Monday April 20, 2015 Search
Weather | Athens
14o C
09o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
European bank stocks diverge from credit

By Christopher Whittall

The divergence between European equity and bank debt is expected to broaden further in the coming months as fundamental changes in banking regulations continue to impact the industry, giving credit investors a lucrative relative value play.

The iTraxx Senior Financials index - the credit default swap benchmark for senior European bank debt - is currently outperforming the equivalent basket of underlying equities by a "significant" 42bp, credit strategists at Barclays said in a recent report. In contrast, European non-financial CDS are only 6bp better off than their equity counterparts.

The strategists pointed to the "fundamental changes" in banking regulation to explain the shift in market sentiment, after the Euro Stoxx Banks index dipped to just above 140 on July 10 - its lowest level since early January.

"Bank capital is now safer (and implicitly more attractive), but the resulting lower profits for financials lead to underperformance in their equities," they said. "Credit outperforming equity for financials could be a lasting theme."

Bank shares and bonds moved more or less in lockstep over the first quarter of the year (see chart above). Investors bought bank stocks as a leveraged way to play the European recovery, helping to fund a splurge of capital raisings from lenders in Italy, Spain, Portugal and Greece.

And though recent news about accounting irregularities at Portugal's Banco Espirito Santo has compounded matters, financial shares were already struggling to maintain the momentum that carried the Euro Stoxx Banks index to a three-year high of 163 in early April.

That was the time when the positive correlation with bank debt began to fray. As bank equities sputtered, the Senior Financials index continued its rally, eventually reaching a multi-year low of 58bp in June - 25bp tighter than when the Euro Stoxx Bank index recorded its April peak.

"There has been a slow decoupling between bank equities and credit,» said one credit hedge fund manager. «Regulators are asking banks to hold higher equity buffers, which makes senior and subordinated bonds safer."

Many believe current market conditions favour bonds over equities, not least because the European Central Bank's continuation of easy monetary policy is expected to further support European credit.

JP Morgan analysts believe the iTraxx Main index, the bellwether for investment-grade credit, could grind in as far as 40bp from its current level of around 60bp - and investors appear to be bullish. Barclays said there is a US$17.2bn long position in the on-the-run Main index based on DTCC data, which they predicted should not fluctuate too much over the quiet summer months.

Furthermore, financial bonds have performed particularly strongly, buoyed by negative net issuance year-to-date in European senior bank debt. There has also been rampant demand for Additional Tier 1 securities despite solid supply of 11bn in the first half of the year, according to Citigroup, with average spreads falling by 134bp.

The outlook for bank equities, however, has been less rosy. While few expect the problems at BES to be replicated elsewhere, many lenders in the region still have to plug capital shortfalls, incentivising them to retain more earnings rather than distribute cash to shareholders.

And on top of pressure from the ECB to shore up Core Tier 1 ratios, the seemingly never-ending series of eyewatering fines being handed down by US regulators is plaguing European banking names. BNP Paribas's recent US$8.9bn fine is the highest on record.

When combined with the outlook of anaemic economic growth across the eurozone, many expect the bank equity and credit decoupling trade to have some legs in it yet.

"The situation is not all that dissimilar to the Japanese scenario," said the hedge fund manager. "Credit keeps on tightening as rates fall and defaults remain low, while flat regional growth is bad for equities." [Reuters]

ekathimerini.com , Thursday Jul 17, 2014 (15:40)  
Unclear strategy has everyone puzzled
Piraeus confirms absorption of Panellinia Bank
Social security problem is due to general economic issues
List of revenue measures drafted
Greece will not cross ´red lines´ on debt talks: deputy PM
Greece's deputy prime minister Yiannis Dragasakis said on Sunday that Athens would stand firm on its red lines in negotiations with its creditors for billions in aid, despite escalating fear...
Tsipras says EU needs urgent plan to tackle migrant crisis
Greek Prime Minister Alexis Tsipras urged the European Union on Sunday to urgently come up with a plan to tackle a mounting migrant humanitarian crisis in the Mediterranean. "The Mediterrane...
Inside News
GYMNASTICS
Petrounias wins gold in Europeans
Lefteris Petrounias won his first gold medal in a European Artistic Gymnastics Championship on Saturday finishing first in the rings at Montpellier in France. Petrounias was impeccable in th...
BASKETBALL
Panelefsiniakos is relegated from the Basket League
Panelefsiniakos has become the other team to go down from the Basket League, after Panionios, as in the battle for survival against Korivos Amaliadas it hosted on Saturday it lost to its vis...
Inside Sports
COMMENTARY
The price of compromise
The representatives of the middle-class political world made plenty of compromises over the years and now we are paying the price. The current government’s appointment of failed politicos, u...
EDITORIAL
Premier’s choice
Prime Minister Alexis Tsipras was not elected by the 4 percent that has traditionally formed the hard core of SYRIZA supporters. Greeks may be desperate and exhausted but they still have the...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Petrounias wins gold in Europeans
2. Greece will not cross ´red lines´ on debt talks: deputy PM
3. Tsipras says EU needs urgent plan to tackle migrant crisis
4. Panelefsiniakos is relegated from the Basket League
5. Olympiakos clinches fifth consecutive soccer league title
6. Unclear strategy has everyone puzzled
more news
Today
This Week
1. Coalition ponders next move as talks with lenders resume
2. The price of compromise
3. Greece bailout plan still lacking, ECB chief Mario Draghi says
4. Spike in Syrians seeking asylum in Greece
5. Potami not seeking cooperation with other parties, says leader
6. Panousis skeptical about law allowing early prison release
Today
This Week
1. Quarantine for Greek bank subsidiaries in neighboring countries
2. Greek finance ministry hits back at German newspaper report
3. Time to get serious
4. 'Civil war' brewing over disputed Greek goldmine
5. Putting off payments led to Q1 budget primary surplus
6. Obama calls for flexibility in Greek reform talks in brief exchange with Varoufakis
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.