Financials On Friday: Primary And M&A Dominate News

Two key themes this week; primary issuance and M&A. Both banks’ and insurers’ spreads were very marginally tighter on the week (<0.5bp) which, in itself, is a positive sign amidst the wave of issuance.

• Primary: we had a few tender-and-issue deals this week with Arion ending the week amongst the best performers and Allied Irish doing meaningfully worse. NordLB returned to the market with a Tier 2 issue for the first time in, reportedly, a decade. Raiffeisen’s Hungarian vehicle also got a senior preferred issue away.
  
  Predictably, NICs appeared lower but not zero/negative across the board (which has been the case in some recent periods). Positively, the sector is still tighter on the week, even with this level of supply.
  
  
• M&A: BBVA-Sabadell is the big story continuing to dominate M&A newsflow this week. BBVA finally went hostile on its smaller target bank which led to a range of responses. Sabadell is a Catalan bank, a region with a strong state identity, had regional elections last Sunday (12-May) so, ahead of this, politicians weighed in on the subject, generally negatively. Sabadell’s management indicated BBVA is optimistic in its financial assumptions, but we note that Sabadell is far from the efficient end of Spanish banking. Finally, the ECB has indicated it would be open to this deal with, predictably, the Bank of Spain quickly making the point that it is the final arbiter. This one is set to run and run but Sabadell’s spreads have tightened somewhat but still a good way from fully discounting the deal.
  
  
  • BCP continues to be the subject of bid speculation after 20% shareholder Fosun made it clear it is “open to selling”. Another 20% sits with Sonangol, which is hardly a synergistic shareholder. Results this week (16-May) also saw the CEO comment about his openness to consolidation. The bank had been linked with both BBVA and Caixabank, so the path currently appears clear for the latter. BCP’s been another positive spread performer.
  • This leaves us with a tail of smaller banks, including the Italians (BMPS, BAMI, BPER, BP Sondrio, to name a few), the UK government is selling down its banking stakes relatively quickly and even France’s President Macron has, reportedly, indicated his openness to banking deals.
  • We should not forget the add-ons and the streamlining disposals that are ongoing, too – Barclays has been active in lifting UK banking assets from owners where those assets were non-core (Tesco and Goldman with GM cards). Aviva did the same with AIG Life UK. Centerbridge took Aareal out in its entirety, Nordea has bought Danske’s Norwegian arm and Virgin Money and Co-Op Bank in the UK are being bought, too. So, even outside of the big leagues, lots of credit-meaningful events.
    
• In other news… a good week for German banks with DePfa’s slowing rate of NPL formation being warmly welcomed by credit investors (96bp tighter on the week but excluding from the following chart as it skews the axis!). Commerzbank results were good, too and Aareal followed DePfa’s lead.
  
  
  • Virgin Money’s trading statement indicated UK margins are already turning down, rather earlier than guidance from some of the majors. This is a key concern of equity investors.
  • ABN’s results were marginally weak from a credit standpoint (CET1 below expectations and NPLs only flat) but a tiny loan loss provision did drive a profit beat. KBC’s results were more obviously solid.
  • Swiss regulators are enacting a counter-cycling buffer, much to the chagrin of UBS management but spreads are tighter as this is clearly designed to bolster the bank’s resilience. Even if equity buyers don’t like it!
  • Finally, Raiffeisen deserves a word. Our political expert, Tom Lake, indicated to us in April, that it was very unlikely its Russian asset swap deal would happen – he was proven right last week. The ECB has continued to push for a more rapid extrication of European banks from Russia, at least in part as the threat of ex-communication from the USD bloc would be a severe problem for any European bank. And that was precisely the threat reportedly put in writing to Raiffeisen by a key US Treasury official this week. We think much of this is captured in current spreads but there are certainly downside risks and few obvious catalysts to improve the situation, we feel.