AT1 issuance off to a strong start

Issuers in corporate credit have started this year on the front foot, capitalising on the current supportive market conditions and front loading their funding plans in anticipation of higher funding needs from the hyperscalers in the US, among other factors. European banks have been no exception. In the AT1 space we have seen record high new issue volumes to start the year.  This strength in supply comes against a backdrop of (i) limited growth in capital needs – given robust profitability and strong core capital positions, and (ii) a relatively light refinancing schedule in AT1s for the remainder of 2026. 

It is important to emphasize that AT1s are part of banks’ capital stack, as opposed to senior unsecured bonds or covered bonds that are pure funding instruments – so any uptick in lending during the year wouldn’t have direct read across to the AT1 issuance (only to the extent that the higher growth leads to materially increased capital requirements). We believe that these create a supportive technical backdrop in this product for the remainder of the year.

First, we note that we have seen €9.5bn gross equivalent of AT1s being issued year to date across the three major currencies (the figure is even higher if we include other currencies such as Australian dollars and Singapore dollars, which are also being increasingly used). The year-to-date issuance is also at a little over €11bn if we include restricted tier 1s from insurers, giving a full picture of the supply from financials. Even on a combined basis, this represents a record start to the year for European financial junior subordinated issuance.

Second, the market has absorbed this supply well. Bloomberg European Banks CoCo Tier 1 Total Return Index (EUR Hedged) is up 1.19% year-to-date. At the same time, the ICE BofA Euro High Yield Index (EUR) and the equivalent Investment Grade Index have increased by 0.98% and 1.01% year-to-date. In terms of spreads, some of the issuers that wanted to take advantage of supportive conditions and came to the market late last year, have seen those AT1s issued in November tighten anywhere from 25 to 65 basis points as supportive conditions exist.  Deman remains strong, underpinned by solid sector results, constructive outlooks for 2026 and stable macro conditions in Europe.

Third, it is worth pointing out that 2026 was supposed to be the year of lower supply after a record breaking 2025 that saw around €47bn brought to the market across the three major currencies (along with a record year in RT1s as the sector transitioned away from grandfathered legacy bonds). Indeed, most of the supply estimates for 2026 oscillated around the €25-30bn mark for the full year – this would leave around €15-20bn still to be done. This compares to approximately €14bn still callable for the rest of 2026 and another €14bn in the first six months of 2027 (some issuers will opt to prefund early). It is important to reiterate that net supply remains largely close to zero as AT1 issuance needs are driven by the capital requirements and associated balance sheet growth (higher stock of loans normally increases required capital) – these have remained relatively stable and banks have also resorted to other capital optimisation tools, e.g. significant risk transfers, to improve their returns on equity.

Overall, the strong start to the year contrasts to the forecasts by investment banks late last year that 2026 would be a “quiet year”. In our view that this activity is driven by a number of considerations, but primarily historically supportive spread levels and the willingness of banks to lock those in for longer (hence some longer tenors among new issues). The supply is however not endless and will be limited by the growth in capital requirements and refinancing needs – which remain largely muted relative to previous years. We believe that this sets us up for a situation where the supply may moderate after the first quarter, creating positive technicals for the space – whilst this cannot be ruled out, we do not assign a high probability to a scenario where 2026 issuance will come close to the 2025 figure.