen market reported record issuance volumes in Q119 for Samurais and Euroyens.
Recent Developments ECB tiered deposit rate There were suggestions by the ECB this week that the Governing Council is preparing the groundwork to introduce a tiered interest rate system on similar lines to those of the BoJ and SNB. In this system, banks pay interest on only a portion of the deposits they hold at central bank. At the moment, euro area banks have to pay 40bps on all deposits held at the ECB, at an estimated cost to euro area banks of €7.5bn (40bps on an average of €1.87tn of deposits). The savings would naturally be welcome for euro area banks, but their profitability will remain under pressure for as long as interest rates are negative, economic growth is anaemic and cost efficiency efforts are substandard. We would also note that excess liquidity holdings at central banks is unevenly distributed among countries and banks within the euro area, with Germany and France accounting for around 60% of excess liquidity holdings. This is, in part, driven by the fact that banks in higher-risk/higher-yielding countries are likely to reinvest their excess reserves in their home country sovereign bonds. Among banks, higher levels of excess liquidity tend to be held by investment banks, clearing houses, and smaller banks with limited access to capital markets. In that context, any benefit from changes in the ECB deposit facility would need to be assessed on a bank by bank case. It also remains far from certain that such a policy change will indeed take place.
Deutsche Bank/Commerzbank Merger In line with most commentators, we remain sceptical on the rationale behind the proposed merger of Deutsche Bank and Commerzbank. We have recently listed some of the pros and cons on the merger, with the cons far outnumbering the pros. Accordingly, enthusiasm for the merger seems to be fading. In addition to the expected push back on job cuts, recent rumours focus on how much the merged entity would have to raise in order to compensate for potential losses arising from the restructuring costs and the revaluation of Commerzbank’s assets. If such a rights issue goes ahead, it would be the fifth time since 2010 that Deutsche raises equity in markets, totaling €29.2bn. It would also further dilute the resulting German government stake. We maintain our view that the merger would be neutral at best for credit holders of both entities, as the increased implicit government support would be offset by a deteriorated credit profile in the short to medium term on the back of significant execution risks. A decision on whether the merger will take place will reportedly be made by 26 April.
Swedbank The Swedish bank’s anti-money laundering issues reached a whole new level on Wednesday, with allegations that the bank handled up to €135bn from high-risk clients between 2010 and 2016 in Estonia, a considerably larger figure than initially alleged. The once rather dull mortgage lender is now being investigated by the Swedish FSA, the Estonian FSA, the Swedish Economic Crime Authority (SECA), and the New York State Department of Financial Services. Adding to the stream of bad news, the bank’s HQ was raided on Wednesday by the SECA as part of the investigations. Finally, hours before the bank’s AGM yesterday, the board decided to dismiss the bank’s CEO, Birgitte Bonnesen, who will be replaced temporarily by the CFO, Anders Karlsson. The dismissal was driven by the pressure from 3 of the bank’s biggest shareholders, and a result of Bonnesen’s weak early response to the issues and the fact that the alleged misconducts took place under her watch. On paper, Swedbank benefits from a solid credit profile, on the back of a strong capital base, clean balance sheet, cost efficient operations and high profitability. This should provide the bank with some buffer towards any potential significant fine. That said, due to stricter Swedish capital requirements, Swedbank excess capital is relatively thin. Excess CET1 capital stood at $1.2bn at YE18, albeit this is mitigated by the bank’s good profitability, with a net income of $2.3bn in 2018. In addition, the bank had a total capital ratio of 21.5% as at YE18, or $15bn in absolute values, meaning the bank has at least a $15bn of loss absorption capacity before senior debtholders are impacted. The impact to the bank’s franchise is yet to be translated into tangible figures. The bank last made a public transaction of a senior unsecured bond in August 2018, a 5Y € Senior Preferred, placed at MS+18. It started trading with a Mid-Z spread of 16bps and is now trading at a Z-Spread of 46bps, although still below the peak of 48bps observed in early January.
Money laundering is increasingly becoming a systemic issue in Europe, with several names linked to suspicious flows of funds across the continent, the eventual resulting fines and other potential impacts will be closely watched.
Q119 Results The weak performance reported by European trading floors in Q418 is expected to have continued in Q119, both UBS and SocGen have signalled weak Investment Banking and Global Markets performance in the first quarter of the year. UBS’ CEO, Sergio Ermotti, has said revenues in the bank’s investment banking division were down by about a third compared to Q118.
EMEA European Banks – Credit Update 29 March 2019
Meanwhile, SocGen‘s deputy CEO reportedly stated that there’ll be no “structural” improvement in the market environment in the medium term because of geopolitical tensions and reduced investor appetite. Lackluster trading conditions are hence likely to continue. J.P.Morgan and Citibank gave similar signals in recent weeks. The earnings season start on 12 April with J.P. Morgan in the U.S., and on 17 April with Svenska Handelsbanken in Europe. Markets The tightening trend observed since the beginning of the year started to reverse a little in the past week in both EUR and USD markets, particularly for lower ranked paper, following the release of weaker economic data. Nonetheless, the strong volume of new issuance continued in the past week, after a brief hiatus at the end of last week, supported by some indications by the U.S. Fed it won’t raise rates in 2019, and by banks taking advantage of the pre-earnings window. Transactions have been closing comfortably within IPT in recent weeks, although NIP are starting to pick up and excess demand has weakened marginally, albeit at still comfortable levels. The USD market was preferred by UK credits, which ignored the Brexit deadlock, and lower-ranked papers. In the past week, Barclays disclosed a $750m OpCo increase on a previous issue, 4NC3, priced at T+170bps, a 10bps increase from the original $1.75bn placement, price on 07 Nov 2018. RBS came to the market with a dual tranche NRF OpCo $1.5bn paper, 3.5Y, with the fixed tranche priced at T+145bps, from an IPT of T+150/155bps. Unicredit went for a riskier $1.25bn T2 bond, 15NC10, for which it paid a high T+487.5bps, from an IPT of T+500bps. In the EUR market, BPCE placed a €1bn 6Y SNP paper at MS+89, from an IPT of high 100s, with book orders over €2.2bn from a very granular investor base. This is only 3bps above a 5Y SP paper the bank issued in early January, highlighting how much the market has moved since the beginning of the year. BFCM issued a €1.5bn 7Y SP paper, at MS+55bps, from an IPT of MS+70bps, with books closing at around €2bn.
The Yen market saw a strong flow of issuance in Q119, with a total volume of JPY1.16trn of Samurais and Euroyens according to Refinitiv, the highest Q1 figure since Q117. Total volumes were supported by a push from GSIBs to issue prior to 01 April, from which date regional banks will face a 150% risk weight on holdings of TLAC bonds above 5% of their core capital. In the European FIG space, BNP Paribas, BPCE, Rabobank, ING Groep, SocGen, Credit Agricole, and Intesa tapped the Yen market in the quarter. Barclays announced a deal last week, according to Bloomberg, but Brexit uncertainty and the proximity to the end of march deadline seem to have led the bank to pull the transaction. Charts
Average EUR Z-spread1,2 Average USD Z-spread1,2 250 250 USD T2 bps* EUR T2 bps* EUR SB USD SB 200 EUR SP 200 USD SP 195
150 155 150 144
100 93 100 84
50 50 36
0 0
EUR Z-Spread Dispersion1,2 USD Z-Dispersion1,2 100 100 bps bps 90 T2-SB SB-SP 90 T2-SB SB-SP 80 80 70 70 60 62 60 57 58 50 50 50 40 40 30 30 20 20 10 10 0 0
Source: Daiwa Capital Markets Europe Ltd, Bloomberg. SP= Senior Preferred, Senior OpCo; SB=Senior Bail-in (Senior Non-Preferred, Senior HoldCo) 1 Average Z-Spread of the largest European banks’ debt securities across maturities. Not adjusted for duration. Herein included figures may not be reflective of the whole 2 market. Mid Z Spread to maturity/call.
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EMEA European Banks – Credit Update 29 March 2019
Key contacts
London Head of Research Grant Lewis +44 20 7597 8334 Financials, Supras/Sovereigns & Agencies Israel Da Costa, CFA +44 20 7597 8355
Research Assistant Manager Jodene Adjei +44 20 7597 8332
Tokyo Domestic Credit Chief Credit Analyst Toshiyasu Ohashi +81 3 5555 8753 Electronics, Automobiles, Non-Banks, Real Estate, REIT Takao Matsuzaka +81 3 5555 8763 Chemicals, Iron & Steel Kazuaki Fujita +81 3 5555 8765
International Credit Non-Japanese/Samurai, European Sovereigns Hiroaki Fujioka +81 3 5555 8761 Non-Japanese/Samurai Fumio Taki +81 3 5555 8787 Non-Japanese Jiang Jiang +81 3 5555 8755
London Translation Head of Translation, Economic and Credit Mariko Humphris +44 20 7597 8327
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