Banks

In response to the exceptional circumstances brought about by Covid-19, the Prudential Regulation Authority (PRA) at the Bank of England has written to UK banks asking them to ‘consider’ appropriate action regarding the payment, accrual and vesting of variable remuneration (i.e. bonuses) for senior staff, together with any dividend payments or share buyback plans.

With central banks and governments pumping huge amounts of funding into their domestic economies, they are obviously very keen that companies act with prudence and look after their surplus cash sparingly, by cutting back on distributions such as dividend payments and any share buyback plans.

After a considerable period of zero activity new issue bond markets have reopened this week with a flurry of deals in the US and now in Europe. As usual it has been frequent high quality borrowers reopening the marketplace, and they have done so with confidence from their syndicate bankers that attractive pricing will result in successful transactions.

Some of the panic selling has also abated as investors are gradually building their cash piles to desirable levels. However, we are still a long way away from normal bond markets.

In the last two weeks we have seen savage falls in risk assets, but with the unprecedented stimulus and support action taken by policymakers globally, many investors’ minds have inevitably turned to when risk assets might be a buy again. More specifically, given equities are higher beta assets in multi-asset portfolios, when should asset allocators be buying equities again?

In the case of Aareal Bank the management decision is understandable in our view; should the market panic and begin to offer extended AT1 bonds at a heavy discount, then investors could see this as a real opportunity over the medium term.

For participants in financial markets a liquidity squeeze that lasts for a prolonged period is one of the most difficult environments to cope with. Correlations break down, markets trade in a vacuum, small trades lead to disproportionate price moves, relative value goes out of the window, panic sets in, selling is indiscriminate. This is where we have been for the last two weeks. So we thought we would share some of these experiences with you and try to rationalise why it is happening and when it might end.

The authorities are now rapidly promising huge aid packages, but how do these aid packages find their way to the people that need aid? This is what is missing

In the last few days the World Health Organisation has declared COVID-19 a global pandemic, the Italian government has imposed a nationwide lockdown on 60 million people, and President Trump has banned all travel to the US from Schengen Area European countries for 30 days.

Our take on all of this is that the central bank has acted in a very targeted and timely way, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system.

Monday was one of those days investment professionals will remember all their lives, and compare with similar standout days from the past.

This deal may well perform in the short-term, and we sincerely hope Alpha’s plan works, but we also recognise there is a high degree of execution risk and the domestic economy still has considerable headwinds.