May 10, 2017 / 3:20 PM / 7 months ago

Fitch: Investors Absorb Riskier EMEA Bank Bonds, Tighter Spreads

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: EMEA Financials Bond Market Monitor here LONDON, May 10 (Fitch) Average credit quality of new European Financial Institution (FI) issuance was weaker in the first quarter with the share of 'BBB' rated bonds rising 10pp to 27% year-on-year. The deterioration in new issuance credit quality was accompanied by tighter spreads, reflecting improving European and global economic data and a positive shift in narrative for banks as steeper yield curves boosted optimism about the earnings outlook, according to Fitch Ratings' latest EMEA Financials Bond Market report <iframe allowfullscreen src="//" title="EMEA Financials 1Q17 Charts" width="1000" height="" scrolling="no" frameborder="0"> In contrast, rating activity on a market composite basis improved, with the volume of bond upgrades marginally exceeding downgrades, recovering from a low upgrade-to-downgrade ratio of 0.4:1 in 1Q16. Upgrades included bonds from Belgian, Austrian and German banks, comprising almost half by volume, whereas 73% of downgrades emanated from Turkey and Italy. Fitch's EMEA FI credit rating Outlooks and Watches remain net negative as at 31 March 2017, but have been on a recovering trajectory since 3Q16, following downgrades in emerging market EMEA, notably banks in Turkey and Saudi Arabia. At end-1Q, Italian FIs comprised the largest share of Negative Outlooks or Watches within developed market (DM) EMEA as the banks work to address high levels of non-performing loans. Positive outlooks in DM Europe were led by banks in France, Ireland and Spain. Bond issuance activity by EMEA FIs has risen marginally year-on-year, following years of decline since the financial crisis, Issuance in 1Q17 of EUR190 billion was up 2% on the same period last year, supported by modest lending growth and a positive shift in investor sentiment, which has been robust in the face of political risk, and underpinned by steeper yield curves due to an improvement in economic data. This points to full-year volumes in-line with 2016's EUR570 billion - which was less than two-thirds of the 2007 record. However, there is a possibility that bond markets may yet be exposed to bouts of political risk. Issuance by global systemically important banks (G-SIBs) accounted for 28% of new volume in 1Q17, unchanged from 1Q16. This is a smaller share than in the US, where G-SIBs account for 46% of the FI debt market. European G-SIBs' share of US-dollar denominated bonds rose by12pp to 47% while average tenors increased. European banks are increasingly turning to US investors to issue at longer maturities. The share of US-dollar bonds issued with tenors of 6-12 years rose to 35% in 1Q17 from 26% in 2016 - above the level for equivalent euro bonds, which declined 14pp to 31%. The trend reflects the growing use of the Yankee market by both European banks and corporates as the greater depth of US credit markets offers certain issuers cost savings compared to issuing in euros. The full report, EMEA Financial Bond Markets, is available at or by clicking the link above. Contact: Michael Larsson Director +44 20 3530 1260 Fitch Ratings Limited 30 North Colonnade London E14 5GN Alan Adkins Group Credit Officer +44 20 3530 1702 James Longsdon Managing Director +44 20 3530 1076 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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