VISUEL. European Bank Resolution regime - Impact on the European FIG segment May 2014

Transcription

1 VISUEL European Bank Resolution regime - Impact on the European FIG segment May 2014

2 European Banking Union: Key dates 2

3 European Parliament adopted BRRD, SRM and DGS 3

4 Rating agency response to the RRD 4

5 EBA Methodology for the EU-wide 2014 stress tests 5

6 ECB guidance on capital measures 6

7 A Pending regulatory and supervisory issues 7 7

8 Leverage Ratio calculation The Leverage Ratio has been a key factor for AT1 issuance and it will continue to be so going forward as banks need to build up a cushion of Tier 1 capital above the 3% threshold. Calculation of the leverage ratio has been a topic of discussion since its first introduction by the Basel Committee in December 2009: Discrepancies in terms of accounting treatment between IFRS and US GAAP, particularly for repo and derivative transactions, can lead to substantial differences in terms of leverage ratio. The Basel Committee introduced in January 2014 a revised framework, allowing for netting between repos and reverse repos in limited circumstances. The EBA published on 5 March 2014 a report on possible leverage ratio definitions: Interestingly the EBA published this report on its own initiative to give its recommendations to the European Commission ahead of the forthcoming delegated acts The report uses data collected as of 30/06/2013 on a sample of 173 banks to compare the revised Basel leverage ratio (as published on 12 January) with the CRR leverage ratio Overall the EBA indicates that the revised Basel framework leads to leverage ratios broadly in line with or possibly slightly higher than the CRR ratio The EBA recommends to align the CRR definition to the Basel definition The EBA indicates that the current CRR definition may lead to different interpretations for the treatment of repo transactions, and recommends a clarification based on the more prudent interpretation which is more in line with Basel 8

9 Bank Resolution and Recovery Directive and Single Resolution Mechanism The European Parliament approved on 15 April the EU Bank Recovery and Resolution Directive (BRRD) as well the Single Resolution Mechanism (SRM) and updated deposit guarantee rules, three very important milestones in the implementation of the Banking Union in Europe. Key features of the BRRD: Requirement for banks and resolution authorities to draw up recovery and resolution plans; Early intervention powers for supervisors if a bank faces financial distress before it becomes critical: ability to dismiss the management and appoint a temporary administrator, to convene a shareholders meeting to adopt urgent reforms, to require the bank to set up a plan for the restructuring of its debt; Resolution tools given to resolution authorities (see below); Cooperation and coordination framework to ensure effective resolution of cross-border banking groups; Application from 01 January Resolution tools: Effect private sector acquisitions; Transfer business to a temporary structure (bridge bank); Separate clean and toxic assets; Bail in creditors. Bail-in tool: Applicable from 01 January 2016 at the latest; Excluded liabilities include guaranteed deposits, short-term interbank lending, liabilities backed by assets or collateral; Other liabilities (e.g. derivatives) can be excluded on a case-by-case basis; Minimum requirement for eligible liabilities to be determined based on a bank s risk profile, complexity, size, interconnectedness The Commission can specify criteria to ensure the consistency of standards for similar banks; At least 8% of total liabilities including capital (or alternatively 20% of RWAs in specific circumstances) must be bailed-in before resolution funds could assume losses for up to 5%. 9

10 B Impact on Primary markets 10 10

11 Financials main themes in main themes for European banks: Application of Basel 3 for CET1 and the LCR. The NSFR and leverage ratio are still pending, but will be phased in from a funding and capital raising point of view We anticipate continued terming out of debt and a busy year in the AT1 and Tier 2 space Banking Union and bail-inability are now more precisely defined, but have yet to be fully interpreted by rating agencies and investors The AQR and ECB stress test in Q3 will test the resilience of the banking sector and may be key hurdles for bp Continued performance in the credit market Min Max Current Source: Natixis 11

12 Financials main themes in 2014 Outlook for European banks: A NEW ROADMAP Higher pressure from regulatory / external environment Lower ROE / lower revenue stream Requirement to trim costs and to bolster capital generation CRDIV / RRD: Huge shortfall of capital New industry rules for capital: 12% / 20% according to market participants Banks are offloading non-strategic assets, alleviating pressure on RWA Originate to Distribute concepts and strategy Private-Equity funds OUTCOME Results of the stress tests and forthcoming AQR European banks need more than EUR 350bn of new capital Via RWA reduction / containment => development of CLOs and ABS transactions in 2014 onwards This will be done from 2013 to 2016 with AT1 / LT2 transactions Multi-currency strategy of debt issuance: Markets are now globalized Source: Natixis 12

13 Lower supply in Euro funding markets Net undersupply in Senior issuance 2013/2014 Net undersupply in Covered issuance 2013/2014 In financial primary markets in 2013, there was EUR160bn of senior issuance (+5% from 2012 yoy), EUR96bn of covered issuance (-10% from 2012 yoy) and EUR23bn of capital issuance (+46%) This year, we seen continued undersupply of senior and covered deals as redemptions exceed issuance Senior unsecured issuance has been increasing, a possible sign of issuers reducing encumbrance, although favourable market conditions have made senior issuance more attractive There has also been a surge in capital issuance from the lows of Bank issuers have been the most active as a result of the phasing in of Basel 3 regulations Sources all charts : Natixis, Dealogic 13

14 High market redemptions Redemptions were high in 2013 but even higher in 2014 The prevailing theme over the last few years has been heavy redemptions across asset classes, repeating in 2014, with financial institutions senior debt and SSA the main drivers: 240bn of maturing senior debt in a market where deleveraging means many deals may not be re-financed 275bn in SSA 155bn in Covered Bonds The shortfall in new supply vs. high redemptions in 2013 left investors cash rich, a situation that will be exacerbated in 2014, with Q1 s redemptions, setting the tone for the first half of the year. May will be the second highest month for redemptions this year This shortfall in issuance will continue to provide good technical support to debt markets, where the supply/demand imbalance may enable further tightening in issuance spread levels, across all asset classes The lack of supply in 2013 led investors to broaden the scope of their asset purchases, with high yield and corporate debt issuance enjoying strong demand throughout the year. We expect the same in 2014 Sources all charts : Dealogic 14

15 FIG segment 2014 forecasts Forecasted banking volumes by rank ( bn) Forecasted split of banking volumes European Bank Subordinated forecasts for 2014 T1 issues ( bn) non-t1 issues ( bn) With a theoretical 15% growth in outstanding subordinated debt in 2014, Natixis credit research estimates at EUR92bn eq. the needs in subordinated debt, of which potentially EUR46bn (50%) denominated in Euro (vs. EUR33bn eq. of redemptions). Natixis forecasts EUR22bn of Tier 1 Basel III format issues and EUR24bn of Tier 2 debt. As opposed to this burst of subordinated issues, Natixis forecasts stable volumes of Senior Unsecured debt vs All in all, Natixis forecasts EUR353bn bank issues in 2014 with stable senior unsecured volumes, slightly increasing covered bonds and a burst of subordinated issues. Sources all charts : Natixis, Bloomberg, Dealogic 15

16 EUR bn 2014 FIG opening 2014 supply YTD FIG average stats YTD (mn) Total issued Total Book Average deal size Average Book Average O/S 20 Covered Bonds 50,650 99, , Senior Unsecured 62, , , LT2 11,430 53,400 1,039 4, AT1 7,150 64,000 1,192 10, Sub Senior CB Since the beginning of the year, the primary market has been resilient driven essentially by strong technicals in a context of very high redemptions: Issuance across the capital spectrum with strong reception. High oversubscription particularly for the higher beta names / instruments (3.3X for peripheral CBs, 4.9X in sub, and 11X in AT1!), emphasizing the hunt of yield and clear evidence of investor confidence. Solid secondary market performance, although the market saw a correction in January following the emerging market sell-off and a pause in the midst of the Ukrainian / Russian crisis. Since the end of Q1 however there has been another leg in spread amidst a relatively quiet primary market. Dutch issuers have been reasonably active in terms of new supply. However this supply is limited to the SSA sector, Senior Unsecured, and GGB market. In Covered Bonds there was only EUR1.5bn in one issue from ABN Amro and NIBC with a Eur 500mn Pass Through structure Average deal performance by segments Core CB Periph CB Core Senior Periph Senior Sub Tier 2 O/S ratio (lhs) NIP (rhs) Secondary performance Sources all charts : Natixis, Bloomberg, Dealogic 16

17 Subordinated market supply dynamics 60 bn FI Subordinated issuance this year YTD UT 2 Tier 3 Tier 1 Other Sub LT 2 Insurance Tier 2 Insurance Perp Subordinated debt redemptions bn Subordinated issuance by countries All Sub issuance YTD: EUR 21bn After a couple of moribund years the subordinated debt market has come back to life in in 2014 YTD there has been over Eur 21.5bn of issuance in Euro supplementary capital with a pick in AT1 issues (Eur 7.1bn YTD). With Eur 11.3bn of LT2 issuance YTD we have almost reached the full year 2013 amount. The gradual phasing in of Basle III regulations and Solvency II are the main drivers for banks and insurance companies respectively. On the bank side the formulation of bail-in regulation is also a strong motivation. In addition to structural diversifications (perpetual, longer call dates) it is also worth pointing out the ability of peripheral issuer to come to market, a clear sign of a stronger market. On the demand side, improving fundamentals, low yields, and defined regulation have made investors increasingly openminded and keen on subordinated debt. Sources all charts : Natixis, Dealogic 17

18 AT1 instruments: distance to loss absorption triggers The table below shows the distance to the loss absorption trigger of the AT1 instruments, at the date of issuance. The Barclays instrument has a distance to trigger < 3% of RWAs, which impacted its S&P rating due to the rating cap calculated based on the distance to the trigger. Instrument Unicredit KBC Group Danske Bank Banco Santander Nationwide BBVA 7% CASA 7.875% SG 7.875% CS 7.5% Barclays 8.25% Banco Popular 11.5% BBVA 9% Date of announcement 27/03/ /03/ /03/ /03/ /03/ /02/ /01/ /12/ /12/ /11/ /10/ /04/2013 Reference ratio for CET1 CET1 CET1 phasediin CET1 phased- CET1 fully CET1 CET1 phased- CET1 CET1 CET1 fully CET1 phased- EBA CT1 the trigger phased-in phased-in loaded phased-in in phased-in phased-in loaded in Trigger for loss 5.125% 5.125% 7.000% 5.125% 7.000% 5.125% 7.000% 5.125% 5.125% 7.000% 5.125% 7.000% absorption Ratio at issuance % % % % % % % % % 9.600% % % RWA (m) 394,000 90, , ,736 41, , , , , ,000 87, ,984 CET1 (m) 40,800 12, ,000 57,299 5,384 37,492 57,750 37,681 43,780 43,008 9,550 33,189 Distance to Triger (% 5.225% 8.375% 7.700% 6.575% 6.100% 6.475% 4.000% 5.675% % 2.600% 5.775% 3.150% of RWA) Distance to Triger (m 20,600 7,579 65,627 32,200 2,507 20,953 21,000 19,800 30,090 11,648 5,060 10,300 of CET1) Comments (In DKK) (In GBP) High trigger on EBA CT1 temporary In addition to the distance to the loss absorption trigger, investors are increasingly focusing on the risk of non-payment of coupons, due to MDA restrictions with respect to the combined buffer requirement. 18

19 C Rating Agencies approach to AT1 instrument 19 19

20 Rating considerations for an AT1 instrument Fitch: Rating at least 5 notches below the issuer s VR (when VR are bbb- or higher) -2 notches for loss severity At least -3 notches for non-performance Update of Fitch s report Assessing and Rating Bank Subordinated and Hybrid Securities Criteria : There is no longer the requirement for permanent and full write-down for the 100% equity credit in Fitch s ancillary measure of capital (Fitch eligible capital, FEC) This means instruments with temporary write-down features can now be eligible for the 100% equity credit in FEC. Moody s: Rating at least 4 notches below the adjusted BCA for low trigger instruments Moody s currently does not rate high trigger instruments S&P (subject to potential change cf. request for comment Feb. 2014): Rating at least 4 notches below the issuer s SACP Subject to a rating cap which depends on the distance between the trigger level and S&P s projection of the issuer s relevant capital ratio over a months time horizon AT1 instruments eligible for the intermediate equity content 20

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