Fitch: EMEA Financials' Issuance Falls as Support Revision-Related Downgrades Hit

Fitch Ratings says EMEA financial-sector issuance continued its downward trend, falling 7% yoy in 5M15, although junior bond sales remain strong, if broadly unchanged from last year's level. Spreads remain close to the lows of the year to date despite the sell-off in Bunds.

The trend of improving composite credit ratings through the first quarter was halted in May in part by Fitch's well-signalled downgrades to European Union banks, which related to weakening sovereign support. Fitch downgraded the credit ratings for 46 EU banks and subsidiaries in mid-May, and Support Rating Floors now reflect the view that sovereign support can no longer be relied on for most EU banks unless they benefit from some form of state sponsorship. The downgrades mean that previously Negative Outlooks on affected banks are now mostly Stable.

Issuance of subordinated debt remained at an elevated level as banks continue to bolster junior debt and capital buffers due to resolution legislation and the adoption of Basel III, while spreads on junior bonds were on average 67% wider than their 2014 low.

The pace of bank deleveraging is showing signs of stabilisation, as loans to EU corporates ticked up. Further recovery in bank lending activity is unlikely to come solely from monetary stimulus as credit demand remains subdued due to the nascent state of Europe's recovery.

Issuance of additional Tier 1 bonds remained close to record levels in 5M15, with EUR21bn in new supply, but marginally slower than the pace seen a year earlier. Institutions from the UK, Switzerland and the Nordic region accounted for two-thirds of new supply, as investors readily absorbed the glut of subordinated paper to boost yields, despite ongoing Greek debt concerns.