‘Remarkable’ result buoys early bird Abanca

Abanca opened the euro subordinated space for 2021 with its second AT1 on 7 January, a €375m perpeutal non-call 5.5 trade that attracted over 200 accounts and achieved pricing inside fair value. Alberto de Francisco Guisasola, CFO, and Juan Luis Vargas-Zúñiga Mendoza, general manager, capital markets, institutional distribution and management, at Abanca, discussed the Spanish bank’s approach to the new issue and broader strategy with Bank+Insurance Hybrid Capital.

Bank+Insurance Hybrid Capital: What was the rationale behind your AT1 transaction?

Abanca: Abanca’s objective in this transaction is to continue strengthening and diversifying its capital structure in order to comply with regulatory requirements. With this second AT1 debt issue, Abanca increases its capital ratio by 120bp and meets such debt buffer as is required by the authorities. In addition, the issuance allows the release of CET1 that the bank had been allocating to cover the part of the P2R that can be covered with AT1, increasing the buffer of the highest quality capital.

BIHC: You reopened the euro AT1 market for 2021. Did you have any hesitation about being first into an untested market? Why did you choose to come so early in the year rather than later?

Abanca: We felt comfortable with the market opening after the Christmas period and the read-outs it gave after Monday’s session. Our joint lead managers proved paramount in assessing the risks and rewards of tapping the market so early in 2021. In our view, the risks of waiting further into a year so full of uncertainties outweighed those implicit in playing the role of early bird. And after seeing how the market received our bond, that proved to be the case.

BIHC: What were the key messages to investors during the marketing exercise in relation to your strategy, capital position or other topics? What did investors focus on?

Abanca: The issues discussed with investors during the marketing exercise were diverse and spanned all the major aspects of Abanca’s business, governance and strategy. These would be the three main topics:

Strategy

The first thing to highlight is the execution record of accomplishments performed by the bank. Since 2014, it has consistently met the targets of its strategic plan and been able to generate 8%-9% returns.

The strategy has been based on three main points:

• Transformation towards a simpler, cooperative and innovative company
• Improvement of the customer experience through multi-channel management with best-in-class support.
• Generation of recurring profitability thanks to the: i) growth of the banking business (organically and inorganically), increasing its presence in business lines aimed at companies or means of payment; ii) the diversification of income sources (thanks to the development of insurance businesses and asset management); and iii) efficient use of capital when generating profitability.

Capital position

Sound capital ratios and ample buffers above regulatory requirements, as well as the bank’s capability to generate recurrent capital.

Impact of Covid-19 on asset quality

Four points are important when it comes to understanding the good performance of Abanca in the first nine months of 2020 and the bank’s soundness to face the uncertain recovery scenario:

• Differential entry point: Abanca faces this pandemic as one of the best entities in the Spanish financial system (NPL ratio of 2.6%, NPL coverage of 66%, and Texas ratio of 31%). Despite this, Abanca has made a significant effort in terms of credit provisions during the first nine months of the year (€210m allocated).
• Galicia, the core territory for Abanca due to its presence as a clear leader in the region, presents a better performance at the macroeconomic level than that presented by both Spain in general and other regions in particular.
• The exposure of Abanca’s portfolio of companies and self-employed people to the most vulnerable sectors is lower than that of other competitors.
• Abanca has been very proactive in channelling the aid offered by the authorities to companies and households. These have helped and help Abanca customers to cope with this adverse transitory situation.

Examples of other aspects covered during the marketing exercise are:

• M&A strategy and current vision on the latest movements in the system
• Update of the latest acquisition announced by Abanca (Bankoa)
• The funding plan of the bank
• ESG positioning and developments in this matter
• The bank’s capability to maintain those profitability levels shown in recent years despite the adverse interest rate environment.

Abanca’s de Francisco Guisasola (left) and Vargas-Zúñiga Mendoza

BIHC: How important was the marketing exercise to the overall process and result?

Abanca: Our marketing exercise has to be understood in light of our broad strategy of being as close to our investor base and as transparent as we can be. The roadshow of 5 and 6 January was just fine tuning of this long term commitment to our investor base, tailored towards an AT1 issue — we tried to a) address whatever doubt they might have about the issue or the bank at the time we decided to go to the market, and b) gather intel about their stance on an eventual AT1 Abanca bond.

BIHC: How do you feel about the outcome?

Abanca: We feel extremely happy, not only about the absolute figures, which speak for themselves, but also because it proves our approach to MREL issuance makes sense, in that we understand the whole process to be a long term — if not permanent — task, tackling the most junior instruments first and building from there upwards. The fact that we came from a book of 70 investors in our first AT1 to a 200+ book in this latest one, after issuing two Tier 2 in between, speaks loudly about the market liking this approach. And we feel this is very pertinent, because even after the tightening from IPTs, keeping over 180 individual orders in the book gave us comfort about the final conditions, especially after printing a 6% bond, which is quite remarkable given the rest of our AT1 and Tier 2s’ conditions. We feel it’s worth noting that not only in terms of coupon — this AT1 is 150bp below the one we printed in February 2018 — but also the spread over swaps is substantially tighter — from 732.6bp to 657bp, reflecting what we feel is a better perception of our bank, and greater confidence in our long term business model.

BIHC: How did the level of demand and pricing compare with your hopes and expectations?

Abanca: Although we felt we had a good chance of hitting a sweet spot by launching so early in 2021, and that feeling was backed by very strong investor feedback from our roadshow, we used a bit of caution at IPTs. But very soon the book showed its robustness, reaching two times oversubscription in approximately half an hour. The book grew steadily, giving a hint of a 6% landing zone, which was a bit better than expected. Anyway, the raw pricing is not as important on this occasion as the volume of demand and, perhaps even more importantly, the sheer number of individual investors that cared to show their interest in our paper. We are both delighted and grateful in equal measure about this.

BIHC: Can we expect to see any further issuance from Abanca in 2021?

Abanca: When we printed our first AT1 in 2018, we told investors that we will be a recurrent issuer. This is a commitment that we take very seriously and, within reason for our size and what market conditions dictate, we are committed to complying with it. We have filled our AT1 bucket with this last bond and we had already done the same with our Tier 2 bucket last year, so we anticipate no more issuance of these two particular MREL categories in the near future. We have yet to issue senior preferred/senior non-preferred paper, but we don’t expect to do so within the first half of 2021. Maybe the latter half could see that, but we are definitely not in a hurry to issue anything at this point in time.