This is only half the story, however. Italys was the fastest growing covered bond market of the first half of 2011, and banks have taken full advantage of this growth. Italian FIG borrowers can also rely heavily on one of the strongest domestic markets in the eurozone, and retail investors have, so far, stood staunchly by their banks in the senior unsecured format.
But with investors increasingly swayed by movements in sovereign debt, Italian banks are finding it hard to access the capital markets for funding, and relying solely on covered bonds and retail funding is not necessarily an option. The ECB recently announced a purchase programme for Italian and Spanish government debt, which has stabilised yields to an extent, but the future is still uncertain for Italian FIG borrowers.
In this roundtable on Italian banks, issuers and dealers met in Milan to discuss how banks are responding to the sovereign turmoil as well as other market issues such as liquidity, Basel III regulations and the threat of bail-ins on the senior unsecured bank funding market.
Participants in the roundtable were:
Giacomo Burro, chief financial officer, Banca Carige
Claudio Capuani, fixed income, structured finance and securitisation origination for financial institutions, Natixis
Claudio De Lucia, senior funding manager, Intesa Sanpaolo
Giorgio Erasmi, head of funding, UBI Banca
Flavio Fabbrizi, head of Italian debt capital markets, HSBC
Luca Falco, head of debt capital markets for Italy, UniCredit
Gabriele Frediani, head of markets, MTS, London
Tamara Haegi, treasury, Banca Monte dei Paschi di Siena
Claudio Livolsi, debt capital markets, ING
Christoffer Mollenbach, head of FIG debt capital markets, Lloyds Banking Group
Gabriele Minotti, head of funding, Credito Emiliano
Mauricio Noé, covered bonds and senior funding, Deutsche Bank
Philipp Waldstein, head of funding, UniCredit
Toby Fildes, moderator, EuroWeek
Will Caiger-Smith, moderator, EuroWeek
EUROWEEK: Weve obviously had a very different August to the one we were expecting, so Id like to start by asking some of the issuers around the table how you are faring in terms of your wholesale funding this year. What have been the effects of the sovereign crisis and the recent widening of Italian government yields on your funding programmes? Philipp, lets start with you how have the past couple of months affected UniCredit?
Philipp Waldstein, Unicredit: Of course all of us are affected by the sovereign crisis. Theres no doubt about that. With respect to UniCredit, we are maybe by sheer luck well advanced and have now closed 95% of our 2011 funding plan of 32bn. So weve done 30.5bn of that, as of this Monday. The question was to what extent is it affecting your funding cost, and thats a bit unfair to us because we are not only an Italian issuer we are a European bank and that is reflected both in our volumes and in our spreads.
We have also published that our funding cost so far corresponds to around 125bp and that is only 24bp wider than it was in 2010. So that is so far quite a moderate increase in funding spreads. However, that is primarily due to two things. First, we are geographically diversified Germany, Austria and Italy but were also probably most advanced with respect to using a recoverable platform from all those three countries, so we are leveraging that a lot. So far, so good.
As we look ahead, things will get tougher. We are affected by the sovereign crisis because all our instruments are implicitly linked to the government deal curve whether it be via the network distribution on which we keep a spread in line with BTPs or maybe in covered bonds where we might be very tight to or even below the government curve but still affected.
EUROWEEK: Giorgio, obviously UBI Banca doesnt have the same ownership structure that UniCredit has. Let me ask you the same question has it been very difficult at times this year and how have you coped with that?
Giorgio Erasmi, UBI Banca: Our bank is completely different from UniCredit in that our assets and distribution are completely Italian. Luckily we had a lot of funding activity in the first half of the year, and in wholesale funding we have done 3.5bn against 2.7bn of total maturities for the year. And this has been very important for us because obviously markets have been closed for two or three months now and its difficult to see opportunities in the immediate future to go to the market.
If the market improved we could think of using the last part of the year for pre-funding activities.
The second positive point for us is retail funding, not only for UBI Banca but for other Italian banks as well. Our customers are confident in the UBI Banca name and the total funding from our customers is increasing year on year, both in deposits and in retail bonds, which usually have two or three year maturities.
And we think that this could be the answer to the situation we are facing at the moment. If spreads remain at this level it will be very difficult for us to go to the market especially as an Italian bank and so we have to look more and more at our internal, domestic funding.
EUROWEEK: Is MPS the same?
Tamara Haegi, MPS: Yes. Like UBI Banca, we did a lot of work in the first half of the year and we have completed our funding plan. We did start to pre-fund, and we have done about 20% of next years funding. But we do not think we will be in the market for the last quarter of 2011 if conditions dont change. Also for Monte Dei Paschi retail funding constitutes a great buffer. Its about 86% of our total direct funding and makes up two-thirds, more or less, of our securities on the market.
EUROWEEK: Has that percentage gone up or down this year compared to previous years?
Haegi, MPS: Its quite stable because for the retailers Monte Dei Paschi is a very traditional bank. We are the oldest bank in the world and we leverage on our franchise.
Gabriele Minotti, Credito Emiliano: Our position is similar. We have completed our 2011 funding programme, having issued in the first half of the year covered bonds and retail bonds for a total amount of 1.3bn against only 700m of bonds maturing this year. We prefer to pay this kind of spread to our customers rather than to the market. We continue to have a strong demand for our own bonds from our customers, so we can achieve our funding targets.
Also, dont forget that our customers assets under management in money market funds represent a significant liquidity buffer, and we can offer retail bonds to our customers as an alternative to money market funds. We have little worries about being able to do so.
EUROWEEK: Claudio, were you surprised at how difficult its been?
Claudio De Lucia, Intesa Sanpaolo: To some extent we were. Actually when we did most of our funding programme in the first half, like most of the other Italian banks, we found there was some criticism about being ready to tap the market even in that difficult environment. Sometimes somebody would ask, "Why you dont wait and hope for better times?" In fact it was a lucky choice but it proved to be correct and now we are very close to the end of our funding programme.
And, like any other Italian bank, we are relying strongly on the power and the potential of the network. So thats where we are. In principle, we can afford to look at Reuters and Bloomberg screens with some sort of peace of mind because what we had to do has already been done. The calendar is ticking over, yes, but were always looking ahead to the next week.
Giacomo Burro, Banca Carige: We share the same business model, and like other banks we did all our funding in the first half. We are probably one of the less frequent issuers but in the first half we issued a covered bond and some senior unsecured bonds. The two transactions totalled 1.2bn and in terms of budget we had a plan of 1bn of new funding for the whole year. So the two transactions exceeded the plan and thats good, given the difficult state of the market.
Probably more than other banks, we rely heavily on retail funds, and the good news is that retail customers are always very confident about the Italian banking system. The bad news is that the cost of retail funding is increasing dramatically because the difficult conditions in the wholesale markets are spreading into the domestic market.
And this is the big problem, I guess. This year everyone is experiencing an increase in retail customer funding of over 100bp if you consider the last couple of years. So we can go on funding the banks in the retail market but the pressure is increasing as the cost increases. Everyone is competing in this market.
Mauricio Noé, Deutsche Bank: On average, Italian banks had covered 60% of their 2011 total bond maturities by May 70% of their 2011 wholesale maturities before the sovereign crisis became widespread, and 2012 total maturities have reached 96bn, of which 40% relates to wholesale bonds. This is versus 103bn in 2011, of which 36% is related to wholesale bonds. The effort to replace them should be manageable, as Italian banks have been able to count on their retail networks, even when wholesale markets were under pressure.
Having said that, overall funding costs are increasing and market access is difficult due to the sovereign crisis. Italian banks will likely have to use less expensive covered bonds to replace maturing senior bonds, push on direct deposits and retail, and increase the use of ECB support for liquidity.
EUROWEEK: Weve just been talking about rising wholesale spreads for Italian banks and obviously to some extent that is linked to problems with sovereign debt in the eurozone and with the Italian sovereign as well. So how does the panel feel Italian FIG debt should be perceived in relation to the sovereign? Is it core, soft-core or is it peripheral? And are the levels that its currently trading at fair?
Noé, Deutsche Bank: Italian banks funding structures appear robust with a stable commercial banking business model. Their placement power, given strong retail support, is still there. In these days where France and French banks are also coming under pressure given the sovereign contagion, Italy has been penalised because of its very high public debt level. But private indebtedness remains very low and this is an extremely important difference compared to other peripherals and also a guarantee of stability for Italian financial institutions.
Flavio Fabbrizi, HSBC: Clearly the market has moved very rapidly and in violent outbursts over the past couple of months. My impression is that volumes have been very low and in a way its difficult to understand whether these levels are really validated by investors. We havent seen significant selling of paper from real money accounts on the senior and on the subordinated side. Most of the market participants are in a risk-off mode at this juncture, but theyre also trying to find what the signs are that could turn this situation around. There is a lot of liquidity out there in the market and if there is the right catalyst the market could snap back, but it needs to find something to grab on to.
Claudio Capuani, Natixis: Of course everybodys looking on the secondary market, as Flavio was saying. We dont see a lot of activity on the secondary market actually just a few million a day. So it is difficult for anybody to assess the real level of where an issuer can place its paper in the market. Of course, we are comparing all the banking spreads over the government, but its also very difficult to find paper to buy if you want to buy 50m on the secondary market its pretty much impossible.
And on the other side a banker can rely on suggesting a tap so the issuer can just pay an extra spread on the previous issuance, making an average. But I dont think this kind of spread will be sustainable for a long period of time. So it is very difficult to understand where the market really is right now, at least on the senior unsecured side. Subordinated is not something were really assessing at the moment. Its also very difficult to find a fair level in the covered bond market.
Christoffer Mollenbach, Lloyds: I think the expression risk-off is very telling because what were seeing is this macro environment where we have risk-on/risk-off.
One of the main challenges we face is that investors have a hard time discriminating between different credits and also between the sovereign and the bank credits because everything is up in the air, whether its the politics or the regulation. Unfortunately, until we get more clarity on some of these things, I think its going to be difficult to get a sustained recovery on the bank side and also for banks to differentiate themselves in a proper way within the marketplace.
Claudio Livolsi, ING: What you have now is a floor, which is the BTP. And even UniCredit, which did a deal last week, couldnt go through that floor because all investors are looking at it. BTPs are moving quite rapidly so if the floor goes down by 100bp, Im not saying banks funding costs will go down by 100bp, but they could go down significantly.
So we are in a really paradoxical situation where the floor is set by the government and that floor is moving quite widely, and the discussion is not really about the credit standing of the borrower but about the sovereign. I think most investors these days are quite comfortable with the credit of the Italian banks theyre just a bit worried on the sovereign levels.
Burro, Banca Carige: For those who took part in the same roundtable last year, some investors were saying what you have to pay is the covered bond plus a spread for the illiquidity of the covered bond. And that spread was regardless of the quality of the issuer and the quality of the underlying. We have discussed the matter with a lot of investors and the conclusion is that you have to pay the country risk plus a spread. So the question is where you put Italian debt.
Haegi, MPS: Yes, this split between fundamentals and credit spreads is even more important when you look at ratings. Right now we have no consideration of what a rating actually is. Also, a banks rating incorporates the risk of Italy, and so the last UniCredit covered bond issue, with a triple-A rating, incorporates the fact that the underlying and the issuer are Italian. But, even so, there is a spread to a credit risk that is not triple-A, so we have a complete separation between the
perceived risk and the rating given by the rating agency.
Luca Falco, Unicredit: The problem is that its easy to just say OK, pay government bonds plus a spread because it saves you a lot of work. One day we say the rating agencies are reliable, the other day we say they are not, but the triple-A rating given to Italian covered bonds is real.
Italian retail is sound. Every bank here relies on their Italian funding because Italians are savers and they can invest. So when an Italian bank issues a covered bond, the debt is covered by somebody that has a mortgage but is cash rich. Investors dont want to look at that because now the knife is in their hands, they can dictate exactly what you have to pay. But what Im saying is that retail is not dead retail is strong because Italians do not leverage on their mortgages.
In Italy we dont go to the bank to renegotiate the mortgage and then spend the money to buy something. In Italy, when people go to the bank they say "I want to close part of my mortgage". So the level the banks are now paying is completely wrong.
Noé, Deutsche Bank: Italian banks would want covered bonds to become an extremely important funding tool as the market is quite small and collateral is available. Besides, given the recent widening, senior funding is extremely expensive and covered bonds are the first way to access the market. The questions remain if the new bonds will be sold in the market or repoed at the ECB given the current turmoil in the Italian sovereign market.
My concern is that the recent sell-off of Italian sovereign bonds and ECB intervention impaired investors confidence but recently we saw a successful re-opening of the market with UniCredits deal. There is cash to be invested but not at any price.
So market access for national champions is there while it is probably very challenging for second tier players. In a nutshell, ECB funding for Italian banks via covered bonds is likely to go up. In time, we hope OBGs will regularly price through BTPs as investors appreciate their relative safety.
EUROWEEK: Id like to bring in Gabriele here. Weve talked about liquidity and hes probably well-placed to give his opinion on how he perceives that. It would be interesting to see whether you agree with his views on liquidity in this market.
Gabriele Frediani, MTS: Obviously we are very interested in this topic because the buzz word for us is liquidity. MTS, as most people around the table probably know, runs bond markets in both B2B and B2C, and also runs repo markets, a topic Im sure is going to be discussed here. And whatever the solution of retail, youre going to have a problem with repo. And one of the reasons were here is that the covered bond space in particular is one we knew quite well.
The logic behind the covered bond market could probably apply to a number of other markets over the last couple of months. One of our buzz markets, the Italian government bond market, has been difficult. It hasnt been liquid. So my angle here is liquidity and what weve learned is that the solution from the past, where there was a natural animation from the banks towards a secondary market, is a difficult thing to maintain.
Its difficult in corporates, its difficult in covered bonds and its now becoming very difficult even in government bonds.
So the angle for us here is to understand how we can bring new systems and new ideas to recreate liquidity because, just as you said earlier, yes this year hopefully everybody will get through I dont know how Christmas is going to be but for next year, we look at what were seeing today in the covered bond space, where even the most prized are trading in millions. If youre lucky the prices are old. The animation is now in the government space auctions are getting tougher and tougher.
The demand for triple-A products is increasing. I dont know where were going to find all the triple-A products maybe covered bonds. Every time theres a rumour about a country being downgraded we have the double whammy of not being able to fund so the rates go all over the place. The new rules and regulations set in place for Solvency II and Basel III are an opportunity for certain securities and a threat for others.
So from my perspective, yes, the liquidity has been something that spoilt my summer its made life very tough. But, again, the solutions of the past are not applicable to the future and thats the way we see things today. So we are working on projects like the Cassiopeia Project and the all-to-all prime models. We have been working closely with the buy-side investment community to develop an all-to-all electronic market MTS Credit for euro-denominated non-government debt, including covered and corporate bonds. When this is launched later in the year, we believe it will meet the specific need for an electronic trading venue offering efficient access to liquidity and price transparency in this market.
Its not a question of people being good or people being bad or banks not fulfilling their role. Its just that its not possible today to maintain a continuous market on bid-offer spreads. You cant go short, you cant go long and these are very good securities covered bonds particularly.
Im doing all the rounds with all your colleagues. Every country is different and Italy is a very key one for us. So that is my angle.
Waldstein, Unicredit: Covered bonds used to offer a premium over BTPs because its a less liquid instrument that was the argument. But liquidity has increasingly become an acronym for volatility and I can only say the experience of our latest covered bond was that there were a number of investors that looked at it from the opposite perspective. The BTP market had widened up to ranges even exceeding 300bp, while the covered bond market didnt really go in excess of the 200bp range. So in a sense, illiquidity actually means more stability, because youre less exposed to short selling and arbitrage, things which are currently driving our spreads wider. So I dont think were at the stage yet where liquidity is the thing to argue about, its more about credit.
Frediani, MTS: Let me just step in about the liquidity and volatility. Im not equating the two things and again Im not saying that liquidity is a key point. Lack of liquidity seems to me to have much more problems. The fact that you dont see volatility because there is no liquidity doesnt necessarily mean that if you stepped into the market at that particular time you wouldnt be a victim of the volatility. Afterwards you can choose whether or not to go in. But the lack of liquidity weve seen in the government bond space is massively penalising. And in the past it wasnt so important it was less liquid and the spreads were very tight. In the last couple of months weve seen zero liquidity, very little liquidity, or very wide spreads in the liquidity which cover volatility, I suppose, one way or the other. I dont think the answer is complete today.
EUROWEEK: Given that banks funding levels are obviously linked to BTPs, has the announcement by the ECB about buying Spanish or Italian government bonds had any effect on liquidity and stability in the Italian FIG space?
De Lucia, Intesa Sanpaolo: I still consider there to be a wide difference between the government bond market and over-the-counter FIG debt. I totally agree about the current limited liquidity of the BTP market, but of course the liquidity of our own bonds over the counter is even worse, as Claudio was rightly saying before. So what we have seen so far is that the purchase plan by the ECB on government bonds has been good. But and correct me if Im wrong all we can see now is that, in the best case, we are seeing some stabilisation of the spreads, and Im not going to say more than that.
EUROWEEK: It wont lead to issuance, you mean?
De Lucia, Intesa Sanpaolo: Exactly. So its a stabilisation which is not so stable, because we have seen BTP spreads going down anyway despite the purchase plan. Now, if this is the case for government bonds, of course it is even worse for private banks. And so far, honestly, we have not seen any major benefit in our own market. Its a matter of time. I believe that there is some delay effect between the two phenomena and so personally I would be rather optimistic that in the next few weeks, if the purchase plan goes on with the same kind of efficiency or a higher level of efficiency, then sooner or later the beneficial effects should also come for private banks.
But of course the scarcity and the limited liquidity of the financial bond market are somehow slowing down this correlation. So I am not totally disappointed by the fact that this kind of positive consequence has not yet been visible for everyone. Im expecting to see it in the next few weeks. If that does not happen then of course the theory is wrong and we should probably then think more about the credit side of the problem. But I am one of those who believe that liquidity is more important than the credit assessment.
Noé, Deutsche Bank: Italian banks are carrying the cost of being Italian even if their business model is robust and the capital structure of the banks is solid. Given the recent tensions in the market around Italy, Italian CDS and government bonds were widening towards what probably were disruptive and somewhat irrational levels and ECB buying stopped and limited it.
EUROWEEK: Id be interested to hear any other issuers views on that.
Fabbrizi, HSBC: The ECB purchase programme has stopped something that was really getting out of hand. I think it was important but its a temporary measure. We must remember that the purchase programme is a liquidity bridge. The ECB is not meant to monetise fiscal imbalances between European governments. It is clear that this liquidity bridge has been given at a time of stress but the governments need to take action to foster economic growth, achieve fiscal stability and so on and so forth.
The market now is trying to see if those plans are real, if they have legs, if they can invest money on the back of that. So I think it was very important that there was a level of stability and for investors to see that the volatility has subsided but my view is that it needs the other side of the equation this is part of a crisis management toolkit in the hands of the European governments, but the governments need to do their part.
Capuani, Natixis: We dont know what the real levels of the BTPs are either.
Mollenbach, Lloyds: I think an important thing to say is that weve talked a lot about liquidity but we havent talked about what liquidity actually means. Is liquidity a visible price? I think when investors talk about liquidity they mean the ability to get a bid on their paper at a time of crisis. And the problem weve had throughout the crisis is that we havent had an opposing bid come in from the market. All investors are always the same way around either risk-on or risk-off. So it becomes incredibly difficult to provide liquidity in this market, because youre going to get trampled down by a herd of elephants. Nobody is willing to go against the market right now and thats why I think there is basically very little liquidity in the current market.
Theres then the question of whether or not we have visible prices and I dont think we do because the prices shown are not really tradeable prices. I think the prices we have in the market are driven by traders who are moving prices up because they dont want to go long and they dont want to be hit. I also think that a lot of investors would love to buy in the primary market at the prices we currently have in the secondary market but obviously none of the issuers want to issue at those levels. So theres a huge split off at the moment and until we find some way of having price discovery its going to be difficult to move forward.
Capuani, Natixis: We know that in the two main markets for Natixis apart from France, Italy and Spain, investors are there, are liquid and they want to buy. The problem is normally that the issuer is unwilling because of current market prices, so everything is linked and this is the problem. The secondary market is not a real one but investors look at that and then look at the BTPs. So sometimes youve got the secondary market which is much higher than the BTPs, which could be normal or not we are not able to say. Then, as the gentleman was saying, you have to pay 50bp over BTPs for investors but its much more because youve got the secondary market which is already aggressive at 25bp. So all in all you end up finishing at 75bp, because the investor is looking at the secondary levels. Its a bit confusing so its not very clear what we can do.
Livolsi, ING: The Italian widening has been fairly recent but we can draw some lessons from what has happened in Spain, because Spain has been at a significantly wide level for quite a long time and even through those times we have seen issuance. We have seen issuance from the big banks and from the mid-sized banks. Basically there was a period when markets were closed and then all of a sudden the big banks started issuing at those new levels. If a bank issues one bond at a relatively wide spread, it doesnt necessarily mean that its cost of funding will go to that level, its just one issue to show that they can access the market.
So what happened in Spain was that Santander and BBVA opened the market and then all of a sudden you saw more issuance. We have seen Santander paying over 200bp. Its probably one of the best banks in Europe and still they paid over 200bp because the govvies were quite wide. So I think if things stabilise a bit then banks might start saying if the cost of funding goes significantly higher well probably have to see some re-pricing in terms of credit. That is the next step. If oil goes up, gasoline goes up. If the cost of money goes up, then I guess the cost of credit will go up.
EUROWEEK: Lets move on to covered bonds. Weve talked about how difficult conditions are but lets look at particular products now. At the very beginning of this discussion some of you mentioned how important covered bonds have been, so from your point of view, what role do covered bonds play in your funding profile and, perhaps more interestingly, how is that changing? How is it becoming more important?
Burro, Banca Carige: That question could have been what role should covered bonds have played in the funding mix of Italian banks. The Italian covered bond market is very young, but at the beginning we expected to see these kinds of bonds used to cover long term funding needs. In some ways it didnt happen, given the market conditions, and we issued a four year covered bond. The idea was that the short term up to five years would have been covered by senior unsecured debt and longer maturities by covered bonds. But market conditions did not allow that.
So presently, the covered bond market is the cheapest source of funding that you can find on the wholesale market. And right now we tend to issue as much as possible in covered bonds because of the lower price. But we dont expect to see covered bonds in long maturities. We are looking at the market but I think a possible transaction could be maybe a three year maturity we dont expect to be able to issue one for five or seven years.
EUROWEEK: But at least its issuance.
Burro, Banca Carige: Yes. You have, lets say, an attitude to the market which is opportunistic. We do what we can and so its not clear to say what kind of specific role you can assign to covered bonds. Its another funding tool.
EUROWEEK: But a more important one than perhaps anybody imagined?
Burro, Banca Carige: Yes, in terms of wholesale funding its the most important because the senior bond market does not exist.
EUROWEEK: Id like to hear from any other issuer about covered bonds. Have they become more important? Are you looking a lot more closely nowadays? Are they an essential part of your toolkit now whereas perhaps four years ago you could take them or leave them?
Minotti, Credito Emiliano: I believe that covered bonds will play a fundamental role in the near future, so during next year covered bonds will be, I think, the only instrument that we will go to the markets for. Our strategy in covered bonds is that if we want to pay credit spreads dictated by the market, we will, and we will keep senior unsecured bonds for our retail based clients.
We are trying to find a way to issue only to retail clients. If prices for covered bonds stay at current levels we will go to our retail clients and build a funding plan for next year based only on this kind of product. So basically we will issue covered bonds if the price goes down. Otherwise we will find another way.
Burro, Banca Carige: I dont think its possible to cover all our funding needs with covered bonds. It
is not possible because we dont have enough mortgages. We need new production to secure the new issuance.
EUROWEEK: Is finding enough collateral to carry on issuing covered bonds a problem for any other issuers around the table?
Erasmi, UBI Banca: Just to give you some numbers, we have about 11bn of MTNs outstanding nowadays, while our covered bonds outstanding is 5.5bn, so roughly 50% of our MTN outstandings. The problem is that the collateral of covered bonds is made up of our best quality assets, residential mortgages, according to the Bank of Italy rules. It means that if we have, for example, 100 mortgages, only 40 or 50 of these may be included in the pool because we do not use commercial mortgages or other categories of mortgages or RMBS. And of the 50% of total mortgages or less, we have to put up collateral of 30%, which means that out of 100 of the total mortgages, we can use at most 30 for covered bonds. This is why its not possible to have covered bonds as the only instrument for funding Italian banks. This is the first point.
Second, for our new funding needs, we normally face around 4bn of maturities a year in institutional funding. And our plan for the future is to issue around 1bn a year in covered bonds, so only a part of the total funding can come from covered bonds. The other part has to come from MTNs.
EUROWEEK: Would any other issuers like to add anything on that topic?
Waldstein, Unicredit: For us there is absolutely no doubt that the covered bond is extremely strategic. We believe it is the funding tool going forward. We put utmost focus on it and we think we need to establish it on a very strategic basis. But I think its also going to be the starting point for the recovery of the Italian capital markets.
The point is, however, that it is also a very interesting and very positive story to tell. I think there are very few markets in Europe that can present such a positive picture as the Italian covered bond market. Its an excellent story and its been confirmed in many investor meetings that Ive had. People really like it a lot and if there wasnt the volatility they would be buying it more. And I think those are the building blocks to work on and thats a good story to tell.
Frediani, MTS: But thats also true for the rest of Europe. Its thought by many to be a better asset than government bonds thats the reason Im here.
Capuani, Natixis: Because of how easy the covered bonds structure is, and the fact that the underlying assets are granular in terms of mortgages the Italian domestic market has a fantastic history of repaying first house mortgages the triple-A rating is not well understood, I think, by investors who compare vis à vis with BTPs. This is not really what covered bonds offer to the investor.
Livolsi, ING: Yes. What we have seen from our analysts research, though, is that the biggest correlation in covered bond pricing is with government bonds, and not just in Italy. So I think this is a factor which is going to be very difficult to change.
EUROWEEK: Some of you mentioned earlier that spreads in senior unsecured are prohibitive for most of the issuers here. Does that change your strategy towards covered bonds? Are you hoping for a rally in senior or are you thinking at some point youre just going to have to adapt to these new levels and go for senior funding? Because you cant fund with covered forever, or at least not covered on its own, and you cant rely on the retail market 100%.
De Lucia, Intesa Sanpaolo: My personal view is that in the covered bond area of course the size of the assets does make the difference. I was listening to what Philipp was saying and its more or less the same as we feel. We have, thank goodness, large pools of mortgages to be exploited and also sizeable amounts in the public debt market which could be used for collateralisation, within reason.
I remember when we started to discuss internal frameworks and covered bonds a few years ago. Many of the people around this table were probably there and we were trying to convince each other that once the framework was in place, everything would change and that covered bonds would become the main source of funding for all of us. And we were, I believe, in good faith, convinced about that.
Well, to some extent Im still convinced about that. Yes, it is true that at the moment you cannot go very long on maturities. And at the moment, some sectors of the banking industry may not have unlimited cover pools. But on the other hand, it is my personal opinion that we will see a gradual and progressive growth of this market both because the level of cost is lower compared to senior unsecured, and also because there is a large area of the market which so far has not yet responded to this newborn market. As far as I can see, Italian bank investors are not very large buyers of covered bonds. They have not yet totally understood what a covered bond is to some extent. There is no response from the Italian retail market yet either. But its a good product, even for the retail market.
EUROWEEK: Is that a point that everyone agrees with?
Falco, Unicredit: Its a question of minimum size. If you issue a covered bond with a 1k minimum piece you wont sell any more senior to retail clients.
De Lucia, Intesa Sanpaolo: No, this is true. But on the other hand, you know that there are large areas of private banking which would buy covered bonds.
Capuani, Natixis: But also Italian so-called institutional investors. They are especially reliant on covered bonds in Germany and France. The real thing is to develop, together with investors, a real covered bond market not only of issuers but also of investors.
De Lucia, Intesa Sanpaolo: So would you agree that in fact there is still some demand to come from the Italian market?
Livolsi, ING: I wouldnt be worried about the demand. In my experience it takes some time before investors understand the product. Having the Benelux countries as our domestic market, I can confirm that they were until a few years ago completely out of the covered bond market. Then they slowly started to understand what it was and now they are an important part of it. So I think it might take some time. I think the main issue will be the lack of collateral so overall this will drive prices down, assuming that the govvie problems are sorted out. In general covered bonds will remain fairly tight in terms of the crisis because there is going to be a lack of collateral not only in Italy but in every country. Every bank is experiencing a lack of collateral.
Mollenbach, Lloyds: One of the important points for me is that covered bonds have had a different type of acceptance in the public space. You saw the ECB programme earlier on in the crisis, and that stamp of approval from the ECB has made it the gold standard of bank funding. Therefore, the expectation from investors if the worst comes to worst is that its a market that will be taken care of. Thats why, with the triple-A rating, they will continue to buy it.
Frediani, MTS: Basel III is probably the biggest stamp of approval for covered bonds.
Burro, Banca Carige: Yes, its getting more and more difficult not only because its a matter of credit but also because all the bank treasuries have disappeared as buyers of senior bonds, as a result of Basel III. Hence there is room for widening of the investor base of covered bonds.
EUROWEEK: But an issuer must balance that increased popularity with what we would call asset encumbrance. Philipp, do you think that worry is overblown?
Waldstein, Unicredit: Yes, I think its overblown because to focus that discussion on covered bonds is only looking at one side of the coin. If you want to look at asset encumbrance, you need to include securitisation. If Im getting the number right, the overall covered bond market is 2.1tr while the overall European ABS market is 1.7tr so they are not so far apart. I think what is happening in Italy is simply that banks are swapping assets from the securitisation platforms to the covered bond platforms, so overall the percentage of assets encumbered doesnt really increase that much. It has become a bit of a fashionable discussion and doesnt really reflect the reality.
Haegi, MPS: From the experience of Monte dei Paschi, what we are doing is focusing on covered bonds and concentrating all our mortgages on that. We are also trying to securitise our other types of assets, as other Italian banks have done, such as leasing or consumer credit.
Erasmi, UBI Banca: In our case, we keep retail mortgages free for the covered bond programme and on the other side securitise the leasing contracts as well as consumer loans and some commercial mortgages.
Burro, Banca Carige: I think we are the only Italian bank which has put a small amount of commercial mortgages in our covered bond programme. I think this approach could be improved because the recession mortgage market in Italy is not fully understood. In some senses the commercial mortgage market in Italy is very close to the residential in terms of risk. There are no big amounts and no big transactions.
My view is that we could improve the promotion of this kind of market, and let the investor know more in order to widen the portion of the commercial mortgages one can use in the covered bond pool. The origination every year is pretty much 50/50 between residential and commercial. I think its a matter of discussion with investors. And it could also be a matter of price to ask how much should I pay for the largest portion of commercial mortgages in the pool?
EUROWEEK: It certainly sounds like an innovative option. Is that something that other issuers are looking at?
Haegi, MPS: Not for Monte Dei Paschi at the moment, given the pricing and the level of demand.
Erasmi, UBI Banca: At the moment UBI is not looking at this as we have enough residential mortgages.
EUROWEEK: Now, we mentioned ABS or structured finance as part of this discussion. You mentioned using consumer loans or loans to SMEs for securitisation, but is securitisation as a bank funding tool based on mortgages now dead in Italy?
Haegi, MPS: For the moment I would say yes, even though we were in the market last year. We had a transaction in which we sold 1bn of short triple-A. The marketing of this deal has been hard work really, because there is a fear of investing in Italian assets, even though Italian securitisations and Italian RMBS have been around since 2000-01 and have really a good performance, not only at Italian level but also in our case at Monte dei Paschi. So we have a track record but even so it is difficult to convince investors to buy it. And now I see the secondary market between 250bp and 300bp for short triple-A paper.
EUROWEEK: So do you think those levels are deserved? Do you think theyre correct or do you think that securitisation has perhaps taken too much of the blame?
Haegi, MPS: If you compare the underlying performance of the credit delinquency, default and recovery and the underlying performance of the real estate market with the UK, for example, the perceived risk is not there.
EUROWEEK: On the CMBS side do you mean?
Haegi, MPS: Im comparing the Italian RMBS market with UK master trusts, for example. But if you consider, of course, liquidity and sovereign risk, its another type of discussion.
EUROWEEK: I probably dont need to emphasise that everyone is convinced of the need and usefulness of securitisation around this table. But what can we do as a group to try to put it back on its feet? Can we do anything?
Fabbrizi, HSBC: I completely agree with what Tamara was saying and I think that ABS deserves a fresh look. I think at this juncture there is very much a risk that everything is painted with the same brush and there are no distinctions between what is actually better value. It is symptomatic of our situations of high volatility and the crisis in which we are living.
The market is more focused now on UK and Dutch prime RMBS, some German auto loans, and maybe some French autos as well. We do see enquiries from time to time from somebody checking out the Italian assets but it is premature for a re-opening of the primary market. But I think this is undeserved and it should be looked at with a fresh eye.
EUROWEEK: Is part of the problem that the investor base no longer really exists?
Capuani, Natixis: In 2011 we brought another issue to the market, which was very successful. Of course, the tenor was short and a lot of the structuring is a bit different there is more credit announcement and the structure has been retailed on investor interest. There is a lot of work to do in order to understand what kind of structure is accepted by the market. But we have been experiencing a lot of interest, not only in Italy but particularly in the UK and the Netherlands and also in France.
According to them, they were very scared in the beginning but its only a matter of how to convince them, how to market the product and how to explain the risk. It basically doesnt exist because its too short. There are a lot of issues which can convince an investor to offset or to think about the Italian market because Italy, unfortunately, is not marketed very well from the top, from the government. We are Italian of course so its easier for us to understand, but there is still a lot of value in this country.
Mollenbach, Lloyds: I think you could say marketing will be important at some point in the future. Right now its more about having access to the market. But if you look to the future and the next set of funding ratios, or some of the other liquidity ratios that will be implemented, then I think its important to look at the securitisation market.
However, securitisation is a very bespoke process. Its all about identifying a small group of cornerstone investors very early on in the process. It is a small group of investors but they can invest in significant size, and the positive thing is that theyre very good at doing their credit work and therefore much more interested in the nitty gritty of the actual credit rather than being driven by macro. As illustrated in the past, even when weve had very high volatility its been possible to execute securitisations because the investors are there. They know the asset and theyre committed to the process.
Waldstein, Unicredit: The RMBS market, especially the Italian one, has all the prerequisites to kick off. Looking at the figures, I found one that is mind-boggling I think in 2007-10 Standard & Poors looked at default in the US, which in RMBS reached about 7.5% on a cumulative basis. For the same period in Europe, they were talking about total defaults of 7.5bp. This certainly proves that we are talking in Europe about an issue of perception rather than of substance.
So I think its all about rebranding it, and then I think theres a good chance we can re-launch it.
However, its also up to the issuers and the community to make it a bit more harmonised, more transparent and maybe a simpler product. Together with many other banks we are working on a market-led initiative to put together a catalogue in order to re-launch the asset class on a European basis and we hope that later this year we can present something to the market.
Noé, Deutsche Bank: Italian banks which do not have the pre-requisites to set up covered bond programmes, and also the ones which do, will look into structured finance and ABS as a source of funding diversification. They can also be used in repo operations with the ECB. Besides, covered bonds are perceived to be more correlated and linked to the sovereign performance irrationally so while ABS as an asset class is less volatile to the macro environment given investors focus mainly on the underlying assets.
Mollenbach, Lloyds: Another key question is whether at some point the ABS paper becomes part of the liquidity buffers again.
Waldstein, Unicredit: We need some regulatory signalling with respect to this asset class and I am comfortable that we are seeing that. At least those regulators that I have spoken with have always said this market is a very important one and we need to give it more substance.
EUROWEEK: Have they done that publicly though?
Waldstein, Unicredit: They havent done it publicly yet but I think they are working out how to support the asset class. Because thats the problem the covered bond has seen all these positive regulatory signals and ABS been left out, unrightly so.
Livolsi, ING: I think the key could also be to try to diversify the instrument and maybe focus ABS on other types of assets. Or if ABS is done on other types of assets then you have a distinction and you might have a functioning market. But in any case, the level of investor demand for ABS has gone down dramatically. It will be a market sooner or later but I guess the best way to see it flourishing is probably to differentiate it from the covered bond market. So one option could be to have it use other types of assets or maybe to have a structure which differentiates it from covered bonds.
EUROWEEK: Im hearing that the investor base is made up of between 30 and 50 names for securitisation in Europe. Is that something that you are picking up on or is it more than that?
Minotti, Credito Emiliano: Banks have had some difficulties in buying this kind of asset because Bank of Italy put a new regulation in place. So if I want to buy an RMBS issued last year or before I can do that, but if I want to buy a new RMBS, I have to put in place due diligence, demonstrate that I understand the transaction and carry out some checks. Our first reaction was that we cant buy under these constraints. So I will buy a covered bond or an EMTN up to two years back but nothing else. This is probably what every medium-sized bank will do in that situation.
EUROWEEK: We touched on the senior earlier. Yes, weve had some issuance last week and this week in covered bonds, but if the situation continues to be very poor in the last quarter or the last four months of the year, is there scope do you think for people to lobby the government to introduce a government guaranteed bond scheme again in Italy for senior issuance? Youve seen it being talked about in the rest of Europe.
De Lucia, Intesa Sanpaolo: I think the attitude of Italians is different. Im not so sure that this is the first choice, first because there were technical reasons why it couldnt be arranged before. The second reason, which was even more important, was that in many parts of the banking industry there was no interest in doing that. So honestly, I would be surprised if somebody hopped up and said were going to ask for government guaranteed bonds for the banking system.
EUROWEEK: But obviously it wouldnt be marketed to internal investors but to retail investors. Would that help the process at all?
De Lucia, Intesa Sanpaolo: Im not so sure that the retail investor actually needs anything remarkably different from what we have now. There might be a problem with the institutional investors elsewhere but Im not so sure.
Mollenbach, Lloyds: I think the whole question about government guarantees has become a little bit more moot given the sovereign developments that weve seen since 2007. In Europe the banking debt was assumed by the governments and that in turn created huge issues for the governments. So I dont think thats a route that many people are looking to go down right now. Theres obviously the European debate but I think thats going to be very different as well and for banks I think its better to avoid any kind of support and stand alone as much as possible.
Burro, Banca Carige: So far we havent experienced any problem coming from a lack of confidence in the Italian banking system among retail customers.
Erasmi, UBI Banca: For our customers, theres a certain diversification they buy both government bonds and bank bonds. So the first impression is that its not particularly required by bank customers to have a guarantee from the government for bank bonds.
EUROWEEK: Lets move on to Basel III and the new regulatory environment. What changes are Italian banks seeing within their investor bases? And how will that investor base change as the transition to Basel III gets under way?
Burro, Banca Carige: I think the more significant change has been what I said before about the investment in senior bonds. We dont see banks investing in senior bonds anymore there has been a narrowing of the investment base for senior bonds. I think that now only real money investors are buying senior bonds.
Fabbrizi, HSBC: I think that the two big introductions will be the bail-in concept and non-viability. If you remember at the beginning of this year or late last year, there was a heightened sensitivity about transactions which were crossing January 2013, which was when bail-ins could be introduced. Then the market was completely saturated by bigger issues such as Greece and other things that we know very well, but I believe this is probably something that, at the right time, investors both institutional and retail will need to be educated about and come to terms with.
From my perspective, the domestic market has been very active in supporting Italian banks pretty much across the scale of products from equity, convertibles and soft mandatories, which have happened quite a lot over the past years, tier two and senior deals. So I think that investor base is close to its own banks and will support them going forward.
Also with the new Basel III regulations, I think we will probably see some more core/non-core distinctions between issuers among the institutional investor base. Is this a core holding for me, important to be had, or is this a non-core holding which, however, will act in my portfolio for diversification when conditions are right? I think this is probably what will happen more going forward.
Waldstein, Unicredit: Thats totally right. This is one of the key issues and its what I would call an emotional discussion. Nobody knows what its really all about, so the next three or four months are going to be essential and hopefully by the end of the year we will know more so we can analyse it. Then people will make a rational decision. Whether its going to be totally closed down remains to be seen. I think some of it will remain, but its just not going to be as much as we are used to. Looking through the cycle, looking at the banks doing more capital and stronger forms of capital, there is a point at which you might argue that you are well-off enough to buy a senior bond at a certain price.
Noé, Deutsche Bank: Bail-ins remain a very divisive issue, without any clear and formal implementation guidelines. However, post 2013 it will become a relevant issue for jurisdictions that have restructuring acts the UK, Ireland, Germany, Denmark and the Netherlands. On the tier two front, bail-in is very much part of the structure going forward, particularly for gone concern institutions. We have seen this in Ireland and Denmark.
Demand for senior is unlikely to be massively affected as a result of bail-in given the fact that only a few countries, as above, have the legislation to implement bail-in. However, what we have seen is the cost for banks in jurisdictions that have used bail-in legislation, like Denmark, have materially risen, so expect that to be the case when a formal pan-European bail-in arrives post 2013.
De Lucia, Intesa Sanpaolo: I believe that a difference should be made between a possible bail-in for senior debt and subordinated debt. Obviously for subordinated debt I believe that sooner or later both issuers and investors will accept the idea, so it will be a matter of price to some extent. And its a matter of culture as well, but it will probably be accepted in the long run.
What we are very concerned about is bail-ins on senior debt because at that stage any possible consequence will not only be on the funding programmes of banks but on the banking industry as a whole and on the national economy at large. It will be devastating in fact, at least as far as Italy is concerned. So just to try to answer the question as far as subordinated debt is concerned, we will have to see what the attitude of the investor is towards the new rules for hybrid and lower tier two or tier two, but Im not expecting any major change. Im not expecting any major change on senior debt either, providing senior debt remains as it is.
EUROWEEK: Just going back to what you said about a bail-in having quite disastrous effects on national economies, how would that effect be any different from a regime under which a bail-in is not allowed and a taxpayer-led bail-out is the alternative? Surely both would be just as disastrous but in different ways?
De Lucia, Intesa Sanpaolo: Well, if the bail-in is not applied then of course any increase on the cost of funding is just, lets say, ordinary. It will depend only on the assessment of the credit, on all the parameters that we usually take into consideration. But if there is a bail-in, that will also be considered and in that respect there will be an increase of cost which is virtually unpredictable. And we often forget that a bail-in would also apply to retail investors. In that case, the main franchise of most Italian banks would probably go down and nobody knows to what extent it would suffer from this new development. So increasing the cost of funding would of course imply an increase in the cost of lending thats why we are saying that it would be bad for the economy.
Burro, Banca Carige: I dont think its possible in Italy to have a bail-in like we are seeing elsewhere because there is a huge domestic bond market. Italian banks didnt issue domestic bonds just because they like it. It was only a matter of when they changed the taxation on bank deposits in 1997 so at that time banks started issuing bonds. Now you have minimum term bank deposits and it is nothing like that its only bonds. So the retail customers, the bank depositors and holders of domestic bonds mean that a bail-in would be a nightmare.
Erasmi, UBI Banca: Perhaps it could change in the future because the tax rate on bonds in Italy will be 20%, so there will be a shift from retail bonds to deposits.
We could use term deposits, for example, as in northern European countries. Term deposits are different from bonds and I dont think they would be affected by bail-ins. The environment is quickly changing, but we are discussing what our balance sheet looks like now, and the average maturity of our retail bonds is about two years.
Maybe within two years we could have a completely different mix in terms of funding diversification. Retail bonds could be at a new low percentage and we could have a higher percentage of deposits, maybe sight deposits and time deposits, which we dont have now. It could be better for Italian banks.
De Lucia, Intesa Sanpaolo: Yes, that would be extremely strange, I would say, even grotesque because in 1996, as Giacomo was saying, the tax rate was changing and so the certificate of deposit virtually disappeared and they were all shifted into a new-born bond market which did not exist before that.
Now we would find ourselves in the other situation where the bond market would have to change back into certificates of deposit or time deposits, just because of this monster bail-in feature which nobody understands. So we all hope that regulators will understand that bail-ins would be extremely serious.
Livolsi, ING: Theres one consideration, I think, apart from the bail-in. Lets suppose that the bail-in is changed so that there isnt one, at least for senior bonds. One factor, though, which is important, is that the senior market is now made up of 90% real money investors. And real money investors are still under-invested in senior bank bonds compared to other asset classes compared to other sectors, I mean. They are greatly over-invested in utilities, in other industrial sectors, but they are under-invested in senior bank debt.
So I think, in this respect, there is the potential for investors to increase their exposure to banks.
EUROWEEK: Yes. Although the last 12 months havent really endeared the asset class to investors.
Livolsi, ING: Yes, of course. But at these levels, Im wondering whether it makes much sense that almost all corporates, no matter what their rating, are trading below their banks in their respective countries. Im not 100% sure that makes sense.
EUROWEEK: How much are people worrying about Solvency II? It affects the insurance industry and insurance companies are, of course, big investors in financial institutions. Are you worried that Solvency II is going to turn that tap off as well?
Mollenbach, Lloyds: Again, its important to look at two things: the immediate funding of this year and next year, and then the longer term strategic balance sheet allocation that wed all like to have in terms of the net stable funding ratio. We talked earlier about using covered bonds to term out liabilities and longer term funding and the Solvency II debate plays very much into the question of the duration that you can get from the investor base.
Longer term, it is clearly a worry. Banks are being pushed to have closer asset liability matching, both by regulators and also by rating agencies. But at the same time the natural investor base is being pushed to shorten their investments. Thats obviously going to create a conflict but I think, given the volatility weve had over the last two or three months, thats a concern thats a little bit further on the horizon.
But I think its very important that these things are coordinated at a senior level on the regulatory side.
EUROWEEK: Lets move back to Basel III. In terms of capital, how are Italian banks placed to meet the new capital requirements?
Minotti, Credito Emiliano: It looks to me that we are in line with the new regulations, we are a well-capitalised bank as our tier one capital is all core. We already meet new regulatory requirements, so we are not worried about that.
De Lucia, Intesa Sanpaolo: Weve just done our own work so in principle we are very well positioned. But in this case we have to look not at how we are next week but how we are over the next months and years. We strongly believe that the equity market is not
an unlimited source of capital, obviously. But its probably even clearer now that issuer rights make it extremely complicated to take advantage of the equity market.
So the only way out is doing our best to ensure the hybrid market is still available for all of us. And there is a moment of enthusiasm for the internal banking industry after the recent tax reform, which allows banks to issue hybrids and also get tax deductibility for any new hybrid.
There are still a few parts of the hybrid regulations which are not totally clear. But we still believe we might find ourselves in the situation of having a new, growing hybrid market in Europe, and also in the internal banking industry.
EUROWEEK: Can I just get an answer from the other issuers around the table regarding how youre placed to fulfil Basel III capital requirements?
Haegi, MPS: We just had an increase of 2bn so we are now well positioned. In terms of the core tier one ratio we are at 8.9% as of June 30, so we are fine with this level, given the type of activity Monte Dei Paschi engages in. Of course we dont know how the hybrid market will develop, but it will be an important tool for additional tier one and tier two calculation so we are expecting to look at that.
Erasmi, UBI Banca: UBI Banca just did a rights issue of 1bn two months ago. We have over 8.2% of core tier one according to the first-half numbers. This is, for us, a good ratio. We are not planning on issuing any new capital instruments.
EUROWEEK: It is rather ironic that everybodys got much better capital yet no one can issue, isnt it?
Fabbrizi, HSBC: If I can maybe tag onto what Claudio was saying about the different layers of capital, I think this is a fairly important topic because the new Basel III regulations carve out a very defined space for hybrid securities and tier two securities in a certain percentage of the RWAs.
At these current levels of the market, with the depressed state of securities equities, hybrids or tier twos its difficult to imagine wanting to issue any form of capital. However, we need to remember that hybrids have a very important role and that, if its not fulfilled, it will trap equity that will be put against the conservation buffer and the countercyclical buffer.
And my sense is that some issuers are making sure that they cover the entire bucket conservations, countercyclical, etc and theyll be sure to have a buffer above the minimum margins. And maybe some others because hybrids are expensive are probably trying to cut it a bit finer, more towards the conservation buffers and maybe leaving the countercyclical for a later stage, if it will be applicable to them.
On the other side, I think investors are really expecting banks to exceed the minimum ratios because it all goes in circles with what weve been discussing today. They need security, they need comfort that ratios are not going to be breached, that there are not going to be conversions to equity or triggering of loss absorbency on their capital instruments.
So I think that hybrids and tier twos will remain very important instruments for the future. Clearly, as of today, the market is in a very dislocated state and its difficult to talk about cost and prices.
EUROWEEK: Are you including contingent capital in that?
Fabbrizi, HSBC: Contingent capital is an important discussion because I feel it has lost its way over the past few months during the twists and turns of the regulations, and the result of that is that banks will use common equity to meet the SIFI buffers. And because of this, I think it is prudent to have the different buckets of hybrids and tier twos filled with tier twos and hybrids, otherwise equity will be trapped further down the capital layers and it could cause limitations on the banks distribution of their own profits.
EUROWEEK: What do the issuers think about Cocos? Are they a novelty and a distraction or are banks right to have looked into them?
De Lucia, Intesa Sanpaolo: Honestly, in recent years weve never seen any real advantage in doing that. The Italian regulatory environment is extremely complicated. Its probably been getting better in the last few months but we still have some concern that it might be extremely burdensome to propose a contingent capital transaction in the Italian
At the moment, as Flavio was saying, we dont see any real use in doing that.
Mollenbach, Lloyds: In some ways, the differentiation between hybrid and contingent capital gets a bit blurred when you look at the write-down and write-up language. So you often end up with something thats a little bit like contingent capital.
We can also think about contingent capital in relation to the stress tests. It depends on what happens in the stress tests but clearly that was, for Lloyds, a big driver when we did the contingent capital it was specific to the stress tests. So there are many different uses of capital and I think each institution will have a separate view depending on their asset mix and balance sheet, and what makes most sense for them.
EUROWEEK: You just mentioned the stress tests having seen the results two months ago and digested what happened, does the panel think they were a worthwhile exercise?
Livolsi, ING: Well, in normal circumstances, they would have been. But these days, what you have is a sovereign crisis, which the tests did not take into account. Nowadays were talking about something of a different magnitude. I think the stress tests would have had some use but these days, we first have to sort out the sovereign crisis and then we can discuss bonds, capital and so on.
EUROWEEK: Would you advocate annual tests?
Mollenbach, Lloyds: I think that the stress test failed to give comfort to investors in the fixed income space. But I wouldnt underestimate the value of the exercise, not least because of the disclosure provided. I think the disclosure of the granularity of banks exposures to, for instance, sovereign debt across countries in a consistent way was extremely valuable.
Given Basel II, where most large European banks are now IRB-based and have very different models with regards to risk weightings for instance, even just comparing the capital asset ratio becomes meaningless. So having a detailed level of disclosure, I think, is quite valuable for investors.
EUROWEEK: Lets come to some final comments. What are your expectations for the next quarter and also what do we expect to happen early next year, in terms of funding? Tamara, why dont we start with you?
Haegi, MPS: Thats a difficult question. At current levels, we dont think well be in the market. Like other banks, our funding plan and our retail investor base is sufficient to cover liquidity needs, more or less. But this is a crisis that has to be solved somehow.
Its important to stress that this is not something related to peripheral countries because just yesterday we were talking about the stress on French banks. So its something that can spread widely everywhere in Europe. Its something that we have to solve on a European level so I think that will be the core problem to solve over the coming months.
EUROWEEK: OK. Claudio?
De Lucia, Intesa Sanpaolo: Its the same situation for us. We dont expect to do anything major in the primary market. I believe that what Claudio was saying before that liquidity in the market, meaning the non-matching of money and supply in the secondary market and investors being interested instead in buying new issues which are not there that is an extremely important point because my feeling is that there is a sort of tug-of-war going on between issuers and investors.
Investors are trying to get as much spread as they can from the issuers and the issuers are saying, if this is what you want, I am not going to give it to you. So it will be interesting to see how this tug-of-war will end up. I believe that, as usual, the Italian way will probably prevail, meaning that there will be some sort of matching of mutual requirements which will be ultimately found maybe even before the end of the year and then some retracing of spreads could be seen, especially if the sovereign debt helps us. And, of course, investors could be ready to freeze some very good spreads for the next three, four or five years, even. This is what we hear, even now, even though those spreads are not going to be the same as those we see now on the screens.
It may take another couple of months before we see that, providing, of course, that nothing serious happens in the political arena.
Capuani, Natixis: We need a brave heart to open up the market!
De Lucia: Of course, were waiting for it.
EUROWEEK: Gabriele, why dont you give us some cause for optimism in the next two, three months?
Frediani, MTS: Cause for optimism? The only point I want to make and obviously, some are much better -placed to make other comments than this is that we are pan-European and Im participating in every one of these roundtables. So far weve had the roundtable on the French side and weve also participated in the corporate space.
At the end of the whole tour of roundtables it will be interesting for me to see what levels of optimism and views there are, in particular from the issuers in each market.
I think the French are trying to dissociate themselves completely from the creditworthiness of the government space. And what Im feeling in Italy, especially on the real money side, is that were seeing billions at the moment going through in emerging market government bonds and Im thinking there is definitely something wrong here.
So the only point I want to make is that this space the one Im interested in, the covered bond space has a lot of legs on it and maybe the way its structured today, in a very limited manner, is not the way to go forward. Obviously, its not easy. A lot of communication is needed. Next week in Barcelona theres a big covered bond event and the Nordics are probably a good example to follow. That gives me optimism and Italians are very inventive when it comes to financial products.
Erasmi, UBI Banca: As my colleagues have explained, we are not expecting to come back to the market. We think the market will remain volatile also in relation to government bonds. Investors would like to invest in our bonds. We see a lot of enquiries but every time we have said no because we are not willing to issue at such high levels.
For the time being the government spread is very volatile. We dont understand when this situation will end, so when there is a window at appropriate levels, we think its a good opportunity to finance our needs, as we did in the first half of the year.
But these are not appropriate levels. In the future, if we see appropriate levels, well be very quick to go to market.
EUROWEEK: OK. Luca, anything to say?
Falco, Unicredit: People that buy now will double their money. The problem is that nobody will. But we have a clear example. Its called the November 2023 BTP. It was a 30 year bond with a 9% coupon. That bond has passed from a price of 65 to a price of 150 and its going to repay at par, so whoever bought that paper at 70 has doubled their money. But when it was at 70 in 1995, people were selling like mad. And I believe were in that same situation now.
Frediani, MTS: That was the most used bond in the repo market at the top of the market.
Fabbrizi, HSBC: I think liquidity is building up more and more because there are so many redemptions coming due, of government, bank and corporate bonds. Supply is very scarce. I think, at some point, we will find an equilibrium for the national champion to surf those waters first and set the example. Its clearly not at these levels but I think there is a great imbalance in liquidity.
And clearly, on the other side, my impression is that the EU is taking this crisis in the right way. They have provided all the toolkits to stabilise the market and governments are trying to do the right thing to foster growth, balance budgets and so forth. So Im reasonably optimistic that were going to find a common ground, as Claudio was mentioning before, where the national champion will be able to surf the waters and re-open things.