financial special dez/2016: outlook 2017
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Fixed Income Research
Financial Special
20. December 2016
Outlook 2017
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 2 of 17
Financials Outlook 2017
Analysts:
Michaela Hessmert
Melanie Kiene, CIIA
Review of 2016
The past year has been rather turbulent for the senior unsecured bonds as-
set category. The bail-in regime has been in place in Europe since the start
of 2016 and has led to a change in the risk profile of senior unsecured
bonds. At the end of November, the European Commission prepared to pro-
pose a harmonised European approach for the ranking of unsecured senior
debt. Essentially, the French proposal on establishing a non-preferred senior
asset class has been adopted and will be implemented in all member states
by mid-2017. As a whole, 2016 was characterised by some periods of in-
creased volatility, which has particularly affected financials in the credit seg-
ment. In the first quarter, spread widening was above all caused by concern
about the declining growth momentum in China and the emerging markets.
In this period of greater risk aversion, investors became aware of the fact
that risk pricing of bank bonds did not reflect the potential loss participation
of creditors, which consequently resulted in a revaluation of (senior and sub-
ordinated) bank bonds. A further trigger of spread widening was the surpris-
ing referendum result in the United Kingdom in favour of leaving the Europe-
an Union. Brexit has had the most negative impact on banks in the UK,
which saw spreads widen accordingly. In this phase of increased risk aver-
sion, market players also recognised that problems within the eurozone have
by no means all been resolved, with especially Italy being pilloried for its
exceedingly high proportion of problem loans. In September, Deutsche Bank
was also hit by a breakdown in trust. The U.S. Department of Justice de-
manded it pay a fine of around USD 14bn in relation to its mortgage lending
activities in the USA, which would have drained a significant portion of the
bank's capital and consequently unsettled investors, especially as Deutsche
Bank has in any case been delivering poor results recently due to its restruc-
turing efforts. The German banking market was to some extent held guilty by
association during this period and the matter of often rather weak profitability
was also addressed. In November, the election of Donald Trump as the new
President of the United States also sent shock waves around the world.
However, the insights gained from the market response to the Brexit vote
meant that there was only very cautious spread fluctuation, with some even
being corrected in part on the same day. ^
iTraxx € Senior vs. Subordinated Financial Euro Stoxx Banks
0
50
100
150
200
250
300
350
12. 14 03. 15 06. 15 09. 15 12. 15 03. 16 06. 16 09. 16
BP
Spread Sen vs. Sub. iTraxx € Senior FinancialiTraxx € Subordinated Financial
70
80
90
100
110
120
130
140
Euro Stoxx Banks
Source: Bloomberg, NORD/LB Fixed Income Research Source: Bloomberg, NORD/LB Fixed Income Research
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 3 of 17
Regulation:
banks operating in a more
stable environment
After the financial market crisis, politicians and supervision made great pro-
gress in their common objective of strengthening the stability of the Europe-
an banking market. The Basel III requirements led to the improved capitali-
sation and liquidity position of institutions. In the EBA’s Basel III Monitoring
Exercise (sample of 227 banks) with data as at the end of December 2015,
the average (fully loaded) Common Equity Tier 1 (CET1) ratio stands at
12.4% for banks in Group 1 (tier 1 capital of EUR > 3bn and active interna-
tionally) and 13.6% for banks in Group 2 (all other institutions).
Bail-in regime will be
harmonised in the EU
With the Bank Recovery and Resolution Directive (BRRD), a framework for
European law was established in the EU effective 1 January 2015, the aim of
which is to introduce and harmonise a process for the recovery and resolu-
tion of financial institutions at national level in all EU member states. For
example, this includes institutions having in place an individual resolution
plan or living will. One potential resolution tool is the bail-in of debt instru-
ments. Since 1 January 2016, the Single Resolution Mechanism (SRM), the
Single Resolution Board (SRB) and the Single Resolution Fund (SRF) have
been responsible for the resolution of systemically important banks in the
eurozone. Investors in unsecured debt instruments are undoubtedly aware
that the risk profile of plain vanilla senior unsecured bonds has deteriorated,
because it is now not just shareholders and subordinated creditors that are
being held accountable for loss compensation, but specifically also creditors
of primary unsecured debt instruments. Investors in this asset class must
therefore analyse issuers more intensively than they did in the past, given
that the declared political goal of the bail-in was for both banks and investors
to no longer rely on an implicit guarantee from the state. To ensure sufficient
“bail-inable” capital is held, the bail-in concepts of Total Loss Absorbing Ca-
pacity (TLAC) and Minimum Requirements for own funds and Eligible Liabili-
ties (MREL) were introduced. While the TLAC applies only for global system-
ically important banks (G-SIBs) and goes towards resolving the “too big to
fail” problem in the wake of the financial crisis, all institutions throughout the
EU must satisfy the MREL. Despite the fact that the two concepts apply to
different areas, they will be harmonised for reasons of efficiency and trans-
parency as they are pursuing a shared aim. This was put forward in the pro-
posal by the European Commission at the end of November 2016. Once the
EU proposal on establishing a new asset class, “non-preferred seniors”, has
been finalised, the respective national implementation will be a main focus
over the coming year. Alongside the “bail-inable” non-preferred seniors, the
traditional plain vanilla senior unsecured bonds will therefore continue to
exist, with the distinction “preferred seniors” potentially becoming established
for these bonds in future.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 4 of 17
Revision of Basel III has
explosive power
Although the European Commission already presented a wide array of re-
vised proposed amendments to the CRR II, the CRD IV and the BRRD II (cf.
Financial View dated 1 December 2016), their implementation is still de-
pendent on the EU Council and EU Parliament, so nothing is set in stone
yet. In general, it is to be welcomed that the leverage ratio, the net stable
funding ratio (NSFR), the harmonisation of the TLAC and the MREL as well
as the issue of proportionality are all being addressed. Several significant
decisions that will have an influence on the market are on the agenda for the
future of banking regulation in the coming weeks. For example, the Basel
Committee on Banking Supervision (BCBS) is currently revising the require-
ments of Basel III, which is being referred to on the market as Basel IV and
is expected to once again intensify the existing regulatory capital require-
ments.
Basel III reform package
1. Reducing variation in risk-weighted assets in the use of internal ap-
proaches (constraints on the use of models and greater standardisation)
2. Improving risk sensitivity (increased granularity and improved methodolo-
gy for standard approaches)
3. Agreeing rules that are as simple as possible
4. Ensuring that overall capital requirements are not increased significantly
(GHOS Statements, January and September 2016)
5. Conclude work by end of 2016
Source: Deutsche Bundesbank, NORD/LB Fixed Income Research
European opposition against
Basel reform package
An overall aim of the Basel reform package is to improve risk sensitivity.
However, this has revealed some conflicting goals. The proposals are cur-
rently encountering some strong opposition on the side of European policy
and national supervisory authorities. Although the schedule of the BCBS,
which develops coordinated rules for banking supervision at international
level, intends to complete the revision of Basel III by the end of 2016, it is
currently likely that the deadline will not be met. At least, international con-
sensus was not reached at the talks in Santiago, Chile, at the start of De-
cember. From a European point of view, the greatest problems are above all
the increasing requirements for capital adequacy (RWA increase through
capital floors/output floors and a new standardised approach for credit risk).
French, German, Dutch and Nordic banks were particularly severely affected
by the floor rule, as they exhibit low risks for mortgage and corporate expo-
sure. The proposal to abolish the internal ratings-based approach (IRBA) for
specialised lending is also problematic as this would result in a sharp in-
crease in the risk weights (cf. table on risk weights). If the BCBS fails to hold
a new voting meeting before the end of the year, the next fixed date is
8 January 2017. In addition to opposition within Europe, it remains to be
seen whether the new U.S. administration headed up by Donald Trump will
potentially become a less willing negotiating partner in terms of actually im-
plementing these changes.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 5 of 17
Preliminary Basel proposal on risk weights
Risk weights for: IRBA Standardised approach for credit risk
Property finance 20% 80%
Project finance 75% 100-150%
Aircraft finance 55% 120%
Ship finance 50% 120%
Commodities finance 33% 120%
Source: Basel, NORD/LB Fixed Income Research
Political markets? Next year will offer a number of highlights on the political stage. In addition to
Donald Trump’s inauguration in January, there will be elections in France,
Germany and the Netherlands. Furthermore, the UK is expected to trigger
Article 50 of the Lisbon Treaty and officially initiate leaving the EU. As finan-
cials are currently very dependent in the current environment on the respec-
tive risk appetite or aversion of investors, bank bonds have been corre-
spondingly sensitive to changes in the market sentiment. In our opinion,
political influencing factors should also be viewed as negative. The elections
in the eurozone are under the influence of stronger populism and ever-more
widespread Euroscepticism. The negotiations that the UK must conduct with
the EU could provide a blueprint for other countries who wish to follow suit.
Consequently, it must be assumed that the talks will take place with a de-
gree of firmness to ensure that the construct of the eurozone is not put at
risk. The current political developments go against the aim of achieving best-
possible harmonisation within the eurozone through the bank union and its
three pillars: 1) standardised supervisory mechanism, 2) single resolution
mechanism and 3) planned uniform deposit protection. The coming year
could prove to be an acid test for Europe, with a correspondingly negative
impact on market sentiment and the risk spread.
Bail-in makes funding more
expensive
European institutions are obliged to maintain sufficient bail-inable bonds. For
this reason, the issuing activity of non-preferred seniors will be on the agen-
da in the coming year. As they have a poorer risk profile when compared
with preferred seniors, funding will become more expensive for institutions.
We anticipate a spread difference which will of course vary depending on the
specific institution, but will be similar to the currently observable difference
between holding company (HoldCo) and operating company (OpCo) issues
from the same institution. While it can be assumed that French institutions
(above all France’s four G-SIBs) will already start with funding early in the
year (as the French government adopted legislation on 10 December for the
creation of a new senior debt instrument: non-preferred seniors), other coun-
tries might be a little more hesitant. The reason for this is the schedule for
the planned implementation of the European proposal to establish a new
asset class of non-preferred seniors on 30 June 2017. Crédit Agricole was
the first French institution to issue a non-preferred senior bond (maturity:
10 years; volume: EUR 1.5bn; mid swap +115bp; order book: EUR > 5.0bn).
Société Générale followed with a five-year non-preferred senior bond with a
volume of EUR 1.0bn at mid swap +90bp (order book: EUR > 3.5bn).
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 6 of 17
German senior bonds German banks have a lower requirement to issue subordinated senior bonds
as the changes to Section 47f of the German Banking Act (KWG) and the
German Resolution Mechanism Law (AbwMechG) have altered the
insolvency ranking and accordingly all outstanding German plain vanilla sen-
ior unsecured bonds are essentially non-preferred seniors. Through the
harmonisation efforts of the European Commission, Germany will presuma-
bly also be spurred into action once again and possibly adapt the KWG to
ensure German institutions have the option to issue preferred seniors in
future. While the asset category of non-preferred seniors will not have any
ECB eligibility, this is a given for preferred seniors. The collateral capability
of German senior unsecured bonds will continue to exist for the time being,
but will be reviewed again in 2017.
Liability cascade according to the draft for BRRD II
Source: EU Commission, NORD/LB Fixed Income Research
Funding-Ausblick In 2017, senior unsecured bonds in the amount of around EUR 154bn will be
reaching maturity (universe: sector: banks, diversified banks, consumer fi-
nance; currency: euro; collateral type: senior unsecured; amount outstand-
ing/issued: EUR >= 500m; maturity type: bullet; coupon type: fixed/floating;
country: Australia, Canada, New Zealand, Western Europe and the USA).
Maturities in 2017: senior unsecured bonds*
0
5.000
10.000
15.000
20.000
25.000
30.000
FR AS AU BE CA DE EN FI GE GR IR IT NE NO PO SP SW SZ US
Mat
uri
tie
s EU
Rm
n
*Sector: banks, diversified banks, consumer finance; currency: euro; collateral type: senior unsecured; amt. outstanding / issued: EUR >= 500m.; maturity type: bullet; coupon type: fixed / floating; country: Australia, Canada, New Zealand, Western Europe and the USA Source: Bloomberg, NORD/LB Fixed Income Research
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 7 of 17
Maturities in 2017: particular countries by month*
0
5.000
10.000
15.000
20.000
25.000
30.000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Mat
uri
tie
s EU
Rm
n
IT FR GB NL DE SE US
*Sector: banks, diversified banks, consumer finance; currency: euro; collateral type: senior unsecured; amount outstanding/issued: EUR >= 500m; maturity type: bullet; coupon type: fixed/floating; country: IT, FR, GB, NL, DE, SE, US Source: Bloomberg, NORD/LB Fixed Income Research
The TLAC and MREL demand
sufficient bail-inable
liabilities
On account of the regulatory requirements to retain sufficient bail-inable
papers, EU institutions are called on to issue corresponding bonds. While
the TLAC demands subordination for G-SIBs, in the MREL, it will be decided
on an institution-specific basis by the supervisory authority whether papers
should be subordinate or not. As the MREL ratios still need to be released, it
is not yet clear how high the issue requirements of the individual institutions
will be, which means that it is difficult to estimate the total funding require-
ments. In addition, a forecast of issue volume is made more difficult by the
fact that the former senior unsecured bonds will in future be divided into two
different asset categories of non-preferred and preferred seniors.
EUR benchmark issues in 2016*
20%
3%
1%
3%
7%
10%
3%2%10%
1%
4%
10%
2%
4%
19%
FR AU BE CA CH DE DK ES FI GB IS IT LU NL NO SE US
*Sector: banks, diversified banks, consumer finance, commercial finance, financial services; currency: euro; collateral type: senior unse-cured; amount outstanding/issued: EUR >= 500m; maturity type: bullet; coupon type: fixed/floating; country: Australia, Canada, New Zealand, Western Europe and the USA Source: Bloomberg, NORD/LB Fixed Income Research
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 8 of 17
Funding planning in 2017 will
depend on TLAC/MREL
planning
Alongside France, institutions from the USA especially took advantage of the
favourable environment (EUR/USD basis swap) for senior unsecured bonds
in EUR benchmark format in 2016. With the prospect of central bank policies
developing differently in the USA (cycle of rising interest rates) and the euro-
zone (continuation of ultra-expansionary monetary policy) in 2017, the ap-
peal of using the European market for funding and therefore benefiting from
the EUR-USD basis swap can in fact be expected to be even greater for
U.S. institutions. For banks in the eurozone, it has already been the case in
recent years that they were displaying restraint in the issuance of senior
unsecured bonds and that maturities consequently exceeded the new issue
volume. There are many reasons for this situation. It was possible for banks
to secure refinancing at a very affordable rate via the means offered by the
ECB, but the senior unsecured asset class also lost a great deal of its appeal
in the wake of regulatory measures (for example, no LCR eligibility, bail-
inability, illiquid secondary market due to banks’ trading books dwindling
because of regulation). For 2017, funding planning will be greatly dependent
on the MREL and TLAC requirements. The ECB’s targeted longer-term refi-
nancing operations (TLTRO) will in all likelihood be well received again, but
with the corresponding effect of reducing the funding volume. As banks will
also not have any incentive to hold surplus liquidity through senior
unsecured bonds in 2017 due to the high costs associated with maintaining
liquidity, the funding plans for senior unsecured bonds can in contrast be
adjusted so that the TLAC and MREL ratios will be fulfilled – albeit only just.
Overall, we anticipate that the issue volume will range between EUR 130bn
and EUR 160bn in relation to the following universe: sector: banks, diversi-
fied banks, consumer finance; currency: euro; collateral type: senior unse-
cured; amount outstanding/issued: EUR >= 500m; maturity type: bullet; cou-
pon type: fixed/floating; country: AS, AU, BE, CA, DE, EN, FI, FR, GE, GR,
IR, IT, NE, NO, PO, SP, SW, SZ, US.
iBoxx EUR Senior Financial ASW spreads by country
0
50
100
150
200
250
Feb
. 16
Mrz
. 16
Ap
r. 1
6
Ma
i. 1
6
Jun
. 16
Jul.
16
Au
g. 1
6
Sep
. 16
Okt
. 16
No
v. 1
6
De
z. 1
6
ASW
in b
p
DE
DK
ES
FI
FR
GB
IE
IT
NO
SE
Source: iBoxx, NORD/LB Fixed Income Research
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 9 of 17
Economic influencing factors
Event risks influence growth
dynamic
In an environment of wide-ranging external risk factors, the economic situa-
tion in the eurozone is challenging. At 1.7% year on year at the third quarter
of 2016, the GDP of the eurozone continues to indicate moderate economic
momentum. Growth will first and foremost be carried by domestic demand
and monetary policy stimulus. Eurozone countries, companies and private
households all benefit from favourable funding conditions. The ECB is con-
tributing to this positive market environment through ultra-expansionary poli-
cy. The ECB’s most recent bank lending survey reports increased loan de-
mand and improved loan conditions for customers. However, alongside fa-
vourable funding for banks, this is above all due to the strong competition
between institutions. We consider the assessment of market players in re-
gard to global growth momentum, with a particular focus on China and the
emerging markets, to be a fundamental risk factor for the credit market,
which could also be significant in 2017. At the same time, there continues to
be a high level of uncertainty with regard to the medium-term consequences
of the UK leaving the EU. This is above all relevant given the potential for
spill-over effects to those eurozone countries that are holding elections in
2017. Euroscepticism coupled with strongly populist tendencies have the
potential to shake the very foundations of the eurozone. The political situa-
tion in Italy is now fragile following the rejection of constitutional reform in the
recent referendum. The Italian banking sector is particularly affected be-
cause it has a high proportion of problem loans as well as a number of insti-
tutions that are reliant on external capital increases. The “no” result of the
referendum will in all likelihood delay the necessary reforms in the banking
sector, as the resignation of Matteo Renzi means a pro-reform politician is
leaving the political stage. Among other achievements, he was responsible
for the legislative initiative to consolidate the cooperative banking sector in
Italy and for their conversion into joint stock companies (Q2/2015). Together
with his party, he also played a leading role in the initiative to speed up the
lengthy bankruptcy proceedings in Italy. In addition, he was in favour of the
Atlante bank bailout fund.
Despite ultra-expansionary
monetary policy, structural
reforms are faltering
In general, it can be said that the efforts to implement structural and fiscal
reform have lost notable momentum since the sovereign debt crisis eased.
Even if the ECB is in principle giving decision-makers time for these struc-
tural reforms by maintaining its ultra-expansionary monetary policy, the
pressure from the market is not sufficient to make politicians carry out the
necessary reforms. As neither austerity policy nor growth policy appear to be
the preferred path, the eurozone will most likely continue to muddle through
in the coming year. This gives a strengthening populism movement
throughout Europe the opportunity to come to the fore, offering another
possible variant for Brexit.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 10 of 17
Influencing factor in USA A further reason for uncertainty is the new U.S. President who will be inau-
gurated in January 2017. It will only become apparent over the course of
time which geopolitical course the Trump-led U.S. administration will choose
to follow. Even if Europe can remain detached from the cycle of interest rate
hikes in the USA for a while longer and given that the Fed will without doubt
turn the interest rate screw in a very cautious and controlled way, it must be
assumed that the European bond market will also feel a certain amount of
pressure to increase interest rates. On account of the homeopathic dosage
of potential interest rate moves, the search for yield will nonetheless contin-
ue to be a dominating factor for investors. This supports the generally high-
risk asset classes, such as senior unsecured bonds. However, in principle,
the zero-interest-rate policy means that the risks are being underestimated
by investors. It is quite probable that 2017 will be characterised by increased
volatility, which will in some periods lead to considerable risk aversion and
can be expected to have a negative impact on growth dynamics and risk
assets. We identify political uncertainty as the most significant risk factor and
cause for uncertainty in the coming year. Banking markets are affected to
varying degrees.
Key events and elections in 2017
Source: German Bundestag, national parliaments and governments, NORD/LB Fixed Income Research
Banks: challenges for 2017 –
bottleneck factor for equity
and earnings weakness
Banks in the eurozone continued to be subject to the low interest rate envi-
ronment and historically low yield curves in 2016, which above all placed a
negative burden on banks that were highly dependent on the net interest
margin. Institutions that exhibit a stronger income diversification have ac-
cordingly developed more favourably. An ongoing challenge is the high pro-
portion of problem loans held by some countries in the periphery. Institutions
generally have to battle against intensive competition, which is restricting the
assertiveness of spreads. All institutions are affected by the higher cost of
regulation, which will in part be offset by cost savings at other levels. Alt-
hough the capitalisation of European institutions has been steadily improved
over many years, institutions will be required to further strengthen their capi-
tal in light of the further intensifying regulation (Basel IV).
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 11 of 17
Challenges for internal
capital generation capacity
Institutions that have demonstrated no or insufficient profits in order for them
to be retained are faced with the dilemma of having to acquire capital exter-
nally. However, investors are only willing to support institutions whose profit-
ability is weak to a limited extent. Too-low equity ratios will in turn reduce the
option of banks to provide credit to the real economy. For 2017, we antici-
pate that weak bank profitability will remain problematic in a sustained low-
interest environment with moderate growth rates and that the affected banks
will continue to face major challenges as a result. This is also addressed by
the supervisory authority and is likely to be investigated in the Supervisory
Review and Evaluation Process (SREP). In our view, the institutions have
several options for action. First, they could take greater risks in credit busi-
ness to increase profitability. However, this is not a route that the supervisory
authority would welcome. Second, the institutions must implement higher
margins to increase profitability. Given the competitive situation, it is difficult
as non-banks are also making the business environment controversial. A
sustained steeper yield curve would help banks in their efforts to transform
maturities, but is outside their influence. For example, the German 10y2y
yield curve has in fact doubled since the end of September (~50bp) to reach
its current level of more than 100bp. To cut costs, institutions are increasing-
ly turning their attention to the topic of digitisation. Processes must be
streamlined in order to improve efficiency. While European banks take risks
on their own balance sheets and these must accordingly be backed by capi-
tal, U.S. banks have also been operating according to an originate-to-
distribute business model for some time. This type of risk transfer disencum-
bers the institutions and diversifies income sources. In 2017, banks will face
major challenges and these will only be mastered in the long term by those
that adjust their business model to the changed general conditions.
Outlook: ECB creates more
positive market environment
with a large number of
potential stress factors
For senior unsecured bonds, 2017 is not expected to differ from the past
year all too significantly. We will continue to see the ECB’s ultra-
expansionary monetary policy and the continuation of various purchase pro-
grammes as spread-dominating factors. The ECB will continue to ensure a
relatively positive market environment, from which banks will benefit, if not
directly through bond purchases, then at least because of the improved mar-
ket sentiment. Although the allocation of senior unsecured bonds has deteri-
orated in the liability cascade (non-preferred seniors), it must be noted that
alongside the improved environment for banks, the fundamentals of institu-
tions have often improved considerably. This applies equally to both capitali-
sation and cash position. Furthermore, banks have reduced their balance
sheet total in a deleveraging process and have reduced, divested or sold
non-core assets. Banking supervision has in the meantime been operating
proactively and is able to intervene in and control processes in good time.
On account of the improved influencing parameters, we therefore predict that
the actual involvement of creditors (bail-in) will become less probable. In
terms of regulation, a tough struggle lies ahead for the eurozone and the
BCBS.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 12 of 17
Search for yield leads to
mispricing of risk assets
Spreads of senior unsecured
bonds should increase over
the course of 2017
From a European perspective, the Basel proposals to introduce a permanent
output floor on the basis of the standardised approach for credit risk as well
as the constraints on the IRBA are problematic. A considerable increase in
RWA cannot be accepted by Europe, as a potential increase in RWAs of
“only” 10% on average could prove to be extremely problematic for a number
of institutions. We are operating on the assumption that, in this heightened
atmosphere of banking regulation, certain topics will lead to periods of in-
creased volatility on the financial markets and, in a worst-case scenario, will
cause affected institutions to lose their funding access in the short term. As
we have seen in 2016, the whole banking market is often held collectively
responsible for the actions of a particular institution. In 2016, idiosyncratic
risks of individual institutions (for example, Deutsche Bank) had the potential
to influence the whole market segment (for example, market for subordinate
securities). This trend is likely to continue in 2017. In our view, this is con-
nected with the fact that the risk (in this case, credit risk) has not been cor-
rectly priced in, which is in turn one of the consequences of cheap money.
So long as the ECB maintains its current ultra-expansionary monetary policy,
this mispricing is likely to continue. With the start of tapering, the spreads of
senior unsecured bonds will also be affected and widen (directly also
through the reactions of other asset classes, such as covered bonds). In
terms of event risks, it is above all political risks that will continue to grip the
financial markets in 2017. Elections in a number of countries in Western
Europe have the potential to seriously challenge the eurozone. In this re-
gard, the negotiations for the UK’s exit from the EU are of particular im-
portance. Geopolitical risks are in any case a latent risk factor which will
continue to result in increased risk aversion throughout some periods of
2017. Despite the dominating ECB monetary policy, which is ensuring a
positive credit environment, we anticipate that the spreads of cash bonds will
continue to increase over the course of the year. The potential risk factors
that operate in the market for financials are in our view too significant. As
was the case in 2016, we are assuming that risks spread reactions will be
more notable in the CDS market than in the ECB-dominated cash market in
2017.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 13 of 17
Appendix Contacts
Fixed Income Research
Michael Schulz Head +49 511 361-5309 [email protected]
Kai Ebeling Covered Bonds +49 511 361-9713 [email protected]
Mario Gruppe Public Issuers +49 511 361-9787 [email protected]
Michaela Hessmert Banks +49 511 361-6915 [email protected]
Melanie Kiene Banks +49 511 361-4108 [email protected]
Jörg Kuypers Corporates / Retail Products +49 511 361-9552 [email protected]
Matthias Melms Covered Bonds +49 511 361-5427 [email protected]
Sascha Remus Corporates / Retail Products +49 511 361-2722 [email protected]
Norman Rudschuck Public Issuers +49 511 361-6627 [email protected]
Thomas Scholz Corporates / Retail Products +49 511 361-4710 [email protected]
Martin Strohmeier Corporates / Retail Products +49 511 361-4712 [email protected]
Kai Witt Corporates / Retail Products +49 511 361-4639 [email protected]
Markets Sales
Carsten Demmler Head +49 511 361-5587 [email protected]
Institutional Sales (+49 511 9818-9440)
Thorsten Bock [email protected] Gabriele Schneider [email protected]
Uwe Kollster [email protected] Dirk Scholden [email protected]
Daniel Novotny-Farkas [email protected] Uwe Tacke [email protected]
Sales Savings Banks / Regional Banks (+49 511 9818-9400)
Christian Schneider (Head) [email protected] Martin Koch [email protected]
Thorsten Aberle [email protected] Stefan Krilcic [email protected]
Oliver Bickel [email protected] Bernd Lehmann [email protected]
Tobias Bohr [email protected] Jörn Meißner [email protected]
Kai-Ulrich Dörries [email protected] Lutz Schimanski [email protected]
Jan Dröge [email protected] Ralf Schirrling [email protected]
Sascha Goetz [email protected] Brian Zander [email protected]
Sales Asia (+65 64 203136)
Jefferson Ko [email protected] Muhammad Peter Shep-herd
Fixed Income / Structured Products Sales Europe (+352 452211-515)
René Rindert (Head) [email protected] Toni Martikainen [email protected]
Morgan Kermel [email protected] Laurence Payet [email protected]
Patricia Lamas [email protected]
Corporate Sales
Shipping / Aircraft +49 511 9818-8150 Corporate Clients +49 511 9818-4003
Real Estate / Structured Finance
+49 511 9818-8150 FX/MM
+49 511 9818-4006
Syndicate / DCM (+49 511 9818-6600)
Thomas Cohrs (Head) [email protected] Julien Marchand [email protected]
Axel Hinzmann [email protected] Wlada Pesotska [email protected]
Thomas Höfermann [email protected] Andreas Raimchen [email protected]
Tobias Jesswein [email protected] Udo A. Schacht [email protected]
Alexander Malitsky [email protected] Marco da Silva [email protected]
Financial Markets Trading
Corporates +49 511 9818-9690 Collat. Mgmt / Repos +49 511 9818-9200
Covereds / SSAs +49 511 9818-8040 Cust. Exec. & Trading +49 511 9818-9480
Financials +49 511 9818-9490 Frequent Issuers +49 511 9818-9640
Governments +49 511 9818-9660 Structured Products +49 511 9818-9670
Länder & Regions +49 511 9818-9550
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 14 of 17
Disclaimer
This investment recommendation/investment strategy recommendation (hereinafter the „Investment Recommendation”) was drawn up
by NORDDEUTSCHE LANDESBANK GIROZENTRALE („NORD/LB“). The supervisory authorities in charge of NORD/LB are the Euro-
pean Central Bank („ECB“), Sonnemannstraße 20, D-60314 Frankfurt am Main, and the Federal Financial Supervisory Authority (Bun-
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Frankfurt am Main. Details about the extent of NORD/LB´s regulation by the respective authorities are available on request. Generally,
this Investment Recommendation or the products or services described therein have not been reviewed or approved by the competent
supervisory authority.
This Investment Recommendation is addressed exclusively to recipients which are professional and institutional clients in Germany, the
United Kingdom, Austria, Belgium, Italy, Spain, Denmark, Finland, Estonia, France, Greece, Ireland, Luxembourg, the Netherlands,
Poland, Portugal, Sweden, the Czech Republic, Canada, Switzerland and Cyprus (hereinafter the „Relevant Persons” or „Recipients”).
The contents of this Investment Recommendation are disclosed to the Recipients on a strictly confidential basis and, by accepting this
Investment Recommendation, the Recipients agree that they will not forward to third parties, copy and/or reproduce this Investment
Recommendation without NORD/LB’s prior written consent. The figures discussed in this Investment Recommendation are only ad-
dressed to the Relevant Persons and any persons other than the Relevant Persons must not rely on this Investment Recommendation.
In particular, neither this Investment Recommendation nor any copy thereof must be forwarded or transmitted to the United States of
America or its territories or possessions or distributed to any employees or affiliates of Recipients resident in these jurisdictions.
This Investment Recommendation was drawn up in compliance with the applicable provisions of the German Securities Trading Act
(Wertpapierhandelsgesetz) and the Regulation Governing the Analysis of Financial Instruments (Verordnung über die Analyse von
Finanzinstrumenten). In organizational, hierarchical, functional and local terms, the Research Division of NORD/LB is independent of any
divisions responsible for the issuance of securities and investment banking activities, for trading (including proprietary trading) in and
sales of securities as well as for lending activities.
This Investment Recommendation and the information contained herein have been compiled and are provided exclusively for information
purposes. This Investment Recommendation is not intended as an investment incentive. It is provided for the Recipient’s personal infor-
mation, subject to the express understanding, which is acknowledged by the Recipient, that it does not constitute any direct or indirect
offer, individual recommendation, solicitation to purchase, hold or sell or to subscribe for or acquire any securities or other financial
instruments nor any measure by which financial instruments might be offered or sold.
All actual details, information and statements contained herein were derived from sources considered reliable by NORD/LB. However,
since these sources are not verified independently, NORD/LB cannot give any assurance as to or assume responsibility for the accuracy
and completeness of the information contained herein. The opinions and prognoses given herein on the basis of these sources consti-
tute a non-binding evaluation by the analysts of NORD/LB. Any changes in the underlying premises may have a material impact on the
developments described herein. Neither NORD/LB nor its governing bodies or employees can give any assurance as to or assume any
responsibility or liability for the accuracy, adequacy and completeness of this Investment Recommendation or any loss of return, any
indirect, consequential or other damage which may be suffered by persons relying on the information or any statements or opinions set
forth in this Investment Recommendation (irrespective of whether such losses are incurred due to any negligence on the part of these
persons or otherwise).
Past performances are not a reliable indicator of future performances. Exchange rates, price fluctuations of the financial instruments and
similar factors may have a negative impact on the value and price of and return on the financial instruments referred to herein or any
instruments linked thereto. An evaluation made on the basis of the historical performance of any security does not necessarily give an
indication of its future performance.
This Investment Recommendation neither constitutes any investment, legal, accounting or tax advice nor any representation that an
investment or strategy is suitable or appropriate in the light a Recipient’s individual circumstances, and nothing in this Investment Rec-
ommendation constitutes a personal recommendation to the Recipient thereof. The securities or other financial instruments referred to
herein may not be suitable for the Recipient’s personal investment strategies and objectives, financial situation or individual needs.
Also this Investment Recommendation as a whole or any part thereof is not a sales or other prospectus. Correspondingly, the infor-
mation contained herein merely constitutes an overview and does not form the basis for an investor‘s potential decision to buy or sell. A
full description of the details relating to the financial instruments or transactions which may relate to the subject matter of this Investment
Recommendation is set forth in the relevant (financing) documentation. To the extent that the financial instruments described herein are
NORD/LB’s own issues and subject to the requirement to publish a prospectus, the conditions of issue applicable to any individual finan-
cial instrument and the relevant prospectus published with respect thereto as well NORD/LB’s relevant registration form, all of which are
available for downloading at www.nordlb.de and may be obtained, free of charge, from NORD/LB, Georgsplatz 1, 30159 Hanover, shall
be solely binding. Any potential investment decision should at any rate be made exclusively on the basis of such (financing) documenta-
tion. This Investment Recommendation cannot replace personal advice. Before making an investment decision, each Recipient should
consult an independent investment adviser for individual investment advice with respect to the appropriateness of an investment in
financial instruments or investment strategies as contemplated herein as well as for other and more recent information on certain in-
vestment opportunities.
Each of the financial instruments referred to herein may involve substantial risks, including capital, interest, index, currency and credit
risks, political, fair value, commodity and market risks. The financial instruments could experience a sudden substantial deterioration in
value, including a total loss of the capital invested. Each transaction should only be entered into on the basis of the relevant investor’s
assessment of its individual financial situation as well as of the suitability and risks of the investment.
NORD/LB and its affiliates may, for their own account or for the account of third parties, participate in transactions involving the financial
instruments described herein or any underlying assets, issue further financial instruments having terms that are the same as or similar to
those governing the financial instruments referred to herein as well as enter into transactions to hedge positions. Such actions may affect
the price of the financial instruments described in this Investment Recommendation.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 15 of 17
To the extent the financial instruments referred to herein are derivatives, they may involve an initial negative market value from the
customer’s point of view, depending on the terms and conditions prevailing as of the transaction date. Furthermore, NORD/LB reserves
the right to pass on its economic risk from any derivative transaction it has entered into to third parties in the market by way of a mirror
image counter-transaction.
Further information on any fees which may be included in the sales price is set forth in the brochure „Customer Information Relating to
Securities Transactions“ which is available at www.nordlb.de.The information set forth in this Investment Recommendation shall super-
sede all previous versions of any relevant Investment Recommendation and refer exclusively to the date as of which this Investment
Recommendation has been drawn up. Any future versions of this Investment Recommendation shall supersede this present version.
NORD/LB shall not be under any obligation to update and/or review this Investment Recommendation at regular intervals. Therefore, no
assurance can be given as to its currentness and continued accuracy.
By making use of this Investment Recommendation, the Recipient shall accept the foregoing terms and conditions.
NORD/LB is a member of the protection scheme of Deutsche Sparkassen-Finanzgruppe. Further information for the Recipient is set
forth in clause 28 of the General Terms and Conditions of NORD/LB or at www.dsgv.de/sicherungssystem.
Additional information for recipients in the UK
NORD/LB subject to limited regulation by the Financial Conduct Authority (“FCA”) und Prudential Regulation Authority (“PRA”). Details
about the extent of our regulation by the FCA and PRA are available from NORD/LB on request.
This Investment Recommendation is a financial promotion. Relevant Persons in the UK should contact NORD/LB’s London Branch,
Investment Banking Department, Telephone: 0044 / 2079725400 with any queries.
Investing in financial instruments referred to in this Investment Recommendation may expose an investor to a significant risk of losing all
of the amount invested.
Additional information for recipients in France
NORD/LB is partially regulated by the Autorité des Marchés Financiers for the conduct of French business. Details about the extent of
our regulation by the respective authorities are available from us on request.
This Investment Recommendation constitutes investment research within the meaning of Article 24(1) Directive 2006/73/EC, Article
L.544-1 and R.621-30-1 of the French Monetary and Financial Code and does qualify as research recommendation under Directive
2003/6/EC and Directive 2003/125/EC.
Additional information for recipients in Austria
None of the information contained in this Investment Recommendation constitutes a solicitation or offer by NORD/LB or its affiliates to
buy or sell any securities, futures, options or other financial instruments or to participate in any other strategy. Only the published pro-
spectus pursuant to the Austrian Capital Market Act should be the basis for any investment decision of the Recipient.
For regulatory reasons, products mentioned in this Investment Recommendation may not being offered into Austria and are not available
to investors in Austria. Therefore, NORD/LB might not be able to sell or issue these products, nor shall it accept any request to sell or
issues these products, to investors located in Austria or to intermediaries acting on behalf of any such investors.
Additional information for recipients in Belgium
Evaluations of individual financial instruments on the basis of past performance are not necessarily indicative of future results. It should
be noted that the reported figures relate to past years.
Additional information for recipients in Cyprus
This Investment Recommendation constitutes investment research within the meaning of the definition section of the Cyprus Directive
D1444-2007-01(No 426/07). Furthermore, this material is provided for informational and advertising purposes only and does not consti-
tute an invitation or offer to sell or buy or subscribe any investment product.
Additional information for recipients in Denmark
This Investment Recommendation does not constitute a prospectus under Danish securities law and consequently is not required to be
nor has been filed with or approved by the Danish Financial Supervisory Authority as this Investment Recommendation either (i) has not
been prepared in the context of a public offering of securities in Denmark or the admission of securities to trading on a regulated market
within the meaning of the Danish Securities Trading Act or any executive orders issued pursuant thereto, or (ii) has been prepared in the
context of a public offering of securities in Denmark or the admission of securities to trading on a regulated market in reliance on one or
more of the exemptions from the requirement to prepare and publish a prospectus in the Danish Securities Trading Act or any executive
orders issued pursuant thereto.
Additional information for recipients in Greece
The information contained herein describes the view of the author at the time of its publication and it must not be used by its Recipient
unless having first confirmed that it remains accurate and up to date at the time of its use.
Past performance, simulations or forecasts are therefore not a reliable indicator of future results. Mutual funds have no guaranteed
performance and past returns do not guarantee future performance.
Additional information for recipients in Ireland
This Investment Recommendation has not been prepared in accordance with Directive 2003/71/EC, as amended, on prospectuses (the
“Prospectus Directive”) or any measures made under the Prospectus Directive or the laws of any Member State or EEA treaty adherent
state that implement the Prospectus Directive or those measures and therefore may not contain all the information required where a
document is prepared pursuant to the Prospectus Directive or those laws.
Additional information for recipients in Luxembourg
Under no circumstances shall this Investment recommendation constitute an offer to sell, or issue or the solicitation of an offer to buy or
subscribe for Products or Services in Luxembourg.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 16 of 17
Additional information for recipients in Netherlands
The value of your investments may fluctuate. Results achieved in the past do not offer any guarantee for the future (De waarde van uw
belegging kan fluctueren. In het verleden behaalde resultaten bieden geen garantie voor de toekomst).
Additional information for recipients in Poland
This Investment Recommendation does not constitute a recommendation within the meaning of the Regulation of the Polish Minister of
Finance Regarding Information Constituting Recommendations Concerning Financial Instruments or Issuers thereof dated 19 October
2005.
Additional information for recipients in Portugal
This Investment Recommendation is intended only for institutional clients and may not be (i) used by, (ii) copied by any means or (iii)
distributed to any other kind of investor, in particular not to retail clients. This Investment Recommendation does not constitute or form
part of an offer to buy or sell any of the securities covered by the report nor can be understood as a request to buy or sell securities
where that practise may be deemed unlawful. This Investment Recommendation is based on information obtained from sources which
we believe to be reliable, but is not guaranteed as to accuracy or completeness. Unless otherwise stated, all views herein contained are
solely expression of our research and analysis and subject to change without notice.
Additional information for recipients in Sweden
This Investment Recommendation does not constitute or form part of, and should not be construed as a prospectus or offering memo-
randum or an offer or invitation to acquire, sell, subscribe for or otherwise trade in shares, subscription rights or other securities nor shall
it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. This Investment Recom-
mendation has not been approved by any regulatory authority. Any offer of securities will only be made pursuant to an applicable pro-
spectus exemption under EC Prospectus Directive, and no offer of securities is being directed to any person or investor in any jurisdic-
tion where such action is wholly or partially subject to legal restrictions or where such action would require additional prospectuses, other
offer documentation, registrations or other actions.
Additional information for recipients in Switzerland
This Investment Recommendation has not been approved by the Federal Banking Commission (merged into the Swiss Financial Market
Supervisory Authority “FINMA” on 1 January 2009).
NORD/LB will comply with the Directives of the Swiss Bankers Association on the Independence of Financial Research, as amended.
This Investment Recommendation does not constitute an issuing prospectus pursuant to article 652a or article 1156 of the Swiss Code
of Obligations. This Investment Recommendation is published solely for the purpose of information on the products mentioned in this
advertisement. The products do not qualify as units of a collective investment scheme pursuant to the Federal Act on Collective Invest-
ment Schemes (CISA) and are therefore not subject to the supervision by the Swiss Financial Market Supervisory Authority (FINMA).
Additional information for recipients in Canada
This Investment Recommendation has been prepared for informational purposes only in relation to the products contained in this materi-
al and is not, under any circumstances to be construed as an offering memorandum or as an offering of any securities for sale directly or
indirectly in any province or territory of Canada.
No securities commission or similar regulatory authority in Canada has passed on the merits of these securities nor has it reviewed this
material and any representation to the contrary is an offence.
Relevant selling restrictions, if any, are contained in the prospectus or other documentation for the respective product.
Additional information for recipients in Estonia
It is advisable to examine all the terms and conditions of the services provided by NORD/LB. If necessary, Recipient of this Investment
Recommendation should consult with an expert.
Additional information for recipients in Finland
The financial products described in this Investment Recommendation may not be offered or sold, directly or indirectly, to any resident of
the Republic of Finland or in the Republic of Finland, except pursuant to applicable Finnish laws and regulations. Specifically, in the case
of shares, those shares may not be offered or sold, directly or indirectly, to the public in the Republic of Finland as defined in the Finnish
Securities Market Act (746/2012, as amended). The value of investments may go up or down. There is no guarantee to get back the
invested amount. Past performance is no guarantee of future results.
Additional information for recipients in Czech Republic
There is no guarantee to get back the invested amount. Past performance is no guarantee of future results. The value of investments
could go up and down
The information contained in this Investment Recommendation is provided on a non-reliance basis and its author does not accept any
responsibility for its content in terms of correctness, accuracy or otherwise.
Financial Special 20. December 2016
NORD/LB Fixed Income Research
page 17 of 17
Arrangements for the confidential treatment of sensitive customer and business data as well as for avoiding and handling conflicts of
interest
NORD/LB has separated its business divisions that may have access to sensitive customer and business data (confidential areas) from
its other divisions (e.g. NORD/LB Research) in terms of functions and locations and/or via relevant data processing arrangements.
The disclosure of confidential information that may have an impact on the prices of securities is monitored by NORD/LB’s Compliance
Unit which is independent of its trading, operational and settlement divisions. This independent unit controls the transactions undertaken
by NORD/LB and its employees on a daily basis to ensure that they are in line with market conditions. The Compliance Unit may impose
such trading bans and restrictions as may be necessary to ensure that information, which may affect the prices of securities, is not mis-
used and to prevent confidential information from being disclosed to divisions that are only allowed to use information available to the
general public. To avoid conflicts of interest in connection with the preparation of financial analyses, the analysts of NORD/LB are
obliged to inform the Compliance Unit of any studies being drawn up and must not invest in the financial instruments handled by them.
They are obliged to notify the Compliance Unit of all transactions (including external transactions) undertaken by them for their own
account or for the account or on behalf of third parties. Thus the Compliance Unit is in a position to identify all unauthorized transactions
undertaken by the analysts, such as insider trading and front and parallel running. When a Investment Recommendation involving con-
flicts of interest to be disclosed within the NORD/LB Group is drawn up, any information on such conflicts of interest will only be made
available by the Compliance Unit upon completion of the Investment Recommendation. Any subsequent amendment of the relevant
Investment Recommendation may only be made upon consultation with the Compliance Unit and when it has been ensured that the
results of the study are not affected by the knowledge of such conflicts of interest. Further information on these matters is set forth in our
Investment Recommendation or Conflict of Interest Policy which is available from the Compliance Unit of NORD/LB upon request.
Time of going to press
15 December 2016 10:34h (CET)
Disclosure of NORD/LB’s potential conflicts of interest according to § 34b Abs. 1 WpHG and
Article 5 and 6 according to the Commission Delegated Regulation (EU) 2016/958 of 9 March 2016
None.
Additional disclosures
Sources and price indications
Depending on the issuer, we use information from financial data suppliers, our own estimates, company data and the public media for the
preparation of our Investment Recommendations. Unless otherwise stated in the report, prices indicated relate to the closing price on the
previous day. Fees and commissions apply to securities (buy, sell, hold) and these may reduce the yield on investments.
Analytical methods and updates
In the preparation of Investment Recommendations, we take company-specific methods used for fundamental securities’ analysis and
quantitative/statistical methods, as well as technical analytical methods as the basis for valuations and for the regular updates. All as-
sumptions and analytical derivations related to our recommendation may be extracted from the underlying research analysis. It should be
noted that the results of analyses provide a snapshot overview and that past developments do not constitute a reliable indicator for future
profits. The basis of the valuations is subject to unforeseen change at any time, potentially leading to different conclusions. The present
report is prepared irregulary. Recipients are not automatically entitled to receive report update publications. Detailed information with
respect to our rating methodology is available at the webpage www.nordlb-pib.de/Bewertungsverfahren.
Recommendation system Share of recommendation (12 months)
Positive: Positive expectations for the issuer, a security type or a specif-
ic security of an issuer.
Neutral: Neutral expectations for the issuer, a security type or a specif-
ic security of an issuer.
Negative: Negative expectations for the issuer, a security type or a
specific security of an issuer.
Relative value (RV): Relative value recommendation in comparison to
a market segment, an issuer or a maturity.
Positive: 47%
Neutral: 46%
Negative: 7%
Recommendation history (12 months)
An overview of all our bond recommendations during the last 12 months is available at the webpage www.nordlb-pib.de/empfehlungsuebersicht_renten. Corresponding password: "renten/Liste3".
Issuer / security Date Recommendation Bond type Cause