Reforms bring Spanish banks back

 

Recent reforms are helping to strengthen the nation's banks, which have returned to the market to get new injections of capital.

5 Spanish banks have issued new bonds in the last week, amid strong signs that the government is determined to restore confidence and face down the nation's financial woes.

After an 8 month covered bond funding drought, 4 banks sold €4.7bn in covered bonds while a 5th, BBVA, went a step further and issued €2bn of senior unsecured debt.

"The newly introduced banking reforms are renewing confidence in Spanish debt," said Torsten Strohrmann, fund manager at DWS.

"There is a clear commitment from the Bank of Spain that they are not going to allow the country's banks to go under," he said.

The government has decreed that Spanish banks will be obliged to provision an additional €50bn by 2013 to cover toxic real estate assets.

According to Strorhmann, the reform plan, along with further support from the ECB's LTRO liquidity programme, is "giving investors the reassurance they need".

Equity analysts at HSBC called the government's reform plan a "major game-changer".

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UNEXPECTED DEMAND

Demand for all 4 covered bond issues was unexpectedly strong.

Santander's 3 year deal attracted a €8bn book. Sabadell proved investors had appetite for the 2nd tier, selling a 3 year €1.2bn deal backed in large part by domestic accounts.

Banesto and CaixaBank meanwhile both went beyond the 3 year safety net of the LTRO. Banesto's 4 year deal was nearly 4 x oversubscribed, and Caixa priced a five-year offering that attracted €2.3bn in demand for a €1bn deal.

Of the 4 deals, international investors accounted for an average of 60% of the distribution.

"The bank reforms that were introduced last week are taking us in the right direction and are renewing investor confidence in Spanish debt," said Miguel Sanchez Vaquero, head of funding at Banesto.

Given the tough road ahead, of course, many believe that Spain's deeper financial problems are still unsolved and that the situation is unchanged.

Analysts at Deustche Bank spelled out a number of concerns, notably the impact of GDP contraction on unemployment levels and NPLs for mortgages.

And one covered bond investor, who stayed away from the bank deals, said it was still early days for the troubled sector.

"We still see Spain as a bit of a risk," the investor said. "Spain needs to go further in solving the financial crisis if we are going to change our risk outlook on country's banks."

IMPRESSIVE BBVA

But anyone looking for a reason to cheer could point to BBVA, which attracted more than 250 accounts for its 18-month €2bn senior unsecured bond, which priced at mid-swaps plus 193bp.

Initial guidance of 200bp area was revised to 195bp, attracting an order book of €2.8bn.

BBVA opted for notes of only 18 months, but the crucial question was quality and not term, said Erik Schotkamp, the bank's capital and funding management director.

"The maturity in itself is not very relevant. What is relevant is that we execute a senior unsecured trade," Schotkamp said.

"The senior unsecured market is the highest quality access to finance. It does not depend on collateral; it is a true vote of confidence."

The issuer hit the market 10 mins after the bank's executives briefed investors on the reforms to the banking sector and how they would impact BBVA.

"The government has a clear mandate to restructure the banking sector, and we think this has helped build the momentum that benefited other issuers such as Telefonica and other Spanish banks," Schotkamp said.

One of the most notable aspects of the deal was the pricing relative to secondary levels. A banker away from the deal said it was particularly impressive, because BBVA managed to price the new notes flat to secondaries.

In the wake of the successful Spanish deals, some syndicate bankers are saying there is no reason now why they shouldn't see more supply in the Cedulas sector - but Italian OBGs look to remain a challenge to sell.