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Emerging Markets

Regulatory clarity remains key issue for Dutch banks

Dutch banks appear to be in an enviable position — well capitalised, with a secure sovereign, little peripheral exposure and plenty of retail deposits.

  • 28 Sep 2011
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But that doesn’t mean things are easy. The Dutch can’t count on a strong domestic bid to get their funding done so they’re vulnerable to the vagaries of the eurozone crisis. And the recent shutdown of senior unsecured means plugging the €200bn gap between deposits and mortgages in the Netherlands is becoming ever more challenging.

Dutch banks also suffer from crisis overhang — Rabobank is the only big bank that avoided state aid entirely. ING has repaid government support but ABN Amro is still state-owned, and the seismic shifts in their business models from integrations and disposals will take time to work through.

Worse, the crisis overhang has put the Dutch regulator on the front foot. Like the UK’s FSA, it is pushing for tough measures for the banks, above and beyond the regulatory requirements of Basel III and Solvency II.

EuroWeek collected six issuers, five dealers, and secondary market operator MTS together in a distinctive greenhouse-based restaurant in Amsterdam in early September, where the discussion covered Basel, senior shutdown, new investors and the challenges ahead.

Sjaak-Jan Baars, vice president, long term funding, Rabobank Group

Martin Nijboer, head of long term funding, ING

Erik Bosmans, group treasurer, ABN Amro

Frenk van der Vliet, managing director, treasury, NIBC Bank

Bart Toering, managing director, financial markets, SNS Bank

Marc Benders, treasury, liquidity and portfolio management, Van Lanschot

Eric de Boer, director, treasury, Friesland Bank

Caroline Bryant, head of FIG DCM Nordics and Netherlands, Natixis

Fabio Tosi, origination, international financial institutions, UniCredit

Peter Diamond, director, financial institutions group, Deutsche Bank

Jens Rasmussen, director, debt capital markets — Netherlands, HSBC

Mike Koerkemeier, head of financial institutions Europe — DCM, ING

Fabrizio Testa, MTS

Owen Sanderson, moderator, EuroWeek

EUROWEEK: Shall we start this off by hearing from the issuers round the table how the Dutch banks are getting on with wholesale funding this year: who’s done what; what remains still to go; how has the environment been?

Baars, Rabobank: Well, it’s been a challenging environment, with a lot happening in the markets. So far we’re doing pretty well in terms of our overall funding requirement. In a way, you can benefit from a safe haven effect with a triple-A rating for Rabobank and the Netherlands, but a lot of investors are stepping back and taking more time to make decisions. Execution is much more difficult, and timing of transactions is much more important.

We have raised €35bn so far in terms of senior debt, which is actually more than we needed to do. We’re just trying to raise as much as possible in this kind of environment, trying to be ahead of any potential problems in the market, any periods of market slowdown, and because we never know when those slowdowns happen we need to be available.

EUROWEEK: Martin: is that your experience?

Nijboer, ING: We have done more funding this year than we have done in the last four or five years. ING only started issuing long term senior funding in 2008, so we are relatively new and need to establish ourselves in more markets. There are still a lot of markets where we have not issued in size, so there’s a lot of room to grow further and to get a more diversified investor base. But this year it’s going quite all right as we have now done more than €20bn of long term funding. It’s in general difficult to find the right window, but when you have a window you can easily get a transaction out of the market, and in nice size as well.

EUROWEEK: So are you pre-funding as well?

Nijboer, ING: Yes. We haven’t really got a fixed target for what we want to do this year but our strategy is to diversify the investor base as much as possible. So we monitor the markets closely and look at the possible interesting opportunities in the various markets and try to get as much as possible at interesting spreads. We need to do at least what is maturing every year, which is €10bn or so. It’s not difficult to do that each year in general, but when there’s an opportunity to do more you take it.

EUROWEEK: Maybe we can turn to Erik from ABN now. Are you fully funded for the year?

Bosmans, ABN Amro: Yes. We already pre-funded €6bn to €7bn for 2012. In total we did €14bn this year.

Our two targets for the future are further terming out our wholesale funding and further diversification, in currencies as well as geographies, to tap different investor bases.

The market, though, as Martin pointed out, is getting increasingly difficult. The timeframes in which you can access the markets are getting smaller and narrower, and the amount you can take out is getting smaller, so there are two forces making it challenging.

I’m anxious to see what happens when the first bank comes back to issue senior unsecured — the last one I think was two months ago. This might set the tone for the rest of the year. But for the moment uncertainties will continue to rule the game.

EUROWEEK: So the issue of execution keeps coming back — maybe we should hear from the dealer side?

Bryant, Natixis: What we’ve heard so far echoes broadly what other Northern European issuers have done — front-loading their programmes to the first half of the year. We had a very bullish market in the first half. I’d almost call it overbought, in the sense that the fundamentals weren’t there and we always had the European sovereign issues in the background.

My feeling is that issuers, including the ones around this table, knew that and stepped in to make sure they had done as much funding as they possibly could at half-year. In fact by the end of June some banks were pretty much fully funded for the year and beyond. If we looked at covered bond funding, in terms of our internal projections, Dutch and Nordics issuers were roughly 65%-70% done for the year. Looking at Germany, it was more a matter of 75% of programmes done, so this is a sign that issuers were reading the markets well in the first half and that they have learnt their lessons well. I think these last four years have taught us that when the market is there you have to go and fund as much as possible.

Another theme has been investor diversification for issuers, with non euro markets increasingly important, of which US dollars predominates. Although covered bond issuance out of the Netherlands is still tentative there has been good activity in the senior unsecured space during the first half’s benign market conditions. The more you diversify, the more you give yourself room for manoeuvre on the execution side. One last point is pricing considerations — these last few years have taught us that quibbling over the last basis points can jeopardise deal execution and of late issuers are seemingly more focused on execution and getting the funding raised.

EUROWEEK: So is it a case of "be cheap, grab it while you can"?

Koerkemeier, ING Bank: No, I wouldn’t say it was that. You need to price to clear, but just being cheap is not the right way forward.

I was also at the French and German roundtables. Those issuers were geared around their strong domestic investor bases. Here in the Netherlands, although you have pretty big investors, the overall base is smaller. Therefore I agree with Caroline: diversification is a key goal that Dutch issuers will want to look at.

Execution is key, diversification is key, and we’ll see how the market further develops. Because the big issuers are pretty far done with their funding programmes, pre-funding is definitely one of the subjects on people’s minds. We’ll see how the senior market evolves going forward.

EUROWEEK: Can we go for a smaller institution perspective from you, Bart?

Toering, SNS Bank: For the smaller institutions it can be difficult to move out into the market, whether your deal is cheap or not. At certain times you can load your pockets full with funds, but you’ll have your CFO talking about the negative carry in your cash position, so it’s not all about grabbing as much as you can. There is a time-related cost you’re running there.

For SNS Bank at the moment, our rating is not really favourable enough to fund through senior unsecured as we did in the past. We’re more dependent on our RMBS and covered bond programmes.

We haven’t done any funding from SNS Bank this year. We did our 2011 funding in 2010, actually. At the same time, we’ve seen a growth of deposits in SNS Bank and we’re winding down some of our property finance business, so we’re actually shrinking the balance sheet. That brings us to where we are — done for the year. We might come into the market in the last quarter in order to pre-fund ourselves for 2012. Our requirements for next year are a bit heavier because of the payback of government-guaranteed debt.

EUROWEEK: Can we turn to Marc, and ask more about the domestic investor base, and your funding experience so far?

Benders, Van Lanschot: Van Lanschot’s funding requirement this year is fairly limited, so we did a benchmark €500m senior issue at the beginning of the year, after which our wholesale funding was more or less complete. We don’t have a covered bond programme in place, but instead use securitisations and senior unsecured as wholesale funding tools. The last placement of our RMBS notes took place in Q4 last year. As the majority of our funding comes from customer deposits, our wholesale funding needs are limited.

EUROWEEK: But retail deposits are zero sum, surely? Your thoughts on that, Eric?

de Boer, Friesland Bank: We’ve made quite a shift in our funding programme last year. We were fairly reliant on capital markets in the past but we’ve changed that quite successfully to retail deposits.

We are a small bank and our rating is not favourable for activity in the senior market, so the change towards retail funding is important for us, and maybe for everyone else as well.

It is quite clear that the capital markets are challenging and are closed for much of the time for smaller banks. Maybe Rabobank can still fund in the capital markets but the change towards retail deposits is a development which we see in other banks in the coming years.

EUROWEEK: Who is going to lose retail deposits? You can’t attract more deposit funding to the whole system, can you?

de Boer, Friesland Bank: You can see in the market that there is a battle for retail deposits. You can see it in price levels, and that will be the challenge of the coming year.

EUROWEEK: Can we come back to the safe haven idea? Maybe Peter could give an overview?

Diamond, Deutsche Bank: The Netherlands, as one of the few triple-A countries left in Europe, does have a strong following in international markets. Investors understand the Dutch economy, they understand that the Netherlands is a stable triple-A country as well and that it doesn’t suffer from some of the issues that are surrounding other countries at the core of Europe.

The Dutch banks are seen as having a strong regulator: the DNB has been a very strong commentator and a leader in this crisis. Having moved over the first hurdle, the national champions do have access to the capital markets — which is a rarity in today’s environment. The question is whether the issuers are prepared to actually take advantage of that and pay the prices the market wants, and I think that will be interesting going forward.

This doesn’t apply to the second tier though. Safe haven status only applies to the so-called national champions. Anything beneath that has to fight for its funding along with other second tier issuers around Europe, so you do have a significant mismatch between the two of them.

EUROWEEK: So will the Dutch banks be OK if the senior market doesn’t improve? What are the likely effects? Jens?

Rasmussen, HSBC: I’ll look in the crystal ball a bit here. Depositors have already been mentioned a couple of times, but that’s effectively a zero-sum game, and the banking system as a whole will still has a substantial wholesale funding requirement.

If that’s not available in senior unsecured, I think we will go into a phase where we will temporarily see a growing reliance on secured funding — covered bonds or RMBS. Fortunately Dutch banks have very good access to these markets and many have also been very effective in pre-funding earlier this year.

EUROWEEK: And is it likely that senior markets will improve?

Rasmussen, HSBC: We all hope that the senior markets will re-open. I think September will the key period in that respect.

A bigger question that investors are waiting for the answer to is what’s happening in terms of resolution schemes and bail-ins. The EC consultation on bailing in still has not produced any tangible outcome and I think this is a key area of investor uncertainty. Until this is resolved, some investors may feel that they do not know what they’re in for when they buy senior unsecured. Are they buying what they used to be comfortable with in the past or are they effectively buying a new type of subordinated debt?

Toering, SNS Bank: That’s already priced in though, isn’t it?

Rasmussen, HSBC: Yes. And I think at the current levels, if we look at the secondaries as guidance, clearly those levels are not palatable to the issuers. Senior unsecured funding costs at these levels may simply not work from a longer term economic perspective. This means senior issuance is likely to resume in the shorter end until we have greater clarity.

EUROWEEK: Moving round the table to Fabio, what’s your view of bail-ins? How important is this issue and is it already in the price?

Tosi, UniCredit: There will certainly be changes in the senior unsecured market going forward. As Erik pointed out, it hasn’t been tapped for a while, and the bail-in discussion doesn’t make this topic any easier. So the question will be: what kind of premium will be required to get issues done?

The maturity bracket that will be possible for future senior unsecured issues will be a constraint for some issuers. The top tier institutions will still be able to come to market with medium to long dated issues. The second tier institutions will have more difficulties in selling long dated issues will be more limited to the short maturities.

They will have to manage their funding mix well — the split between senior unsecured, covered bonds and other types of issuance. They will use senior unsecured at a higher price for short dated issues, and then use covered bonds for longer term issuance.

We expect that the market will re-open at a certain stage and it will be interesting to see where the pricing will be and what will be required by the investor base.

We’ve noticed in the last few months that there has been a change in investor activities. In the order books there are fewer relative value accounts, but we see more buy and hold investors buying bank paper.

The positive effect is that those issues will be more stable. Due to the new regulations we might expect to see a senior unsecured market not as large as we’ve seen in the past, so there could be smaller deal sizes as well, and smaller sizes will reduce volatility.

EUROWEEK: Won’t smaller sizes and buy and hold investors make issues less liquid?

Tosi, UniCredit: Liquidity is a different aspect to size. Even if you do a €750m rather than a €1bn senior unsecured issue, it doesn’t mean the issue is not liquid.

As I said, the investor mentality has changed due to the regulations that are coming into place. Everybody is aware that the risk-weighted assets available at the big dealer banks are more restricted than in the past and therefore traders are not expected to be running big positions on day books in order to keep a market making capability at all times.

We’re probably not going to see the historic high levels of liquidity which we had pre-crisis, due to the restrictions that every house has on the risk-weighted assets in the trading book. But smaller issue size should not be a concern.

EUROWEEK: Can we turn back to covered bonds now? Several people have mentioned their role in the funding mix. Are they the future? I’ll direct that to ING’s Martin Nijboer, as he re-opened the market after the summer break with a covered bond.

Nijboer, ING: Well, we do €5bn to €7bn in covered bonds every year, and in total we have around €21bn outstanding with our Dutch covered bond programme, so it’s a useful funding tool, but we don’t need to rely on covered bonds. The good thing is that the covered bond market has almost always been open over the last few years so it is a reliable market for us to get access to long term funding.

But I think covered bonds in general will be more important if we get covered bond laws in the US and Australia. We issued for instance our first Pfandbrief this year as well and have now two covered bond programmes in place which we can use. We will probably establish also programmes in other jurisdictions when that is possible and issue more covered bonds in total.

But the issuance from the Dutch programme will not change much. There’ll be €5bn or €6bn issued every year.

EUROWEEK: But is the term funding aspect important? If it’s going to be harder to get senior unsecured at the long end, then maybe covered bonds solve that problem?

Nijboer, ING: In general the senior market is more difficult but it’s not impossible, so it’s just a matter of timing and maybe sometimes you end up paying a higher spread than you would like. But if you do that constantly through the cycle, then sometimes you’ll pay a cheaper spread as well. Of course it would be nice if the markets improve, especially of course if you look at the last two months, but if you take the whole year then senior wasn’t bad at all. We did €15bn already this year in senior funding all over the world.

Toering, SNS Bank: Covered bonds are of course limited to a certain extent, because in the Netherlands we have a regulator that is keener to put ceilings in place than in other jurisdictions.

Nijboer, ING: And also the ratings agencies. You can’t always concentrate on the same maturities — you need to do five, sevens and 10s and that’s pretty much all you can do in a year, or you get a ridiculously high percentage of over-collateralisation, which doesn’t make much sense.

Rasmussen, HSBC: A couple of years ago nobody bothered about the asset encumbrance because it wasn’t an issue for anyone: nobody had issued in secured funding in significant size and volume compared to the overall balance sheet. Now investors are starting to ask serious questions about encumbrance, and becoming increasingly sophisticated in terms of how they assess the use of asset on the balance sheet.

Interestingly, renewed and targeted use of subordinated debt could be an important factor in underpinning the senior market.

Bosmans, ABN Amro: Some regulators have already put a ceiling on some of their banks — in Switzerland, for example, they can issue 10% of the full mortgage book — and there’s no clarity as to what the Dutch central bank will do.

Toering, SNS Bank: Yes, but it’s flexible and still negotiable, at the moment anyway. It’s a moving target with the Dutch central bank, so we’ll see where that ends and what the opportunities are for Dutch banks.

Bosmans, ABN Amro: We need to get bridge the gap between deposits and the outstanding amount of Dutch mortgages, giving Dutch banks a €200bn space that they need to fill.

Toering, SNS Bank: That gap’s not going to be taken out by the Dutch investor base: they’re not going to help you get bonds done.

van der Vliet, NIBC Bank: On the contrary, domestic investors are looking abroad. That’s why we have a funding gap in the Netherlands — the pension funds, where a large part of the Dutch pension savings are held, invest a very large part of their assets abroad, and as a consequence here in the Netherlands there are not enough savings to fund the whole banking system. This means Dutch banks need to go abroad.

Covered bonds and RMBS help to fill this gap and tap international demand. But the new regulation makes this harder. By not including RMBS in the liquidity coverage ratio, this creates a large distinction between RMBS and covered bonds, whereas from a Dutch perspective we need them both, and we need to be able to tap both markets in order to be able to fund the banking system.

EUROWEEK: That’s a good point, does anyone want to come in on the LCR?

Bosmans, ABN Amro: As with the asset encumbrance it’s not yet final, but the way it’s now looking is that the liquidity value of RMBS in the LCR will be zero.

Liquidity values have already caused major headaches for the Dutch banks. As of May 1 this year, the Dutch central bank said we could only give 50% liquidity value to RMBS that banks held.

In my view, there’s a inconsistency in the expected rules and regulations from the different regulatory authorities. On the one hand, they take the RMBS liquidity value down; but on the other hand, you’re encouraged to improve the way you fund yourself and term out maturities in particular.

This is just going to end up in banks going to the ECB,and doing all kinds of tenors for the repo window. I don’t think that is what Basel III had in mind. So that’s my view in a nutshell on inconsistency with respect to liquidity rules for RMBS. It might drive banks in a direction they shouldn’t be aiming in.

Toering, SNS Bank: That goes for all banks — us, Rabo, and your bank as well. If you have retained securitisations, you’re going to be less liquid.

van der Vliet, NIBC Bank: It’s a pity that this is probably a Dutch and UK thing and not so much a German and French — that’s why we lost out on the lobbying.

Koerkemeier, ING Bank: There is certainly some lobbying going on elsewhere. The Germans have a strong interest in maintaining the Pfandbrief market, so of course that is going to be maintained. It’s the same story from the French on the covered bond side — neither the French nor the Germans are natural users of RMBS. And unfortunately, the Dutch financial institutions lose out to some extent to that weight of lobbying.

EUROWEEK: How important is this losing out effect? Can we put any numbers on the final impact?

Koerkemeier, ING Bank: It’s probably very difficult to quantify, but you can see that, as long as securitisations are not used for the LCR, you will see fewer banks buying them.

Diamond, Deutsche Bank: If you look at the number of investors that participate in an RMBS deal, it may be 25 to 30, while if you look at a covered bond book it’s up to 100. I can tell you now that we won’t see the whole 70 or 80 jump into RMBS were they to be included within the LCR. But certainly quite a part of that number are bank buyers who would participate if they could count it towards their regulatory liquidity.

EUROWEEK: What’s the impact for senior unsecured? That is also being left out of the LCR?

Diamond, Deutsche Bank: At the front end, up to two or three years, probably a reasonable amount. Banks were the biggest buyers of floaters. Out to three years in the fixed rate market there will be a degree of bank buying, but beyond that maturity much less so. Then you move into the real money players, insurance and pension funds, and for that it doesn’t make any difference at all.

EUROWEEK: Is that your view, Caroline? What if we see senior unsecured more concentrated in the front end and banks unable to buy it for liquidity? Does that matter?

Bryant, Natixis: Maybe I’m seeing the world with a glass half full but I do not think the senior market will disappear in its entirety, nor is it confined to the short end. The problem that we have now is that we have a big void between where the buyers are and where the issuers are willing to print.

There is demand, there are some investors that are lined up, it’s just that, as you can see around this table, everybody is fully funded and is not ready to print at historically wide levels. Whereas the investors are understandably quite keen to buy at historically wide levels.

So let’s not panic about the senior market. It’s not going to completely disappear. Sure, there are regulatory forces on the demand side that do not support the senior market, there’s no question about it. The LCR measures do discourage bank buyers from holding senior, and Solvency II for insurance companies is another regulatory hurdle to the detriment of senior debt.

Under Solvency II, covered bonds are going to be a more attractive asset to hold, because insurers will need to hold less capital against them and concentration thresholds will be limited to the same extent as unsecured debt. In France, insurance companies that have been very present in senior unsecured paper are fundamentally overweight senior, and in the context of Solvency II need to increasingly shift the composition of their portfolios towards covered bonds.

This will develop the long end bid in covered bonds. In fact it is rather interesting to see that, after a couple of months of total closure, the covered bond market re-opened at the 10 year part of the curve and that issuance has been dominated by longer end transactions. This is driven by the insurance bid out of Germany and France, and is a result of these regulatory changes.

There’s also central bank policy — senior debt takes a much larger haircut at the ECB and that is another factor weighing on the bank demand side.

However, because issuers are shifting more and more towards covered bonds, what we are seeing on the supply side are huge amounts of redemptions in senior, that are not being replaced. Year to date, we’ve had €80bn more redemptions than we’ve had issuance in the euro denominated senior unsecured market. That is significant and on top of this we have roughly another €80bn redeeming between September and December — this will free up demand capacity and not all of it will shift to covered bonds. In fact, going forward, we are going to continue to see very heavy redemptions in senior. So despite the fact that it is less attractive for a bank or an insurer to buy senior debt, these investors will not fully disappear and there will be a price at which it will be attractive for them to buy senior.

de Boer, Friesland Bank: What’s your perspective on where the demand will come from?

Bryant, Natixis: Well, asset managers are going to continue to be a driving force — they’re a big component of the senior unsecured market. Again, I don’t think insurers will fully disappear and I don’t think banks will fully disappear, because we are going to stay in a very low rates environment for a long time and the senior unsecured market will be providing yield pick-up. Economies in the Western world will take a long time to recover, and rates are going to stay very low for what is now an unforeseeable future. The investor community will have to find a yield pick-up somewhere.

Benders, Van Lanschot: But then if banks are disappearing as buyers of senior unsecured at the short end, where will the buyers be at the long end of the curve?

Bryant, Natixis: Maybe I just have a French perspective, but the big buyers of short dated senior in France consisted more of money market funds. Maybe that type of demand will increasingly replicate itself elsewhere.

EUROWEEK: I wanted to pick up on your point about the insurance bid — does Solvency II mean disappearing insurers, Jens?

Rasmussen, HSBC: Insurers will remain major investors and still have appetite for bank risk, there’s no doubt about that. They have yield and duration target considerations to look at, so definitely there will be a strong bid from the insurance industry for certain asset classes, but it will probably be a lot more selective and individually determined than it has been in the past.

EUROWEEK: They’ll only pick certain names for any jurisdiction?

Rasmussen, HSBC: They pick the names they fundamentally like when the value makes sense and their own internal economic capital models support it. That’s what’s driving it, the Solvency II internal capital models that the insurers themselves are developing. It’s becoming a more complex investment choice for the insurers than it has been in the past.

EUROWEEK: So if insurers and other investors need a little more persuasion, how does an issuer make sure that they are comfortable?

Bosmans, ABN Amro: I think it is of critical importance for all the banks to move forward and to continue to do a lot of investor work with all the changes and challenging markets ahead.

The second part of the answer is the inconsistency between Solvency II and banking regulation. Insurers are forced to get more short term investments on their balance sheet, while banks need them to give long term funding.

Whether this is what Solvency II is supposed to be like I don’t know — it’s a whole other debate. But I don’t know for sure how final all of it is. I’m open to more views on the way insurers will behave going forward — it’s going to be a complex world out there.

Koerkemeier, ING Bank: I think for insurers, it’s going to be increasingly difficult to maintain their income target if they continue to go very short. We discussed the yield argument already, and I think yield is probably a very compelling reason why the bid will stay, and likely for pension funds as well. But I think for the banks as issuers the question is whether you actually want to accept these levels at the moment and whether you actually want to issue. Does it make sense for your business model to pay these prices?

Toering, SNS Bank: That’s right — for the low rated banks diversification is very important. As SNS Bank, we aren’t going to issue any five year unsecured and it’s going to be too expensive anyway. This changes the business model, so you might move to 18 months maximum, with the rest of your wholesale funding up to five year maturities coming from RMBS or covered bonds. That’s not a new action though.

de Boer, Friesland Bank: You have to be very critical in the choice you make for your funding strategies as a small bank with a low rating, and the instruments available to you are limited these days. Pricing is also a difficult thing, so again retail funding will be more and more important in the coming years.

Toering, SNS Bank: Retail funding and also shrinking balance sheets.

EUROWEEK: Is this just holding down your assets, or is this kind of divesting in non-core business? What are we talking about here?

Bryant, Natixis: When you look at Dutch bank results over the past quarters there are definite trends — a lacklustre housing market means that mortgage loan growth is slow and, given that Dutch banks’ lending is mostly concentrated on residential mortgages, this slow growth is making limited demands on balance sheets. In addition, following various bank bail-outs, there are certain EU constraints on asset sales under state aid rules. As such there’s an element of banks getting rid of assets that aren’t strategically viable. And of course, asset sales and divestments generate funding by freeing up cash and extracting capital. These trends are true across Europe.

Bosmans, ABN Amro: ...like in Spain, although there it’s also due to funds.

They needed close to €130bn but could only do €30bn in the first six months, now they have started to sell off real estate. They’re already €60bn done on that, so that shows the strength of the deleveraging.

If you look at mortgages within ABN Amro, origination was around €3bn, while outflow was around €5bn, so due to the economic environment we are in assets will go down anyhow.

Toering, SNS Bank: Yes, but that’s also in line with capital safety of course. You have to keep your ratios where they are, at least, so you have to keep your assets under control. All banks do that.

van der Vliet, NIBC Bank: But it’s not just banks, it’s also households and corporates. Everyone is deleveraging and so banks will require less funding. On the other hand, I think that almost all of us have a larger liquidity buffer now than we have ever had before, and that is to be invested in short end paper as well. So it’s a sort of countervailing effect, although not in the same size as the general deleveraging.

EUROWEEK: Is Rabobank also shrinking its balance sheet?

Baars, Rabobank: To a lesser extent, we are. Our last numbers still showed a slightly larger balance sheet, but the growth rate is decreasing.

Another point I want to touch upon is that, a lot of this is driven by upcoming regulations which haven’t been decided yet. We’ve seen that senior will become more difficult because of the bail-in proposals, and that there will be challenges for wider capital markets with insurers basing their buying decisions on Solvency II recommendations that are not fully implemented.

So it’s all very unclear. A bit more clarity — something of an understatement [laughter] — will already help a lot, and make things easier for issuers in general.

Benders, Van Lanschot: That’s basically on the funding side. In terms of capital, banks need to reassess their business model and rethink how they want to allocate capital.

That’s a big challenge as well, and also needs more clarity from regulators. In Van Lanschot’s case, we are focusing more and more on our target group clients. And as the demand for lending from these clients is falling, the balance sheet is naturally shrinking. I think that’s generally the case at other banks too.

Bosmans, ABN Amro: More specifically in the Dutch banking system, our minister of finance has decided to staple together numerous rules and regulations.

So we have a bank tax, we have the guaranteed scheme for deposits to be paid up front, and we have a resolution regime. If we look at Europe, as it looks right now most of the countries are given one or two of these measures. There is a risk that Dutch banks will no longer be able to compete in Europe because of the extra costs these measures impose.

Toering, SNS Bank: And taking CRD II measures as well.

Baars, Rabobank: ...and implementing them faster.

Bosmans, ABN Amro: Yes, that’s it. So it’s faster, there are more measures — that’s how to kill your financial system.

Diamond, Deutsche Bank: These sorts of measures trigger a vicious circle, because they all impact on capital, but also on profitability. Lower profitability then triggers a ratings action, because rating agencies say, "You’re undercapitalised and you’re not making as much money". And when your ratings start coming under pressure, that impacts on your funding tools, your bonds, your RMBS, your senior unsecured and your short term.

That spiral is very dangerous and you need to cut it off at the very beginning, because once you’re in the spiral it’s very difficult to escape.

We’re seeing a different spiral in the funding markets — no one’s funding, everyone’s worried, therefore the pressure’s on funding, which is scaring investors, so spreads go wider and no one’s funding again.

EUROWEEK: So how far can the Dutch regulator soften the tone? How much of this is set in stone right now?

Toering, SNS Bank: That’s difficult to control!

EUROWEEK: The other side of this is raising capital itself, and meeting higher capital requirements. The Dutch banking system is pretty well capitalised, but what kind of impact could the new capital rules have?

Bosmans, ABN Amro: I don’t think that Dutch banks have really an issue with capital. Look at what they came up with in the stress test, their ratios. Common tier one capital ratios are way above what they should be, at least for the majority of the Dutch banks, so I don’t really see issues going forward.

Banks that want to continue issuing Cocos and everything — that’s over now, but I don’t see the need either. From a capital perspective, I don’t think this question is going to be a very long one, as far as I am concerned.

EUROWEEK: Did you say Cocos are over now?

Bosmans, ABN Amro: You could say I was hoping to trigger a discussion....

EUROWEEK: Excellent idea! Sjaak-Jan, are Cocos over now?

Baars, Rabobank: No, they’re not! But it comes with a bit of a discussion. We feel that the Coco solution is a better solution than the bail-in discussions that are going on at the moment.

We think it’s a perfect safety net in your capital structure, to be able to withstand shocks to your bank or to the system, and you allow the market to price whatever risks are involved.

In that respect, we think contingent capital is a much better solution, it’s superior to regulated bail-in discussions.

Toering, SNS Bank: I agree, but you need to have a bit more recognition from rating agencies for your contingent capital, and not every bank is actually capable of raising it.

Also it’s not yet clear what future hybrid tier one is going to look like. So the permanent writedown structure in your Rabobank issue is not possible for many banks, at least not for the lower rated ones.

Lower rated banks could probably do it with a coupon of 20% or something, and therefore it’s still unclear what will work for everyone. But I agree that contingent capital is a better instrument than bailing in, but it’s too uncertain at the moment to do anything. CRD IV will dictate what is possible.

Baars, Rabobank: Exactly, that comes back to my point about clarity. More clarity on capital would just help the situation so much. Then you’d know what kind of capital you could raise, and then you know what base you have to build on. It all starts with more decisions being taken.

EUROWEEK: Has the Dutch regulator given any indications as to how it regards Cocos? Have you Erik, or you, Martin, looked at this sort of option?

Nijboer, ING: We will be a little sidelined from this discussion, since we cannot call any hybrids yet because of the intervention of the European Commission and the state aid rules.

So we are well capitalised and we will remain so! When we have done the IPOs of the insurance company, then probably we will look at it more closely.

But I’ve also heard it’s very uncertain what will work as capital, so do we need to take that risk and pay a high price now? I think when there is clarity, then the senior unsecured market will also come back and you will see issuance of new forms of Cocos. But there needs to be clarity first. That’s not in our hands, that’s in the hands of the politicians.

When there’s clarity, then banks can change their business model as well, you can change the asset side of your balance sheet, maybe you can have new kinds of mortgage products which suit the requirements on the liability side. When there’s no clarity, what can you do?

EUROWEEK: What about you Erik, have you looked at Cocos or other capital forms?

Bosmans, ABN Amro: No.

EUROWEEK: Is that because you’re well capitalised?

Bosmans, ABN Amro: Yes, for us it’s no issue. For the next two years, we are thinking about more creative ways to deal with funding than about new forms of capital.

EUROWEEK: How about liability management?

Rasmussen, HSBC: Well, liability management has so far predominantly been a way to optimise certain aspects of capital structures and funding profiles, but in a market with potential difficulties in executing new issuance it’s a tool of growing importance. Banks can use it to extend duration and maintain their investor base.

I think it’s important to distinguish between liability management for capital purposes and for funding purposes. So far, for funding purposes, it has been quite limited in the Dutch market, but there have been transactions, and in a difficult market this could be an effective tool to retain liquidity and manage duration.

On the capital side, I expect that we will see more liability managements. The existing capital structures in most banks still have room for optimisation. Nobody in the Dutch market has a capital problem, that’s very clear, but there’s room to improve.

As we go into a new regulatory regime, the way we assess capital is not necessarily just about what the ratio is, but also how banks measure against the new buffer requirements, and ultimately their ability to freely distribute capital and dividends to their owners.

Within that scope there is room for optimisation, and I expect we will continue to see liability management as an important tool. Some issuers here round the table have already done trades. I think we will see more of that.

EUROWEEK: So it sounds as though the next two weeks will tell us whether we have that. The other thing I wanted to bring up was secondary market liquidity — perhaps you could start us off, Fabrizio?

Testa, MTS: That’s probably the only thing missing from the conversation so far. In fact another piece of legislation which we have not mentioned during this discussion — Mifid II — focuses on pre and post trading transparency across all asset classes, including bonds.

MTS has been a facilitator for electronic bond secondary markets in Europe since 1988 and set up a network of euro sovereign bond markets engaging DMOs and primary dealers. The Dutch DMO was one of the first to become part of our network and has always been at the forefront of sponsoring pre and post trading transparency, recognising the positive impact on the primary market. MTS is now moving into credit — we will launch MTS Credit in the coming months — as we believe corporate issuers, including banks, will benefit from the transparency of secondary markets. I’d like to hear the opinion of the issuers around the table

MTS Credit will offer buy-side clients price discovery and execution via RFCQs, click-to-trade on executable prices dealers stream in the single dealer pages and order book trading in MTS Prime, an all-to-all market where clients will be able to post orders using a Prime firm. Different from the existing MTS markets, which are quote driven, MTS Prime will be order driven as better fits the nature of the credit market.

Another interesting topic which came out of the discussion is the use of collateral to raise cash alongside other solutions like retail deposits, commercial papers and unsecured loans. There is one market that never died, which in fact has been the best performer through the crisis. This is the repo market, and we believe it could become an even more interesting tool for bank funding, as opposed to the other instruments mentioned above, if it could attract new cash providers. We are planning to do that by launching an agency cash management facility which will enable cash rich investors to enter into secured market investments via the tripartite repo mechanism.

New clients would include hedge funds as well as corporate firms who are cash rich and currently either invest in unsecured deposits or buy each other’s commercial paper with maturities between three to six months.

By bringing a new pool of cash providers, the market will also benefit banks facing continued pressure to diversify their sources of funding in the face of Basel III and get ready for the time when the ECB will reduce the current level of liquidity.

EUROWEEK: Any more views on liquidity or the repo market as a funding tool?

Baars, Rabobank: Not so much on transparency, but liquidity is value-added to your issues. If you speak to investors, liquidity is a key element in the buying decision, so as long as you can promote that — and we can market the techniques that we use in our issues — and you can sustain that liquidity even in more difficult periods, then investors will recognise that.

de boer, friesland bank: Investors are paying much more attention to the secondary market and liquidity is an important driver for them. It’s very important from an issuer perspective to pay attention to the secondary market and support your paper.

  • 28 Sep 2011

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
1 Citi 17,937.65 77 10.67%
2 HSBC 17,202.71 88 10.24%
3 JPMorgan 15,720.00 64 9.35%
4 Deutsche Bank 13,208.40 58 7.86%
5 Bank of America Merrill Lynch 10,749.43 54 6.40%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
1 HSBC 6,221.38 14 11.59%
2 JPMorgan 5,140.67 18 9.58%
3 Bank of America Merrill Lynch 4,497.27 18 8.38%
4 Deutsche Bank 4,264.56 14 7.95%
5 Credit Suisse 4,132.73 8 7.70%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
1 Citi 6,674.27 20 14.95%
2 JPMorgan 5,884.96 16 13.18%
3 Barclays 4,728.57 10 10.59%
4 Deutsche Bank 4,044.06 10 9.06%
5 Goldman Sachs 3,229.17 5 7.23%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
1 Goldman Sachs 182.99 41 13.58%
2 Bank of America Merrill Lynch 90.70 28 6.73%
3 JPMorgan 88.18 43 6.54%
4 Deutsche Bank 85.13 29 6.32%
5 Lazard 80.06 43 5.94%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
1 ING 382.49 5 8.60%
2 Commerzbank Group 292.65 4 6.58%
3 UniCredit 275.33 3 6.19%
4 SG Corporate & Investment Banking 271.81 3 6.11%
5 Raiffeisen Bank International AG 207.65 3 4.67%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
1 Standard Chartered Bank 1,072.16 12 9.37%
2 Deutsche Bank 1,008.26 15 8.82%
3 AXIS Bank 1,000.88 27 8.75%
4 Barclays 699.87 9 6.12%
5 Trust Investment Advisors 698.72 32 6.11%