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A triumphant return to bond markets for peripheral banks has grabbed the headlines at the start of the new year. But a less-discussed phenomenon has been the scarcity of new debt issues from fundamentally healthier banks in countries at the core of the single currency, and elsewhere in Western Europe. What does this mean for upcoming LTRO repayments, the outlook for bank lending and, of course, prospects for credit investors?
During the first half of January the continent’s banks raised €35bn by selling senior unsecured and covered bonds to investors. While down over 20% compared to the same period in 2012, the scale of this reduction in industry-wide issuance was largely in line with expectations. But take away the resurgent peripheral banks – entirely absent from wholesale debt markets while the crisis simmered at the start of last year – and other Western European banks have slashed fundraising from bond investors by more than 50% (from €45bn to €22bn) so far in 2013.
New issues of senior unsecured and covered bonds from Western European banks
*Mtd is the first eleven business days of both years. Source: Bond Radar and Daiwa Capital Markets Europe Ltd.
One might have anticipated more debt sales by now, were banks planning to raise money externally for repaying LTRO borrowings to the ECB, or more optimistically, if the recent easing of the crisis had given them confidence to boost lending to households and businesses.
We still expect a relatively large number of stronger banks to start paying down the ECB’s three-year loans early – possibly as much €200bn in total – when this option becomes available to them from the end of this month (for the December 2011 LTRO) and then end-February (for the second operation). However these repayments are likely to be primarily financed from internal resources, with a shift towards more aggressive liquidity management now tacitly endorsed by the Basel Committee’s recent watering down of Basel III’s liquidity rules.
Meanwhile, confronted with the near-term introduction of tighter capital standards, a still-weak economic outlook and muted demand on the part of borrowers, it is still too early to expect a significant upswing in bank lending. And in the unlikely event that credit growth returns, many banks now have alternatives to wholesale debt markets, including swelling customer deposit bases and government-subsidised programmes such as the UK’s Funding for Lending Scheme.
Even with these developments, European banks will continue to tap capital markets for the ongoing repayment of maturing bonds, and also to maintain relationships with investors. But the supply of new debt issues will remain subdued for the foreseeable future – certainly below the volume of bonds maturing – as the sector’s external borrowing needs remain significantly diminished.
On the other side of the market, investor demand for European bank bonds remains buoyant, with volatility still capped by the ECB’s interventions and inflows to European credit funds persisting (no obvious signs yet of the “great rotation” out of fixed income assets and into equities). And while new issues of higher-yielding peripheral bank bonds have certainly found a sweet spot with investors, demand for higher-rated transactions from other Western European banks has also been robust, as indicated by the solid performance of most deals in subsequent trading. That is, of course, on the rare occasion that a new issue has come to market.