Banks

Like many market participants we are looking ahead to a much anticipated Q2 reporting season, which is even more pertinent this year given the unprecedented environment we have all found ourselves in. We are particularly interested in reviewing the major banks given they are at the centre of the transmission mechanism and hence a barometer for the wider economy.

On what was a very busy morning for new issues, AIB probably came with one of the most interesting, announcing a €500m Additional Tier 1 (AT1) deal with a 5.5-year maturity with initial price thoughts of 7%, though we expect this will be tightened as the order book builds.

A few weeks ago Bank of America Merrill Lynch’s CEO, Brian Moynihan, said that loan losses were not coming through as thick or as fast as he would normally expect for a recession, in particular a recession of this magnitude.

Thursday saw the reopening of the bond market for bank Additional Tier 1 (AT1) debt, more colloquially known as ‘Coco’ bonds.

One of the big support mechanisms for the UK economy during this pandemic has been the availability of grants and corporate loans via the banking system, aided by unlimited liquidity from the central bank.

Over the past couple of months risk markets have experienced unprecedented volatility, and the economic uncertainty caused by the COVID-19 pandemic looks set to continue while a proven vaccine or an effective treatment both remain elusive.

The list of policy actions from the major central banks keeps getting longer, and today the Bank of Japan has added the purchase of “as many Japanese government bonds (JGBs) as necessary” so as to keep the 10-year rate at around zero percent.

We engage with Santander as a debt issuer across many jurisdictions and various fixed income products, and we have had mixed views on the bank’s behaviour in recent years following a controversial approach to a 2018 AT1 refinancing and the exercise of an early call in a Spanish ABS deal in 2019. On both these occasions, we felt bondholders were treated poorly and this was reflected in our ESG analysis of the issuer.

The European high yield sector has seen a sharp correction from its highs earlier this year, with the Crossover index moving from a tight of 203bp in January to an intraday wide of 730p on March 18 (by this morning it had also seen a retracement of around 50% to 470bp).

It has been a positive sign for us that despite lockdowns being enforced in most of the major economies around the world, in the last two weeks several issuers have managed to successfully raise new debt via the primary market.

After a period of material weakness in spreads and general market stress, the common ingredient to recent corporate bond spread stability and subsequent strength has been the resurgence of the primary market.

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.