24 AUG 2023
Edina Rozinka, our Financials Credit PM provides a brief update on the European Financials sector.
Despite the macro and market volatility and certain negative bank headlines (Credit Suisse story, small US bank defaults), the IG rated bonds from European financials have outperformed the EUR and GBP credit indices (such as iBoxx). The subordinated bonds issued by the insurance sector have been the best performing segment YTD, outperforming banks and delivering higher excess returns even compared to the corporate sector.
Regarding fundamentals, we note that EBA and Bank of England bank stress test results were reassuring for the market and the banks and insurers provided generally supportive updates during the 2Q/1H 23 earnings season. We also saw a number of positive rating actions on banks and insurers, with certain bonds (including Irish banks) moving buckets. We continue to expect insurers to optimize their capital structure and see further bond tenders.
We view the regulatory changes as key for bondholders. While the deposit guarantees and liquidity ratios are in focus on the banks side, we highlight the solvency rule changes regarding the insurers. We expect the Solvency II changes to result in higher solvency ratios in the UK and expect to see new bond structures on the back of the new Swiss insurance solvency regime coupled with the S&P methodology changes.
Worth mentioning is that despite the unusual move from the Swiss Regulator on Credit Suisse (ie. wiping out AT1s without touching equities), the AT1 asset class rebounded. While low cash price AT1s had a great run, we expect the asset class to remain volatile. We view the recent calls from issuers as supportive for the asset class.
Overall, we continue to remain constructive on the subordinated bonds of Insurance companies (especially on dated insurance T2s) and remain more selective when it comes to opportunities in bank capital structure. Given the recent rate moves, we have a general preference on spread price products currently which typically show a higher correlation to interest rate moves. With many of the companies out of the blackout period and the summer holiday season is coming to the end, we expect to see further interesting opportunities in the primary market.
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