- The Chair of the SSM, M. Enria has recently stated that CRD5 “will lead to more lenient requirements” and “will generate an average reduction in CET1 requirements of 90bps.
- Benefits will be differentiated among single banks and with a time lag of 1-2 years from now. That said, the possible positive impact on average EU banks’ price appreciation is in the order of +6- 8%. Such positive news from regulation is quite unusual in the recent history and could represent a less punitive regulator’s attitude compared to the past.
- While Base 4 rules will oblige banks to maintain a tight control on capital in the next years, yet the egulator is giving more clarity to the sector, possibly also supporting a higher M&A activity starting from the next year. This could improve investors’ sentiment.
- The regulation news flow comes on top of the recent stabilization in both bond yields and economic momentum. Adding to this the enduring discount in banks’ relative valuations we decided to upgrade the sector from neutral to slightly OW.
- Finally, we notice that the sector is still characterized by a higher beta vs market which contributes to keeping its cost of capital higher. We think that, in time, increased capital positions and more predictable regulation could eventually lower the banks’ perceived risk, adding to the re-rating of the sector.
- From a credit stand-point we keep our OW recommendation on AT1 even though CET1 may potentially slightly fall on eased capital requirements and translate into higher supply.
- Among AT1 instruments we recommend in particular to favour low trigger instruments (5% threshold) as they might be disqualified going forward hence reducing significantly extension risk.
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FROM EASED CAPITAL