Fitch Ratings says in a new report that EMEA financial-sector issuance so far lags the pace set at the start of 2014 - declining 12% yoy in 2M15 - while a QE-inspired rally has sent spreads and new issue premia tumbling.
The ECB's stimulus programme is unlikely to boost bank lending in isolation due to subdued credit demand, while the sector exhibits an unusually high proportion of Negative rating Outlooks by Fitch, indicating lingering challenges ahead, primarily related to resolution legislation. Changes to state support propensity place many EU banks at risk of downgrades in 2015.
The decline in overall issuance volume was driven by a 21% fall in covered bond volume, while banks cut back on their supply of senior unsecured bonds by 11%. Junior bond issuance rose 6% yoy in 2M15, extending the upward trajectory established in 2014, during which issuance of this type of bond grew by 1.6x as banks sought to augment capital and subordinated debt buffers in response to planned bail-in changes and the adoption of Basel III. Regulatory capital and subordinated debt issuance should therefore continue to support overall new bond supply for the year but solid liquidity profiles allow banks to delay issuance if the pick-up in growth lags expectations or if market conditions remain unfavourable.
Financial-sector bonds experienced a 17% yoy rise in downgrades in 2014 by the three major agencies, driving a 13% increase in the excess of downgrades over upgrades, by volume. Banks in peripheral eurozone countries benefited from a 21% reduction in downgrades; volume, however, this was offset by a 30% rise in negative rating actions on institutions in other countries, due to a combination of changes to systemic state support assumptions and idiosyncratic factors.
Despite a higher downgrade volume, a 33% rise in composite upgrades led to an overall 14% yoy improvement in the upgrade/downgrade ratio to 0.25x. German financial institutions led the upgrades, accounting for 42%.
Additional Tier 1 bond issuance increased 1.5x yoy in 2M15, driven by Nordic, Swiss and Spanish institutions, which accounted for over half of new supply. February issuance picked up to a near monthly record high of EUR8.7bn, demonstrating resilience despite Greek debt negotiations and a fragile Ukraine-Russia truce, as investor demand for extra yield from subordinated paper readily absorbed supply.
