Key Takeaways
- The speed and scale of the monetary and fiscal policy response to COVID-19 sparked a material risk-on credit spread rally after March 2020 lows.
- The rapid and fulsome primary market reopening de-risked both a short-term liquidity shock and medium-term recapitalization requirement.
- Risk-weighted-asset inflation and regulatory changes on capital composition should stimulate additional subordinated issuance (Tier 2 and Additional Tier 1) to supplement Common Equity Tier 1 ratios, markets permitting.
- We see multiple incentives for banks to continue liability management exercises across the capital stack.
The year 2020 has been unique in many ways. The COVID-19 shock to, and subsequent recovery of capital markets has been both severe and rapid. The initial liquidity shock saw a wave of corporate revolving credit facility drawings and an associated flurry of senior unsecured funding at elevated spreads. The speed and scale of central bank and government responses, via respective additional quantitative easing and fiscal support, inspired a significant stabilization in primary capital markets and a rally that returned spreads toward pre-pandemic levels (see chart 1). Time will tell whether this phenomenon is more reflective of learned investor behavior from the global financial crisis or appropriate re-pricing of risk. To date, COVID-19 remains an economic shock and not a financial crisis.
From a creditworthiness standpoint it is encouraging to see a fulsome reopening of capital markets for European banks, including access to Tier 2 and Additional Tier 1 (AT1) contingent capital securities by lower-rated jurisdictions. The regulatory response has clearly influenced issuance trends, leading to a significant decline in covered bond activity relative to senior and subordinated markets (see charts 2 and 3). Many issuers have taken full advantage of historically low rates to execute AT1 instruments at near-average coupons and reset spreads. Unlike in the global financial crisis, the absence of a material shortening in average duration of issuance is another indication of confidence in the credit markets, post central bank intervention. Overall, the narrative that banks are part of the solution rather than the root of the crisis has been evident.
The provision of central bank term funding schemes across Europe has resulted in a reduction in covered bond supply volumes. Most financial services companies have used the constructive market tone to issue MREL (minimum requirement for own funds and eligible liabilities) senior nonpreferred and holding company debt, Tier 2, and AT1 instruments to defend their capital ratios ahead of elevated provisioning because weaker economic conditions are likely to last well into 2021/2022.
Chart 1
Chart 2
Chart 3
Chart 4
European banks have experienced a more constructive primary market during the COVID-19 shock to date than in the global financial crisis. Although credit spreads widened materially in March 2020 as the "dash for cash" liquidity stress ripped through global markets, including for highly rated government bonds, central bank action, national government credit guarantee liquidity schemes and banks' relative credit resilience aided a swift correction in investor receptivity through the second quarter of 2020 across all bank asset classes. The reopening was led by senior unsecured products, both opco/preferred and holdco/nonpreferred (see charts 6 and 7) in euro and U.S. dollar markets offering superior liquidity (see chart 4). By and large, European banks have seized the opportunity not only to bolster liquidity at the first opportunity, but also capital via Tier 2 and AT1 trades. The strong investor demand uncovered in such subordinated transactions, albeit at elevated spreads (see charts 8-10), reflects a frequently held view that banks are part of the solution.
We have also seen a meteoric rise of green bonds in recent years (see chart 11 and 13). For European banks, this market remains concentrated in euro-denominated transactions although activity in a wider range of currencies and asset classes, notably in Tier 2 and AT1, continues to mature at pace (see chart 12; and for further details see "The Greening Of Financial Services: Challenges For Bank And Insurance Green And Sustainability Hybrids," published Aug. 12, 2020, on RatingsDirect.
European Bank Average Monthly Primary Market Spread By Asset Class And Rating
Chart 5
Chart 6
Chart 7
Chart 8
Chart 9
Chart 10
Chart 11
Chart 12
Chart 13
Active Liability Management
European banks have been actively undertaking liability management exercises so far this year as they seek to rationalize funding and capital debt profiles in response to regulatory and central bank liquidity schemes (see table 1 for a list of key exercises completed year to date). We see a number of incentives for them to continue to do so:
- Switch legacy MREL instruments from English law to the law of an EU member state, where it lacks a bail-in recognition clause;
- Optimize composition of Pillar 2R capital after scope was given by regulators to count more AT1 and T2 across the EU;
- Refinance legacy AT1 capital instruments that lose AT1 grandfathering benefit;
- Certain groups headed by holdcos opted to refinance legacy externally-issued operating company level capital instruments that lose MREL benefit; and
- Replace noncallable senior nonpreferred or nonoperating holding company senior instruments that will lose MREL benefit one year before maturity.
Table 1
| 2020 European Bank Tender Offers | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Date | Issuer | Currency | Size (mil.) | Details | ||||||
| Jan-20 | Ibercaja Banco SA | EUR | 281.9 | Tier 2 | ||||||
| Feb-20 | Santander UK PLC | USD | 600 | Tier 2 | ||||||
| Feb-20 | ING Bank NV | USD | 999.7 | Tier 2 | ||||||
| Mar-20 | Lloyds Bank PLC | USD | 333.6 | Senior unsecured notes | ||||||
| Apr-20 | Credit Agricole SA | USD | 25.9 | Perpetual Tier 1 | ||||||
| Apr-20 | Lloyds Bank PLC | USD | 137.4 | Perpetual Tier 1 | ||||||
| May-20 | Credit Agricole SA | EUR, GBP | 1927 | Senior Preferred | ||||||
| May-20 | Credit Agricole SA | USD | 1600 | Senior Preferred | ||||||
| May-20 | Deutsche Bank | EUR | 2000 | 11 nonpreferred senior, issued new tier 2 11nc6 | ||||||
| May-20 | Lloyds Bank PLC | EUR, GBP | 486.7 | Senior unsecured notes | ||||||
| May-20 | Lloyds Bank PLC | USD | 2145 | Senior unsecured notes | ||||||
| May-20 | Lloyds Bank PLC | AUD | 90.49 | Senior unsecured notes | ||||||
| May-20 | Lloyds Bank PLC | GBP | 1820 | 17 covered bond (denominated in EUR, GBP, USD) | ||||||
| Jun-20 | Berlin Hyp AG | EUR | 303.2 | Pfandbrief | ||||||
| Jun-20 | Deutsche Pfandbriefbank AG | EUR | 60.6 | Pfandbrief | ||||||
| Jun-20 | HSBC Holdings PLC | USD | 3400 | Holdco senior unsecured notes | ||||||
| Jun-20 | Skipton Building Society | GBP | 283.4 | Preferred senior | ||||||
| Jul-20 | Barclays PLC | EUR | 334 | Senior unsecured notes | ||||||
| Jul-20 | Shawbrook Group PLC | GBP | 74.8 | Tier 2 | ||||||
| Aug-20 | HSBC Holdings PLC | USD | 3500 | Holdco senior unsecured notes | ||||||
| Sep-20 | Virgin Money UK PLC | GBP | 444.6 | Tier 2 | ||||||
| Sep-20 | Nationwide Building Society | GBP | 2040 | 11 covered bonds (EUR and GBP) | ||||||
| Sep-20 | NatWest Group PLC | USD | 1977.3 | Tier 1, Trust preferred, 2 x Tier 2 | ||||||
| Sep-20 | Barclays Bank PLC | USD | 42.1 | iPath® MSCI India Index ETNs | ||||||
| Sep-20 | HSBC Holdings PLC | USD | 1700 | Holdco senior unsecured notes | ||||||
| Sep-20 | Yorkshire Building Society | EUR | 250 | Preferred senior | ||||||
| Source: S&P Global Ratings. | ||||||||||
Table 2
| Additional Tier 1 Issuance 2020 YTD | ||||||||
|---|---|---|---|---|---|---|---|---|
| Pricing date | Issuer | First call date | Tranche currency | Size (mil.) | Coupon (%) | Reset (bps) | CET1 trigger (%) | Conversion |
| 9-Jan-20 | Santander | 16-Jan-26 | EUR | 1,500 | 4.375 | 453.40 | 5.125 | Equity conversion |
| 13-Jan-20 | UBI Banca | 20-Jan-25 | EUR | 400 | 5.875 | 606.60 | 5.125 | Temporary write down |
| 14-Jan-20 | Banco BPM SpA | 21-Jan-25 | EUR | 400 | 6.125 | 634.80 | 5.125 | Temporary write down |
| 16-Jan-20 | Credit Suisse Group AG | 24-Jan-30 | USD | 1,000 | 5.100 | 329.30 | 7.000 | Permanent write down |
| 6-Feb-20 | Luzerner Kantonalbank AG | 5-Mar-27 | CHF | 360 | 1.500 | 150.00 | 5.125 | Partial permanent write down |
| 12-Feb-20 | UniCredit | 3-Jun-27 | EUR | 1,250 | 3.875 | 408.10 | 5.125 | Temporary write down |
| 11-Feb-20 | Deutsche Bank | 30-Oct-25 | USD | 1,250 | 6.000 | 452.40 | 5.125 | Temporary write down |
| 24-Feb-20 | ING Groep NV | 16-Nov-29 | USD | 750 | 4.875 | 350.60 | 7.000 | Equity conversion |
| 20-Feb-20 | Intesa Sanpaolo SpA | 27-Feb-25 | EUR | 750 | 3.750 | 410.20 | 5.125 | Temporary write down |
| 20-Feb-20 | Intesa Sanpaolo SpA | 27-Feb-30 | EUR | 750 | 4.125 | 427.40 | 5.125 | Temporary write down |
| 18-Feb-20 | BNP Paribas SA | 25-Feb-30 | USD | 1,750 | 4.500 | 294.40 | 5.125 | Temporary write down |
| 14-May-20 | Bank of Ireland | 19-May-25 | EUR | 675 | 7.500 | 792.40 | 7.000 | Temporary write down |
| 8-Jun-20 | ABN AMRO Bank | 22-Sep-25 | EUR | 1,000 | 4.375 | 467.40 | 5.125 | Temporary write down |
| 10-Jun-20 | Nationwide Building Society | 20-Jun-27 | GBP | 750 | 5.750 | 562.50 | 7.000 | CCDS conversion |
| 16-Jun-20 | AIB Group plc | 23-Jun-25 | EUR | 625 | 6.250 | 662.90 | 7.000 | Temporary write down |
| 17-Jun-20 | Standard Chartered plc | 26-Jul-25 | USD | 1,000 | 6.000 | 566.10 | 7.000 | Equity conversion |
| 24-Jun-20 | Natwest Group | 29-Dec-25 | USD | 1,500 | 6.000 | 562.50 | 7.000 | Equity conversion |
| 7-Jul-20 | Cooperatieve Rabobank UA | 29-Dec-27 | EUR | 1,000 | 4.375 | 467.90 | 5.125 | Temporary write down |
| 7-Jul-20 | BBVA | 15-Jan-26 | EUR | 1,000 | 6.000 | 645.60 | 5.125 | Equity conversion |
| 8-Jul-20 | Bankinter | 17-Jan-26 | EUR | 350 | 6.250 | 671.40 | 5.125 | Equity conversion |
| 22-Jul-20 | UBS Group AG | 29-Jul-26 | USD | 750 | 5.125 | 485.50 | 7.000 | Permanent write down |
| 4-Aug-20 | Credit Suisse Group AG | 11-Feb-27 | USD | 1,500 | 5.250 | 488.90 | 7.000 | Permanent write down |
| 5-Aug-20 | Barclays plc | 15-Dec-25 | USD | 1,500 | 6.125 | 586.70 | 7.000 | Equity conversion |
| 25-Aug-20 | Intesa Sanpaolo SpA | 1-Mar-28 | EUR | 750 | 5.500 | 584.80 | 5.125 | Temporary write down |
| 25-Aug-20 | Intesa Sanpaolo SpA | 1-Sep-31 | EUR | 750 | 5.875 | 608.60 | 5.125 | Temporary write down |
| 26-Aug-20 | Bank of Ireland | 1-Sep-25 | EUR | 300 | 6.000 | 643.40 | 7.000 | Temporary write down |
| 1-Sep-20 | BAWAG Group AG | 1-Oct-25 | EUR | 175 | 5.125 | 554.60 | 5.125 | Temporary write down |
| 8-Sep-20 | Commerzbank | 9-Oct-29 | EUR | 500 | 6.500 | 674.3 | 5.125 | Temporary write down |
Table 3
| Additional Tier 1 Calls Decisions January 2020-September 2020 (Excluding Legacy Instruments) | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Call Date | Issuer | ISIN | Priced | Currency | Size (mil.) | Coupon (%) | Reset spread | Post call structure | Call decision announced | |||||||||||
| 18-Feb-20 | BBVA | XS1190663952 | 11-Feb-15 | EUR | 1,500 | 6.75 | 660.4 | Interest will be reset every 5 years to 5 yrs EUR MS + 660.4bps | Called | |||||||||||
| 19-Feb-20 | UBS Group | CH0271428317 | 13-Feb-15 | USD | 1,250 | 7.125 | 546.4 | Reset on the first call date and every 5 years thereafter, to a new fixed rate equal to the 5-yr mid swap rate plus 546.4bps | Called | |||||||||||
| 17-Mar-20 | Swedbank | XS1190655776 | 12-Feb-15 | USD | 750 | 5.5 | 376.7 | Coupon will reset to 5-year MS + 376.7bps. Callable every 5 years from 17-Mar-2020 at par | Called | |||||||||||
| 26-Mar-20 | DNB Markets | XS1207306652 | 19-Mar-15 | USD | 750 | 5.75 | 407.5 | Coupon will reset every 5 years to 5-year MS + 407.5bps. Callable 20-Mar-2020 and annually thereafter | Called | |||||||||||
| 2-Apr-20 | Standard Chartered | US853254AT77 | 26-Mar-15 | USD | 2,000 | 6.5 | 488.9 | Interest will reset every 5 years at the prevailing USD 5-year mid-swap rate + 4.889% per cent year, being the initial credit spread on the securities | Called | |||||||||||
| 6-Apr-20 | Danske Bank | XS1044578273 | 5-Mar-14 | EUR | 750 | 5.75 | 464 | Coupon will reset to 6-year MS + 464bps | Called | |||||||||||
| 16-Apr-20 | ING Groep | US456837AE31 | 9-Apr-15 | USD | 1,000 | 6 | 444.5 | Callable every 5 years after 16-Apr-2020 | Called | |||||||||||
| 30-Apr-20 | Aareal Bank | DE000A1TNDK2 | 13-Nov-14 | EUR | 300 | 7.625 | 718 | Coupon will reset annually mid swap rate plus initial credit spread (no step-up) 718bps | Not Called | |||||||||||
| 30-Apr-20 | Deutsche Bank | XS1071551474 | 20-May-14 | USD | 1,250 | 6.25 | 435.8 | Coupon will reset every five years to 5yrs USD MS + 435.8bps | Not Called | |||||||||||
| 13-May-20 | SEB | XS1136391643 | 6-Nov-14 | USD | 1,100 | 5.75 | 385 | Coupon will reset every 5 years to 5-year MS plus reset margin | Called | |||||||||||
| 18-Jun-20 | Bank of Ireland | XS1248345461 | 11-Jun-15 | EUR | 750 | 7.375 | 695.6 | Coupon will reset to 5 year MS plus 695.6bps | Called | |||||||||||
| 29-Jun-20 | Rabobank | XS1171914515 | 15-Jan-15 | EUR | 1,500 | 5.5 | 525 | Coupon will reset to 5 year EUR mid-swap rate plus initial margin of 525 bps (no step-up) | Called | |||||||||||
| 22-Sep-20 | ABN AMRO Bank | XS1278718686 | 15-Sep-15 | EUR | 1,000 | 5.75 | 545.2 | Coupon will reset to 5-year MS plus 545.2bps | Called | |||||||||||
| 26-Oct-20 | Nykredit Realkredit | XS1195632911 | 19-Feb-15 | EUR | 500 | 6.25 | 598.9 | Coupon will reset to 5 year EUR MS + 598.9bps. Callable annually from 26 Feb 2020 | Called | |||||||||||
| 15-Dec-20 | Barclays | XS1002801758 | 4-Dec-13 | EUR | 1,000 | 8 | 675 | Callable every 5 years from 15-Dec-2020 | TBD | |||||||||||
| 19-Jan-21 | Intesa Sanpaolo | XS1346815787 | 12-Jan-16 | EUR | 1,250 | 7 | 688.4 | Coupon will reset to 5-year EUR MS + 688.4bps payable semi-annually in arrears. Callable quarterly from 19-Jan-2021 at par | TBD | |||||||||||
| 1-Mar-21 | Svenska Handelsbanken | XS1194054166 | 18-Feb-15 | USD | 1,200 | 5.25 | 333.5 | Coupon will reset to 5-year MS plus 333.5bps. Callable every 5 years from 1-Mar-2021 at par | TBD | |||||||||||
| 22-Mar-21 | UBS Group | CH0317921697 | 14-Mar-16 | USD | 1,500 | 6.875 | 549.65 | Coupon will reset every 5-year mid swap rate + 549.65bps. Callable annually from 22-Mar-2021 at par | TBD | |||||||||||
| 30-Mar-21 | BNP Paribas | USF1R15XK441 | 23-Mar-16 | USD | 1,500 | 7.625 | 631.4 | Coupon will reset every 5 years to 5-year USD mid-swap rate + 6.314% | TBD | |||||||||||
| 1-Apr-21 | Permanent tsb | XS1227057814 | 27-Apr-15 | EUR | 125 | 8.625 | 835.6 | Coupon will reset to 5 yrs EUR MS + 835.6 bps, payable annually on 1 April each year and will reset every 5 years | TBD | |||||||||||
| 10-May-21 | Bankinter | XS1404935204 | 28-Apr-16 | EUR | 200 | 8.625 | 886.7 | Coupon will reset to 5 yrs MS + 0.041% payable quarterly in arrear. Callable 10-May-2021 and then at any time thereafter | TBD | |||||||||||
| 23-Jun-21 | Credit Agricole | XS1055037177 | 1-Apr-14 | EUR | 1,000 | 6.5 | 512 | Callable every 5 years from 23-Jun-2021 at 5-year mid swap rate +5.12% | TBD | |||||||||||
| 29-Jun-21 | Rabobank | XS1400626690 | 19-Apr-16 | EUR | 1,250 | 6.625 | 669.7 | Coupon will reset every 5-year MS + 669.7bps (no step-up) | TBD | |||||||||||
| 10-Aug-21 | UBS Group | CH0331455318 | 3-Aug-16 | USD | 1,100 | 7.125 | 588.3 | Coupon will reset to 5-year MS plus 588.3bps | TBD | |||||||||||
| 15-Aug-21 | RBS Group | US780097BB64 | 10-Aug-16 | USD | 2,650 | 8.625 | 759.8 | Fixed until the first call date, reset every 5 years thereafter (non-step) | TBD | |||||||||||
| 10-Sep-21 | UniCredit | XS1107890847 | 3-Sep-14 | EUR | 1,000 | 6.75 | 610 | Coupon will reset every 5 years to 5-year MS + 610bps. Callable semi-annualy from 10-Sep-2021 | TBD | |||||||||||
| 11-Sep-21 | Santander | XS1107291541 | 2-Sep-14 | EUR | 1,500 | 6.25 | 564 | Coupon will reset every 5 years to 5 year MS + 564bps. Callable quarterly from 11-Sep-2021 at apr | TBD | |||||||||||
| 13-Sep-21 | Nordea Bank | XS1202090947 | 5-Mar-15 | USD | 550 | 5.25 | 324.4 | Coupon will reset every 5 years to 5-year USD MS + 324.4bps | TBD | |||||||||||
| 13-Sep-21 | Societe Generale | USF43628C734 | 6-Sep-16 | USD | 1,500 | 7.375 | 623.8 | 5-yr mid swap + 6.24% resettable every 5 years | TBD | |||||||||||
| MS--mid swap. TBD--To be decided. | ||||||||||||||||||||
Related Research
- European Refinancing: €4 Trillion In Rated Debt Matures Through 2025, Sept. 3, 2020
- The Greening Of Financial Services: Challenges For Bank And Insurance Green And Sustainability Hybrids, Aug. 12, 2020
- Europe’s AT1 Market Faces The COVID-19 Test: Bend, Not Break, April 22, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | John Wright, London (44) 20-7176-0520; john.wright@spglobal.com |
| Secondary Contacts: | Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@spglobal.com |
| Giles Edwards, London (44) 20-7176-7014; giles.edwards@spglobal.com |
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