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Michael Benyaya, co-head of DCM so-
lutions and advisory, Crédit Agricole
CIB: To set the scene, what is the central
scenario for the Eurozone economy?
And do we foresee a recession for
2024?
Bert Lourenco, global head of rates
research, Crédit Agricole CIB: Relative
to other houses, we are somewhat more
optimistic, and even within CACIB, I’m
probably more optimistic than my col-
leagues. We don’t expect a recession this
year. In fact, we expect growth to pick
up — still sub-trend, but just below 1%.
What are the reasons for this?
First and foremost, we had a terms of
trade shock for the past few years, led by
the energy crisis, and that’s clearly un-
wound itself. This is leading to the cur-
rent account changing from a deficit to a
surplus for the EU in general. Secondly,
we still have pretty strong labour mar-
kets — which is pretty astounding — and
these labour markets are still generating
wage gains of 4.5% or so, so we think that
real household incomes will increase, giv-
ing household consumption a boost. And
then we have this phenomenon that is
pertinent around the world, not just for
Europe, which is that we have deficits, and
these deficits seem to be structurally per-
sistent. So in aggregate, governments have
less net issuance this year, but when you
throw in the EU and supranational issu-
ance, that actually becomes a net positive,
so we also have support through the fis-
cal side. When you bring all this togeth-
er, that’s quite a good combination for a
broadening out of growth.
One final thing to mention is the junc-
ture of banks with the real estate sector.
High interest rates have not caused as
much pain in residential real estate as one
might expect. There are pockets in the EU,
like Sweden and Germany, that still have
some pain to come in real estate. But over-
all, banks seem to be in pretty good shape,
able to provide credit if there’s demand,
which is pretty amazing given the level of
rates we have right now.
So it’s really a matter of subdued, but
better growth across Europe — but re-
membering that Germany is going to re-
main the sick man of Europe for a while,
and so we should not depend on the Ger-
man manufacturing sector to lead growth
in Europe for some time at least.
Benyaya: In terms of the financial insti-
tutions primary market, what have we
seen in the first two months of 2024?
And how does it compare with early
2023?
Vincent Hoarau, head of FIG syndicate,
Crédit Agricole CIB: Since the beginning
of the year, the primary market activ-
ity in euro-denominated format has been
very robust, around €140bn. Nonetheless,
down 18% year-to-date versus 2023. Last
year’s volumes were exceptionality high;
2024 volumes are still up 35% versus 2022,
and twice the volumes of 2021. So far this
year we have enjoyed issuance activity
in line with what should be a reasonable
pace in a normalised world post a decade
of QE.
If we look at issuance in US dollars,
it is exceptionally high, with numerous
jumbo offerings from Yankee banks. This
time last year, funding in US dollars was
less competitive in terms of arbitrage for
European banks; nonetheless, Yankee is-
suance is down 10% this year versus last.
Elsewhere, European issuers also con-
tinue to be active in sterling and niche
currencies, looking to further diversify
their funding sources. Lastly, on ESG, is-
suance is down 30%, but still up versus
2022.
In terms of demand and investor re-
ception, the tone is particularly supportive
and all the metrics we look at around deal
execution have been great. Oversubscrip-
tion levels are exceptionally elevated. The
Return towards IG: Today’s FIG landscape a
promising stage for next Greek adventures
1 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
Buoyed by the return to investment grade of the Hellenic Republic, Greek issuers have been given
an increasingly warm welcome by investors across asset classes. In Athens on 29 February, Crédit
Agricole CIB syndicate, DCM, advisory and research set the scene for Greek banks’ next steps as
they navigate the maze of risks and opportunities in today’s FIG market.
In association with
Bank+InsuranceHybridCapital Briefing
12 MARCH 2024
stickiness of demand when we adjust pric-
ing lower in bookbuilding, the granularity
and the quality of order books are great.
Secondary performance post pricing can
be impressive. New issue concessions have
been drifting tighter since the beginning
of the year, and are sometimes non-exist-
ent or even negative.
All those things point to a very healthy
market. Investors love the current level of
yields. The iTraxx financials is currently at
a two year low.
Looking at the profile of issuance, in
senior unsecured, tenors are well spread
across the maturity spectrum. In covered
bonds, 50% of supply has come with a ma-
turity between five and seven years. Last
year the average duration for funding was
shorter than five years. The growing ap-
petite for long dated assets is remarkable.
We have seen much more 10-12 year new
issues this year compared to last.
We see the most noticeable change
across funding instruments in the cov-
ered bond space. 2023 was a record year
in terms of issuance, but a very challeng-
ing one for covered bonds, a year during
which the asset class digested the legacy
of a decade of quantitative easing. The
market has been dealing with ongoing
technical distortions because of the lack
of relevance of secondary market spread
levels, which were kept artificially tight
sometimes because of the purchases of
the Eurosystem. After a year of repricing
across jurisdictions, we started 2024 with
much healthier trading metrics. Globally,
the product has become much more ap-
pealing, while the buyer base has grown
steadily. That’s a relevant evolution for FIs.
Benyaya: You mentioned that spreads
are tight — why is that in the current
environment?
Hoarau: A couple of elements explain the
current spread complex. First of all, the
demand side of the equation is supported
by a very robust economy in the US, while
the situation in Europe is improving sig-
nificantly, particularly in the South and to
some extent in France, even if we have the
aforementioned situation in Germany. We
also have a very favourable credit environ-
ment in spite of the string of rate hikes
over the past two years. We have not seen
a lot of credit events — yes, we had Credit
Suisse and the US regional bank issues last
year, but away from that the market has
been extremely resilient. Over the past 12
months, we have enjoyed a very nice situ-
ation in terms of ratings evolution, with
a lot of upgrades and many financial in-
struments moving from non-investment
grade to investment grade. So that’s the
first element.
The second element explaining why
the spread complex situation looks really
exceptional, is that the equity rally is also
pushing pension funds to rebalance cash
to the benefit of the credit market. And if
you screen the world of investment grade
credit funds, we continue to see tremen-
dous inflows.
But most importantly, the yield envi-
ronment combined with the excess liquid-
ity situation is certainly what is keeping
spreads so tight nowadays. And as long
as the liquidity situation does not change,
we are going to see a market that remains
extremely resilient, and any sign of correc-
tion will very likely be short-lived. In this
very particular rate environment, there is
little upside in selling bonds, particularly
high coupon bonds. And the recent nega-
tive headlines around commercial real
estate for the time being remain isolated
cases that are not derailing the market
from its very strong path.
2 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
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Bloomberg: € = BGCS2 Global Directory = BGCP
Panellists (left to right):
Michael Benyaya, co-head of DCM solutions and advisory, Crédit Agricole CIB
Bert Lourenco, global head of rates research, Crédit Agricole CIB
Yves Glaser, head of financial institutions advisory, EMEA, Crédit Agricole CIB
Vincent Hoarau, head of FIG syndicate, Crédit Agricole CIB
After more than a decade in sub-investment grade territory,
Greece was in the autumn rewarded for reform efforts by receiv-
ing a series of upgrades that saw it finally regain investment rat-
ings, with only Moody’s yet to take this final step.
S&P was the first of the “big three” rating agencies to upgrade
the sovereign back into investment grade territory, lifting it from
BB+ to BBB- on 20 October 2023.
Implementing a stable outlook, the rating agency cited an im-
provement in public finances thanks to budgetary consolidation
efforts, noting that since the debt crisis of 2009-2015, significant
progress has been made in addressing the country’s economic
and fiscal imbalances.
“We expect additional structural economic and budgetary re-
forms, coupled with large EU funds, will support robust economic
growth in 2023-2026 and underpin continued reduction in gov-
ernment debt,” said S&P.
Fitch followed suit on 1 December, also lifting Greece from
BB+ to BBB-, on stable outlook. High among key rating drivers
cited by the rating agency were favourable debt dynamics.
It noted that a projected decline in the debt to GDP ratio of
65pp, from a pandemic high of 205% to a forecast 141.2% in
2027 would be among the best performances of any Fitch-rated
sovereign. The rating agency acknowledged that the ratio is fore-
cast to remain close to three times the BBB median, but said miti-
gating factors such as low debt servicing costs, very long maturi-
ties (18 years) and a substantial liquid cash buffer (around 16.5%
of GDP mid-November) reduce public finance risks.
A commitment to fiscal consolidation was the other factor up-
permost among drivers of Fitch’s upgrade. The primary surplus
was set to increase to 1.1% of GDP and average 2.2% in 2024-
2025, according to the rating agency’s forecasts.
“Fiscal prudence is anchored in conservative expenditure as-
sumptions in recent budgets (and is also the case in the 2024
budget),” said Fitch, “with revenue over-performance providing
fiscal space for temporary spending: in 2023 this included energy
crisis and climate change-related measures.”
With Scope Ratings having upgraded the Greek sovereign
from BB+ to BBB- in August 2023 and Morningstar DRBS having
lifted it from BB (high) to BBB (low) in September, the next move
from Moody’s is awaited. A Moody’s upgrade in September left
Greece on the cusp of investment grade, at Ba1, on stable out-
look, although the rating action was by two notches, from Ba3.
The rating agency cited several factors that could lead to an up-
grade.
“A continuation of economic policies and commitment to fiscal
consolidation, together with successful implementation of remain-
ing reforms, particularly in the judicial system, leading to greater
resilience to external shocks, faster than expected improvement
to fiscal strength and work-out of non-performing loans (NPLs)
would support a higher rating,” said Moody’s. “In addition, a
more rapid change in Greece’s economic structure that helps to
improve economic resilience would be credit positive.
“Further improvements in the banking sector,” it added, “re-
ducing volatility of profitability and bringing asset quality and
capitalisation ratios closer to the euro area average, would also
be credit positive.”
Moody’s two notch upgrade of the sovereign was accompa-
nied by an improvement in its macro profile for Greece from Mod-
erate- to Moderate+.
This contributed to the six Greek banks rated by Moody’s ben-
efiting from one or two notch upgrades in the wake of the sover-
eign’s, with all on positive outlook. l
3 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
-20
-15
-10
-5
0
5
10
15
20
Private consumption Government consumption
GFCF Net exports
Real GDP growth (% yoy)
7 19 September 2023 Government of G
Bank upgrades eyed in wake of sovereign’s
Benyaya: When it comes to the spread
complex for Eurozone government
bonds, and also ECB monetary policy,
what can we expect?
Lourenco: At the start of the year, many
people were looking for the ECB to start
cutting rates even as early as Q1 of this
year, which we thought was way, way pre-
mature. Our view is for three rate cuts in
Q4, i.e. after June, and three rate cuts in
the first half of next year. We think the
ECB needs a lot more evidence to be fully
comfortable that inflation is coming back
to target, and that their fear of a policy
mistake still points towards moving more
slowly in cutting rates. And nobody’s go-
ing to be in a hurry to cut in large amounts
— unless we have a recession, a hard land-
ing — therefore, we foresee 25bp incre-
ments. The market still has a bit more than
that priced in. So if you ask me what our
view is on the rates side, we still think that
yields can go up a little further, simply be-
cause we think the market’s got a little bit
ahead of itself — you have a 25bp cut ef-
fectively priced in for June already, which
we think is too early. And remember that
they will come out with their forecasts in
March, June and September. So really we
think that more time is needed, and that
the forecast in September will allow them
to proceed with that cut.
Robust growth since the pandemic, driven by domestic demand
Growth contribution (percentage points) and real GDP growth
Source: Elstat, Moody's Investors Service
Coming back to the first question,
on the spread complex. What could lead
to massive spread widening in EGBs? It
could result from redenomination risk,
but that doesn’t seem to be credible from
a political angle for any country right
now. It could possibly come from a big
deleveraging event that sharply increases
unemployment. Or counter-cyclical fac-
tors that result in a sudden deterioration
in government finances. But these factors
aren’t at play.
Our view — which is a little different
than a year and a half ago — is that in
spite of hikes, and in spite of QT, we have
not been worried about spread widening.
Why? Number one is that we have high
nominal GDP. This is the impact of infla-
tion. So government tax receipts are very
good everywhere. That will be a support-
ive factor. Number two, high yields cre-
ate demand. We’ve seen a transition away
from institutional investors more to retail
investors being interested in fixed income
— just look at all the retail products com-
ing out of Italy, Portugal, and now places
like Belgium. So higher yields are not an
impediment to keeping spreads tighter —
we do still think that significantly higher
yields leads to a bit of spread widening
pressure, but nothing dramatic. So we
don’t have the ingredients for the mas-
sive spread widening that people were
so afraid of at the start of the cycle. If I’d
asked a year and a half ago if you believed
that spreads would be at these levels with
the ECB having hiked rates 400bp and
unwinding its balance sheet, you’d have
said, no way. But that’s exactly what’s hap-
pened, and that’s actually a pretty good
thing. I think the ECB has done a pretty
good job along the way, which is a slow,
well-flagged pace of QT, and at the same
time creating the the perception, at least,
that there are mechanisms in the back-
ground such that if dramatic spread wid-
ening happens, it can step in at any point
in time. All these factors probably point
towards any spread widening remaining
modest. Lastly, I would mention that the
general abundance of liquidity and per-
formance of credit, with a lack of defaults,
also supports this view.
Benyaya: How are expectations re-
garding ECB monetary policy affecting
investor sentiment and investor posi-
tioning?
Hoarau: The paradigm has changed com-
pletely in 2024 versus 2023: at the begin-
ning of last year, we had the end of the
tightening cycle ahead of us; in 2024, we
have the start of the easing cycle ahead
of us. So while the management of mon-
etary policy risk was on everyone’s agen-
da in 2023, it has been losing a lot of its
relevance. Investors now feel much more
relaxed towards any type of risks. They
like the yield, and while they may dislike
the spread, they just enjoy the carry, dis-
regarding the timing of the first rate cut. I
can imagine that at some point one or the
other may lose patience. But for the time
being, I would say, so far, so good. And we
are in a situation, a very unique situation,
where the relationship between rates and
credit is inverted.
Benyaya: Staying with interest rates,
but looking at it from a slightly differ-
ent angle, banking ALM: we’ve seen
the higher interest rates boosting net
interest margins in some countries —
not everywhere, but in some places —
what could be the hedging strategies
to maintain this type of net interest
margin?
Yves Glaser, head of financial institu-
tions advisory, EMEA, Crédit Agricole
CIB: Indeed, in the southern part of Eu-
rope — Greece, Spain, Italy, Portugal —
banks generally grant variable rate mort-
gages, although there is a recent trend
towards a higher proportion of fixed rate
loans. In the northern part of the euro
area — France, the Netherlands, Belgium
— banks tend to lend at fixed rates. In
France, for example, typically more than
90% of production is fixed rate and for
very long periods, 20 to 25 years. ALM
likes a natural match between assets and
liabilities. That’s a factor contributing to
a shorter model on the liability side for
banks in Italy and Greece. Overall, the
duration of balance sheets in southern
Europe is lower than in northern Europe,
which makes net interest income more
sensitive to a change in interest rates.
Given the rise in market interest rates,
the development of NII for retail ac-
tivities in these countries has been very
favourable.
As rates fall, banks with low balance
sheet duration will lose this benefit rela-
tively quickly and return to lower levels
of NII. The question for ALM teams now
is: is this a good time to increase balance
sheet duration and lock in the benefit of
current interest rate levels?
One welcome development is that
the beta on deposits has been relatively
low over this period. It has been a good
stress test: we have had almost a 400bp
rise in rates and overall, while there has
been some decline and some outflows on
demand deposits, it has been relatively
limited. Customers have been much less
reactive on their deposits in this rising
rate environment than they have been on
their mortgages to prepay when rates went
down. This would argue in favour of in-
creasing the duration of deposits.
Once you increase the duration of de-
posits, how do you increase the duration
of assets to effectively get more stickiness
in your net interest income? The first
way would be to do a receiver swap. But
historically, banks with a high propor-
tion of floating rate loans have tended to
use their liquidity portfolios to increase
4 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
Bert Lourenco, Crédit Agricole
CIB: ’All these factors probably
point towards any spread widening
remaining modest’
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the duration of their assets, and not so
much receiver swaps. So a natural way
to extend the duration of assets and im-
munise NII against lower rates would be
to buy forward bonds, thereby locking in
the reinvestment rate of maturing bonds.
In addition, buying forward bonds rather
than doing a receiver swap will benefit
from the fact that the EGB curve is steep-
er than the swap curve. Finally, hedge ac-
counting of forward bonds is easier than
for a swap because the forward bond is
an all-in-one hedge, the hedge item is the
bond that you will receive, whereas for a
swap, a commercial item would be desig-
nated as the hedged item, with potential
inefficiencies arising from basis risk or
behavioural risk.
Finally, some banks are also looking
to buy floors to protect their NII against
lower interest rates. In the same spirit as
buying forward bonds, buying a call on
government bonds can be an efficient al-
ternative to a floor, both financially given
the shape of the curve, and operationally
for hedge accounting. Also, in terms of
P&L profile, buying a call may be more
suitable as the time value would be re-
corded in the initial period when NII is at
a high level, whereas for a floor this time
value would go to the P&L over the entire
maturity of the hedge.
Benyaya: In terms of banking supervi-
sion, I know that there is a 200bp stress
test set out in the regulation, but you
mentioned we have experienced well
above that. Do you have a view on how
this could develop?
Glaser: The regulatory stress of 200bp
was supposed to be the 99th percentile of
interest rate stress, so once in 100 years,
and we have had a 400bp move in interest
rates. A revision of the stress level is cur-
rently within the scope of the regulator.
In addition, we have had in the last two
years bank failures as a result of interest
rate risk, in particular SVB. This is another
incentive to review the regulation. Pablo
Hernández de Cos, chairman of the Basel
Committee, gave a speech on the subject
in September last year and raised the issue
of IRRBB being in Pillar 2. However, mov-
ing IRRBB to Pillar 1 would be a very long
shot. In addition, at the end of that speech,
he also mentioned that these failures were
more related to poor risk monitoring by
these institutions than a structural prob-
lem for the banking sector which is related
to Pillar 2.
In any case, we could see some chang-
es in regulation, and in particular in the
level of interest rate stress. Currently,
there are discussions about extending the
stress from 200bp to 250bp, which could
be significant for some retail banks that
manage their interest rate exposure close
to the limit. Supervision is also likely to
focus more on the IRRBB models used by
banks, especially on deposit outflows, as
large deposit outflows were the trigger for
the SVB failure.
Benyaya: Let’s turn to sovereign rat-
ings, where we have seen some diver-
gence among countries. What is your
view on such rating developments, also
with reference to the Greek sovereign?
Lourenco: As a general observation,
credit ratings don’t really give inves-
tors much of an advantage, because rat-
ing agencies are very much backward-
looking. That doesn’t mean that they’re
not important, simply because ratings
are used by investors to invest in other
domiciles, by risk management commit-
tees, and even for investors, they provide
a kind of anchoring for valuations. They
are also used by CCPs, for example, and
as such give a kind of indication of what
the value of such collateral might be.
That’s a roundabout way of saying that
you cannot ignore them.
Having said that, there are many met-
rics rating agencies look at, but crucial is
if you’re running surpluses or deficits on
the fiscal side, and likewise for the cur-
rent account. There are a few countries
in Europe that have these twin surpluses,
while a few have twin deficits. Those with
twin surpluses are Greece, Portugal and
Ireland, and these are the smaller coun-
tries that have positive ratings momen-
tum. We think that they’ll still be subject
to upgrades in the future, as long as we
don’t get a massive recession and there’s
no big deleveraging event. Meanwhile,
the bigger countries with twin deficits
are those we are a little more worried
about, such as Belgium and France. We’re
not so concerned about Italy or Spain for
the time being. That’s how we differenti-
ate among European sovereigns. So we
would still be positive on Greek develop-
ments given what’s happening here at a
fundamental level.
Benyaya: On the back of this positive
momentum in Greek sovereign ratings,
how is Greek risk perceived in the credit
markets?
Hoarau: People are chasing Greek assets.
The rating trajectory of the country has
been decisive in spread developments
for the country. Investors are really im-
pressed by the pace of the reforms, and
how austerity has paid off in recent years.
It’s not about cleaning balance sheets
now; good banks are again on the of-
fensive. And we could have further good
news from Moody’s this year on the sov-
ereign, with the ratings of Eurobank and
NBG benefiting. In any case, the trajec-
tory of Greek metrics are clearly reflected
in the evolution of spreads in the sec-
ondary market: over the past 12 months,
Greek senior bonds have tightened by an
average of something like 200bp. When
6 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
Vincent Hoarau, Crédit Agricole
CIB: ’It’s not about cleaning
balance sheets now; good banks
are again on the offensive’
I’m looking at headlines nowadays, with
what’s happening in Germany compared
to what’s happening in southern Europe,
it’s quite a turnaround.
Benyaya: Before we open the Q&A
to the audience, one final question to
each of our panellists on risk factors
for the rest of 2024. Yves, as alluded to
earlier, clearly interest rate movements
can result in some arbitrage strategies
by clients and depositors. How is this
risk factor reflected in banks’ interest
rate risk management, and do you see
any potential changes in the course of
the year?
Glaser: During the decade of very low
interest rates, we have seen a surge in
sight deposits in almost all countries. I
like to look at the ratio of sight deposits to
household disposable income. For a long
time this was very stable — from the late
1990s to around 2010 — but from 2012,
when interest rates were zero or negative,
the ratio started to rise and by 2020 it was
more than double what it was at the end
of 2010. So we clearly have a lot more de-
mand deposits now relative to household
disposable income. And so far we have
seen relatively low deposit outflows. This
situation may not last, as there is no rea-
son why customers should be less efficient
today than they were 20 years ago. It takes
time for customers to regain a deposit cul-
ture. Deposit outflows may also continue
if interest rates remain at current levels.
On the other hand, if interest rates return
to lower levels, we may see an increase in
prepayments on recently sold fixed rate
mortgages. So there is certainly quite a
significant behavioural risk on balance
sheets. The supervisory teams are look-
ing at this very closely, reviewing banks’
IRRBB models and requiring them to
incorporate hypotheses about arbitrage
from non-interest-bearing to interest-
bearing products.
Banks have developed models that link
the stability of deposits and the level of
prepayments to the level of interest rates,
which is a good response to this uncer-
tainty. They are trying to hedge this expo-
sure to behavioural risk. We see this in the
demand for options products.
Benyaya: Bert, not another question on
interest rates, but one on inflation. I be-
lieve inflation forecasts have been rela-
tively sticky. What are the risks to these
forecasts given that inflation seems to
be easing somewhat?
Lourenco: First of all, I’d note that one
of the things that makes us a little bit dif-
ferent from other research shops is how
much time and effort we spend analysing
the inflation side. With the ECB having a
strict and, I should stress, symmetrical in-
flation target, inflation developments are
uppermost in our mind in terms of how
we think about the market.
For this year, we expect the decline
in inflation to proceed, but it might not
proceed as fast as the market has priced
in. We think it’ll be a little bit higher than
implied, particularly in the CPI fixings for
the second half of the year. At the start of
the year, we thought inflation would prob-
ably come in at 2.5%-2.8%, although fol-
lowing some better developments recent-
ly, we’re probably talking about around
2.5% HICP on average for the year. Two
factors explain this higher inflation. One
is tight labour markets, and wages, which
imply that service wages stay high — as I
mentioned earlier, we have wages grow-
ing at around 4.5%, so core inflation will
by default stay high. And then the other
thing that we consider a lot is food price
inflation, simply because of what’s hap-
pening with the climate, the cost of food
production — just look at the farmers’
protests across Europe. These two factors
to us imply that inflation will probably be
a bit higher than others expect.
The last point I would make is that a
lot of people are looking at inflation dy-
namics returning back to what they were
before Covid, and we’re not so sure about
that. It could be that we have sufficient
changes in structural factors, be that in-
dustrial policy, changing global trade
patterns, particularly Asia and China, po-
tentially the implications of green energy
investment, more military spending and
so on, and continued pro-cyclical fiscal
spending. These kinds of structural fac-
tors imply that, this time around, we don’t
expect inflation to be below 2%, we think
that it will stay somewhere around 2% go-
ing forward. It still means that the ECB
can cut rates, but it means that we’re not
going back to a low inflation environment
like we had in the past, and probably not a
very low rate environment, either.
Benyaya: Vincent, what risk factors do
you foresee for the FI primary markets
for the rest of 2024?
Hoarau: I’m fairly bullish, I have to say,
at least for the first half of the year. If I
have to list some potential risk factors, I
would start with a theoretical one, which
is the increase of Minimum Reserve Re-
quirements by the ECB. This could push
7 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
8 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
up supply and increase potential pres-
sure on spreads, but I think this risk is
only theoretical as long as the liquidity
situation remains intact. More impor-
tant, and later in the year, could be re-
financing risk driven by booming SSA
supply and the refinancing of ballooning
budget deficits. And clearly reflation risk
would be a disaster for markets. This is
certainly improbable, but if we have no
rate cuts this year, and a narrative grows
up around rate hikes instead of rate cuts,
it could derail the market from this very
strong base, and this is something we are
all bearing in mind.
Benyaya: Thank you all for your in-
sights. So now I’m happy to open the
Q&A session.
Audience member: Going back to
the regulatory environment, if I’m not
mistaken, there’s a focus on the credit
spread risk for the banking book,
something that might become man-
datory or at least that the regulator is
monitoring. How do you see the banks
in Europe working on that? And what’s
your view on the final outcome?
Glaser: That’s a tricky question, because
I don’t think that there is a lot of consen-
sus on the way to follow the credit spread
risk in the banking book. It’s a new is-
sue. I think that banks were for quite a
while very reluctant to have this CSRBB,
but anyway, now it’s a requirement from
the EBA to have a risk framework on
CSRBB. However, effectively there may
be very heterogenous practice regard-
ing CSRBB. However, I think that quite
a lot of banks still have quite a restrictive
view on the monitoring of CSRBB, and
just have monitoring of the CSRBB on
their bond portfolio, but not on the loan
book. So it will be more like, credit spread
risk in the banking book for the bond
portfolio, than global risk on mortgage
loans, consumer loans or whatever other
type of loans. Same on the liability side, I
don’t think that many banks are using, are
putting credit spread risk on their liabili-
ties. It could be possible on the debt side,
because effectively you have your own
spread, so you can have own credit spread
risk, and it means that it will be favourable
in case of an increase in spreads. I think
that the ECB is relatively reluctant to have
this positive factor in case of credit spread
widening. So that’s why what we are see-
ing is banks sticking only to the bond
portfolio for the credit spread risk.
Audience member: You haven’t dis-
cussed the possibility of Trump being
elected, or all the other elections taking
place this year. What are your thoughts
on this front?
Hoarau: That could be a factor in why
I’m more bullish on the first half of the
year rather than the second half… When
it comes to the direction of spreads and
risks for markets, it’s primarily a ques-
tion of liquidity and market absorption
capacity. Then we look at geopolitics and
that element can go with the liquidity dy-
namic and refinancing risk if the question
around European defence funding comes
up. In the US, the fiscal lever will be heav-
ily used either way. But one scenario po-
tentially implies more pressure on the is-
suance front in Europe, and potentially on
the spread complex in the lower beta part
of the borrower spectrum (government
and supra).
Lourenco: The way I look at it is that for
markets, what matters is the politicians’
positions on deficits, and be it Trump
or be it Biden, the reality is that neither
seems committed to bringing down the
deficit substantially. Large deficits by
definition imply high nominal GDP, and
if you have high nominal GDP, that’s by
definition good for risky assets and for
markets in general. So we shouldn’t over-
play the impact of the difference between
the two, as it’s not that big in terms of what
it means for the fiscal equation. As for one
being more pro-business or against it, the
perception is probably that Trump’s more
pro-business. What that implies for global
trade, sanctions and so on, that’s a differ-
ent question.
Audience member: How would you as-
sess the second round effects of the in-
crease in wages for inflation?
Lourenco: If wages keep increasing, ser-
vice inflation will stay high. And house-
hold real incomes should get a progres-
sive boost, which is actually good for the
growth equation. Quantifying this is quite
difficult, but if we continue to see wages
above 4%, continuously, that just means
that other factors within the inflation mix
will have to come down. So it just delays
the easing cycle. Does it imply that we get
hikes? I’m not so convinced that’s going
to be the case. If we had high wages for a
long period of time and a supply shock —
with oil prices increasing dramatically, for
example — that would really change the
market’s perception of what the ECB will
be doing. l
9 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024
In association with
This material has been prepared by a member of the Front Office department of Crédit Agricole Corporate and Investment
Bank or one of its affiliates (collectively “Crédit Agricole CIB”). Front Office personnel are not part of the research depart-
ment and this material does not constitute “Investment Recommendations” as defined under the Market Abuse Regula-
tions (MAR). It does not constitute research as considered by the Markets in Financial Instruments Directive II (MiFID II).
This material is provided for information purposes only. It is not to be construed as a solicitation or an offer to buy or sell
any financial instruments and has no regard to the specific investment objectives, financial situation or particular needs
of any recipient. It is not intended to provide legal, tax, accounting or other advice and recipients should obtain specific
professional advice from their own legal, tax, accounting or other appropriate professional advisers before embarking on
any course of action. The information in this material is based on publicly available information and although it has been
compiled or obtained from sources believed to be reliable, such information has not been independently verified and no
guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This
material may contain information from third parties. Crédit Agricole CIB has not independently verified the accuracy of
such third-party information and shall not be responsible or liable, directly or indirectly, for any damage or loss caused
or alleged to be caused by or in connection with the use of or reliance on this information. Information in this material is
subject to change without notice. Crédit Agricole CIB is under no obligation to update information previously provided to
recipients. Crédit Agricole CIB is also under no obligation to continue to provide recipients with the information contained
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ments carry significant risk, including the possible loss of the principal amount invested. This material is not intended to
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use of this material.
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BIHC Briefing Greece March 2024, with Crédit Agricole CIB

  • 1. Michael Benyaya, co-head of DCM so- lutions and advisory, Crédit Agricole CIB: To set the scene, what is the central scenario for the Eurozone economy? And do we foresee a recession for 2024? Bert Lourenco, global head of rates research, Crédit Agricole CIB: Relative to other houses, we are somewhat more optimistic, and even within CACIB, I’m probably more optimistic than my col- leagues. We don’t expect a recession this year. In fact, we expect growth to pick up — still sub-trend, but just below 1%. What are the reasons for this? First and foremost, we had a terms of trade shock for the past few years, led by the energy crisis, and that’s clearly un- wound itself. This is leading to the cur- rent account changing from a deficit to a surplus for the EU in general. Secondly, we still have pretty strong labour mar- kets — which is pretty astounding — and these labour markets are still generating wage gains of 4.5% or so, so we think that real household incomes will increase, giv- ing household consumption a boost. And then we have this phenomenon that is pertinent around the world, not just for Europe, which is that we have deficits, and these deficits seem to be structurally per- sistent. So in aggregate, governments have less net issuance this year, but when you throw in the EU and supranational issu- ance, that actually becomes a net positive, so we also have support through the fis- cal side. When you bring all this togeth- er, that’s quite a good combination for a broadening out of growth. One final thing to mention is the junc- ture of banks with the real estate sector. High interest rates have not caused as much pain in residential real estate as one might expect. There are pockets in the EU, like Sweden and Germany, that still have some pain to come in real estate. But over- all, banks seem to be in pretty good shape, able to provide credit if there’s demand, which is pretty amazing given the level of rates we have right now. So it’s really a matter of subdued, but better growth across Europe — but re- membering that Germany is going to re- main the sick man of Europe for a while, and so we should not depend on the Ger- man manufacturing sector to lead growth in Europe for some time at least. Benyaya: In terms of the financial insti- tutions primary market, what have we seen in the first two months of 2024? And how does it compare with early 2023? Vincent Hoarau, head of FIG syndicate, Crédit Agricole CIB: Since the beginning of the year, the primary market activ- ity in euro-denominated format has been very robust, around €140bn. Nonetheless, down 18% year-to-date versus 2023. Last year’s volumes were exceptionality high; 2024 volumes are still up 35% versus 2022, and twice the volumes of 2021. So far this year we have enjoyed issuance activity in line with what should be a reasonable pace in a normalised world post a decade of QE. If we look at issuance in US dollars, it is exceptionally high, with numerous jumbo offerings from Yankee banks. This time last year, funding in US dollars was less competitive in terms of arbitrage for European banks; nonetheless, Yankee is- suance is down 10% this year versus last. Elsewhere, European issuers also con- tinue to be active in sterling and niche currencies, looking to further diversify their funding sources. Lastly, on ESG, is- suance is down 30%, but still up versus 2022. In terms of demand and investor re- ception, the tone is particularly supportive and all the metrics we look at around deal execution have been great. Oversubscrip- tion levels are exceptionally elevated. The Return towards IG: Today’s FIG landscape a promising stage for next Greek adventures 1 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 Buoyed by the return to investment grade of the Hellenic Republic, Greek issuers have been given an increasingly warm welcome by investors across asset classes. In Athens on 29 February, Crédit Agricole CIB syndicate, DCM, advisory and research set the scene for Greek banks’ next steps as they navigate the maze of risks and opportunities in today’s FIG market. In association with Bank+InsuranceHybridCapital Briefing 12 MARCH 2024
  • 2. stickiness of demand when we adjust pric- ing lower in bookbuilding, the granularity and the quality of order books are great. Secondary performance post pricing can be impressive. New issue concessions have been drifting tighter since the beginning of the year, and are sometimes non-exist- ent or even negative. All those things point to a very healthy market. Investors love the current level of yields. The iTraxx financials is currently at a two year low. Looking at the profile of issuance, in senior unsecured, tenors are well spread across the maturity spectrum. In covered bonds, 50% of supply has come with a ma- turity between five and seven years. Last year the average duration for funding was shorter than five years. The growing ap- petite for long dated assets is remarkable. We have seen much more 10-12 year new issues this year compared to last. We see the most noticeable change across funding instruments in the cov- ered bond space. 2023 was a record year in terms of issuance, but a very challeng- ing one for covered bonds, a year during which the asset class digested the legacy of a decade of quantitative easing. The market has been dealing with ongoing technical distortions because of the lack of relevance of secondary market spread levels, which were kept artificially tight sometimes because of the purchases of the Eurosystem. After a year of repricing across jurisdictions, we started 2024 with much healthier trading metrics. Globally, the product has become much more ap- pealing, while the buyer base has grown steadily. That’s a relevant evolution for FIs. Benyaya: You mentioned that spreads are tight — why is that in the current environment? Hoarau: A couple of elements explain the current spread complex. First of all, the demand side of the equation is supported by a very robust economy in the US, while the situation in Europe is improving sig- nificantly, particularly in the South and to some extent in France, even if we have the aforementioned situation in Germany. We also have a very favourable credit environ- ment in spite of the string of rate hikes over the past two years. We have not seen a lot of credit events — yes, we had Credit Suisse and the US regional bank issues last year, but away from that the market has been extremely resilient. Over the past 12 months, we have enjoyed a very nice situ- ation in terms of ratings evolution, with a lot of upgrades and many financial in- struments moving from non-investment grade to investment grade. So that’s the first element. The second element explaining why the spread complex situation looks really exceptional, is that the equity rally is also pushing pension funds to rebalance cash to the benefit of the credit market. And if you screen the world of investment grade credit funds, we continue to see tremen- dous inflows. But most importantly, the yield envi- ronment combined with the excess liquid- ity situation is certainly what is keeping spreads so tight nowadays. And as long as the liquidity situation does not change, we are going to see a market that remains extremely resilient, and any sign of correc- tion will very likely be short-lived. In this very particular rate environment, there is little upside in selling bonds, particularly high coupon bonds. And the recent nega- tive headlines around commercial real estate for the time being remain isolated cases that are not derailing the market from its very strong path. 2 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with MAN CANNOT DISCOVER NEW OCEANS UNLESS HE HAS THE COURAGE TO LOSE SIGHT OF THE SHORE Bloomberg: € = BGCS2 Global Directory = BGCP Panellists (left to right): Michael Benyaya, co-head of DCM solutions and advisory, Crédit Agricole CIB Bert Lourenco, global head of rates research, Crédit Agricole CIB Yves Glaser, head of financial institutions advisory, EMEA, Crédit Agricole CIB Vincent Hoarau, head of FIG syndicate, Crédit Agricole CIB
  • 3. After more than a decade in sub-investment grade territory, Greece was in the autumn rewarded for reform efforts by receiv- ing a series of upgrades that saw it finally regain investment rat- ings, with only Moody’s yet to take this final step. S&P was the first of the “big three” rating agencies to upgrade the sovereign back into investment grade territory, lifting it from BB+ to BBB- on 20 October 2023. Implementing a stable outlook, the rating agency cited an im- provement in public finances thanks to budgetary consolidation efforts, noting that since the debt crisis of 2009-2015, significant progress has been made in addressing the country’s economic and fiscal imbalances. “We expect additional structural economic and budgetary re- forms, coupled with large EU funds, will support robust economic growth in 2023-2026 and underpin continued reduction in gov- ernment debt,” said S&P. Fitch followed suit on 1 December, also lifting Greece from BB+ to BBB-, on stable outlook. High among key rating drivers cited by the rating agency were favourable debt dynamics. It noted that a projected decline in the debt to GDP ratio of 65pp, from a pandemic high of 205% to a forecast 141.2% in 2027 would be among the best performances of any Fitch-rated sovereign. The rating agency acknowledged that the ratio is fore- cast to remain close to three times the BBB median, but said miti- gating factors such as low debt servicing costs, very long maturi- ties (18 years) and a substantial liquid cash buffer (around 16.5% of GDP mid-November) reduce public finance risks. A commitment to fiscal consolidation was the other factor up- permost among drivers of Fitch’s upgrade. The primary surplus was set to increase to 1.1% of GDP and average 2.2% in 2024- 2025, according to the rating agency’s forecasts. “Fiscal prudence is anchored in conservative expenditure as- sumptions in recent budgets (and is also the case in the 2024 budget),” said Fitch, “with revenue over-performance providing fiscal space for temporary spending: in 2023 this included energy crisis and climate change-related measures.” With Scope Ratings having upgraded the Greek sovereign from BB+ to BBB- in August 2023 and Morningstar DRBS having lifted it from BB (high) to BBB (low) in September, the next move from Moody’s is awaited. A Moody’s upgrade in September left Greece on the cusp of investment grade, at Ba1, on stable out- look, although the rating action was by two notches, from Ba3. The rating agency cited several factors that could lead to an up- grade. “A continuation of economic policies and commitment to fiscal consolidation, together with successful implementation of remain- ing reforms, particularly in the judicial system, leading to greater resilience to external shocks, faster than expected improvement to fiscal strength and work-out of non-performing loans (NPLs) would support a higher rating,” said Moody’s. “In addition, a more rapid change in Greece’s economic structure that helps to improve economic resilience would be credit positive. “Further improvements in the banking sector,” it added, “re- ducing volatility of profitability and bringing asset quality and capitalisation ratios closer to the euro area average, would also be credit positive.” Moody’s two notch upgrade of the sovereign was accompa- nied by an improvement in its macro profile for Greece from Mod- erate- to Moderate+. This contributed to the six Greek banks rated by Moody’s ben- efiting from one or two notch upgrades in the wake of the sover- eign’s, with all on positive outlook. l 3 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with -20 -15 -10 -5 0 5 10 15 20 Private consumption Government consumption GFCF Net exports Real GDP growth (% yoy) 7 19 September 2023 Government of G Bank upgrades eyed in wake of sovereign’s Benyaya: When it comes to the spread complex for Eurozone government bonds, and also ECB monetary policy, what can we expect? Lourenco: At the start of the year, many people were looking for the ECB to start cutting rates even as early as Q1 of this year, which we thought was way, way pre- mature. Our view is for three rate cuts in Q4, i.e. after June, and three rate cuts in the first half of next year. We think the ECB needs a lot more evidence to be fully comfortable that inflation is coming back to target, and that their fear of a policy mistake still points towards moving more slowly in cutting rates. And nobody’s go- ing to be in a hurry to cut in large amounts — unless we have a recession, a hard land- ing — therefore, we foresee 25bp incre- ments. The market still has a bit more than that priced in. So if you ask me what our view is on the rates side, we still think that yields can go up a little further, simply be- cause we think the market’s got a little bit ahead of itself — you have a 25bp cut ef- fectively priced in for June already, which we think is too early. And remember that they will come out with their forecasts in March, June and September. So really we think that more time is needed, and that the forecast in September will allow them to proceed with that cut. Robust growth since the pandemic, driven by domestic demand Growth contribution (percentage points) and real GDP growth Source: Elstat, Moody's Investors Service
  • 4. Coming back to the first question, on the spread complex. What could lead to massive spread widening in EGBs? It could result from redenomination risk, but that doesn’t seem to be credible from a political angle for any country right now. It could possibly come from a big deleveraging event that sharply increases unemployment. Or counter-cyclical fac- tors that result in a sudden deterioration in government finances. But these factors aren’t at play. Our view — which is a little different than a year and a half ago — is that in spite of hikes, and in spite of QT, we have not been worried about spread widening. Why? Number one is that we have high nominal GDP. This is the impact of infla- tion. So government tax receipts are very good everywhere. That will be a support- ive factor. Number two, high yields cre- ate demand. We’ve seen a transition away from institutional investors more to retail investors being interested in fixed income — just look at all the retail products com- ing out of Italy, Portugal, and now places like Belgium. So higher yields are not an impediment to keeping spreads tighter — we do still think that significantly higher yields leads to a bit of spread widening pressure, but nothing dramatic. So we don’t have the ingredients for the mas- sive spread widening that people were so afraid of at the start of the cycle. If I’d asked a year and a half ago if you believed that spreads would be at these levels with the ECB having hiked rates 400bp and unwinding its balance sheet, you’d have said, no way. But that’s exactly what’s hap- pened, and that’s actually a pretty good thing. I think the ECB has done a pretty good job along the way, which is a slow, well-flagged pace of QT, and at the same time creating the the perception, at least, that there are mechanisms in the back- ground such that if dramatic spread wid- ening happens, it can step in at any point in time. All these factors probably point towards any spread widening remaining modest. Lastly, I would mention that the general abundance of liquidity and per- formance of credit, with a lack of defaults, also supports this view. Benyaya: How are expectations re- garding ECB monetary policy affecting investor sentiment and investor posi- tioning? Hoarau: The paradigm has changed com- pletely in 2024 versus 2023: at the begin- ning of last year, we had the end of the tightening cycle ahead of us; in 2024, we have the start of the easing cycle ahead of us. So while the management of mon- etary policy risk was on everyone’s agen- da in 2023, it has been losing a lot of its relevance. Investors now feel much more relaxed towards any type of risks. They like the yield, and while they may dislike the spread, they just enjoy the carry, dis- regarding the timing of the first rate cut. I can imagine that at some point one or the other may lose patience. But for the time being, I would say, so far, so good. And we are in a situation, a very unique situation, where the relationship between rates and credit is inverted. Benyaya: Staying with interest rates, but looking at it from a slightly differ- ent angle, banking ALM: we’ve seen the higher interest rates boosting net interest margins in some countries — not everywhere, but in some places — what could be the hedging strategies to maintain this type of net interest margin? Yves Glaser, head of financial institu- tions advisory, EMEA, Crédit Agricole CIB: Indeed, in the southern part of Eu- rope — Greece, Spain, Italy, Portugal — banks generally grant variable rate mort- gages, although there is a recent trend towards a higher proportion of fixed rate loans. In the northern part of the euro area — France, the Netherlands, Belgium — banks tend to lend at fixed rates. In France, for example, typically more than 90% of production is fixed rate and for very long periods, 20 to 25 years. ALM likes a natural match between assets and liabilities. That’s a factor contributing to a shorter model on the liability side for banks in Italy and Greece. Overall, the duration of balance sheets in southern Europe is lower than in northern Europe, which makes net interest income more sensitive to a change in interest rates. Given the rise in market interest rates, the development of NII for retail ac- tivities in these countries has been very favourable. As rates fall, banks with low balance sheet duration will lose this benefit rela- tively quickly and return to lower levels of NII. The question for ALM teams now is: is this a good time to increase balance sheet duration and lock in the benefit of current interest rate levels? One welcome development is that the beta on deposits has been relatively low over this period. It has been a good stress test: we have had almost a 400bp rise in rates and overall, while there has been some decline and some outflows on demand deposits, it has been relatively limited. Customers have been much less reactive on their deposits in this rising rate environment than they have been on their mortgages to prepay when rates went down. This would argue in favour of in- creasing the duration of deposits. Once you increase the duration of de- posits, how do you increase the duration of assets to effectively get more stickiness in your net interest income? The first way would be to do a receiver swap. But historically, banks with a high propor- tion of floating rate loans have tended to use their liquidity portfolios to increase 4 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with Bert Lourenco, Crédit Agricole CIB: ’All these factors probably point towards any spread widening remaining modest’
  • 5. Crédit Agricole Corporate and Investment Bank is authorised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and supervised by the European Central Bank (ECB), the ACPR and the Autorité des Marchés Financiers (AMF) in France and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Crédit Agricole Corporate and Investment Bank London branch on request. Crédit Agricole Corporate and Investment Bank is incorporated in France with limited liability and registered in England & Wales. Registered number: FC008194. Branch No. BR 1975. Registered office: Broadwalk House, 5 Appold Street, London, EC2A 2DA. www.ca-cib.com building success together NOVO BANCO, S.A. Joint Bookrunner EUR500,000,000 3.250% Inaugural Covered Bond (“Obrigações Cobertas”) Due 2027 FEBRUARY 2024 NOVO BANCO, S.A. CAIXA ECONÓMICA MONTEPIO GERAL, S.A. Joint Bookrunner EUR250,000,000 8.500% Tier 2 Due 2034 MARCH 2024 BANCO SANTANDER TOTTA, S.A. Joint Bookrunner EUR1,000,000,000 3.25% Covered Bond (“Obrigações Cobertas”) Due 2031 FEBRUARY 2024 BANCO DE SABADELL, S.A. Joint Bookrunner EUR750,000,000 4.00% Senior Preferred Due 2030 JANUARY 2024 INTESA SANPAOLO S.p.A. Joint Bookrunner EUR1,750,000,000 3mE+80bps Senior Preferred Due 2025 NOVEMBER 2023 BANCO BILBAO VIZCAYA ARGENTARIA, S.A. Joint Bookrunner EUR1,250,000,000 3.875% Senior Preferred Due 2034 JANUARY 2024 CAIXABANK, S.A. Joint Lead Manager EUR1,000,000,000 4.375% Senior Preferred Due 2033 NOVEMBER 2023 BANCO SANTANDER, S.A. Joint Bookrunner EUR1,250,000,000 Senior Preferred 3.50% Due 2028 EUR1,000,000,000 Senior Preferred 3.50% Due 2030 EUR1,500,000,000 Senior Preferred 3.75% Due 2034 JANUARY 2024 BANCO BPM S.p.A. Joint Bookrunner & Joint Dealer Manager (Tender Offer) EUR300,000,000 9.500% PNC5.5 AT1 NOVEMBER 2023
  • 6. the duration of their assets, and not so much receiver swaps. So a natural way to extend the duration of assets and im- munise NII against lower rates would be to buy forward bonds, thereby locking in the reinvestment rate of maturing bonds. In addition, buying forward bonds rather than doing a receiver swap will benefit from the fact that the EGB curve is steep- er than the swap curve. Finally, hedge ac- counting of forward bonds is easier than for a swap because the forward bond is an all-in-one hedge, the hedge item is the bond that you will receive, whereas for a swap, a commercial item would be desig- nated as the hedged item, with potential inefficiencies arising from basis risk or behavioural risk. Finally, some banks are also looking to buy floors to protect their NII against lower interest rates. In the same spirit as buying forward bonds, buying a call on government bonds can be an efficient al- ternative to a floor, both financially given the shape of the curve, and operationally for hedge accounting. Also, in terms of P&L profile, buying a call may be more suitable as the time value would be re- corded in the initial period when NII is at a high level, whereas for a floor this time value would go to the P&L over the entire maturity of the hedge. Benyaya: In terms of banking supervi- sion, I know that there is a 200bp stress test set out in the regulation, but you mentioned we have experienced well above that. Do you have a view on how this could develop? Glaser: The regulatory stress of 200bp was supposed to be the 99th percentile of interest rate stress, so once in 100 years, and we have had a 400bp move in interest rates. A revision of the stress level is cur- rently within the scope of the regulator. In addition, we have had in the last two years bank failures as a result of interest rate risk, in particular SVB. This is another incentive to review the regulation. Pablo Hernández de Cos, chairman of the Basel Committee, gave a speech on the subject in September last year and raised the issue of IRRBB being in Pillar 2. However, mov- ing IRRBB to Pillar 1 would be a very long shot. In addition, at the end of that speech, he also mentioned that these failures were more related to poor risk monitoring by these institutions than a structural prob- lem for the banking sector which is related to Pillar 2. In any case, we could see some chang- es in regulation, and in particular in the level of interest rate stress. Currently, there are discussions about extending the stress from 200bp to 250bp, which could be significant for some retail banks that manage their interest rate exposure close to the limit. Supervision is also likely to focus more on the IRRBB models used by banks, especially on deposit outflows, as large deposit outflows were the trigger for the SVB failure. Benyaya: Let’s turn to sovereign rat- ings, where we have seen some diver- gence among countries. What is your view on such rating developments, also with reference to the Greek sovereign? Lourenco: As a general observation, credit ratings don’t really give inves- tors much of an advantage, because rat- ing agencies are very much backward- looking. That doesn’t mean that they’re not important, simply because ratings are used by investors to invest in other domiciles, by risk management commit- tees, and even for investors, they provide a kind of anchoring for valuations. They are also used by CCPs, for example, and as such give a kind of indication of what the value of such collateral might be. That’s a roundabout way of saying that you cannot ignore them. Having said that, there are many met- rics rating agencies look at, but crucial is if you’re running surpluses or deficits on the fiscal side, and likewise for the cur- rent account. There are a few countries in Europe that have these twin surpluses, while a few have twin deficits. Those with twin surpluses are Greece, Portugal and Ireland, and these are the smaller coun- tries that have positive ratings momen- tum. We think that they’ll still be subject to upgrades in the future, as long as we don’t get a massive recession and there’s no big deleveraging event. Meanwhile, the bigger countries with twin deficits are those we are a little more worried about, such as Belgium and France. We’re not so concerned about Italy or Spain for the time being. That’s how we differenti- ate among European sovereigns. So we would still be positive on Greek develop- ments given what’s happening here at a fundamental level. Benyaya: On the back of this positive momentum in Greek sovereign ratings, how is Greek risk perceived in the credit markets? Hoarau: People are chasing Greek assets. The rating trajectory of the country has been decisive in spread developments for the country. Investors are really im- pressed by the pace of the reforms, and how austerity has paid off in recent years. It’s not about cleaning balance sheets now; good banks are again on the of- fensive. And we could have further good news from Moody’s this year on the sov- ereign, with the ratings of Eurobank and NBG benefiting. In any case, the trajec- tory of Greek metrics are clearly reflected in the evolution of spreads in the sec- ondary market: over the past 12 months, Greek senior bonds have tightened by an average of something like 200bp. When 6 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with Vincent Hoarau, Crédit Agricole CIB: ’It’s not about cleaning balance sheets now; good banks are again on the offensive’
  • 7. I’m looking at headlines nowadays, with what’s happening in Germany compared to what’s happening in southern Europe, it’s quite a turnaround. Benyaya: Before we open the Q&A to the audience, one final question to each of our panellists on risk factors for the rest of 2024. Yves, as alluded to earlier, clearly interest rate movements can result in some arbitrage strategies by clients and depositors. How is this risk factor reflected in banks’ interest rate risk management, and do you see any potential changes in the course of the year? Glaser: During the decade of very low interest rates, we have seen a surge in sight deposits in almost all countries. I like to look at the ratio of sight deposits to household disposable income. For a long time this was very stable — from the late 1990s to around 2010 — but from 2012, when interest rates were zero or negative, the ratio started to rise and by 2020 it was more than double what it was at the end of 2010. So we clearly have a lot more de- mand deposits now relative to household disposable income. And so far we have seen relatively low deposit outflows. This situation may not last, as there is no rea- son why customers should be less efficient today than they were 20 years ago. It takes time for customers to regain a deposit cul- ture. Deposit outflows may also continue if interest rates remain at current levels. On the other hand, if interest rates return to lower levels, we may see an increase in prepayments on recently sold fixed rate mortgages. So there is certainly quite a significant behavioural risk on balance sheets. The supervisory teams are look- ing at this very closely, reviewing banks’ IRRBB models and requiring them to incorporate hypotheses about arbitrage from non-interest-bearing to interest- bearing products. Banks have developed models that link the stability of deposits and the level of prepayments to the level of interest rates, which is a good response to this uncer- tainty. They are trying to hedge this expo- sure to behavioural risk. We see this in the demand for options products. Benyaya: Bert, not another question on interest rates, but one on inflation. I be- lieve inflation forecasts have been rela- tively sticky. What are the risks to these forecasts given that inflation seems to be easing somewhat? Lourenco: First of all, I’d note that one of the things that makes us a little bit dif- ferent from other research shops is how much time and effort we spend analysing the inflation side. With the ECB having a strict and, I should stress, symmetrical in- flation target, inflation developments are uppermost in our mind in terms of how we think about the market. For this year, we expect the decline in inflation to proceed, but it might not proceed as fast as the market has priced in. We think it’ll be a little bit higher than implied, particularly in the CPI fixings for the second half of the year. At the start of the year, we thought inflation would prob- ably come in at 2.5%-2.8%, although fol- lowing some better developments recent- ly, we’re probably talking about around 2.5% HICP on average for the year. Two factors explain this higher inflation. One is tight labour markets, and wages, which imply that service wages stay high — as I mentioned earlier, we have wages grow- ing at around 4.5%, so core inflation will by default stay high. And then the other thing that we consider a lot is food price inflation, simply because of what’s hap- pening with the climate, the cost of food production — just look at the farmers’ protests across Europe. These two factors to us imply that inflation will probably be a bit higher than others expect. The last point I would make is that a lot of people are looking at inflation dy- namics returning back to what they were before Covid, and we’re not so sure about that. It could be that we have sufficient changes in structural factors, be that in- dustrial policy, changing global trade patterns, particularly Asia and China, po- tentially the implications of green energy investment, more military spending and so on, and continued pro-cyclical fiscal spending. These kinds of structural fac- tors imply that, this time around, we don’t expect inflation to be below 2%, we think that it will stay somewhere around 2% go- ing forward. It still means that the ECB can cut rates, but it means that we’re not going back to a low inflation environment like we had in the past, and probably not a very low rate environment, either. Benyaya: Vincent, what risk factors do you foresee for the FI primary markets for the rest of 2024? Hoarau: I’m fairly bullish, I have to say, at least for the first half of the year. If I have to list some potential risk factors, I would start with a theoretical one, which is the increase of Minimum Reserve Re- quirements by the ECB. This could push 7 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with
  • 8. 8 BANK+INSURANCE HYBRID CAPITAL 12 MARCH 2024 In association with up supply and increase potential pres- sure on spreads, but I think this risk is only theoretical as long as the liquidity situation remains intact. More impor- tant, and later in the year, could be re- financing risk driven by booming SSA supply and the refinancing of ballooning budget deficits. And clearly reflation risk would be a disaster for markets. This is certainly improbable, but if we have no rate cuts this year, and a narrative grows up around rate hikes instead of rate cuts, it could derail the market from this very strong base, and this is something we are all bearing in mind. Benyaya: Thank you all for your in- sights. So now I’m happy to open the Q&A session. Audience member: Going back to the regulatory environment, if I’m not mistaken, there’s a focus on the credit spread risk for the banking book, something that might become man- datory or at least that the regulator is monitoring. How do you see the banks in Europe working on that? And what’s your view on the final outcome? Glaser: That’s a tricky question, because I don’t think that there is a lot of consen- sus on the way to follow the credit spread risk in the banking book. It’s a new is- sue. I think that banks were for quite a while very reluctant to have this CSRBB, but anyway, now it’s a requirement from the EBA to have a risk framework on CSRBB. However, effectively there may be very heterogenous practice regard- ing CSRBB. However, I think that quite a lot of banks still have quite a restrictive view on the monitoring of CSRBB, and just have monitoring of the CSRBB on their bond portfolio, but not on the loan book. So it will be more like, credit spread risk in the banking book for the bond portfolio, than global risk on mortgage loans, consumer loans or whatever other type of loans. Same on the liability side, I don’t think that many banks are using, are putting credit spread risk on their liabili- ties. It could be possible on the debt side, because effectively you have your own spread, so you can have own credit spread risk, and it means that it will be favourable in case of an increase in spreads. I think that the ECB is relatively reluctant to have this positive factor in case of credit spread widening. So that’s why what we are see- ing is banks sticking only to the bond portfolio for the credit spread risk. Audience member: You haven’t dis- cussed the possibility of Trump being elected, or all the other elections taking place this year. What are your thoughts on this front? Hoarau: That could be a factor in why I’m more bullish on the first half of the year rather than the second half… When it comes to the direction of spreads and risks for markets, it’s primarily a ques- tion of liquidity and market absorption capacity. Then we look at geopolitics and that element can go with the liquidity dy- namic and refinancing risk if the question around European defence funding comes up. In the US, the fiscal lever will be heav- ily used either way. But one scenario po- tentially implies more pressure on the is- suance front in Europe, and potentially on the spread complex in the lower beta part of the borrower spectrum (government and supra). Lourenco: The way I look at it is that for markets, what matters is the politicians’ positions on deficits, and be it Trump or be it Biden, the reality is that neither seems committed to bringing down the deficit substantially. Large deficits by definition imply high nominal GDP, and if you have high nominal GDP, that’s by definition good for risky assets and for markets in general. So we shouldn’t over- play the impact of the difference between the two, as it’s not that big in terms of what it means for the fiscal equation. As for one being more pro-business or against it, the perception is probably that Trump’s more pro-business. What that implies for global trade, sanctions and so on, that’s a differ- ent question. Audience member: How would you as- sess the second round effects of the in- crease in wages for inflation? Lourenco: If wages keep increasing, ser- vice inflation will stay high. And house- hold real incomes should get a progres- sive boost, which is actually good for the growth equation. Quantifying this is quite difficult, but if we continue to see wages above 4%, continuously, that just means that other factors within the inflation mix will have to come down. So it just delays the easing cycle. Does it imply that we get hikes? I’m not so convinced that’s going to be the case. If we had high wages for a long period of time and a supply shock — with oil prices increasing dramatically, for example — that would really change the market’s perception of what the ECB will be doing. l
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