05 January 2016

Financial Times: Eurozone bank bond issuance to stagnate

Over recent years European banks, enfeebled by the financial and sovereign debt crises, have shed assets, shrunk their balance sheets and cut back on borrowing from capital markets. Debt bankers have pointed to limited expectations of balance sheet expansion as one explanation for this year’s relatively unchanged fundraising plans of large European banks.

In pre-crisis years, the amount issued regularly exceeded €300bn. Other than 2012 and 2013, last year’s €196bn represented the lowest level of eurozone issuance since 2002, and the lowest number of individual issues this millennium.

Alberto Gallo, analyst at RBS, suggested that the worst of the contraction may have already taken place, but that balance sheets were unlikely to increase significantly. “What we should see is capital markets and large banks taking some of the slack from the mid-tier and small banks, which should consolidate,” he said.

In addition to the impact of deleveraging on funding requirements, a labyrinth of new regulatory measures is presenting banks with additional complications in how they structure their liabilities.

“It will be yet another year of continued regulatory development for financials, asking funding heads to consider how to shape the balance sheet going forward rather than taking the best price for a funding opportunity,” said Armin Peter, global head of syndicate at UBS.

The need for banks to raise capital and other “loss-absorbing” securities may in fact provide some support for new issuance, in particular through refinancing. Zoso Davies, an analyst at Barclays, suggested that new regulation — specifically a need for banks to increase their total loss-absorbing capacity (TLAC) — will be supportive of the need for banks to refinance existing debt, rather than letting it expire. He estimates bank issuance will rise as a result.

Expectations for limited growth in bank balance sheets come in spite of the launch of the European Central Bank’s quantitative easing programme, which is designed to encourage lending and boost growth. The ECB’s purchases have, however, helped boost the market for covered bonds, a secured form of funding used primarily for mortgages.

Future growth of European bank funding requirements will depend heavily on underlying reforms, suggested Mr Gallo.

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