European Banks: 1Q24 FAQs

Puja Karia - Head of Western European Banks
Simon Adamson - Head of Financials
Paola Biraschi - Head of Southern European Banks
Jennifer Ray - Head of Northern European Banks
Feargus Haston - Analyst, Banks

  • In client meetings and calls, the question we invariably hear is: “What are other people asking you about?”.
  • So, as in previous quarters, we recap a selection of the most frequent or interesting questions asked by clients in the first few months of 2024.
  • The most popular topics have included commercial real estate exposure, AT1s and legacy instruments, as well as relative value analysis between banks in the same jurisdiction.
  • The most frequently requested reports, which include financial data and analysis relevant for those interested in European banks, are the European Banks CoCo Database, the European Bank Capital Model, Loan Stage analysis, and European Banks’ Credit Metrics data.

Why are European banks issuing a lot of $AT1 at the beginning of the year? Any specific reason for issuing in USD and not in EUR?

There are several reasons why banks might issue in USD: the investor market is deeper, the bank might have USD assets to hedge, or the issuance costs might be lower on a swapped basis. Banks outside the euro zone also see USD as a natural issuance market.

The US dollar market remains deeper and more liquid generally. Year to date, there have been 24 AT1s printed – 8 in EUR, 1 in GBP, 5 in SEK, 1 in SGD and 9 in USD. The latter have come from BNP, SocGen, ING, Swedbank, UBS, Akbank, TKSB Bank, Yapi Kredi and Standard Chartered.

According to BNP, dollar deals have been the most competitive versus the euro funding cost “in several years”. At its 2023 AGM, the bank stated that it: “intends to continue issuing in US$, since the market is deeper and the economic conditions significantly more attractive”. ING issues AT1 only in USD, so the latest deal ties in with its existing funding strategy. In the past the bank has stated it tends to issue in USD as a natural hedge against USD RWA volatility driven by cross currency moves. The major Nordic banks all tend to issue AT1s in USD – only Nordea has a single, euro-denominated AT1, and DNB also has AT1s in NOK. UBS and Standard Chartered are frequent dollar issuers.

In Turkey, Yapi Kredi and Akbank tapped the US dollar AT1 market this year, attracted by strong market demand and low credit spreads; in general, Turkish banks are frequent unsecured dollar funding issuers given the more attractive valuation compared with domestic issues.

HSBC did some tender offers back in August 2022 for subordinated instruments, to make the exchanged issues conform with recognition of the UK bail-in power. There appear to be differences in the various instruments, as one of the smaller instruments now explicitly has bail in language whereas the larger one doesn’t.

As we understand it, the situation is complicated and a little unclear. The smaller instrument now has the clauses recognising bail-in and therefore will continue to count as Tier 2 capital. The larger issue that was left outstanding following the tender is grandfathered as Tier 2 until 28 June 2025 so will no longer count as Tier 2 capital after that date. In terms of MREL, both issues will in theory continue to be eligible after 2025, but HSBC says the larger legacy issue is likely to be subject to “voluntary derecognition” after June 2025.

In terms of resolution or liquidation, the legal status remains the same – both issues will continue to be subordinated debt and therefore subject to bail-in on that basis. The lack of contractual recognition might give rise to legal objections by holders, which is why the PRA wanted the terms to be amended. This is what regulators call infection risk – the risk that the legal status of bonds might be different to the regulatory status.

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