Archive

Monthly Archives: March 2019

18th March 2019

Credit making hay while the sun shines

Credit sees off any Brexit uncertainty… We had a potentially massive few days ahead of us, but the third meaningful Brexit vote is looking increasingly unlikely that it is going ahead – and it was the most important event, in our view. The EU Council meetings on 21/22 March now comes into play in its […]
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17th March 2019

Will the German Mega Zombie Bank (GMZB) take off? | Bank Capital Insights

So, it is official – Two zombies may join up to form a mega bank Earlier this Sunday, both DB and Commerzbank officially confirmed that they are in exploratory talks about a potential merger.  It looks like the German government is happy to see the two banks combine and create a German national champion bank.  […]
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17th March 2019

Half time – and it’s game on

Credit parties like it’s… We’re at the halfway stage for the month and just a couple of weeks away from the corporate bond market seeing out the first quarter – and in fine form. Unbelievable as it might be, we need a double-take at the performance it has delivered for investors, who had been very […]
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13th March 2019

Wary markets

It ain’t over just yet… This Brexit jig is anything but over. The EU should cut the legs off from under it and refuse an Article 50 extension because if we get no deal and no Brexit – it will only be ‘for now’. There will be immense pressure for the UK to go for […]
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12th March 2019

May’s mess

Hold your nerve… Well, that was what we would call a volatile session. It impacted FX, rates and equity markets with credit alone in the ascendancy. The greatest levels of volatility were in FX markets. We think that Unicredit played it smart with an AT1 print, on the screens just as the markets opened with […]
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11th March 2019

Uncle Sam to the rescue

Calm amid stormier waters… The reverberations from last week’s slashing of growth and inflation Eurozone forecasts for 2019 by the ECB are still being felt. Equities had a bad couple of days and, admittedly, we saw a smart bounce in this week’s opening session, but it all feels tentative. It won’t take much for the […]
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8th March 2019

ECB’s Third Let’s Try Risk On (TLTRO 3) | Free Content

Post-ECB Meeting

I had set out my Bank Capital Outlook at the beginning of the year (2nd January 2019) wherein I saw significant scope for generating substantial returns (10%+) based on single name selection and evaluation of macro factors.  And as of now, this strategy has returned 6% YTD.

Now, following yesterday’s ECB meeting wherein additional accommodation was announced, subtle changes to the investing strategy are required.

ECB keep on accommodating again and again

ECB’s TLTRO 3 will undoubtedly help the EZ banking system with more liquidity and funding options and will help the weaker banks to roll over existing debt – and also help credit creation in the process. Overall, the probability of default should decrease further as banks fund through the ECB.


Equities look slightly vulnerable

Without economic growth, most of the existing NPL stock is unlikely to go away and, in fact, may lead to further NPL creation.  In any case, earnings are likely to be impacted due to margin compression and given the high cost base, little room for additional loan loss provisions.  And if banks were to take additional litigation/settlement and restructuring costs, earnings are likely to come under pressure.

Return on Equity is already low for many of the banks, and may yet go lower.  Given the 10%+ COE for most EZ banks, the case for investing in EZ bank equities is just not there.  To me, there is plenty of downside in EZ bank equities.

Whilst the ECB may have solved the liquidity issue, it has not taken away the potential Solvency issue (in case of a deep recession and/or other tail risks) and consequent recapitalisation for some banks and this new TLTRO does not address that.  I believe that there is still plenty of downside in EZ bank equities.


AT1 is attractive but needs careful selection

Most of the AT1 issued by large cap EZ banks do look attractive. However, one needs to take into account the potential extension risk and especially those AT1s with low reset spreads.

Is AT1 attractive to own?

Once the right issuer has been identified, then AT1s issued by that bank would be attractive to own if:

  • AT1 yield is double the bank’s dividend yield
  • No more issuance to meet regulatory capital thresholds
  • Significant headroom on both coupon paying ability test and conversion trigger test
  • Bank’s equity is trading at or above 0.6 P/TNAV

And if rates keep rallying, the chances of non-call actually increase as banks may be incentivised to keep the existing AT1s instead of tapping the markets for replacement.

So, I think the longer call AT1s may be better to own ahead of short-dated calls.  Also, it is better to own the national champion peripheral bank AT1s given the additional yield and hedge them with single name equity puts.


NPS the sweet spot

My personal view is that the Non-Preferred Senior / Holdco Senior issued by the large EZ banks look very attractive on a risk-adjusted basis (taking into account probability of default and loss given default).  The spread differential between NPS and LT2 of the same issuer seems to be excessive. The only issue seems to be the potential large supply of NPS debt, but I think that it has been overplayed.

CDS land..

And in CDS land, I think Senior Fin Index is wide relative to Main and I see Senior Fin trading through Main over the course of the year.  And within Single names, Senior CDS of peripheral EZ banks look wide relative to Core EZ banks and expect further compression.


Conclusion

2019 will continue to be a very interesting year for bank capital with loads of opportunities and significant volatility. But there is significant scope for generating substantial returns based on single name selection and dynamic portfolio risk management.

7th March 2019

Thanking you, Mr Draghi

Can’t blame it on the Brexit… The Eurozone is still in crisis. Just as we suggested previously, the ECB came out with additional policy accommodation. Although rates were left unchanged – we think moving on them is politically more difficult – the potential rise in interest rates was pushed back to 2020, and the central […]
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7th March 2019

When the DOVE turned even more DOVISH | Bank Capital Insights

Carry on “TLTRO”… In a slightly unexpected move, the ECB pushed out the timing of its first hike until the beginning of 2020 at the earliest and offered banks a new round of TLTRO loans to help revive the euro zone economy.  In the process, the ECB further lowered the growth and inflation forecasts for […]
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6th March 2019

Go with the flow

The crystal ball says… The deals keep coming but there was a kind of lull in the market nevertheless. We’re pre-ECB and it’s likely going to be all guns blazing thereafter. Surely Draghi will present a more dovish policy stance amid continued (and increasing) weakness across the Eurozone, even if some have pointed to the […]
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