GlobalCapital: When do you expect net negative supply to cease?
El Amir, UniCredit: I think it’s going to take a couple more years especially now we’re not really seeing a lot of new jurisdictions coming on board. And more generally the net increase in mortgage lending is not enough to replace what’s being redeemed.
Burmeister, DeAWM: I roughly expect to see €150bn of covered bonds to mature in 2015 and the same amount in 2016 which is unlikely to be replaced to the full extent.
Costa, CGD: As Europe’s economy recovers and central banks gradually remove excess liquidity from the financial system net covered bond supply should eventually become positive and the imbalance will tend to disappear.
Ségur, La Banque Postale AM: We don’t see any reason for a positive turnaround in net covered bond supply as some banks need to improve their capital base and issue subordinated debt while others have limited collateral and a lower funding requirement due to less credit production.
Gotrane, Caffil: We don’t expect a dramatic change in the foreseeable future. Looking at our own funding needs, we expect relatively stable volumes over next two years of between €4bn and €6bn. I understand most other issuers from core Europe also plan to have relatively unchanged funding programmes for the near future.
Some growth can be expected from issuers from outside Europe, for example Canada or Australia. We could also imagine some European banks increase mortgage lending again after the AQR, which would contribute to a slight increase in covered issuance. Overall, I consider a slight increase in issuance in covered issuance as the most likely scenario.
When we look at redemptions, volumes in 2015 and 2016 will be around €150bn, which is roughly in line with this year’s levels. We will then see significantly lower levels starting in 2017.
So putting all this together, we can expect negative net supply, though on lower levels than this year, for two more years.
When we talk about the effect of negative net supply, there is special effect we tend to forget. July 2015 was the maximum maturity for guaranteed Landesbank debt and redemptions by these issuers will be above €200bn this year and also in 2015. There will be no new supply of guaranteed paper, so part of these redemptions will probably be re-invested in covered bonds. We will see in one year from now whether there will be an effect on covered demand once this liquidity dries up.
Boehm, Pimco: I wouldn’t expect the backdrop of negative supply to change any time soon. This year we expect €120bn-€130bn of gross issuance but I wouldn’t expect this number to increase much in the next few years.
Hoarau, Crédit Agricole: Central bank liquidity and liquidity facilities are here to stay and will limit banks’ funding requirements. And so far there is no sight of a strong recovery in mortgage production across Europe. So I don’t see how gross supply could recover strongly in the near future even if peripheral banks turn collateral posted with ECB into public offerings.
The mortgage market in the EU has not performed exceptionally well if you consider the gross lending which fell 14% from the last quarter of 2013 to the first quarter of this year. Though the year-on-year rate improved 13%, the quarterly contraction in gross mortgage lending was the largest since the first quarter 2009. The contraction was pretty broad based with most EU countries experiencing a reduction in mortgage lending during the first quarter this year.
The gross supply outlook for covered bonds is not too rosy either and is expected to stabilise between €110bn and €125bn over the next two years. On the other hand, benchmark redemptions amount to around €145bn for the full years of 2014, 2015 and 2016. This number doesn’t even take into account redemptions of privately placed covered bonds and Namensschuldverschreibung format bonds that were issued over the last decade.
Mugat, AGI: Banks relied a lot on the issuance of covered bonds during the crisis as the product was strongly supported even by the European Central Bank, which had set up covered bond purchase programmes. More recently, banks have been willing to rebalance the funding mix towards senior. Besides, they need to take into account more and more the asset encumbrance issues. This being coupled with high level of redemptions in 2014 (more than €150bn) and 2015 (close to €150bn), I am pretty sure that we can expect 2015 being another year of negative net supply.
Benchmark redemptions should, however, start to drop in 2017 when €125bn of bonds mature and again in 2018 when the number falls to €80bn. That potentially means we could start to see a turnaround in terms of the technical balance of supply relative to demand. This period could also prove to be an inflexion point in terms of the European economic turnaround, which should consequently lead to greater mortgage production.
Pimper, Commerzbank: The TLTRO is probably by far the cheaper alternative of funding and although retail mortgages are excluded commercial mortgages are not and in Germany commercial mortgages are still a huge part of Pfandbrief collateral pools. I don’t see retail mortgage lending increasing heavily in the eurozone which means it’s unlikely there’ll be a shift into new covered bond supply.
GlobalCapital: Given the uptick in German house prices lately, could we expect an improvement in residential mortgage lending which feeds into covered bond supply?
Pimper, Commerzbank: I expect core covered bond issuance to be stable over time. In Germany for instance any increase in retail mortgage lending that could lead to higher mortgage covered bond issuance will be compensated by maturing public sector covered bonds comprising of mostly grandfathered issues from saving banks and their respective Landesbanks.
Issuance of peripheral covered bonds, however, could increase as many banks are still holding their own issues for ECB funding purposes. Those issues could be turned into public transactions going forward.
Burmeister, DeAWM: What makes us quite comfortable is if you look at the mortgage loan production at around 2.5% per annum it’s really not that excessive in Germany. But if you look at previous growth rates in other parts of Europe, in the most extreme cases lenders had 22% loan growth per year.
GlobalCapital: Peripheral lending volumes were high and though they’re not now, presumably the legacy loans need to be refinanced?
Burmeister, DeAWM: The bigger question on my mind is how peripheral issuers eventually resolve the still relatively high amount of retained covered bond issuance. Is this going to be sold into the market, or will they simply wait and try to lighten up their balance sheets by allowing the loans to roll off and continue to deleverage. I had expected peripheral banks to make strong use of falling rates by bringing retained covered bonds to the market, but it hasn’t hapened to the extent I’d hoped.