Bank : IMPLEMENTATION OF MREL AND GREATER ACCESS TO SENIOR NON-PREFERRED NOTES

Tuesday 10 January 2017 - - - - - After a year of waiting, French banks can finally issue senior non-preferred debt. This new senior bond, bailinable before (standard) senior preferred notes in resolution, offers a spread pick-up that attracted many investors from the first issuances on the primary market in December. - > - The good news is that the European Commission has decided to propose creating these bonds as part of the European directive that needs to be implemented by member states in July 2017. As a result, all banks that have not hitherto had the solution to issue via HoldCo, such as Spanish, Italian, some Dutch banks, etc. will be able to issue Senior Non-Preferred notes (SNP). - These instruments will enable them to meet MREL requirements. Note that the MREL criteria are not yet fully finalised. Overall, the EC's November 2016 proposals are a move in the right direction, i.e. to harmonise its representation and eligible liabilities with the TLAC for global systemically important banks. - - In this note we publish our estimates of the minimum requirement for eligible liabilities (MREL) for a sample of around 30 European banks. This results in an average MREL level of 24.9% compared with an average total capital ratio of 19%. The cumulative MREL requirement of the 27 banks stands at around € 380bn, under the strict assumption of subordination for all liabilities. The banks with the largest issuance requirements are BNP, Santander, Groupe Crédit Agricole, ING, BBVA and Unicredit. - - Forthcoming Senior Non-Preferred (SNP) issuances suggest softness in primary issuances of senior notes, at least in the long term. The TLAC/MREL criteria will be implemented between 2019 and 2022 and eligible liabilities are required to have a residual maturity of one year. Hence, banks will have to issue SNPs with maturity in 2020 or thereafter. In the short-term segment, i.e. 2017/2020, senior notes should remain relevant for banks. Accordingly, we anticipate tightening at the longer end of the yield curve of senior notes (scarcity effect) but stability at the short end (excluding external or idiosyncratic tensions). - SNP issuances cast little shade on Tier 2 debt, on the contrary. Tier 2 bonds boast major strengths, namely a spread two to three times higher than that of SNP debt, with identical coupon/loss-absorption provisions in a going concern situation, and an offer that should remain limited (to 2% RWA per bank). Tier 2 remain our preferred asset class.