Market commentThe negative headlines have been plentiful this week and a few positive macro numbers at the end of the week were not enough to change the overall risk-aversion mode of debtinvestors. During the week US politicians repeated their inability to put the good of their country ahead of partisan ambitions when the Super Committee failed to reach an agreement on US budget cuts. China released weak macro numbers. Some Greek politicians flagged reluctance to sign austerity measures, which is a prerequisite for the release of the next help-package tranche. Italian 10Y government bond rates are still close to the notorious 7% mark and other core EU countries’ interest rates are heading north as well. Concluding the list of negative stories, even the Bund now sees fading investor appetite – as Wednesday’s auction only resulted in 65% of the bonds being sold. While this is probably just a matter of tight pricing, it is still a worrying signal.
This barrage of weak macro-stories was followed by worrying headlines from the European banking sector. Currently the outlay of the Dexia restructuring plan is caught in a battle between France and Belgium over who should bear the biggest restructuring burden. This has caused increased uncertainty about the prospects for support assumptions for the whole European banking system. Coupled with stories on further capital requirements for large European banks, this caused the senior financial CDS index to widen 60 basis points during the week to 360bp.
The broader iTraxx Europe index has widened more than 20bp during the week, now standing at 212bp at par with the stress level seen in the beginning of October and indeed close to levels seen at the widest of the financial crisis in 2008/09.
In the Nordic region – which is perceived as a relative safe haven during this crisis – the multi-notch downgrade of Norwegian Eksportfinans from Aa3 to Ba1 rattled the market. The downgrade follows Norway’s decision to wind down Eksportfinans. While the Norwegian government states that it plans to wind down Eksportfinans with the aim to maintain equity value in the company, the risk to recovery rate has certainly risen as government support assumptions are now off the table. That said we expect an orderly wind-down and a very high degree of commitment from owners.
In spite of the weak investor sentiment this week, we have seen a few French corporate issues coming to the primary market. Auchan issued a EUR600m five-year bond and Vivendi issued EUR1bn in two bond series maturing in 2015 and 2018. Especially the latter deal faced problems grinding enough investor interest and the bond spread relative to initial guidance had to be widened to make the deal go through. In the aftermarket the Vivendi bonds widened further the next day.
Riksbank introduces new capital requirements for banks
On Friday morning the Swedish Riksbank announced new stricter capital requirements for the four largest banks (Handelsbanken, Nordea, SEB and Swedbank). From the beginning of 2013 the core tier 1 capital requirement will be set at 10% and from 2015 it will be 12%. Thereby, the Swedish regulators are following the example set by Switzerland and go further in their requirements for the largest banks than what is required under Basel III.
The proposal does not come completely out of the blue, as over the past couple of years Swedish regulators and politicians have advocated stricter rules for the larger banks on numerous occasions. The new requirement includes a capital conservation buffer but excludes a counter-cyclical capital buffer. Hence, banks will not need to have substantial buffers on top of the minimum requirements, as a limited breach would imply ‘only’ caps on dividends and bonuses.
Of further interest is that the Riksbank has written that the Swedish FSA will review the risk weights used under Basel II and come up with a proposal on how risks with too low risk weights (e.g. residential mortgages) can be handled. In particular, this will hit the banks with large residential mortgage operations (Handelsbanken and Swedbank).
The requirements are a little stricter than we expected, especially if regulators push forward with the requirements for higher risk weights on residential mortgages. As the Swedish banks are well capitalised, we believe the new capital requirements will not be difficult to comply with by 2013 and 2015 respectively. Of the four Swedish banks, Nordea is the one that will have to make the biggest adjustment in order to comply with the new requirements as the current core tier 1 ratio stands at 11%. Overall, we consider the news negative for equity investors and neutral for credit investors in the short term (senior unsecured bonds). Longer term, the impact for credit investors is clearly positive, as it increases the cushion for losses on senior unsecured debt and lowers the risk of building up a housing bubble.
This barrage of weak macro-stories was followed by worrying headlines from the European banking sector. Currently the outlay of the Dexia restructuring plan is caught in a battle between France and Belgium over who should bear the biggest restructuring burden. This has caused increased uncertainty about the prospects for support assumptions for the whole European banking system. Coupled with stories on further capital requirements for large European banks, this caused the senior financial CDS index to widen 60 basis points during the week to 360bp.
The broader iTraxx Europe index has widened more than 20bp during the week, now standing at 212bp at par with the stress level seen in the beginning of October and indeed close to levels seen at the widest of the financial crisis in 2008/09.
In the Nordic region – which is perceived as a relative safe haven during this crisis – the multi-notch downgrade of Norwegian Eksportfinans from Aa3 to Ba1 rattled the market. The downgrade follows Norway’s decision to wind down Eksportfinans. While the Norwegian government states that it plans to wind down Eksportfinans with the aim to maintain equity value in the company, the risk to recovery rate has certainly risen as government support assumptions are now off the table. That said we expect an orderly wind-down and a very high degree of commitment from owners.
In spite of the weak investor sentiment this week, we have seen a few French corporate issues coming to the primary market. Auchan issued a EUR600m five-year bond and Vivendi issued EUR1bn in two bond series maturing in 2015 and 2018. Especially the latter deal faced problems grinding enough investor interest and the bond spread relative to initial guidance had to be widened to make the deal go through. In the aftermarket the Vivendi bonds widened further the next day.
Riksbank introduces new capital requirements for banks
On Friday morning the Swedish Riksbank announced new stricter capital requirements for the four largest banks (Handelsbanken, Nordea, SEB and Swedbank). From the beginning of 2013 the core tier 1 capital requirement will be set at 10% and from 2015 it will be 12%. Thereby, the Swedish regulators are following the example set by Switzerland and go further in their requirements for the largest banks than what is required under Basel III.
The proposal does not come completely out of the blue, as over the past couple of years Swedish regulators and politicians have advocated stricter rules for the larger banks on numerous occasions. The new requirement includes a capital conservation buffer but excludes a counter-cyclical capital buffer. Hence, banks will not need to have substantial buffers on top of the minimum requirements, as a limited breach would imply ‘only’ caps on dividends and bonuses.
Of further interest is that the Riksbank has written that the Swedish FSA will review the risk weights used under Basel II and come up with a proposal on how risks with too low risk weights (e.g. residential mortgages) can be handled. In particular, this will hit the banks with large residential mortgage operations (Handelsbanken and Swedbank).
The requirements are a little stricter than we expected, especially if regulators push forward with the requirements for higher risk weights on residential mortgages. As the Swedish banks are well capitalised, we believe the new capital requirements will not be difficult to comply with by 2013 and 2015 respectively. Of the four Swedish banks, Nordea is the one that will have to make the biggest adjustment in order to comply with the new requirements as the current core tier 1 ratio stands at 11%. Overall, we consider the news negative for equity investors and neutral for credit investors in the short term (senior unsecured bonds). Longer term, the impact for credit investors is clearly positive, as it increases the cushion for losses on senior unsecured debt and lowers the risk of building up a housing bubble.
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