Sales of higher risk debt by European banks dropped to their lowest level in more than a decade last year, underlining the pressures faced by banks.
Damped demand for credit and bank deleveraging resulted in the issuance by European banks of unsecured debt, which does not require collateral, falling a quarter last year to $528bn. This marked the sixth consecutive year of decline and was the lowest figure since 2003, according to a report by Moody’s, the rating agency.
“It’s unprecedented that issuance is so low,” said Robard Williams, a senior credit officer at Moody’s. “European banks are under a number of pressures – coming off the financial crisis they had to write down or sell a lot of loans and many of them remain in a low or no-growth economic environment.”
European banks’ annual unsecured issuance was less than half the 2007 peak, although subordinated bond levels have risen in part to satisfy regulators’ requirements for more capital.
Roberto Henriques, European financials credit strategist at JPMorgan, said a drop in issuance was to be expected ahead of a health check by European authorities this year.
“It’s natural that banks would want to position themselves defensively ahead of the asset quality review,” he said. “While deleveraging still has a way to go, I expect in 2015 we will move on to a more ‘normal’ situation where banks are not shrinking their balance sheets.”
The figures come amid an 11 per cent decline in global issuance of unsecured bank debt last year to just over $1tn.
Faltering issuance in Europe, led by steep year-on-year declines in Spain, Austria and Portugal, contrasted with a 39 per cent increase in unsecured issuance by US banks to $309bn. Issuance by banks in Asia-Pacific dropped 13 per cent to $179bn, led by a decline in subordinated debt.
One silver lining is improved market access for eurozone periphery banks, fired by hopes of an economic turnround.
Low interest rates on offer elsewhere have helped unsecured bond issuance by some peripheral banks increase over the past year as they have taken advantage of investor demand for higher-yielding securities.
European banks have bucked the downward spiral in year-to-date issuance, which has risen 8 per cent to $119.4bn against the same period in 2013 according to Dealogic, the data provider.
However, one factor mitigating against more bank bond issuance is the growing appetite among European companies to tap bond markets for finance rather than use bank borrowing, a trend labelled ‘disintermediation’
With European banks still deleveraging, Mr Williams said it was difficult to tell to what extent it would affect the region’s tentative recovery.
“If your economy relies on bank credit then is it banks starting to lend which grows the economy or does the economy have to grow beforehand? It’s hard to tell which will come first.”