With DCM as a core component of its strategy, Natixis CIB last week hosted its inaugural Financial Institutions Group Conference in Paris. A diverse group of nearly 160 individuals, representing 90 European & APAC institutions (issuers and investors) from 18 different countries, gathered to discuss the current hot topics of the sector. Three panels, two keynote speeches, 275 one-to-one & group credit update meetings were scheduled during the two-day event.
Following the conference, we asked three questions to Caroline Bryant and Thibault Archeray – Co-Heads of FIG DCM at Natixis CIB, to deep dive into some of the key themes running through the panel discussions.
Are IFRS 9 & 17 Standards Bringing Improvements or Imposing more Complexity on Insurers?
Hailed as perhaps the most significant change to insurance accounting standards over the past 20 years, IFRS17 along with IFRS 9, has redesigned the shape of insurers’ balance sheet and P&L, bringing more consistency and transparency. While the accounting standard does not change the way that insurers are doing business, IFRS 9/17 goes on the same path as Solvency II by relying on fair value and introducing new indicators such as the Contractual Service Margin (CSM) which will be closely scrutinized by market participants as a way to monitor future profits forecasts vs realization. That being said, the standards do allow room for interpretation and opening balance sheet disclosures have shown divergence in some of the key parameters and transition choices made by insurers. Nevertheless, we expect comparability to improve over the next 2 to 3 years as the industry will converge towards a normalization in reporting and assumptions.
What did we learn from the early events of 2023 and what does the road ahead look like for European banks?
Rising interest rates have been a double-edged sword for EU banks, improving profitability, but also bringing volatility in markets, making bond market financing more challenging, particularly for smaller issuers. Even so, the sector has largely shrugged off US regional banks failures in March and the Credit Suisse AT1 write down, with markets reopening before the summer and seeing continued supply in Q3. Underpinned by strong capital positions, and with increased investors and supervisor focus on liquidity, EU banks have now successfully tapped all major capital markets. Today, current vintage AT1 and T2 offer attractive yields to investors. Banks have adopted pro-active liability management strategies, made easier by recent supervisory guidance, which helps issuers manage cost and optimise transaction execution. While debate remains on AT1 structures, there seems little impetus for significant changes in the near term in Europe; other regions may well see value in updating standards.
What key considerations would shape the approach of credit investors in the financial sector?
A lot happened in the beginning of the year as the banking industry faced important idiosyncratic crises in the US and Switzerland. However, the sector has well recovered since then, with markets regaining stability. On the bank side, 2023 marks the highest year on record for Euro credit supply since 2009. This implies a higher degree of selectivity and higher price sensitivity from the investor community. On the other hand, supply in the insurance space has been limited, on the back of relatively low volumes to refinance and the rise in rates boosting solvency margins and reducing the number of opportunistic transactions.
AT1 will remain an important part of the bank capital structures and the market is experiencing net negative supply at the moment. Regulators (in jurisdictions other than Switzerland) have been quite clear as to how AT1 holders would be treated in case of a loss absorption mechanism being triggered. In light of a potentially upcoming UBS AT1, investors would welcome some clarification on any potential change in structure of Swiss AT1.
Finally, investors are looking more closely at liquidity metrics in the European banking system, as well as asset quality, in particular in sensitive jurisdictions when it comes to CRE exposure.
