Financials On Friday

M&A a dominant force this week, including failures to offload Russian assets.

• Russia seized assets from a range of banks this week – in part due to a legal dispute brought by Gazprom but also, we sense, in retribution for the ECB’s increased pressure on European banks to fully dissociate themselves from the country. Unicredit, Deutsche and Commerzbank were the names in the spotlight this week.
• Separately, the ECB continues to step up pressure on banks to leave the country; we note that both Unicredit and OTP in Hungary have been upstreaming dividends from Russia to parent company levels. Raiffeisen’s failed attempts to sell its Russian business lead us to feel that no European banks are going to derive further economic value from their businesses in that country – however, much of this does now appear to be discounted in asset prices.
• BBVA continues its now-hostile pursuit of Sabadell and has, reportedly, hired lobbyists to attempt to stem the political tide against the deal. France’s President Macron, in contrast to some Spanish politicians, made it clear that he would be supportive of further European banking consolidation to help drive a capital markets union. He is also likely looking to continue to see BNP build itself into a global powerhouse.
• Unicredit CEO Orcel openly welcomed Macron’s intervention. Unicredit did come close to buying BMPS at one stage and is still linked, in the press, with Commerzbank and Banco BPM, amongst others. There’s now a whole range of smaller banks trading tight, as a result.
• The regulatory pressure on UBS remains high with Swiss figures continuing to push for greater capital levels. CEO Ermotti, whilst publicly saying he supports greater powers for Swiss regulators, is trying to steer the debate more towards monitoring and oversight, rather than simple capital surcharges. We can’t see this approach meeting with much success.
• Finally, a few points on operating updates:
  • Generali and Swiss Life both reported results this week. The former posted solid credit metrics and good revenues but a weaker life margin meant expectations were only met. Either way, the outlook statement struck a more bullish tone than three months earlier. Swiss Life continues to run high capital levels with another hint that management are looking to leverage this down. Operating metrics were a little weak, but the capital point is likely to dictate spreads, we feel.
  • Investec’s results were a little disappointing with asset quality in the UK commercial and specialist lending business meaningfully weaker. This appeared a negative lateral for Lloyds and NatWest.
  • Nationwide, in the midst of buying Virgin Money, also posted results which included quite a dramatic erosion of margins, we feel. Investors are well aware that UK banking margins have probably now peaked but the rate of slowdown at NWIDE implies both a highly competitive mortgage market alongside a tough deposit business.
• Key movers this week:
  • Banks: DePfa and Aareal had some relief, even with the latter issuing debt. Raiffeisen also rallied – clearly a “risk-on week”. Nationwide (results) and Sydbank (another issuer) were a couple of the few issuers wider on the week.
  • Insurers: Fosun, Generali (results), Swiss Life (also results) were all tighter with a small selection of the US issuers into the €IG index generally lagging the rally.