The story of bank funding in 2011 so far, in a single chart:
The chart is from UBS banking analysts Alastair Ryan and John-Paul Crutchley. While bank debt issuance has been slightly ahead of maturities so far this year — most of it has come in the form of covered bonds. It’s not difficult to see why, either.
Talk of bail-ins, haircuts for senior unsecured bank bondholders, and even official subordination through legally seperating the debt from deposits, has investors running scared — and banks running for cover(ed bond issuance — gettit?)
These have assets ‘ring-fenced’ on bank balance sheets and are meant to be safer.
But covered bond issuance is not without its limits (and indeed, there’s been some suggestion regulators might look to intensify those limits once the situation in financials returns to some semblance of normality). In the meantime though, covered bond issuance might be reaching its regulatory ceiling in some places…
Write the UBS analysts:
Many Spanish banks have been heavily reliant on covered bond financing for some time now and have little issuance capacity remaining. Recent disclosures from La Caixa highlight the challenge for the system. In Chart 4, we show that la Caixa had 272% mortgage bond overcollateralization as of June 2010. This is a high figure.
However, la Caixa also provided underlying figures: it had €37 billion of covered bonds outstanding and the capacity to issue €22 billion more. This implies a minimum level of overcollateralisation of 170%. Therefore, assuming that other banks have a similar portfolio to that of la Caixa, in Chart 5 we estimate how much more capacity for issuance the banks have. In la Caixa’s case, close to 60% is a robust figure. For several other banks the limits are closer to being binding.
Santander provides helpful disclosure, which points in the same direction. As of Q3 10, the group had €26 billion in outstanding Cedulas Hipotecarias, compared with a maximum capacity of €30 billion. The maximum capacity is only slightly more than half (53%) of the total mortgage portfolio.
Clearly a group as diverse as Santander has substantial alternative financing options, but we believe for many Spanish banks, the picture is a challenging one.
Oh, and what covered bond issuance Spanish banks are still getting away is largely being done at higher rates to compensate investors for perceived added risk.
A challenging picture — for sure.
Related links:
Heavy (covered bond) encumbrance – FT Alphaville
Ants, grasshoppers and Spanish banks - FT Alphaville
Even more Spanish banking negativity - FT Alphaville