The Bank of Italy is planning to do away with the minimum €250m own-funds threshold for Italian banks to issue covered bonds. The changes are intended to align Italy’s rules with the EC’s March harmonisation proposals; the impact is likely to be limited.
Italy’s proposed change to the equity threshold could create a bigger universe of Italian covered bond issuers and boost issuance volumes.
To-date only 15 or so Italian banks have set up covered bond (Obbligazioni Bancarie Garantite) programmes for secured funding. About 60% of outstanding OBGs were issued as private placements, indicating that the majority of issuance is used for ECB repo rather than market funding.
Bearing in mind the breadth of the Italian banking sector, there is ground to make up. Some 500-plus banks were active in Italy at the end of 2017. The banking market is dominated by a small group of very large and internationally active banks and a similarly small group of large predominately domestically-focused banks.
Below this is large number of smaller banks, including some 300-plus mutuals. These are expected to merge over time into smaller core groups, but as small individual banks most have been excluded from the covered bond market because of the required minimum capital base of EUR 250m.
Scope views positively the fact that smaller issuers will be able to broaden their funding sources towards less market-sensitive covered bond funding. At the same time, however, it notes that banks with equity bases below EUR 250m will be too small to issue in benchmark size, while issue sizes below EUR 250m will not qualify for inclusion in Liquidity Coverage Ratio calculations. Lower investor appetite could challenge any positive impacts of the proposed change.
“It is a bit surprising that Italy is applying such a minor change to comply with a tiny part of the EU covered bond principles but is not at the same time making use of the covered bond pooling option that is also one of the principles of a European covered bond. Pooling models have been adapted and are working very well in countries like Norway,” said Karlo Fuchs, head of covered bond ratings at Scope Ratings.
Paragraph 18 of the proposed covered bond Directive was drafted specifically for small issuers, which the Commission acknowledged face difficulties when issuing covered bonds. Setting up covered bond programmes entails high upfront as well as maintenance costs while bond liquidity is a function of issue size.
The EC supports the idea of joint funding by two or more issuers to facilitate covered bond issuance by smaller institutions. The proposal provides for asset pooling by several banks, which can post collateral for covered bonds issued by a single issuer.
“In proposing to remove the equity threshold, Italian regulators will follow the harmonisation proposal. To promote robust investor protection, Article 19 (permission for covered bond programmes) will require all banks to seek prior approval on a case-by-case basis regardless of the amount of own funds they hold before they issue out of covered bond programmes,” said Mathias Pleissner, covered bond analyst at Scope.
To gain approval, issuers will need to provide supervisors with requisite assurance around administrative and operational matters; around policies, processes and methodologies for approving, amending, renewing and refinancing loans in the cover pool; as well as comfort around the skill levels of management and staff assigned to administer the covered bond programme.
Covered bonds are attractive for Italian issuers for several reasons, not least from a yield perspective: OBGs offer yields well below Italian sovereign bonds.
Assisted by the relative scarcity of Italian paper, UBI Banca’s EUR 500m 6.5-year OBG printed in January at 69 basis points below the relevant BTP, while the accompanying EUR 500m 12-year tranche came 93bp below. Crédit Agricole Cariparma’s EUR 500m 20-year OBG, which also came in January, priced 110bp through the interpolated BTP curve. Mediobanca’s EUR 750m 12-year in November 2017 came 76bp through governments; Banco Desio’s EUR 500m seven-year last September, meanwhile, came 47bp below.
OBGs did succumb to bouts of volatility during the recent market turmoil in Italy but prices were comparatively stable; spread widening was more pronounced along the maturity curve.
The Bank of Italy proposal was issued as a 30-day consultation paper; the comment deadline is 15 July 2018. Because the proposed change does not impose any additional burden on banks, there will be no regulatory impact assessment.
Investment Roundtable: Live with Jim Bianco
With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.
- Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
- Identify important intermarket relationships he is watching with respect to Global Equities
- Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.
Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.
Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.
At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.
The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March. As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.
These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.
The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term. A rise in the unemployment rate to 8% or so later this year still looks quite likely.
Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.
Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.
Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.
It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.
All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.
What Investors are Looking for in the Next Fintech
By Shaun Puckrin, Chief Product Officer, Global Processing Services
Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.
Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.
However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.
Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.
Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.
So, what are the four things investors are looking for in the next big fintech?
- A strong, differentiated proposition
The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.
To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.
Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it. What is your moat? Getting this right means a foot in the door with investors.
- A path to profitability or exit
This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.
In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.
Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.
- Strong leadership and core team
Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.
A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.
Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.
- The right partnerships
Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.
From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.
Fintech investment is not dead
After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.
By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.
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