Category Archives for "Bank Capital"
Last week was a good one for European banks with risk rallying across the board – from equities to sub debt to single name CDS to credit indices. We had a number of banks reporting earnings and investors liked what they heard – especially from the banks that have almost completed their restructuring – Commerzbank, Credit Suisse and Royal Bank of Scotland.
The one common theme across the earnings reports was that market activities continue to be a struggle for everyone to make money and normal commercial banking with tight cost controls and low credit costs provide decent returns.
Banco Santander (SANTAN) in the end decided not to call their EUR 6.25 Perp 19 AT1 for economic reasons. This is the first AT1 not to be called and, to some extent, this has come as a surprise to most investors. However, purely from an issuer perspective, it makes complete sense.
Post the non-call, with a reset spread of 541 bps, this AT1 now should yield about 5.5% from next month. Initially post the non-call announcement, the AT1 dropped about 2 points and then bounced back and is trading close to par. This strange price action has opened up more questions than answers.
UCGIM or RBIAV AT1
In general, investors seem to like owning AT1s issued by core Eurozone banks and avoid those issued by peripheral banks, especially the Italians. They are probably right to do so to a large extent given the potential tail risks emerging from Italian politics, for example. But, what if there is a core Eurozone bank that is mostly EM in nature but benefits from its Austrian domicile?
That brings us to our trade idea for this week – Long the UCGIM 6.75 Perp 21 at 98 cash price and short the RBIAV 4.5 Perp 25 at 82 cash price…
Without a doubt an Italian recession or political crisis will have significant impact on the Italian banks given the amount of government debt they hold and the ongoing reliance on ECB for funding. And these issues are well documented and no real surprise and hence no point in pretending otherwise.
There was this Bloomberg article today outlining the exposure numbers and why everyone is scared of Italy.
However, it seems that credit market (especially subordinated debt) investors seem to perceive that the French banks are in a much better position….
Deutsche Bank (DB) reported Q4 (and full year) 18 results on Friday morning and they were hardly inspiring. The bank continues to underperform its rivals driven by what we believe to be is a broken business model, excessive reliance on FICC and very high cost base. The Q4 performance demonstrated the scale of the problems given the very difficult market conditions and drop in trading volumes.
And for all its efforts in 2018, the bank generated net income of just EUR 267 million translating to a meagre RoTE of 0.5%. On the positive side though, the bank generated annual profits for the first time since 2014. With a cost-to-income ratio of almost 93%, it seems that the bank needs to do radical restructuring and substantially move away from the FICC business and focus entirely on corporate banking and wealth management. In the meantime, what should AT1 investors do?
The large US banks reported much better than expected Q4 earnings and revenue growth (other than in FICC) and we saw a significant rally in their respective stock prices. Now, a number of the large cap European banks are due to report earnings this week including Santander, DB, BBVA & Danske Bank and each one of them has distinct issues/topics that investors would be interested in.
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