In its 2021 banking study, the independent Swiss credit research institute Independent Credit View AG (I-CV) examined the global banking sector.
A universe of 47 credit institutions in 16 countries – including the D-A-CH region – was scrutinized using a comprehensive analysis with a stress test. The good news is that the major international banks are doing better than feared. “They are not part of the problem this time”, writes I-CV.
Despite the pandemic and global recession, major international banks are generally in good shape. Only a few banks have structural problems. “Based on our current bank study, we expect mostly stable to positive developments this year and also in 2022. And this despite the probable rise in problem loan rates. We see a robust basis thanks to the progress made by the banks in terms of sustainable profitability, capital and liquidity – also as a result of stricter regulation. In addition, there is massive support from governments, central banks and banking supervision for households and companies and – ultimately – also the banks. The average I-CV rating level is between A and A- and is thus higher than in the previous five years,” says Christian Fischer, lead author of the I-CV banking study.
The I-CV Banking Study 2021 takes numerous questions into account: How much does the pandemic affect the credit profiles of banks? What are the long-term challenges for the business models of banks in terms of structural change? How long will the low interest rate environment last and how much does the long-term refinancing program of the European Central Bank help to counter the pressure on margins and to stimulate lending? And where can problem areas (black holes) open up in the banks’ balance sheets?
“With our extensive stress test, we have taken these questions and many other facts into account in order to provide bond investors with important guidance for their investment decisions. 29 European and 11 North American banks as well as 7 credit institutions from Australia and Singapore were put through their paces,” says Fischer.
North America & Asia versus Western and Southern Europe: the gap is widening
Regarding the results of the study, Fischer says: “The iceberg problem in the banking sector is the tail risks in credit and trading books as well as an appropriate identification and control of risks (the Archegos bankruptcy is an example). In general, 2020 and Q1-2021 surprised both positively and negatively. Despite solid financial figures, the business models of individual banks speak against a more positive view of creditworthiness. The macroeconomic situation and corona-endangered industries remain the most important risks in the short term. If there are no major geopolitical crises and market dislocations, the gap between banks from North America and the Asia-Pacific region on the one hand and banks from Western and Southern Europe on the other is likely to widen in the medium term. The latter suffer from overcapacity and often do not earn their imputed capital costs. In investment banking, European banks are struggling to keep up with US investment banks only in sub-segments, but they are in danger of losing ground. Spreads and yields for bonds from all layers of the capital structure of the banks (senior preferred, senior non-preferred, tier 2, additional tier 1) as well as the risk differentiation are often insufficient”.
In conclusion, banking expert Fischer says: “We recommend bonds along the entire balance sheet structure of defensive banks with good credit ratings. While senior preferred instruments are acceptable for all banks in the study, we recommend senior non-preferred and subordinated bonds only for selective issuers. We would focus on new issues (premium) as well as terms (first call dates) in the shorter range. In addition to the above-mentioned banks from North America and the Asia-Pacific region, Northern European credit institutions are among the banks with the highest creditworthiness and therefore security-conscious investors should pay special attention to them. “