Deutsche sold a €1.25bn 11 year non-call six tier two on Monday.
It was the first time that any bank had launched a subordinated bond in euros during the coronavirus crisis.
But it was also the first time that an issuer had said explicitly that it was issuing to take advantage of a recent change to the composition of Pillar 2 capital requirements.
The European Central Bank announced a series of capital relief measures for banks on March 12, as it sought to relieve some of the pressure on lenders during the coronavirus crisis.
As part of this package, the supervisor said that it was bringing forward a change outlined in the EU’s Capital Requirements Regulation permitting banks to use subordinated debt to meet Pillar 2 targets.
Previously banks could only use debt capital for Pillar 1, with an allowance of 1.5% of risk-weighted assets in additional tier one format and 2% in tier two.
By creating some room for lenders to issue bonds for Pillar 2 purposes, these AT1 and tier two buckets are expected to rise to 1.875% and 2.5% respectively.
A FIG DCM banker told GlobalCapital that a number of eurozone lenders were considering issuing more subordinated debt this year, particularly in tier two format.
“I would expect banks to follow Deutsche Bank’s route,” he said.
There have already been some signs of intent from banks during the first quarter earnings period.
Commerzbank, for instance, said on Wednesday that it would consider “further AT1 and tier two issuance” in 2020, in light of the recent regulatory relief from the ECB.
It said that this could be important for boosting its capital levels further above its regulatory minimums, given the issuance of new subordinated debt would free up common equity tier one (CET1) capital.
“The basic result is that we will see more eurozone banks in the mid-term issuing tier two debt,” said Tom Kinmonth, a fixed income strategist at ABN Amro.
Assuming that EU banking assets add up to nearly €7.8tr and that the average P2 requirement is about 1% of RWAs, the expected net new supply from these changes would therefore be about €35bn.
This figure includes €14.8bn of extra AT1 issuance and €19.5bn of new tier two issuance.
The FIG DCM banker noted that the speed at which banks tap the market with new capital instruments would depend on funding conditions.
Sentiment has soured slightly in the euro market this week, amid gloomy data revealing the potential economic impact of Covid-19.
Deutsche’s €1.25bn 5.625% May 2026 tier two has drifted below par as a result.
By Thursday morning the bond was quoted about 10bp wide of its reoffer spread of 600bp over mid-swaps.
See online for full details of the Deutsche Bank transaction.