GlobalCapital: When do you think banks will be less focused on improving capital and leaning more towards lending to the real economy?
El Amir, UniCredit: A significant amount of balance sheet repair has taken place and bank capital ratios are much better than three or four years ago. The last hurdle the market is looking at this year is the AQR/stress tests. Once that’s done, people are going to be much more focused on their ability to generate capital internally and to provide a return above a bank’s cost of equity.
Burmeister, DeAWM: Certainly not before the AQR is published then we are almost in year-end. So we’re talking about 2015, but by then banks will also want to see the shape of final regulations. There is quite a track record of banks trying to be early movers and adapt themselves before seeing the final draft regulations and it has not necessarily paid off.
Costa, CGD: A bank’s business mix will determine its balance sheet composition and ultimately its capacity to access funding via covered bonds. Banks with more eligible collateral will tend to favour issuance of covered bonds to reduce funding costs. Having said that, compression of spreads between senior and covered debt at times may cause banks to become more opportunistic which may favour issuance of senior debt over covered bonds.
Mugat, AGI: Given requirements for capital instruments, notably the leverage ratio, banks will remain focused on building their capital base. The funding mix could start to change when banks have built enough bail-in-able debt to meet their minimum requirements. To an extent this will depend on banks’ willingness to protect senior debt, limit the rise in their funding costs and meet their leverage ratios. Banks’ willingness to limit balance sheet encumbrance and the final proportion of covered bonds available for use in the LCR will also play a role.
Gotrane, Caffil: Issuers have been actively reducing their cost of funding. However, this has attracted much less attention than the capital measures they’ve done. Covered bonds have been the main tool to reduce the cost of long dated funding as this is a fairly standardised and well established product. When we look at capital measures, things are much more complicated, and that is why these transactions have received so much more attention.
Today, nearly all major banks in Europe have set up their own covered bond programmes. The market is well established and I do not see major changes in terms of funding instruments. However, issuers can still do a lot to diversify their investor base.
Looking at our own experience at Caffil, we have a registered covered bond programme like many other covered bond issuers, which has been very active this year. But we’ve also presented our business model to the main investors outside Europe over the past two years, in particular to those in Asia. These efforts are already paying off with high levels of participation among Asian investors and central banks in recent transactions. We will do more to diversify our investor base in the future, and we expect many of the other larger issuers to do the same.
GlobalCapital: Will regulatory uncertainty remain after the AQR?
Burmeister, DeAWM: Capital is still very much in focus with some states discussing even higher ratios, systemic buffers and so on. So banks may feel they are fine in terms of risk adjusted margins and being well funded, but they won’t be focused on increasing market share until these regulatory doubts about capital are finally resolved.
Costa CGD: Most banks had to increase their capital ratios but may decide to increase them further as a sign of robustness or to allow normal expansion of their business. AQR/stress tests are also affecting the way banks manage their business. Eventually the industry will stabilise around certain levels of capital for banks with similar business models. Once those levels are reached, and we’re not there yet, banks will focus on optimising their long term cost of funding.