Crédit Agricole’s corporate and investment banking arm is expecting full year supply to end 2023 at €577bn and predicts issuance of between €550 and €590bn in 2024.
But while overall volumes may be similar, there will be large shifts across asset classes. At the bottom of the capital stack, the bank is forecasting a 60%-80% increase in AT1 issuance to €35bn-€40bn.
“There is a large amount of European bank AT1 up for call in 2024 and the first quarter of 2025 — between €40bn and €45bn across all currencies,” says Michael Benyaya, co-head of DCM solutions and advisory at Crédit Agricole CIB. “We expect that most banks will continue to try to refinance at the first call date, so there will be a significant increase in activity in 2024.”
Crédit Agricole CIB sees a more measured outlook for the Tier two market, where banks are well optimised and will focus on refinancing and replacing their existing capital stock. Based on the Tier two debt either up for call or with bullet amortisation, the bank thinks supply could stay flat at €35bn or increase modestly to €40bn.
A trend that is likely to continue across both AT1 and Tier two is increasing use of liability management techniques. “We think that a new issue of a capital instrument combined with a tender offer will become even more commonplace in 2024,” Benyaya says.
When it comes to senior non-preferred and senior holdco, the firm is expecting volumes to drop by almost 20%. European banks are well positioned in terms of minimum requirement for own funds and eligible liabilities (MREL) and total loss-absorbing capacity (TLAC) buffers, Benyaya says, shifting from one of expanding supply to one centered on replacement and refinancing.
Issuance in senior preferred and covered bonds, on the other hand, will stay flat. “Here we feel that muted loan growth and a stable deposit base across the European banking system will mean no additional liquidity needs,” Benyaya says.
But even in asset classes where supply will remain stable, there are likely to be shifts — particularly when it comes to currency.
“Currency diversification will again be a prime objective for issuers,” says Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “They will monitor arbitrage opportunities closely. We also expect to see more flexibility and borrowers willing to pay up a little bit more in 2024 to diversify.”
Looking at the wider market backdrop, Hoarau sees dynamics pointing in one direction — normalisation. But he notes that, for the first time in a decade, the year will start without quantitative easing and central bank purchases.
“Macro and monetary policy are going to remain centre stage, with the inflation outlook for the US and Europe in the background,” he says. The US economy and the Fed, in particular, will continue to dominate the macro environment in 2024, and the possibility of higher rates for longer remains still very much alive. Rates will not stabilise necessarily, but Hoarau thinks 2.5%-3% in Europe and about 4% in the US is plausible.
“This will be a key driver for markets and spread levels, and in terms of sequencing supply will be heavily contracted in the early part of the year,” he adds. Abundant liquidity means this front-loading is not a cause for concern. But Crédit Agricole CIB will be monitoring the impact of quantitative tightening and the continuing decrease of Fed and ECB support throughout 2024. “Whether the market will be able to absorb the volume of debt without any pricing adjustment is a key question — particularly in the second half of the year, when the liquidity and supply dynamics will be less favourable.”
However, a potential tailwind could come in the shape of a rate cutting cycle starting in the middle of 2024 in both the US and Europe. The market is already excited about the possibility — but even if the ECB does cut rates, it will remain committed to reducing liquidity in the system.
“We know that this can hurt smaller banks in particular, and it is going to be another of the key spread drivers,” Hoarau says.
Another issue the firm will be monitoring is the possibility of the ECB reducing excess liquidity by increasing the minimum reserve requirement (MRR). “A higher MRR would reduce liquidity coverage ratios,” Hoarau adds. “Banks wanting to reinforce their liquidity coverage ratio (LCR) levels may have to raise additional funding to replenish their liquidity portfolios. This in turn may put additional pressure on covered bond supply. But, in general, we see no reason to believe that overall funding plans will be lower than in 2023.”
