Focus on issuer fundamentals critical in AT1 market

European banks have been diligently bolstering their capital in recent years to fulfil increasing requirements. But as the regulatory cycle stabilises and banks have more clarity about their specific obligations, the trend is slowing or even reversing.

One outcome of the current situation is that the headroom banks have to their Maximum Distributable Amount (MDA) thresholds is likely to decline.

Consequently, when assessing the credit risks of investing in AT1 securities, Scope remains focused on issuer fundamentals and particularly on the stability and predictability of organic capital generation.

“AT1 investors should not be unnecessarily concerned about the headroom to the MDA threshold as banks overall are solidly capitalised, although differences still exist between individual banks. Importantly, management teams are now more focused and risk conscious. There are unlikely to be rash acquisitions or aggressive expansion into new businesses or geographies,” said Pauline Lambert, an analyst in the banks team at Scope in a report out today.

“Further, banks are working through legacy issues, such as conduct investigations and non-performing loans which pose threats to capital levels,” Lambert added.

Most large European banks have either restructured or are completing restructuring programmes forced by the financial crisis. Aside from the longer-term threats of new competitors and technologies, the earnings generation of banks should now be in a steadier state, although generally lower than pre-crisis. With growth opportunities still somewhat subdued, earnings are being returned to shareholders via dividends and share buybacks.

The report contains a summary of key developments of interest to AT1 investors at a number of banks, including Barclays, DNB, ING, Lloyds, RBS, Santander and Société Générale.

Click here to view the full report.

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