Setting the stage for Greece’s top performers amid latest global macro, political dramas

After the epic execution and performance of their comeback issuance, Greek banks are considering their next steps. For their latest local event, Crédit Agricole CIB DCM, advisory and research returned to Athens on 5 February to share their insights into the latest stories driving the capital markets and what backdrop Greece’s financial institutions can expect in 2025.

Michael Benyaya, co-Head of DCM Solutions and Advisory, Crédit Agricole CIB: Following the recent decisions from the Fed and the ECB, where exactly do we stand in the interest rate and inflation cycle?

Bert Lourenco, Head of Rates Research, Crédit Agricole CIB: The picture is quite different if you look at the Eurozone in certain respects relative to the US.

With the US, we think that Trump policy clearly makes it quite challenging to figure out what’s going to happen next in many respects. For example, just last week, as a by-product of the recent tariffs, we’ve kind of bumped up our US inflation forecast a little bit. But generally we think that the current level of rates as embedded in the market is pretty much fair, so we see the Fed stopping at 4%, maybe we don’t get a cut as soon as we thought, but it’s kind of consistent with what we have in terms of the market terminal rates around 4% and 10 year Treasuries hovering around 4.5% as well. I’d say there is risk to the upside for US inflation, which would probably mean that the Fed would hesitate to cut this year still relative to what we have forecast. Nobody’s really talking about Fed hikes yet, but that is a scenario for which I don’t think there’s a zero probability. And with regards to fiscal policy, again, we have to see what the full impact will be and how that gets transmitted to the bond market. So we think Treasury yields could rise a little bit, but capped below 5%.

For the Eurozone, right now we have a situation where the market’s looking for rates to go lower than our own forecast, of 2.25%, and I think that reflects fears that people have on the growth aspect and how that impacts inflation, which is gradually approaching the target. On the inflation side, we could have some small upside surprises for the next few months. It’s really the second half of the year where we think inflation will come back fully towards target. We see 2% headline inflation around July.  So a slightly different path on inflation and policy rates, but nothing too different from what the market’s got priced in. Bunds around 2.5% look like fair value. To us, opportunities lie more in spread products, and we don’t see reason for aggressive bets with regards to the curve or duration.

Benyaya, Crédit Agricole CIB: You mentioned the Bund spread — what can we expect for the spread complex for Eurozone govvies?

Lourenco (pictured), Crédit Agricole CIB: If you look at how much longer we’re going to have QT for in the Eurozone — and it’s in place for the US — we’re talking about possibly another two years. And if you consider the risks of what the German elections might bring, in terms of the possibility of the debt break being removed or relaxed, then our view continues to be that Bunds will remain an underperforming asset. For Germany, the fundamentals don’t suggest there’s strong reasons to believe that things can change in the next few quarters in terms of poor growth.  To us, this implies that over time Bunds gradually lose their allure as a safe haven asset relative to the rest of the EGB complex. So we think that Bunds will keep underperforming swaps, for example, with the Bund curve steepening relative to swaps, and at the same time, we think that the periphery will continue to grind tighter, as long as there’s no big credit event.

And really the credit market is central, especially with regards to BTPs, which can continue to bring the spread compression to tighter levels. There isn’t anything on our radar in terms of political risks in the periphery at present. Even in France, we think the situation is messy but manageable. So we’re also looking for more compression of OATs versus Bunds, believe it or not, and that, I think, will just be a gradual process. So overall, still positive on the periphery. It doesn’t seem like there’s any big risks out there for now. The big thing to be careful of would be a change in the credit cycle in the US and the credit markets, but that’s just not on our radar given the policy mix and large deficits.

Benyaya, Crédit Agricole CIB: Let’s move on to Florian and covered bonds, where swap spreads have been a major topic lately. Can you share with us what the latest sentiment is on this, taking into account the thoughts you have heard from investors on your travels?

Florian Eichert, Head of Covered Bonds and SSA Research, Crédit Agricole CIB: Regarding swap spreads, investors agree with Bert on the direction of travel, but typically not in terms of the extent of the move. Also, Bert, you mentioned economic fundamentals, you mentioned Germany possibly losing its allure as a risk free asset. Well, from most of the investor meetings I had, there is no shift in terms of what investors see as the euro risk free asset. After all, where else are you going to move to in euro markets? French sovereign bonds? They have been reasonably volatile these past months. The European Union is filling that position at the moment, of course. However, it is probably not going to be around in size long enough to really take on that position in the long term.

Hence, at the end of the day, yes, you have the issue of an increase in the Bund free float, with the ECB balance sheet run-off, even without any discussions around new elections and amendments to the debt break. And that, I agree, is continuing to put pressure on Bund-asset swap spreads. However, I have come across a lot of investors from pension funds to bank treasuries and real money who would add Bunds in size if they were to trade as wide as 30bp-35bp over swaps.

For the SSA and covered bond spread complex, this means that no one expects spreads of the European Union, KfW, or, in a second instance, covered bonds at the long end to go meaningfully tighter versus swaps. The floor from Bunds has just shifted up to a level where you cannot expect to move back to the pre-Covid days with covered bonds trading flat versus swaps, or the EU 15bp-20bp through swaps. In fact, further widening and steepening of Bunds versus swaps will keep investors cautious towards long end SSAs and long end covered bonds. Investors do not expect Schatz to move, they do not even really see Bobl move in size. Hence, if I look at the covered bond space, further Bund weakness is a story, but it is not one that would be extremely disruptive. The disruptive part, we have already seen in Q4 with Bund asset swap spreads collapsing, also in five years. But if you expect Bobl to trade flat to swaps, that’s another 5bp-7bp only and the pick-up you have in both SSAs and covered bonds versus Bunds is big enough to then only have a marginal move wider in terms of spreads versus swaps. In other words, we are fairly well-protected from here, especially in the area where we have seen the biggest amount of activity in covered bond markets.

In other words, to me, it is above all a long-end story and it is above all a European Union story as the issuer has size to do and needs long tenors. Banks, on the other hand, do not have the funding needs to be pushed into the long end, and they look at these spread levels almost as a personal insult, and therefore will not issue long-end covered bonds that could reprice their curves.

Benyaya (pictured), Crédit Agricole CIB: I was about to ask about the implication for supply forecasts. You have already specified a few elements, but more broadly, what do you expect for the covered bond market in 2025?

Eichert, Crédit Agricole CIB: We have had a few years with the European Central Bank offering banks very, very cheap three year liquidity, and as a result of this, we had two, three years with very little covered bond supply. As we got to the end of the TLTROs, of course, they had to be refinanced. So we had undershooting of supply, followed by two years of overshooting in 2022 and 2023. Last year and this we are back to the more traditional classic factors driving supply. What happens on your asset side? What do you have in terms of redemptions on your liability side? And then, how do the various liability products price relative to each other? At the moment, we look at a market where there’s virtually no loan growth across many European countries and deposits are really sticky. So there’s limited overall needs on the funding side. Take Crédit Agricole as an example, the bank has a €20bn funding target for this year, after starting last year with €26bn. In addition to this, we have a market where the Bund ASW and EGB spread complex seems to have been relevant for rates buyers only, with the credit world not focused on any of this at all. This has led to performance of senior, senior non-preferred, Tier 2s even in Q4 last year when covered bonds were struggling. As a result of this, banks are actively choosing to not issue secured funding product, but to start the year with unsecured debt because the relative pricing between the two has become very tight. Hence, we are massively behind where we were last year in terms of covered bond supply. I think it will pick up gradually as we go further, but the main drivers on the balance sheet dynamics are just not there to justify huge amounts of issuance.

Benyaya, Crédit Agricole CIB: Cécile, from the origination side, following up on these covered bond dynamics and looking more broadly at funding and the capital structure, what can we expect for 2025?

Cécile Bidet, Global Head of FIG DCM, Crédit Agricole CIB: Florian has already covered a number of the drivers, asset-liability, so on, funding, indeed limited needs. Our view is that overall, the funding is going to be stable this year. One of the parameters is MREL, because even if banks don’t need liquidity, they have capital requirements. Most banks, and Greek banks included, are already more or less at their MREL target and are relatively well optimized on capital, too. So, it will be again redemptions that will drive the market. Same as last year, AT1 and Tier 2 will be a big component of the market. Last year we were around the €40bn mark on AT1, and around €50bn on Tier 2. And for this year, we’re seeing almost the same thing, between €35bn-€40bn, both for AT1 and Tier 2. And again, this is driven by redemptions, because the risk-weighted assets are not growing that much. Asset side is sluggish, and we also don’t have a lot of impact from Basel IV. At the moment, it’s very much manageable. It’s been absorbed by TRIM in the previous years. We will see a little bit more from Basel IV when the output floor kicks in for a number of banks. But at the moment, the risk weighted asset growth is relatively limited. So yes, we see MREL refinancing driving the issuance, with capital still being very much dominant. We’ll see if, in terms of spread, we still have the same compression as we saw last year.

Benyaya, Crédit Agricole CIB: Exactly, that was my follow-up question in terms of funding conditions. Spread convergence has been a key theme in the credit markets. What is the relative positioning of Greek banks now? And do you expect these dynamics to continue or to stabilise?

Bidet, Crédit Agricole CIB: So that’s the big question. And Greek banks were definitely the top performer in the market. I think on Tier 2, we saw the spread compression of around 200bp on average in 2024 — that’s absolutely massive. This being said, when you think about the premium senior-subordinated, there is still a wider premium than for other countries. So yes, there is still a little bit of compression that is possible, but we will not see what we’ve seen since 2023 when the compression started.

We have this compression also because the fundamentals are improving massively. We saw that in the rating. I often say that ratings are a lagging indicator; I think this time, they’re doing a pretty good job in keeping up in terms of upgrades. Also hoping that on the sovereign side, there will be some positive news from Moody’s at some point. And that will also help for the covered bond rating.

Benyaya, Crédit Agricole CIB : Let’s move on to addressing the topic of ESG. I don’t want to be controversial, but we have all seen the North American banks leaving the Net-Zero Banking Alliance. Cécile, what is your feeling around ESG and the funding strategies of European banks? Where does it fit at the moment?

Bidet (pictured), Crédit Agricole CIB: ESG remains a very important topic in Europe politically, and not only: in terms of society, too. And I think that European banks are committed to their decarbonization strategies, and ESG funding is a thing that will remain. It’s very important. It definitely helps in terms of diversification of the investor base. It also helps in terms of performance in the secondary market, because we all know that you have much more demand from ESG funds than there is in terms of supply. In fact, when a fund needs to rotate a portfolio or get some liquidity, the last bond that they will sell is your green bond. So definitely a lot of advantage. And I think that ESG is here to stay for the diversification of funding. It also depends on market participants.

You mentioned some banks leaving the NZBA and the impact of that. It depends on issuers and market participants, if they care about ESG, making sure that they deal with a bank that is still in the alliance in order to make a difference. We all have a say and, maybe I’m a bit biased, but I think it’s important that market participants recognize that some banks are staying in the alliance to make a difference, and you need to validate them on those topics.

Benyaya, Crédit Agricole CIB: Florian, on your side, anything to add on ESG labeling for covered bonds? Does it bring any specific benefits?

Eichert, Crédit Agricole CIB: It depends on market conditions. At the end of last year, we had a really weak market, with covered bond transactions struggling. At that time, banks were shifting their green assets from unsecured transactions to covered bonds to de-risk these transactions. It was not about saving extra basis points, not to have a second curve that trades different to the conventional one — that we don’t even have on the Bund curve — but it was to de-risk trades and ensure market access. Early this year, we are rather looking at limited covered bond supply and squeezed markets. Hence, there is no point in adding a green or social angle to covered bond transactions. Whether you have an eight times oversubscribed book, or ten times by going green/social, does not really change the equation for you as an issuer. Hence, banks have gone back to refocusing their green supply to unsecured trades. So it simply depends on market conditions to determine what banks use these assets for. At the end of the day, banks still only have a limited amount of assets identified on their balance sheet that qualify for their ESG frameworks, so it’s always about deciding where they are needed the most.

Benyaya, Crédit Agricole CIB: Let’s now move to the final part of our discussions: what risk factors do you see for the rest of 2025? Or perhaps you want to share a word of optimism?

Lourenco, Crédit Agricole CIB: I’m always optimistic, which is why I always have a slightly higher yield forecast than many of my peers. I’m not necessarily surprised people are worried about Trump’s policies, but for assets the reaction needs to reflect a lot of future moving parts. It doesn’t have to be catastrophic. It’s just a question of adjustment of trade flows and their composition. And I think applying a geopolitical lens for that sort of analysis kind of implies that Europe is not necessarily going to be at the eye of the storm relative to other cases, like China.

Eichert (pictured), Crédit Agricole CIB: To me, it is hard to think of risk factors from within the covered bond space that could become a bigger problem. Bank profitability may be past its peak, but banks are in good health, with solid capital, liquidity and funding metrics. Covered bond supply will pick up as we move further into 2025, but I do not see a risk of over-supply. Cover pool asset quality may deteriorate marginally, but concerns on the investor side are predominantly limited to commercial real estate backed programmes, of which we have only a few, in Germany. Hence, I am more concerned around exogenous factors. If Bert were to be correct on his Bund-ASW forecast and we get 10 year Bunds trading 35bp over swaps, then we would clearly get pressure on long-end covered bond valuations.

In terms of positive surprises, if the investors that I speak to are correct on Bund-ASW, then we should be close to a stabilization in Bunds. And if we then add the possibility of less rather than more European Union funding, we take away another disruptive element, especially on long-end covered bond spreads. In the first half of this year, the EU is still aiming for EUR90bn of funding, hence the entity is at peak supply and peak volatility. If the EU were to realize in the second half of the year that they are still waiting for disbursement requests from Spain, they will struggle to maintain the current funding pace. Materially less supply from an issuer like the European Union is positive for long end SSA spreads and this in turn may also give covered bonds a bit of extra wiggle room.

Bidet, Crédit Agricole CIB: Last year, all the stars were aligned, technicals, fundamentals, and the market ignored geopolitical risks, political risks, too. I agree with Florian that on fundamentals we are going to see a bit of net interest margin deterioration because interest rates are cut. Maybe cost of risk is going to increase a little bit, but this is absolutely manageable, within the through-the-cycle range, and this is more than mitigated by the strength of balance sheets. Liquidity, capital are extremely strong — I don’t think that the banking sector in Europe has been ever that strong. So fundamentals are going to be fine. The only risk for me is on the technicals. At the moment, we have abundant liquidity, and since Q1 2023, we’ve seen continuous, positive inflows in credit funds.

The question is, what happens in H2 when interest rates are cut and investors have alternatives to invest in, and the flows stabilize or become negative? We’ve already seen a slowdown in ESG investor flows — for the first time, in Q3 2024, ESG inflow was lower than the conventional funds. And that’s my only concern: when the paradigm is not sufficiently compelling that you have to invest in credit because rates will have been cut.