Last week EUR IG credit market tightened by -2bp overall thanks to US CPI and the ECB delivering news as expected, while in France a new prime minister was appointed on Friday (François Bayrou) which raised hopes for a budget to be passed as early as early in January. In this context, Financials were -2.7bp tighter WoW while Utilities were -3.9bp and Industrials -1.4bp.
Within financials, SP bonds were -2.7bp tighter to z-spread +74bp with solid performance across regions. SNPs were -2.2bp WoW with Core banks outperforming the Peripheral peers and investors reaching out for duration with the BACRED 3.875% ’30 -24bp WoW. In Tier 2 bonds tightened by -4.4bp with the periphery continuing the strong performance of recent weeks (PT -14.5bp, IT -8.8bp, HE -6.7bp, and ES – 6.2bp). Similarly, AT1s were -20.4bp tighter with Greek bonds on top of the list at -25.4bp and the CABKSM 3.625% -40bp WoW.
Main events from last week:
- On Tuesday, Nykredit announced an offer to acquire Spar Nord Bank for DKK210 per share (+49% premium over SPNO’s Monday closing price). We see the operation positively, with Spar Nord Bank having the potential to boost the group’s overall profitability, both thanks to higher market share in its domestic market (to 13% in lending #3 in Denmark) as well as the higher underlying profitability of SPNO vs. NYKRE (18.0% RoE vs NYKRE’s 11.7% as of 3Q). Nonetheless, the estimated negative 320bp impact on capital (to a 290bp buffer) and extra EUR2bn funding needs for 1Q25 could add in our view short-term pressures on its SNP/T2 bond valuations.
- On Wednesday, Close Brothers and First Rand were notified that the Supreme Court will hear their appeal to the Appeal’s court decision. Albeit this was expected, we now have a clearer indication on the timeline for this step with the hearing set to be between Jan-Apr 2025 and the ruling following in Apr-Aug 2025. As we reminded before, we expect the FCA to wait for the outcome of this process to proceed with its review.
- In Greece, the parliament approved the 2025 budget last night. Albeit positive in terms of sovereign risk (thanks to a target primary surplus of 2.5% of GDP), the prime minister surprised us by announcing the abolishment of fees on basic banking transactions including tax and bill payments and introducing a EUR0.5 cap on money transfers up to EUR5,000. This clearly represents a headwind for the credits which see a total of 15-20% of their gross income derived from the fees.
- On Friday, Unicredit announced it filed the offer document related to its bid for BAMI with included terms for the offer unchanged, as expected. On the same day, BBG reported the BPM is now exploring its possible defense options with increasing its financial targets and exploring a potential combination with BMPS seen as the two most likely options to follow.
- Moody’s downgraded the French sovereign ratings from Aa3 to Aa2 (now aligned with S&P and Fitch) on Friday. Of banks in our coverage, we note that BNP, BPCE, Credit Agricole, Societe Generale, all benefit from a one notch uplift due to the likelihood of government support and are therefore likely to be impacted by the Sovereign rating action. Of note, a downgrade would be more relevant for BNP’s Senior Preferred rating which would lose its second AA category rating and it would move to A+ composite, while SocGen’s Tier 2 would get its first HY rating at Ba1.
- Also on Friday, Fitch upgraded its view on the Portuguese banking operating environment, triggering subsequent +1 notch upgrades on CXGD/BCPPL/NOVBNC/ MONTPI. Fitch also maintained BCPPL’s positive outlook, still expecting a structural improvement of the bank’s business profile, profitability and internal capital generation as it advances with the execution of its new business plan (see more details here – pg.9).
The week ahead will see numerous updates on the inflation front, with the UK on Wednesday (CPI,RPI, PPI), US on Friday (PCE) and Europe (GE/FR/IT/SP) also on Friday (PPI). New employment data will be posted in the UK on Tuesday (unemployment/wage growth) and growth data in the US on Thursday (GDP). Additionally, this week we will have the Fed (Wednesday) and BoE (Thursday) monetary policy decisions where the Fed is expected to cut rates by 25bp while the BoE is projected to hold them unchanged.