2015 Outlook Challenging,Rating Stabilisation Slows
Fitch Ratings, Dec; 2014
2015 Outlook: Prospects for EMEA bank ratings remain challenged in 2015 as Outlooks and Watches on Fitch-rated entities in the sector retain a negative bias. Many EU banks face potential downgrade pressure due to expected changes in state support under EU Bank Recovery and Resolution plans.
The trend to bolster bail-in buffers and the phasing-in of Basel 3 offer structural support to senior and regulatory capital issuance, but weak growth, TLTRO and generally solid liquidity profiles allow banks to wait if conditions are unfavourable.
Downgrade Pressure Resurfaces: Rating downgrades picked up in 3Q14, leading to a yoy doubling in the overall volume in 9M14. The deterioration was driven by banks in Portugal, after the demise of Banco Espirito Santo (BES), the UK (of which Royal Bank of Scotland and Standard Chartered accounted for 58%) and Austria. Changes to systemic state-support assumptions were behind Austrian bank downgrades, which accounted for the majority (31%), while downgrades in the UK (22%) and Portugal (7%) were driven by idiosyncratic factors.
Slowing Rating Stabilisation: Higher downgrade volume during the year slowed the pace of improvement in rating migration, with the upgrade-to-downgrade ratio settling at 0.25xby volume in 10M14–marginally better than the level in 2013. Downgrades still exceed upgrades but to a lesser extent –declining to 4x from 4.6x in 2013–and representing 6% of financial sector bonds outstanding. Upgrades in 10M14 outpaced the level in 2013, boosted by bonds from German bank Bayern LB, which accounted for 41%.
Junior Bond Volume Jumps: Issuance in 10M14 increased 8% yoy, boosted by a doubling in subordinated bond volume as spreads tightened considerably. The rise more than offset an 18% fall in covered bond volume, which dropped to EUR136bn in 10M14, the lowest level in at least 10 years. Banks have partly used tightening spreads as an opportunity to boost capital buffers for senior bondholders in the event of bail-in and as Basel 3 is gradually adopted.
AT1 Volumes Strong: Issuance of additional Tier 1 bonds boomed to EUR45bn in 10M14–2.5x the 2013 total–helped by record monthly volume of EUR11bn in September, led by UK banks. Issuance exceeded the 2013 volume after only the first five months of the year, but supply slowed in July and August, following the collapse of BES and rising geopolitical tensions, and in October after that month’s market sell-off.
Deleveraging Continues: Total issuance of EUR502bn in 10M14 remains below full year maturities, as banks continue to shrink balance sheets and cut back on the supply of covered bonds. The refinancing gap will narrow overtime as lower levels of issuance gradually reduce maturing bond volume. Sentiment remains favourable towards the sector as investors continue to focus on spreads, betting on the fruition of additional unconventional measures by the ECB. More than two-thirds of investors are overweight financials, according to a recent Fitch poll.