French banks took a hammering in the equity and debt markets in 2011, when worries about their sovereigns economy, and about their own exposures to peripheral European economies such as Greece, pushed investors to examine their funding structures.
An over-reliance on short term funding in banks with very large balance sheets was identified as a key problem one that US money market investors in particular took it upon themselves to regulate, as they pulled out of French lenders for several weeks running.
Since then, Frances financial institutions have made a big effort to streamline their business models, and in particular, the ways they fund themselves. They have deleveraged heavily over the past two years and are weaning themselves off very short term funding, pushing out their average maturity in those markets, and looking to the longer part of the curve in senior unsecured and covered bonds.
The International Monetary Fund published a report on French banking in December 2012, in which it recognised the systems resilience to market pressures and praised the progress banks had made in bolstering their capital reserves and diversifying their funding sources. But it cautioned that more needed to be done.
"They remain... vulnerable to sustained disruptions in funding markets and reduced profitability, which would cause delays in meeting capital-raising plans," said the report.
Over-reliance is over
When mortgage market stalwart 3CIF ran into trouble with Moodys in 2012, one of the main concerns was its over-reliance on the covered bond market and wholesale funding in general.
The largest French banks differ from 3CIF in that they can source a portion of their funding from customer deposits, alongside their capital markets activities. But they still have a lot of diversification to do.
Banks such as Société Générale have made their debut in the Samurai market, and the securitisation market has also become of greater importance as French lenders seek greater funding autonomy for their consumer finance subsidiaries.
Maxime Stevignon, head of French, Belgian and Swiss FIG fixed income capital markets at Morgan Stanley, says this overhaul of banks funding structures will continue, as issuers adapt to changes in investor appetite and look to diversify wherever possible.
"Weve seen diversification of funding products, with the increase of securitisation in particular, which is very much a nascent market weve seen banks securitising consumer loans and other assets," he says.
"In covered bonds, investor appetite is high, but issuance is decreasing. Thats partly because banks are wary of encumbering their assets to raise funding, which favours senior unsecured, especially when markets are strong."
French banks were also active in the Samurai market in 2012, as lenders increasingly sought to source their funding from a wider range of markets, terming out their maturities where possible.
Much of French banks recent issuance in the senior unsecured market has been opportunistic rather than strategic. While few have publicly stated that the short term debt they issued at the end of 2012 and at the start of 2013 was expressly for the purpose of paying back the funds they took in the European Central Banks three year longer term refinancing operation (LTRO), many market participants have drawn that conclusion.
"Given the rally we have seen since September, most banks in core Europe can get two year funding at cheaper levels than the LTRO," says Ivan Zubo, a credit analyst at BNP Paribas who specialises in European banks. "And they can do that in the senior unsecured market, without having to provide the collateral they have to pledge to the ECB.
"Its an economic decision. If you can fund at a cheaper level and with a better structure, its a no-brainer."
A 2bn two year that SG sold in January, for example, pays 48bp over three month Euribor well inside the 75bp cost of the LTRO.
Samurai arrives at last
By contrast, Samurai issuance from French banks has been a long time in the making. BPCE and SG both tapped the Japanese market in late 2012, the culmination of months, or in SGs case, years of planning.
Its trade was initially slated to launch on September 15, 2008 the day when Lehman Brothers collapsed. The transaction was postponed until a second try in the summer of 2011, but SG was again forced to step back from the market after Moodys downgraded it along with other French banks in June that year.
The third attempt, in November 2012, was luckier, netting the bank ¥70bn ($848m) across three fixed rate tranches. SG now aims to be a regular issuer in the Samurai format.
But while diversification of currency and investor base is important, it must come in conjunction with prudent redemption management, says Stephane Landon, head of ALM and treasury at SG.
"We try to manage our funding profile so we can spread our redemptions appropriately," he says. "Were careful to make sure we dont have a wall of redemptions in one year, so we spread them across the curve.
"The other point in terms of maturity is that it also depends on investor appetite. Covered bonds are generally bought by insurance companies, and theyre a more long term instrument, but we dont intend to issue more than 20%-30% in covered bonds, which is what we issue on average every year. In September the average length of our funding was six years, and we dont intend to lengthen that much more."
Like most financial institutions, French banks have made progress in lengthening the average maturity of the capital markets funding, in accordance with new regulations, such as Basel IIIs net stable funding ratio (NSFR).
BNP Paribas this year printed a 1bn 10 year senior clip at 105bp over mid-swaps, while Crédit Agricole and BPCE have been active in five and six year tenors, respectively.
"What they will need to go for is a combination of price and duration and they will try to optimise that balance finding longer tenors at the right price," says Pierre Yves Bonnet, global head of FIG at SG.
"Theyll focus more on the seven year part of the curve, as well as the tier two market."
The Yankee market was tapped by borrowers such as BNP Paribas ($1bn five year sold in April) and offers the opportunity to push out even longer, into the 30 year part of the curve, for example. However, that might not make sense in terms of price, says Stevignon at Morgan Stanley.
"The first move in 2010 and 2011 was to replace short term funding with long term funding," he says. "This trend will accelerate, and banks will focus on the long term portion going forward.
"However, the key focus is now shifting to return on equity, as banks concentrate on profitability again. So while markets are open for longer term debt, particularly the Yankee market, banks are unlikely to push out too far because they dont want to lock in spreads for too long. Three to five years is the issuers sweet spot for senior unsecured, while covered bonds can cater for longer maturities, up to 10 years."
Securitisation comes of age
So while French banks are pushing their profile in global markets, it could take a while before US investors can rely on them being repeat issuers.
Meanwhile, securitisation specialists are wary of French issuers going quiet in their market. After a spate of deals in 2011 and 2012, their challenge is to ensure that the investors that bought in the first time around do not go hungry in the coming months.
Post-crisis securitisation is still a developing market in France, and it makes up a small portion of French banks funding. But it carries the advantage of giving their finance subsidiaries a greater level of autonomy from their parents.
"Following 2007, securitisation deals were used by the French banks, like in many other European institutions, in a fairly defensive way to constitute ECB repo-eligible collateral," says Laurent Mitaty, head of European securitisation at SG. "But over the past 18 months, these deals have become a proper funding tool for French banks."
Specialised lending divisions of French banks, in areas like auto lending, equipment finance and consumer finance, are now getting their funding from the securitisation market.
BNP Paribas Personal Finance launched Autonoria, an auto-loan securitisation, in 2012, while SG intends to tap its own auto-loan ABS, Red & Black, again this year. And Crédit Agricole securitised consumer finance assets in its Ginkgo deal, sold in October 2012.
But the securitisation investor base is a small community, and investors expect their portfolios to be kept full, says Mitaty.
"Once banks launch the public placement of their securitisation programmes, the market expects them to be regular issuers," he says. "They really have to maintain supply if they want to maintain some proper liquidity of their securitisation funding programme. These deals were oversubscribed last year they ticked all the boxes, so now French banks have to bring more.
"Banks also need sufficient origination to be active as recurrent issuers the same way they are in the senior and covered bonds markets. Its a challenge, but its a positive one."
Whether or not they can continue originating enough assets to fill investors boots with new paper will be down, to a large extent, to the performance of the French economy and the depth of consumer demand.But after the battering the banks took just over a year ago, it is heartening to know that for now, the problem is too much demand, rather than too little.