UBI Banca caps year with strong SNP return

UBI Banca made a swift return to the senior non-preferred sector on 14 October, taking advantage of a strong market to sell a €500m long five year benchmark almost 100bp inside where it sold a five year in June. Giorgio Erasmi, head of funding at UBI Banca, discussed the issuer’s strategy, the ECB-primed market, and the Italian landscape with Bank+Insurance Hybrid Capital.

Bank+Insurance Hybrid Capital: You have been very active across the bank capital structure this year, in benchmark as well as private placement formats. What are the reasons for this?

Giorgio Erasmi, UBI Banca: UBI has been focused on two main goals in its funding activity this year. Firstly, building up our MREL buffer, and secondly, strengthening our ratings. That is why we have issued such an important variety of instruments — including both senior and subordinated paper — and we are now in line with our objectives. Regarding MREL, UBI had already achieved an amount of eligible liabilities exceeding the expected required buffer. Regarding ratings, Moody’s at the end of June modified the outlook on its rating from negative to stable.

BIHC: What was the rationale for the timing of the latest senior non-preferred trade? You chose a long five year maturity after issuing a straight five year before the summer break.

Erasmi, UBI: Firstly, according to our plan, we were still missing one deal that would qualify as subordinated under the rating agency methodology, and we chose a non-preferred senior, which could achieve that. Secondly, we were strongly oriented towards issuing before the blackout period ahead of our quarterly results, beginning in late October, so the window was not very wide. We saw the week start positively on the Monday morning and decided to go to market.

Regarding the maturity, bear in mind the maturities of our previous non-preferred senior issues. We issued our first in April 2018 and that matures in 2023, while the second that we issued in June matures in June 2024. We wanted the new bond to mature the following year, so in 2025, to build up a well distributed curve with maturities in different years, hence the five-and-a-half year maturity.

BIHC: How satisfied are you with the outcome of this new benchmark?

Erasmi, UBI: We are very satisfied with the results of the issue. Indeed, we achieved the best outcome we could have imagined when we decided to proceed with the deal. We received orders from about 140 investors for a total order book of €1.4bn before reconciliation. We tightened significantly, from IPTs of the 220bp area to a re-offer spread of 198bp. In terms of distribution, we had a strong participation from Italian investors, with 44%, but I would highlight that on top of that the bond was well distributed across Europe, with notably France taking 18%, Germany 14%, and the UK 10%. We achieved similar distribution to international investors with our deal in June, so this confirms that they appreciate our issuance and it is of course very important to have access to this investor base. And because we had already issued a lot this year this latest issue was something of a test of whether investors would still have appetite for our name, and the answer was yes, so arguably the international participation on this issue was even more notable.

BIHC: You achieved that result even thought the spread was almost 100bp tighter than your June issue — what do you make of that?

Erasmi, UBI: We feel that international investors are looking for yield. In Europe it is now common for bonds up to five years to trade at a negative yield, so when a credit like UBI Banca offers an interesting spread we can find buyers.

BIHC: France has been a prominent investor base for Italian issuers. What are you thoughts on that?

Erasmi, UBI: France has historically been a strong investor base for our bonds. In my experience, it has been one of the countries in Europe that better understands Italian dynamics and has more credit lines open towards Italy, even in periods during the crisis when Italian credits were in general not so sought after — I remember times when French banks were still open to Italian issuers when some other countries were more negative. And of course we regularly update investors, visiting them at least once a year in different venues.

BIHC: What are your funding plans for the rest of the year? Will you consider any 2020 prefunding? Is TLTRO3 impacting your 2020 funding plan?

Erasmi, UBI: We had the usual blackout period ahead of our third quarter results, so there is only a very short window before the end of the year. At the moment we are not planning to use that window for further public issues, while we might consider a reverse enquiry or private placement. We have issued a lot this year and don’t really need any prefunding activity on the public side.

Regarding the TLTROs, we are analysing the next steps for reimbursing the outstandings, so it could be that we prepay part of TLTRO2, but at the moment I’m not able to deliver any detailed information. I can say that we are very long in terms of liquidity at the moment.

BIHC: What are the main risk factors for Italian issuers? The BTP-Bund spread is at long term lows — are we completely out of the woods when it comes to political risk?

Erasmi, UBI: On this point, I would remark that in Italy — as in other countries — predicting the evolution of the political situation it not an easy task. And since the main risk factor is political risk, there may yet be volatility on BTPs. At the moment we are not seeing this as a risk for the short term, but it is not easy to anticipate what will happen in the future.

In terms of levels, we are indeed close to long term lows in terms of spread. We are in a new environment, with negative rates, QE, and investors seeking positive yields — things are changing completely. It could be that the search for yield and support from QE further tightens the spread of peripheral issuers, such as Italian banks, that are linked to government spreads. So I’m optimistic on this point: I think that we could see further tightening.

BIHC: How do you perceive the recent ECB announcements?

Erasmi, UBI: Generally speaking, the rate cut is not positive for financial institutions. The tiering only partly compensates for the 10bp cut. So for banks the environment remains tough.

Regarding QE, it is important to remember that we have the reinvestment of the maturities in the APP portfolio on top of the new bond purchases, and this is a very important factor. The ECB intervention will give another strong tightening push to the credit market.

TLTRO3 should further support spreads over the coming years, with the last opportunity being in 2021 and not expiring until 2024. So overall I expect very strong tightening momentum over the next couple of years.

BIHC: What are your expectations in terms of profitability for UBI Banca? Are you satisfied with progress made in terms of competitiveness?

Erasmi, UBI: Despite a difficult operating environment — modest domestic economic growth, volatile financial markets and prolonged ultra-low interest rates — UBI has achieved quite resilient profitability consistent with its conservative, low risk profile. The strategy of safeguarding spreads pursued from the second half of 2018 had its positive effects during the course of the first nine months of 2019. Current structural scenario challenges (new market conditions and competition) will be addressed in the next business plan, which will be presented in the first half of 2020.

BIHC: What about the stock of NPLs?

Erasmi, UBI: Asset quality has improved materially in recent quarters, at a faster pace than the business plan envisages. The targeted gross NPL ratio of less than 10% in 2020 was reached well in advance. We are now around 9% and have recently announced a further sale which should bring us to around 8% by year end. Internal management of credit recovery also remains the key strategy, in light of an excellent recovery rate, particularly on bad loans. Consider that in the last 12 months we sold €1bn of gross NPLs but recovered a further €1.5bn through internal work-out.

BIHC: Do you see consolidation of the banking landscape accelerating next year?

Erasmi, UBI: M&A could be an option for the Italian banking industry to create fewer, stronger and more profitable players. There would be relevant scope for cost synergies in a sector under pressure on the revenue side. So it is not really a matter of whether but rather a matter of when it will happen.