30-05-2022 · 市場觀點

Positive outlook for European bank bonds

European banks are entering the slowdown with healthy capital buffers. We would argue that they’re in a position to benefit from the rising rates environment.

    作者

  • Jan Willem de Moor - Portfolio Manager

    Jan Willem de Moor

    Portfolio Manager

Accelerating inflation, the start of another Federal Reserve rate-hiking cycle and Russia’s invasion of Ukraine have triggered a rise in global bond yields and a widening of credit spreads. Although the economic outlook has deteriorated, European banks are entering the slowdown with healthy capital buffers and are in a position to benefit from the rising rates environment. Spreads on subordinated financials have widened to levels not seen since the Covid-19 outbreak and we believe this fixed income asset class now offers good value for investors seeking shelter from concerns about spiraling inflation and tightening monetary policy.

Assessing the impact of the Russia-Ukraine crisis on European banks

European banks entered the Russia-Ukraine crisis in a strong position with high capital buffers and substantial balance sheet provisioning, which they had bolstered to weather potential Covid-related loan losses. The question is whether they will be able to sustain this resilience in light of the significant economic and financial consequences of the conflict. Based on our analysis, we believe that the financial implications of the conflict for European banks are manageable and that current valuations in the sector more than compensate investors for the potential risks.

Our analysis distinguishes between the direct and indirect impact of the Russia-Ukraine war on European banks. In particular, we consider the effects of direct exposure to Russian assets and banking activities, and the indirect effects resulting from a war-induced slowdown in economic growth and rise in inflation.

Banks’ direct exposure to Russia is limited

Local banking operations and cross-border lending to Russian or Russian-exposed companies could create direct losses for European banks. Banks have a low exposure to Russia, though, at around 0.5% of total lending. Moreover, many of these loans are short-term in nature.

To quantify potential losses for European banks on account of direct exposure to Russia, we did a comparative analysis of two previous crises: the 1998 Russian crisis led to around 60% of loans on average being wiped out, and the 2008-2010 economic crisis resulted in the loss of about 15% of lending. Importantly, in those cases where management had been willing to walk away from local operations, these losses related to Russian operations were limited to the equity investment.

These previous experiences are constructive examples to banks of how to handle the current crisis. They also confirm that the direct effect for European banks is through the impact on earnings rather than on their capital position.

Our conclusion here is that, even in a worst-case scenario, loan losses as a result of direct exposure to Russia would be manageable for European banks and we do not consider this to be a systemic risk.

The resilience to navigate a stagflationary scenario

The indirect consequences of the Russia-Ukraine war could be through a slowdown in economic growth and further rises in inflation. Depending on the severity of these macroeconomic developments, such a scenario would filter into banking balance sheets via elevated loan losses and to a lesser extent through lower revenues. This effect would be mitigated thanks to the robust condition in which banks entered this crisis, with vast buffers relative to minimum capital requirements. Most banks had planned to pay out these buffers to shareholders, but these plans could be scrapped if banking fundamentals were to deteriorate significantly.

We continue to monitor developments closely, but our assessment is that banks’ balance sheets, buffers and profitability currently are at levels that likely would enable them to navigate a stagflationary scenario without breaching critical capital levels. This implies that AT1 coupons would be safe.

Rising rates supportive for European banks

Rising interest rates are a welcome tailwind for European banks, and are expected to boost earnings and profitability. German, Italian and Spanish banks have the highest sensitivity to rising interest rates, owing to their funding mix. Among the Spanish banks, for example, we see an upside of 25% in net interest income for some of the banks if Eurozone rates were to rise by 100 bps.

Though credit investors – compared to equity investors – benefit less directly from higher profitability, for certain banks we expect rising rates to be a catalyst to fuel restructuring, to weed out those with mediocre profitability and to underpin the longer-term resilience of the sector. For the European banking sector as a whole, higher profitability following rising interest rates could therefore encourage consolidation and reduce fragmentation. This would help reduce a key systemic risk for the sector.

Spreads on subordinated financials have widened

Spreads on subordinated financials widened out significantly in the first quarter of 2022, reaching levels not seen since the Covid-19 outbreak, the period of taper-related fears in 2018 and the 2016 oil crisis. This spread development is indicative of how the tragedy of the war in Ukraine is having more and more impact on European economies, mainly via the channel of inflation and supply-chain disruptions

As a result of these spread movements, we consider yields on European subordinated financial debt to be looking very attractive compared to investment grade corporate debt.

Favorable characteristics of Financial Institutions Bonds

The Robeco Financial Institutions Bonds strategy invests primarily in investment grade-rated subordinated bank and insurance debt, with some leeway to also invest in high yield-rated AT1 CoCo bank debt (to a maximum of 20% of the portfolio). Table 1 shows the yields of the EUR-hedged and USD-hedged strategies, which were respectively 3.8% and 5.3% at the end of April; the portfolio credit spread was 260 bps. These characteristics compare favorably to the yield and spread of the Global Investment Grade Corporate Bond index, while the duration is significantly lower – at 4.2 years for Robeco Financial Institutions Bonds compared to 7.0 years for the Global Investment Grade Corporate Bond index.

Table 1 | Financial Institutions Bonds: portfolio and benchmark characteristics

Table 1 | Financial Institutions Bonds: portfolio and benchmark characteristics

Source: Robeco, Bloomberg. As of 30 April 2022

Although the portfolio yield and spread are lower compared to the Global High Yield Corporate Bond index, these characteristics nevertheless look attractive given that the portfolio has a higher relative credit quality.

免責聲明

本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。