UBS Investment Research Eurobanks Funding Monitor
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ab Global Equity Research Europe Including UK UBS Investment Research Banks, Ex-S&L Eurobanks Funding Monitor Sector Comment Q1 11 – back to full speed, for some 7 April 2011 Robust long-term debt issuance in Q1 www.ubs.com/investmentresearch Total issuance of banks’ term debt reached €315bn in Q1 11, a meaningful step up on the €244bn issued in the last quarter of 2010. At the same time only €225bn of bank debt has matured in Q1 11. We see UK, French and Nordic banking systems as most active in addressing their refinancing requirements. Alastair Ryan Analyst Interbank funding market – rates already priced in [email protected] A higher interest rate environment in Europe is already priced in. 3M EURIBOR +44 20 7568 3238 reached 124 bps on 31 March, compared with 100bps at the start of the quarter. We Anton Kryachok see Intesa, Nordea and Deutsche Bank as net beneficiaries of rising Euro rates. Associate Analyst [email protected] ECB support – still significant +44-20-7568 3580 We believe that, fundamentally, the funding challenges of some European banking John-Paul Crutchley systems are still not fixed. As of February 2011, the European Central Bank has Analyst lent more than €487bn to banks across the continent. Irish and Greek banks are the [email protected] biggest borrowers in absolute terms. And, in the absence of any comprehensive +44-20-7568 5037 funding solution, we expect them to be most vulnerable to any tightening of Philipp Zieschang liquidity by the ECB. Analyst [email protected] UK most advanced in the UBS liquidity test +41-44-239 7414 In a simplified liquidity test we see UK banks as the most advanced in covering their short-term funding requirements. However, in the event of renewed difficult funding markets, Portuguese and Greek banks will struggle most without central bank support, in our view. Chart 1: Debt issuance as % of debt maturity – two-speed structure 400% 335% 350% 300% 232% 250% 221% 200% 150% 116% 116% 100% 50% 0% France Sw eden United Kingdom* Italy Spain* Source: Dealogic, UBS estimates Note *: We adjust the UK and Spanish debt issuance for Santander UK. It is deducted from Spanish total debt issuance and added to the UK. This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Eurobanks Funding Monitor 7 April 2011 Executive summary Given the inherently leveraged nature of the banking industry, ability to issue long-term debt at a sustainable price is paramount for any financial institution, in our view. Therefore we prefer banks which have stable and sustainable sources of external funding (the Nordic names), a well calibrated and deposit- rich balance sheet structure (HSBC, Standard Chartered) or which are quickly addressing their refinancing needs (Lloyds, RBS, the French names). We think that the funding problems of the European banks are still not fully fixed. We therefore reiterate our cautious stance on some peripheral names, particularly on the Spanish and Portuguese domestic players. In a rising interest rate environment, which Europe is quickly becoming, we recommend banks with significant interest rate sensitivity, such as Intesa. Term debt issuance European banks demonstrated robust debt issuance in Q1 11. The total issuance UK, French and Nordic banking of term debt has reached €315bn, versus €244bn issued in the last quarter of systems are most active in addressing 2010. At the same time, only €225bn of the bank debt has matured in Q1 11. In their refinancing requirements absolute terms, the British and French banking systems were most active in issuing debt in Q1. Banks in these countries issued more than €50bn in the first quarter. French banks, including unlisted peers, have issued more than treble their refinancing needs, while UK banks issuance more than double the maturities. On a relative scale, Swedish and Norwegian monetary financial institutions have also demonstrated robust debt issuance. We note that, according to Dealogic, apart from Germany and Belgium, all major banking systems were issuing more debt than the current refinancing need in Q1. Figures in Charts 1 and 2 are based on the nationality of operations of the parent bank. Although, we recognise the limitation of this approach, we believe that this is an optimal way to measure refinancing efforts of diverse European banking groups, with some adjustments indicated in the footnotes. Chart 2: Debt issuance and maturity by banking systems in Q1 11 (€m) 70,000 58,815 54,156 60,000 50,000 35,232 34,361 32,472 32,373 40,000 26,484 30,000 13,645 20,000 8,826 6,261 10,000 0 United France Spain* Netherlands Italy Germany Sw eden Sw itzerland Norw ay Belgium Kingdom* Issued Matured Source: Dealogic, UBS estimates Note *: We adjust the UK and Spanish debt issuance for Santander UK. It is deducted from Spanish total debt issuance and added to the UK. UBS 2 Eurobanks Funding Monitor 7 April 2011 Having issued more than £50bn of term debt in 2010, Lloyds has continued to top debt issuance tables in Q1 11 with more than €18bn of new term debt issued, while only €9.9bn of Lloyds’ long-term debt has matured in Q1, according to Dealogic. Santander and BBVA have both been active on funding markets. This quarter they have issued more than €28bn in total, which accounts for 70% of total debt issued by the whole Spanish banking system (including Santander UK). This reflects, in our view, the fact that only the biggest and internationally diversified Spanish banks are able to access the funding market freely, albeit at a higher cost. We think that funding conditions for smaller Spanish MFIs remain quite challenging. Table 1: Top 10 listed issuers of bank debt in Europe, Q1 11 Lloyds continues to top debt issuance tables in Europe Pos. Issuer Parent Deal Value in euros (Proceeds) (m) 1 Lloyds Banking Group plc 18,236 16,339 2 Banco Santander SA (o/w 5,333- Santander UK) 3 BBVA 11,855 4 Intesa Sanpaolo SpA 11,596 5 Credit Agricole SA 11,244 6 BNP Paribas SA 10,781 7 Nordea Bank AB 10,104 8 RBS Group plc 9,472 9 ING Groep NV 8,415 10 Barclays plc 8,223 Source: Dealogic We tend to treat data from Tables 1 and 2, as a good indicator of the banks’ refinancing efforts, rather than precise and final figures of debt issuance and maturity of all European banks. The table below gives a breakdown of debt issued YTD by type of instrument used, as well as total refinancing need for 2011, which we estimate as total long-term debt maturing this year, based on Dealogic figures. We also include loan-to-deposit ratio as of 2010 for the banks we cover. The L/D ratio serves as a good estimate of the structural dependence of a bank on the wholesale funding markets, in our view. UBS 3 Eurobanks Funding Monitor 7 April 2011 Table 2: Debt profile of European banks (UBS coverage universe) (€ m) Issued in 2011 YTD 2011- Issued in ABS and Corporate Covered Medium - 2010 L/D Issuer Parent Total YTD Refinancing 2010 MBS bond bond term note ratio needs Allied Irish Banks plc 5,484 4,131 n/a Alpha Bank AE 878 5,793 129% Banca Monte dei Paschi di Siena SpA - 6,450 2,245 70 2,315 5,989 99% MPS Banca Popolare di Milano Scarl 1,495 398 333 75 806 2,200 149% Banco Bilbao Vizcaya Argentaria SA - 15,839 4,088 7,615 153 11,855 12,182 123% BBVA Banco BPI SA 2,385 582 133% Banco Comercial Portugues SA - 1,831 3,882 181% Millennium BCP Banco de Sabadell SA 2,277 1,198 1,198 2,975 n/a Banco Popolare Scarl 5,662 998 2,191 357 3,546 1,749 249% Banco Popular Espanol SA 3,751 1,190 1,190 4,616 222% Banco Santander SA 45,445 2,883 6,294 6,714 448 16,339 26,015 123% Bank of Ireland (Governor & Co of) 5,128 2,737 142% Bankinter SA 3,642 874 874 1,050 227% Barclays plc 23,322 1,297 5,353 995 578 8,223 19,212 129% BNP Paribas SA 21,252 8,327 1,856 598 10,781 16,830 118% Commerzbank AG 12,307 1,732 2,140 82 3,954 25,148 125% Credit Agricole SA 21,085 5,635 4,363 1,246 11,244 9,824 76% Credit Suisse Group 34,356 1,858 3,543 5,401 12,740 76% Danske Bank A/S 6,195 1,292 1,292 7,645 215% Deutsche Bank AG 10,421 3,352 1,984 175 5,511 16,519 n/a Dexia SA 35,485 3,880 464 4,344 32,898 277% DnB NOR ASA 11,859 2,157 4,035 120 6,313 8,670 182% EFG Eurobank Ergasias SA 1,522 4,508 127% Erste Group Bank AG 2,177 20 1,113 10 1,143 3,098 113% Espirito Santo Financial Group SA 1,325 3,725 n/a HSBC Holdings plc 23,462 7,252 322 7,574 30,603 78% ING Groep NV 16,340 4,552 3,428 435 8,415 11,246 120% Intesa Sanpaolo SpA 13,298 6,829 3,987 779 11,596 27,653 165% KBC Group NV 3,382 1,746 171 1,917 4,861 78% Lloyds Banking Group plc 36,187 2,391 10,358 4,975 512 18,236 40,161 148% Mediobanca - Banca di Credito Finanziario 2,832 3,973 n/a SpA Nordea Bank AB 16,248 6,772 2,555 778 10,104 4,327 178% Piraeus Bank SA 900 1,150 125% Raiffeisen Zentralbank Oesterreich AG - 1,657 2,381 265 2,646 6,575 129% RZB Royal Bank of Scotland Group plc 33,601 151 4,528 2,989 1,804 9,472 25,170 123% UBS 4 Eurobanks Funding Monitor 7 April 2011 (€ m) Issued in 2011 YTD 2011- Issued in ABS and Corporate Covered Medium - 2010 L/D Issuer Parent Total YTD Refinancing 2010 MBS bond bond term note ratio needs Skandinaviska Enskilda Banken AB - SEB 3,454 499 2,572 66 3,137 6,323 174% Societe Generale 15,124 4,121 998 475 5,594 8,279 119% Standard Chartered plc 5,184 609 6 615 1,947 79% Svenska Handelsbanken AB 7,728 1,721 179 149 2,049 5,079 271% Swedbank AB 9,536 4,354 603 4,957 11,011 222% UniCredit SpA 9,994 2,500 3,860 231 6,591 19,281 95% Unione di Banche Italiane Scpa - UBI 3,196 699 1,742 2,441 3,973 174% Banca Total 483,696 8,581 96,465 75,656 10,973 191,675 446,330 Source: Dealogic, UBS estimates Structure of bonds issued Regulatory and legal changes are combining to effectively subordinate Covered bonds offer protection from unsecured bank funding and make default more likely.