Natixis Corporate & Investment Banking hosted its second annual FIG DCM conference at the Tours BPCE in Paris on September 19th and 20th 2024, coordinated by Thibault Archeray and Caroline Bryant, Co-Heads of FIG DCM.
Mohamed Kallala, Global Head of Natixis CIB, kicked off the conference by welcoming 47 issuers and 58 investors from 20 different jurisdictions. Focusing on the strength of the sector, he highlighted that despite challenging macro-economic conditions and shifts in the financial landscape in the year since the inaugural conference, FIG players have continued to be active in raising capital and liquidity via the bond markets, and fuel the economy.
Jean-François Robin, Chief economist for Natixis CIB, provided a macroeconomic outlook and spoke to key topics notably including the US economy in light of the upcoming presidential elections in November.
On the global outlook, the US economy is performing well with expectations of growth around 2.5% next year, despite concerns about a potential recession. Europe is also showing resilience, particularly outside of Germany, which may face recession. Inflation rates are declining too across various regions, providing a more favorable economic environment. China meanwhile is seeing a decline in growth, looking to be about 5% this year, and potentially 3% in 2025. Issues including high youth unemployment, demographic shifts, and reduced foreign investment are contributing to this outlook, raising questions about the country’s role as a global economic engine.
Jean-François also painted a somewhat stark picture of the impact of climate change – a theme that would later be picked up in great detail by keynote speaker Henri de Castries and the panelists of the Insurance panel.
Panel 1: The Calm after the Storm?
To address the current banking landscape and its capital & funding dynamics, Natixis CIB’s Andrew Peacock was joined by Delphine Reymondon of the European Banking Authority, Kathrin Gfall-Gapp of Erste Group, Scott Forrest from NatWest, and Matthieu Loriferne of PIMCO.
Hot on the tails of 2 years of strong earnings, most financial indicators for the banking sector are very positive and capital buffers are comfortable despite an increase in share buy backs. Asset quality has improved too, although cracks are showing in some sensitive sectors – such as real estate. We move now into a tougher economic environment with lower rates.
Asset quality has improved too, although cracks are showing in some sensitive sectors.
Turning to regulation, the panelists discussed the looming CMDI reform, highlighting that the legislation will once again ‘change the rules in the middle of the game’ – a phenomenon that is not new to the sector when it comes to regulation, but which nevertheless has potential to negatively impact cost of capital for European banks.
Looking to the southern hemisphere, the discussion paper released by the Australian Prudential Regulation Authority (APRA) in early September 2024 (Discussion Paper) outlining its proposal to phase out the use of AT1 capital instruments from capital adequacy requirements for banks, in favour of a combination of T2 and CET1,– raised the question how feasible similar action might be in a European setting.
Across the board, the panelists largely agreed that while the topic itself has traction, in Europe, the AT1 instrument is well-established and has an important place within the capital stack – even in light of the CS rescue in March 2023.
Keynote: Climate and Biodiversity in Crisis
In his keynote speech, Henri de Castries, Chairman of Institut Montaigne and ex-Chairman and CEO of AXA, stressed the importance of recognizing the connection between climate change and biodiversity, taking appropriate action to mitigate potential disaster, and the role the financial industry has to play in addressing these challenges.
Speaking of global awareness and response to the climate challenge, he highlighted the inequality in approach to how various regions are addressing the climate and biodiversity challenge, based on their stage of development. Developed countries, which have historically contributed more to environmental degradation through their activities, are becoming more aware and are taking (or starting to take) action. In contrast, developing nations which are rapidly emerging from poverty and undergoing substantial change as part of their ongoing evolution, are challenging the moral stance of the West, questioning why they should refrain from practices that the West historically engaged in for its own development.
Technological advancements are providing solutions with lower costs and broader scalability than ever before.
That said, technological advancements are providing solutions with lower costs and broader scalability than ever before – progress in renewable energy, batteries, and other areas, are potential game-changers.
The banking and insurance sectors have a significant role to play in helping to address these challenges. There is significant need to direct private investment towards research and development, as private investment will be the most powerful driver of change. At the same time, investment in research and development is essential, and there must be a willingness to accept higher risks for potentially high rewards in order to direct funds towards effective climate change and biodiversity solutions.
Panel 2: Transition Planning: From Assets to Liabilities
Turing to the role of the insurance sector in facilitating both climate mitigation and adaptation, Natixis CIB’s Orith Azoulay spoke to Dr. Thomas Mann Head of Ampega AM and CIO of Talanx, Aurelie Fallon Saint-Lo of AXA, and Thierry Langrenay of Les Ateliers du Futur, about how to effectively deliver transition plans and ensure their credibility.
From planning to delivery, insurers are among the most critical players to facilitate climate mitigation and adaptation, based on three key roles that they can play:
- Engage Investors: insurers are encouraged to invest in green assets, which are essential for transitioning to a low carbon economy. Most analyses converge and suggest that suggest that around €3.5 trillion in additional capital is needed over the next three decades to facilitate this transition. Insurers can influence decarbonization strategies in high-emitive sectors, thereby playing a pivotal role in climate initiatives.
- Responsible Underwriter / Technician: insurers have a responsibility to ensure acceptable risk-taking and manage claims effectively, as these often contribute significantly to their own emissions. By accurately measuring and managing climate risks , insurers can better understand their environmental impact. Responsible underwriting also means guiding clients toward sustainable practices, particularly when market capacity is limited.
- Resilience Champion: insurers must focus on prevention strategies to mitigate risks from climate-related events. This involves raising awareness about risk reduction and closing protection gaps where insurance coverage is lacking. Effective resilience strategies can significantly reduce the economic impacts of climate-related disasters.
When looking to manage risk and their investment decisions, insurers must grapple with the emerging risks associated with new technologies and sustainable investments. As the landscape evolves, there may be uncertainties related to market performance, regulatory changes, and technological viability. Understanding these risks is crucial for making informed investment decisions.
The regulatory aspect of transition planning too is crucial for ensuring that insurers are held accountable for their environmental impact and that they adhere to established standards and practices. While there has been significant attention to transition risk – how companies might be affected by changes in regulations, technology, and market dynamics – there is a call for regulators to also focus on the specifics of the plans themselves - looking not just at the potential risks but also at how companies intend to navigate those risks through actionable strategies.
With variations in how regulators across jurisdictions approach transition planning, the need for standardized regulatory requirements to prevent inconsistent practice shone through. Ideally, there would be a unified regulatory framework that could provide clarity and help ensure that all insurers are meeting similar standards.
Ultimately, collaboration, innovation, and a commitment to transparency are essential for delivering credible transition plans within the insurance sectors. The industry must leverage its unique position to support sustainable practices.
Panel 3: Should I Play or Should I Go?
The final panel of the conference saw Mathilde Lopez of Natixis FIG syndicate desk speak with Simon Outin from Allianz Global Investors, Julien de Saussure of Edmond de Rothschild Asset Management, and Jérémie Boudinet of Crédit Mutuel AM (formerly La Française AM).
Discussing current valuations, the panelists assessed that there is limited potential of further spread tightening – valuations are fair and technical are strong, which leans more towards a question of risk tolerance. Many credit investors are positioning for carry and post FOMC, many are looking to add credit risk to their portfolios.
Looking at regulation, changes coming up in the CMDI framework (proposed in 2023 to enhance the resilience of the sector) were noted to bring more layers of complexity and hence potentially bring extra costs to the final customer.
On fundamentals, it was noted that an increase in net interest income benefited most banks and that key financial ratios are at their best levels in years. This is particularly true for so-called ‘peripheral’ banks, where fundamentals continue to improve, and the dynamic looks set to continue.
A significant concern for credit investors today, is whether loan-loss provisioning will increase, which depends largely on the macroeconomic outlook. Despite a deterioration in asset quality/non-performing loans in ‘core’ markets such as France and Germany, the outlook remains somewhat positive as other countries continue to improve.
Likewise, commercial real estate impacted some banks significantly at the beginning of the year and we are not out of the woods yet. There may still be a continuation in the negative trend, but 2025 could see a turn-around in the sector.
One aspect that has changed the landscape is the more regular use of early tender offers to refinance AT1s which eliminates the uncertainty and reducing extension risk.
The discussion then turned to capital instruments. The panelists agreed that while still present, the extension risks were not deemed to be a major source of concern. Echoing the banking panel, AT1 instruments were again a hot topic of discussion. One aspect that has changed the landscape is the more regular use of early tender offers to refinance AT1s, which eliminates the uncertainty thus reducing extension risk. Picking up the APRA debate from the banking capital discussion, the panelists agreed that while their proposal to phase out AT1s may makes sense for Australia, for the time being, the instrument continues to work well in Europe and offers issuers another means to diversify their capital stack.
On the insurance sector, panelists acknowledged the importance of the sector as a source of diversification, however also noting the weaker technical factors vs. banks’ capital instruments (lower liquidity of the instruments, limited number of insurance specialists on the buy side etc.)
The conference featured over 500 credit update meetings between issuers and investors and therefore plays a valuable role in the investor outreach of many of our financial institutions’ clients.
