Positioning for H2

Pre-funding by banks and a pick-up in insurance issuance, as well as developments in the ESG space and liability management, could see the prospects for financial institutions activity improve in the second half of the year, according to Arnaud D’Intignano, global head of financing and funding solutions at Crédit Agricole CIB (CACIB), with favourable conditions in credit markets likely to persist in spite of downside risks from central bank actions and elections.

What have been the key trends of 2021 in the financial institutions space?

The primary market for financial institutions has been marked by three major trends this year.

Firstly, despite good progress in banks’ issuance plans, volumes for the first half of 2021 are lower than in previous years, driven in particular by the reduced primary market activity in covered bonds. A combination of central bank policy and deposit inflows has provided banks with ample liquidity, and as a consequence they have less pressing funding needs. Insurance sector activity has also been relatively subdued, as the deleveraging trend continues. The currency mix for European banks has shifted during the first half of the year, with more activity seen in dollars and sterling versus euros, given the favourable conditions in these markets and the opportunity for issuers to diversify their funding.

Secondly, the importance of ESG has continued to grow at an impressive pace in the bond markets, with around 50% of total issuance in the euro primary market in June having an ESG angle. The increased activity in this segment has also provided the market with a growing amount of data points to suggest that there is tangible evidence of a “greenium”. We have seen some material developments, with almost 30 new European issuers coming to the market, as well as the first sustainability-linked bonds from financial institutions, with German lender Berlin Hyp issuing a senior preferred bond in euros and China Construction Bank issuing a senior bond in dollars. In addition, ESG themes have broadened into the spectrum of subordinated products more prominently, with several banks opting for Tier 2 issuances with an ESG flavour. CACIB has been active in this sector, acting as a joint bookrunner on three Tier 2 transactions in June, for BayernLB, ING and RBI.

And thirdly, in spite of elevated levels of uncertainty, market conditions have been favourable for issuers, and any spikes in volatility or market fears have thus far proven to be only temporary — even in the face of inflation concerns, credit markets have remained resilient. Credit spreads overall have continued to move tighter through 2021, and new issue concessions have remained in the single-digits, while in the case of higher beta products, zero to negative new issue concessions have been fairly commonplace given the hunt for yield and ample market liquidity.

What do you expect for the rest of the year?

Whilst the uncertainties related to the Covid-19 crisis may have largely abated — in developed countries, at least — a variety of political, fiscal and macroeconomic factors could still play a part in creating some downside risks for credit markets. Issuers and investors alike will continue to closely monitor the tone of central banks and the potential read-across for rates and tapering. We have already seen the Fed introduce a more hawkish tone, guiding the market towards rate hikes sooner than previously expected. Although it is unlikely that we will see the ECB move as quickly as the Fed in rate hikes, I would expect a tightening in the extraordinary measures — the TLTRO conditions, for example.

We also have elections coming up in certain countries, including Germany, and this can also reduce the possible windows of issuance. Although these downside risks may persist, the overarching theme of excess liquidity and the need for investors to put cash to work will mean opportunities to access the market will persist, and we can see some issuers taking advantage of this to opportunistically pre-finance 2022 funding programmes. This is particularly true given the need to refinance the TLTRO funding, which could drive more issuance in the coming years, and banks may want to take advantage of favourable market conditions.

We expect issuance from the insurance sector to pick up in the second half of the year, following relatively subdued issuance from the segment in the first part of the year. Here at CACIB, we have a number of important insurance mandates in the pipeline across various geographies and formats that will materialise in the coming months.

The trends we observe in ESG are set to continue to expand across the product spectrum, not only across the capital structure, but also into asset-backed commercial paper, securitisation and derivatives.

Another area where a pick-up in activity for financial institutions can be expected is in liability management, as banks adjust themselves to the evolving regulatory regimes, be that the treatment of legacy instruments, or the transitioning away from IBOR, and perhaps we will see some more transactions aimed at optimising the liability structure as MREL requirements become clearer.

The implementation of the Basel III standards in Europe will also regain focus as more clarity is gained on how the framework will be applied for the EU and the associated ramifications it brings for RWA inflation, capital requirements and MREL needs. Although the impacts are not expected to be immediate, banks will keep an eye on the capital impacts and may look to ramp up their capital structures, particularly in regions where the RWA inflation may be fairly large.

How is CACIB positioning itself for the second part of the year?

We have made some changes in our debt capital markets organisation to build on the strong platform we have at CACIB, and to ensure we are well positioned for the upcoming challenges that are facing the sector. We have recently appointed Cécile Bidet to lead the DCM Financial Institutions franchise, taking over from Christian Haller, who will run the DCM business in Germany and Austria. Cécile was previously in charge of the DCM Solutions & Advisory business, and will focus CACIB’s strategy for financial institutions on the following three pillars:

ESG: We are seeking to leverage CACIB’s leadership in sustainable banking. CACIB has been a pioneer in the ESG space and given the rapid pace of growth in the sector, Tanguy Claquin — who has been spearheading the team for over 10 years — is further strengthening and broadening our team’s capabilities with a number of new hires as we expand our offering to include ESG rating and carbon advisory.

Advisory: I am a firm believer in cultivating long term relationships with our clients, and to further increase our offering within DCM, we are expanding our advisory capacity, with Michael Benyaya and Véronique Diet Offner now leading our DCM Solutions & Advisory team following Cécile’s move.

EUR/USD platform: Finally, our third pillar remains being focussed on our strong euro and dollar platform. CACIB is a leading player in the financial institutions space within debt capital markets, being number one in the league table in 2020 for all financial institutions in euros. We have maintained this leading position in 2021, and have been involved in many high profile transactions in 2021 across both currencies.