Financials On Friday: Melt-Up Week Feels Vertiginous

Financials on Friday – what have we learnt this week? The lack of bad news in results season has driven the sector to historically tight levels though few companies are upgrading forward guidance. The sector appears to very much be pricing in soft landings across global economies which is an awful lot to hope for, in our view.

• Melt-up in secondary: financials have been flying this week. EUR IG spreads were 12bp better, beating every sector of corporates and nearly 4bp stronger than the index overall. The financials equity index (SXFP) is up around 2.5% in a week, only around 1pp better than the wider market.
  • Banks are c.10bp tighter led by the high-beta names (Aareal and DePfa) as indications from Deutsche (and peers) at a financials conference in London this week were broadly sanguine on credit quality.
  • The lack of negatives from China in AIA’s results yesterday, alongside strong performances from USD issuers this week helped HSBC and StanChart perform well.
  • Raiffeisen, which is trying to sell operations in both Russia and Belarus, had a visit from the US Treasury official to discuss sanctions in place against both countries. Much as the bank indicated these are regular discussions, the market took this news badly.
  • Insurers are c.10bp tighter, also but with fewer overall trends. NN Group’s tender offer earlier this week wasn’t fully subscribed. Swiss Life’s sub-par results dragged local peers Zurich and Swiss Re wider than average this week, too. Coface raised targets on 4-Mar and clearly the credit market is still digesting that and Generali’s results, though only inline, generated something of a relief rally.
  • M&A was a feature again here; Ageas improved its bid for Direct Line which was, again, rejected. We sense Ageas had inadvertently put itself into play with this and BNP’s talks to take Fosun’s stake in the insurer could be a prelude. This should support Ageas’ credit from here, we feel.

• Primary melting-up, too: one of my colleagues put this best, when he said that the tail is basically wagging the dog this week, as primary was pushing secondary tighter. The week began with a Nordea issue which priced very tight, Mediobanca then following suit. The standout was, however, a covered issue from BPER in Italy which priced not only through its own curve but also through that of (much larger) Unicredit.

• Credit quality: much as this was a clear risk-on week, there are still some mixed signals which appear to be timing-related. Swiss Life posted weaker results with German real estate being cited as a reason – we feel this is somewhat retrospective. In better news were Deutsche’s comments (see above), along with similar from BNP. UBS was also indicating that incoming Swiss capital rules are more likely to be liquidity-focused than capital-based – a reaction to CS, NYCB et al, we feel.