Swiss, Mexican deals show strength of bank demand
As we approach the end of the Q4 2024 earnings reporting season for banks, most are now out of their “blackout” periods which means bond issuance has resumed. Wednesday was an active day in primary markets with a couple of deals that are worth commenting on.
UBS was first to hit the tapes with a $3bn Additional Tier 1 (AT1) issue across two tranches, a perpetual non-call five and a perpetual non-call 10, both rated BB/BBB-. Having visited clients in the US recently, one question that still pops up is how the AT1 market has evolved since the collapse of Credit Suisse in terms of investor appetite, new issues, and of course demand for Swiss banks in particular. This is not a question we tend to get from European clients, however, and with UBS pulling in orders of around $30bn and tightening the yield on its five- and 10-year tranches from initial guidance to 7% and 7.125% respectively, there is plenty of evidence that investors remain very comfortable holding AT1s.
Regarding pricing, this deal also served to highlight just how flat spread curves now are. The five-year tranche was priced at a spread of 307bp over swaps, while the 10-year bond was priced at 317bp. This flattening is a feature of credit markets that usually occurs when spreads are below their medium-term averages. The fact that there is not much additional spread for the additional risk of owning bonds a full five years further along the maturity curve exemplifies why, that at this stage, we would rather keep a relatively short credit spread duration. This is not because we are expecting a significant correction, but from a relative value perspective the extra spread just does not look attractive here for the additional increase in duration.
BBVA Bancomer was also in the market with a Tier 2 deal rated Baa2/BB. This is the Mexican entity of the BBVA Group, and it is fair to say it is the crown jewel, being the largest contributor the group’s results. Q4 2024 was not its strongest quarter of the year, but nevertheless it reported a total capital ratio of 18.7% alongside Common Equity Tier 1 and Tier 1 ratios of 15.2% (BBVA Bancomer has no AT1 bonds or any other form of Tier 1 capital) and profitability remains very healthy indeed. It was interesting to see a Mexican bank pricing a Tier 2 bond in the same week that 25% tariffs from the Trump administration were narrowly avoided, at least for now. Pricing on the $1bn deal was tightened markedly from initial guidance to 7.625%, while the order book was close to $5bn.
Both these deals underline a few interesting conclusions. First, the technical dynamic in fixed income is extremely strong with demand persistently outweighing supply. Second, despite the spread tightening, financials still trade at a premium to non-financials and offer attractive relative value. In addition, results in Q4 2024 have been strong with multiple European banks announcing increases to their share buyback programmes, underlining their healthy financial positions. Last but not least, spread curves are flat and therefore keeping a short credit spread duration looks sensible.
