Viking Tour 2018 Credit Conference Global Sovereign Update & - - PowerPoint PPT Presentation
Viking Tour 2018 Credit Conference Global Sovereign Update & Outlook High Government Debt and Dollar Stress Ahead James McCormack Global Head of Sovereigns & Supranationals 13 15 June 2018 Contents 1 Global Snapshot 2 2
James McCormack Global Head of Sovereigns & Supranationals
13 –15 June 2018
Global Sovereign Update & Outlook High Government Debt and Dollar Stress Ahead
1
Global Snapshot 2
Sovereign Rating Trends & Outlooks 7
Emerging Market Sovereigns and the US Dollar 12
US/China/Nordics 15
2
3
Key Global Rating Drivers
Ratings supported by:
Robust global growth Commodity price recovery
Risks are mounting:
US trade policy risk now reality Higher US rates and end of Eurozone QE Government debt levels are high The US dollar is appreciating Political risk is here to stay
Source: Fitch, as of 29 May 2018
4
2 4 6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (%) World World excluding China
Source: Datastream, Fitch
Global Real GDP Growth: Strongest in more than a Decade
5 15 25 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (%) Export volume Export prices
Source: Datastream, Fitch
Global Trade: Volumes and Prices Strongest since 2011
5 10 15 20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (%) Fitch20 average Minimum Maximum
Source: Datastream, Fitch
Global Inflation: Longest Absence of Deflation since 2008
50 65 80 95 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (% GDP) Households Corporates Government Banks
Source: IIF, Fitch
Global Debt: Nominal GDP Growth Stabilises Debt Ratios
Forecast
5
Fitch Policy Forecast Directional Change 2018 – 2019
Source: Fitch
Fiscal and monetary policies are not aligned, and trade policy adds a new dimension Fiscal policy Decidedly expansionary from both tax cuts and spending increases Growing federal fiscal deficit Monetary policy Four policy rate increases in 2018 followed by three in 2019 More assured if inflation surprises higher Trade policy Driven by bilateral trade deficit reduction Even if mostly negotiating “noise”, there is an underlying protectionist bias Net directional impact Stronger growth and higher inflation mean more certainty around Fed, stronger USD Impact on trade balance is ambiguous Real growth Inflation Trade deficit US Dollar
Source: Fitch
6
Fed holds about 3 Times Annual Net Treasury Issuance ECB now holds more than 10 Times Net EZ Gov’t Issuance
100 200 300 400 500 600 700 800 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (USDbn) Net treasury issuance Change in fed holdings
a Net issuance and net purchase are quarterly data
Source: Federal Reserve, Fitch
Fed Net Purchases vs Net Treasury Issuancea
10 20 30 40 50 60 70 80 2015 2016 2017 2018 (EURbn) Eurozone government net issuance ECB PSPP net purchases
a Net issuance is on Three-month trailing average basis
Source: AFME, ECB, Fitch
ECB Purchases vs Eurozone Net Sovereign Issuancea
Cumulative EUR2.02trn Cumulative EUR351bn
7
8
DM Ratings Recovering, EM Deterioration Slowing
Negative Outlooks Positive Outlook
Developed Markets UK AA Andorra BBB Czech Republic A+ Cyprus BB+ Estonia A+ Greece B Emerging Asia Pakistan B Mongolia B– Emerging Europe Armenia B+ Hungary BBB– Georgia BB– Macedonia BB Russia BBB– Latin America Aruba BBB– Jamaica B Costa Rica BB Paraguay BB Ecuador B Middle East & Africa Gabon B Qatar AA- Egypt B Nigeria B+ Tunisia B+ Oman BBB- Zambia B Source: Fitch, as of 29 May 2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 DM EM-Asia EM-Europe EM-Latam EM-MEA
Source: Fitch, as of 29 May 2018
Average Ratings by Region
AA+ AA AA– A+ A A– BBB+ BBB BBB– BB+ BB BB– B+ AA+ AA AA– A+ A A– BBB+ BBB BBB– BB+ BB BB– B+
9
Most Positive EM and DM Outlooks since 2007 More Positive than Negatives in EM and DM; First since 2007
Developed Markets
Upgrades centred on sovereigns recovering from the financial crisis
Emerging Markets
Significant regional differences Will the upturn in late 2017 and early 2018 prove transitory?
5 10 15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EM Net Positive Outlooks DM Net Positive Outlooks
Source: Fitch, as of 29 May 2018
Net Positive Rating Outlooks: Emerging & Developed Markets
10
Government Debt Rising in MEA and Latam Government Debt Rising in BB and BBB Categories
5 10 15 20 25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 DM E Asia E Europe MEA Latam
Source: Fitch, as of May 2018
Number of Sovereigns in which Debt/GDP Peaks 2000–19
5 10 15 20 25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 AAA AA A BBB BB B/C/D
Source: Fitch, as of May 2018
Number of Sovereigns in which Debt/GDP Peaks 2000–19
11
12
The US Dollar has Risen Strongly Since January A Strong Dollar Represents Four EM Challenges
Higher external debt service, as most external debt is dollar denominated Stronger dollar correlated with lower commodity prices, and EMs are net commodity exporters An ambiguous impact on growth; net trade benefits, but investment needs imports EM central bank reserves are likely to decline
Source: Fitch
110 112 114 116 118 120 122 124 126 128 130 J F M A M J J A S O N D J F M A M (Mar 73 = 100)
Source: US Federal Reserve
US Dollar Nominal Index (Daily)
USD Stronger 2017 2018
13
EM Sovereign Ratings Correlated with the USD Dollar Strengthens, EM Central Banks Lean against the Trend
5 10 15 20
200 400 600 800 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (USDbn) FXR change (ex-China, valuation-adjusted) (LHS) USD NEER % change (RHS)
Source: Fitch, Datastream
Changes in FXR (yoy) and Changes in NEER (yoy %)
(Stronger USD Lower EM FXR) Size/persistence of FXR changes suggest an ongoing “fear of floating” USD Weaker 90 95 100 105 110 115 120 125 130 5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EM Sovereign credit index (LHS) USD Index (RHS Jan 97 = 100)
Source: Fitch, Datastream
Emerging Market Sovereign Ratings and Nominal Dollar Index
(Stronger USD Lower Ratings) USD Weaker
14
15
Despite Weak Public Finances, a Solid AAA US Scores About 1/3 Notch better than AAA Peers
According to Fitch’s Sovereign Rating Model
The US is one of the stronger AAAs
Fiscal decline needed to lose model AAA
Government debt increases by 35% of GDP Government debt increases by 20% of GDP, deficit is 6% and interest payment 11% of revenue (now 7.5%) Sovereign Rating
AAA/Stable
Weak public finances will get weaker, but structural and external strengths are likely to persist
Source: Fitch
0.0 0.5 1.0 1.5 2.0
US Relative to AAA Medians in Sovereign Model
(Rating notches vs. the AAA median) Governance GDP p/c Share of world GDP Years since default Broad money (% GDP) Growth volatility Inflation Growth Debt (% GDP) Interest (% revenue) Balance (% GDP) FC debt (% total) Reserve currency Flexibility SNFA (% GDP) Commodity Dependence FX reserves Interest (% CXR) CAB+FDI (% GDP) Structural +1.5 External +0.3 Fiscal
Macro +0.1 Model weight 55% 11% 17% 17%
Source: Fitch
16
Leverage is the Key Risk Debt Less Worrying when Nominal GDP Growth Accelerates
Sovereign Rating
A+/Stable
Continued accumulation of imbalances that raise macro and sovereign credit vulnerabilities
Leverage and deleveraging
President Xi said financial security = national security, focus on financial deleveraging SOE/corporate leverage a lower priority
Sovereign Rating considerations
What will Chinese policymakers do if sequential growth slows, as we expect later in 2018
Source: Fitch
5 10 15 20 25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (%) Real GDP Nominal GDP
Source: Fitch and Datastream
Real and Nominal GDP Growth
17
Only Norway Scores ‘AAA’ in the Fitch Sovereign Model Qualitative Judgements bring most Ratings Lower
Sovereign Rating Model and Qualitative Overlay Sovereign Rating Model Macro Neutral Neutral Strength Weakness Public finances Neutral Neutral Strength Neutral External finances Weakness Strength Neutral Weakness Structural Weakness Neutral Neutral Neutral Predicted Rating AA AA+ AAA AA+ Qualitative Overlay Macro +1
– –
+1 Public finances
– – – –
External finances +1
– – –
Structural
– – – –
Final Rating AAA AA+ AAA AAA
Source: Fitch
1 2 3
0.0 1.0 2.0 3.0 4.0 Canada AAA Denmark AAA Austria AA+ Sweden AAA Finland AA+ France AA Germany AAA Luxembourg AAA N'thlands AAA Norway AAA Switzerland AAA UK AA US AAA Belgium AA- Iceland A Malta A+ Andorra BBB Ireland A+ San Marino BBB- Greece B Portugal BBB Spain A- Cyprus BB Italy BBB Macro Public Finance External Finance Structural
Source: Fitch
Developed Market Qualitative Overlay Adjustments
(Changes (Rating notches) from Sovereign Rating model to final published Rating)
18
Global Sovereign Update & Outlook
Watch the effects of US and Eurozone policy changes Higher interest rates will come at a bad time for government debt levels A stronger dollar means Emerging Market sovereign pressures The AAA Rating of the US is safe for now The risk to China’s Rating is the risk of a return to credit-fuelled investment spending
Source: Fitch, as of 29 May 2018
Yoel Sano Head of Political Risk
13-15 June 2018
The Political Outlook in 2018-2019
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 World China NAFTA
US Goods Trade Balance
(US$bn)
Source: Trade Map
China is US’s Top Target
Absolute size of US trade deficit targeted Intellectual property and industrial policies also disputed Divisions within US leadership creating volatility China threatening retaliation on US agri-products
NAFTA at Risk of Collapse
Autos and agriculture dominate NAFTA talks NAFTA collapse would hurt Mexico and US firms US-Mexico ties may suffer under next Mexican president
EU also Targeted
US aluminium and steel tariffs prompting EU response on selected US products (Harleys, Levis, Bourbon, etc) Trump could counter-retaliate on autos
Biggest risk: Escalating cycle of tariffs and retaliations leading to wider global
trade war
Macro Transmission Mechanisms
Financial market declines Rising business uncertainty worldwide Disruption to trade; higher business costs and inflation Asia’s economies especially vulnerable to US-China clash 50 100 150 200
Hong Kong Singapore Vietnam Taiwan Malaysia Thailand South Korea New Zealand China Australia Indonesia Philippines Japan India
2007 2017 (% of GDP)
Asia – Exports
Source: National statistics offices
21
Much of the rest of the world continues to become more trade integrated, particularly emerging markets Key developments include the new TPP (CPTPP), EU-Canada FTA, EU-Japan FTA, revised EU-Mexico FTA Closer ties between Mercosur and Pacific Alliance, China’s RCEP and ‘Belt & Road’, and others However, benefits of new trade arrangements may take time to be felt
Integration Pushing Ahead Without the US
5 10 15 20 25 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 World Trade Volume, % chg y-o-y Modeled Forecast
Global Trade Momentum is Still Positive
(%)
Source: CPB, BMI Forecasts
22
Trump has shown willingness to mix trade policy with geopolitics North Korea has become ‘bargaining chip’, and Taiwan may become
Trump has pressured Japan and S. Korea to raise defence spending Japan is also facing US pressure on trade, despite close alliance Escalation of trade tensions would increase geopolitical risks US-China rivalry in Indo-Pacific will be defining feature of early 21st century China’s RCEP trade pact and ‘Belt & Road’ to boost geopolitical reach
Source: bmiresearch.com
23
Compromise necessary, because North Korea unlikely to denuclearise completely At best, Kim could offer multi-phased, multi- year, partial ‘denuclearisation’ Even so, summit would begin long process of improving relations ‘Hand of History’
Trump and Kim establish good rapport Both sides feel need to compromise and offer concessions Trump and Kim announce major agreements in principle Trump and Kim agree to maintain negotiations on specifics and implementation Summit begins long prcess of reconciliation North Korea may or may not denuclearise
‘North Korea Off the Hook’
US softens stance more than North Trump proves more flexible, seeking diplomatic coup ahead of US mid-term elections Trump claims 'great deal' achieved, but North Korea's concessions are limited and vague North Korea receives economic rewards, yet fails to completely denuclearise
‘Road to War’
Bad chemistry/rapport between Trump and Kim Kim shows no real willingness to give up nukes US refuses to make concessions, or US issues ultimatum Trump and/or Kim feel betrayed and walk away from summit North Korea resumes ICBM/nuclear tests US prepares for military action
‘Trump Triumphant’
North Korea softens stance more than US Kim proves more flexible, owing to full pressure of sanctions, genuine fear of war, and major shift in attitude Kim seeks to emulate US rapprochements with Vietnam, Myanmar, Cuba Kim's steps towards denuclearisation could leave him vulnerable to hardliners' coup
Trump’s Stance Kim’s Stance Conciliatory Hardline Hardline Conciliatory
Source: BMI
24
Stable Brexit
UK and EU come to a deal, transition period agreed to allow for relatively smooth withdrawal from Single Market 40% Probability
Negotiations Extended
No agreement, but extraordinary circumstances lead EU to extend official negotiations beyond March 2019 10% Probability
UK Stays In A Customs Union
Reached by PM facing major domestic constraints or government of a different composition 30% Probability
UK Crashes Out
Talks collapse or UK Parliament does not approve
agreements in place 20% Probability
Note: Coloured arrows indicate level of disruption and impact on political and economic sentiment
25
Impact on industries would vary, based on five categories UK economy would experience contraction in late 2018-early 2019 and remain weak to 2021 GBP depreciation and rising trade barriers would cause inflation to rise Rising inflation would lead to lower real incomes and consumption in UK Amid WTO rules, exporters would lose competitiveness due to tariffs and non-tariff barriers Foreign firms could reduce or relocate UK operations UK would need to loosen fiscal and monetary policy, but with limitations Weaker Domestic Demand? Investment Cutbacks? Cost Increases? Weaker Exports? EU Funding Cuts? Impact Score (0-5) Agribusiness Yes Yes Yes Yes Yes 5 Autos Yes Yes Yes Yes No 4 Financial Services Yes Yes Yes Yes No 4 Infrastructure Yes Yes Yes No No 3 Retail Yes Yes Yes No No 3 Power/ Renewables No Yes Yes No No 2 Metals Yes Yes No No No 2 Pharmaceuticals No Yes No No Yes 2 Telecoms No Yes Yes No No 2 Oil & Gas No No No Yes No 1
Source: BMI, High score = negative impact
26
Populist 5-Star (M5S) and Lega Nord coalition is untested on national level Fiscal expansion, tax cuts, opposition to deeper EU integration, tougher on immigration Political backdrop negative for economic reform (labour, pensions, banking, etc) However, eurozone referendum unlikely; polls show >60% support staying in euro Ideological divisions could lead to tensions, policy paralysis, or fresh elections If M5S-LN mismanage economy, they could face backlash in next election Overall, Italy will remain biggest systemic risk for eurozone
Party Representation in Parliament Following March 4 Election
5 10 15 20 25 30 35 40
May-17 Jun-17 Aug-17 Oct-17 Nov-17 Jan-18 Mar-18 Apr-18 Jun-18
PD M5S FI FdI LN LeU (%)
Party Representation in Opinion Polls
Source: Piepoli, SWG, Index, Demopolis, EMG, Tecne, Euromedia, Bidimedia, Lorien, Interior Ministry, BMI
March 4 General Election
27
Recent sell-off in the Turkish lira (TRY) raises economic instability Private sector (external) debt has ballooned and costs rising GDP growth unsustainable, propelled by monetary and fiscal stimulus Inflation on the rise, given central bank’s structurally dovish bias Erdogan Seeks to Reassure Voters in June 24 Election Erdogan likely to be re-elected as president and win parliament majority Erdogan positioning himself as a figure of stability The conservative Good Party candidate, Meral Aksener, poses greatest challenge in presidential race Economy and Syrian migrants to dominate debates Pressure Mounts to Face Up to Economic Mismanagement Erdogan has stated his ambitions to tackle the external deficit and high inflation Erdogan urged to preserve central bank independence Post-election reduction of fiscal stimulus to lower household consumption Need to regain investor confidence, given ‘hot money’ dependence Long-term drift away from EU raises geopolitical concerns
3.0 3.5 4.0 4.5 5.0 01 Jun 17 01 Jul 17 01 Aug 17 01 Sep 17 01 Oct 17 01 Nov 17 01 Dec 17 01 Jan 18 01 Feb 18 01 Mar 18 01 Apr 18 01 May 18 01 Jun 18 (TRY/USD)
Turkish Lira
Source: Bloomberg
150 180 210 240 270 300 02 Jun 17 02 Jul 17 02 Aug 17 02 Sep 17 02 Oct 17 02 Nov 17 02 Dec 17 02 Jan 18 02 Feb 18 02 Mar 18 02 Apr 18 02 May 18 (bps)
Turkey 5-Year CDS Spread
Source: Bloomberg
28
Relations with West will remain strained, with no clear improvement in sight EU to extend sanctions till at least Jan. 2019; US sanctions harder to ease Difficult to see breakthrough in Russia-US relations, while Trump investigation and Ukraine and Syria conflicts continue Latvia, Moldova 2018 elections and Ukraine 2019 election could be diplomatic flashpoints Putin unlikely to make a final decision on further term in 2024 until 2023 Putin faces dilemma over whether successor will have security or technocratic background Overall, there is only limited scope for major economic reforms in 2018-2024
Source: bmiresearch.com
29
Main Election Issues
Frustration with Corruption and Weak Growth Brazil’s elites have been tainted by major scandals Mexico’s main parties have also been tainted Mexicans also frustrated by rising violence Opportunities for Political ‘Outsiders’ Mexico’s A.M. Lopez Obrador promoting tough stance towards US
Brazil’s election is wide open, but far-right congressman Jair Bolsonaro performing well Next presidents will need to decide between populist and pragmatist instincts Future of Economic Reforms Populist presidents could adopt less business-friendly policies (eg scaling back energy reform in Mexico) Populist governments could also roll back fiscal reforms in order to win public support
30
Prime Minister Shinzo Abe represents a pillar of relative stability in Japan Mounting scandals could prevent his re-election as LDP party leader in September 2018 Even if re-elected, Abe could be politically weakened In 2019, Japan faces local elections in April and Upper House elections in July Economic policies of Abe’s rivals/successors are unclear ‘Abenomics’, monetary policy, fiscal issues, constitutional reform, could all change But Bank of Japan governor Kuroda could provide some continuity Worst-case scenario: Abe’s downfall could herald return to chaotic ‘revolving door’ leadership, weakening Japan’s economy and foreign policy
283 29 55 39 12 11 36 Liberal Democratic Party Komeito Constitutional Democratic Party Democratic Party for the People Japanese Communist Party Nippon Ishin Others/Independents
House of Representatives
Source: Japan House of Representatives
31
‘Lame Duck’ Term Possible, Post-November 2018 History suggests president’s party loses Congressional seats in mid- term elections Republican House majority may be lost. Even if majority is retained, losing further seats would hurt Trump’s reform agenda Republicans in strong position to maintain/extend Senate majority due to favourable electoral map. However, Democrats likely to retain enough seats (41+) to block legislation Mid-Terms Unlikely to Deliver Policy Breakthrough Democratic win in House could lead to impeachment proceedings, although removal needs 2/3 majority (which is virtually impossible for Democrats) ‘Lame duck’ Trump might focus increasingly on executive powers
election bid
32
For now, Iran nuclear deal holding, but could eventually collapse Mike Pompeo’s 12 demands unacceptable to Iran Saudi Arabia emboldened by Trump’s stance versus Iran Saudi-Iran regional proxy conflict could intensify Syria’s conflict will persist Syria remains flashpoint in US-Russia –Turkey-Iran-Israel relations Israel attacking Iranian military facilities in Syria Yemen’s civil war looks set to persist in 2018 Possibility of new Israeli war in Gaza, or Palestinian uprising
Source: bmiresearch.com
33
Country Date Event Continuity of Government Reform Outlook Nigeria February General Election Thailand February General Election Ukraine
General Election Indonesia April General Election India April-May General Election Philippines 13 May Mid-Term Election South Africa May General Election Japan July Upper House Election Greece by October General Election Canada by October General Election Argentina 27 October General Election Australia by November General Election Israel by November General Election Poland by November General Election
Note: ‘Reforms’ refer to changes in business environment, fiscal position, economic liberalisation, energy, labour market, etc.
Positive Neutral Negative
Yoel Sano Head of Political Risk BMI Research yoel.sano@bmiresearch.com
Björn Norrman Senior Director, EMEA Financial Institution Ratings
13-15 June 2018
Western European Banks – Diverse Region, Common Themes
35
4 8 12 16 20 24 28 32 36 40 44 48 52 56 AD AT BE DK FR DE IE IT LU NL NO PT ES SE CH UK Stable Outlook Positive Outlook/Watch Negative Outlook/Watch (Count)
Outlooks and Watches in the Western European Bank Portfolio
Source: Fitch. Data as of 31 May 2018. Members of cooperative groups counted only once. Only countries with > 3 ratings (IDRs) included
36
Banking systems are working through legacy NPL issues, notably in Ireland, Italy, Portugal and Spain The economic backdrop is now more favourable, but volumes are large The ECB is applying pressure on banks to reduce NPLs; in some cases more capital will be needed In extreme cases further failures are possible e.g. if economic growth prospects reverse or markets won’t provide capital
0.0 CY IT PT IE DK FR UK DE ES NL (%)
Source: EBA Transparency Exercise. Sample of banks that reported in both 2017 and 2016 aggregated by country. Data includes the 10 countries in the sample reporting the greatest volume in EUR of NPLs aggregated across reporting banks
Changes in Sector-Wide NPLs
Changes in NPL%, year to 1H17 43 15 14 11 5 3 3 3 2 2 5 10 15 20 25 30 35 40 45 CY PT IE IT ES FR DK NL DE UK (%)
Source: EBA Transparency Exercise. Sample of banks that reported in both 2017 and 2016 aggregated by country. Data includes the 10 countries in the sample reporting the greatest volume in EUR of NPLs aggregated across reporting banks
EBA Data on NPLs, 1H17
Total NPLs for banks in sample as a % of those banksʼ total loans
37
0.0 1.0 2.0 100 200 300 400 2011 2012 2013 2014 2015 2016 1H17 2018Fª (EURbn) Sofferenze (LHS) Watchlist (LHS) Restructured (LHS) Unlikely to pay (LHS) Real GDP growth (RHS)
Source: Bank of Italy; banks have been reporting Unlikely to Pay (UTP) exposures under the EBA definition since 1Q15. Watchlist and restructured exposures used as a proxy of UTP for the years 2011–2014
Sector NPL Evolution
(%)
38
0.0 0.5 1.0 1.5 2.0 2.5 2012 2013 2014 2015 2016 2017 (%)
Net Interest Margin
Averages, 2012-2017
Source: Banks' financial statements, Fitch
10 20 30 40 50 60 70 80 90 100 2012 2013 2014 2015 2016 2017 (%)
Cost / Income Ratio
Median values, 2012-2017
Source: Banks' financial statements, Fitch
A long period of low interest rates and the zero lower bound on retail deposits continues to pressure margins But the prospect of the end of QE and rising rates hold the prospect of improved margins How will deposits price in a rising rate environment as TLTRO II runs off? Cost-efficiency varies: Efficiency improvements vs investments in digital and compliance
Benelux DE ES FR IT Nordics UK Average trend line Average trend line
39
0.0 1.0 2.0 3.0 4.0 2012 2013 2014 2015 2016 2017 (%)
Operating Profit / Risk Weighed Assets
Median values, 2012-2017
Source: Banks' financial statements, Fitch
0.0 0.5 1.0 1.5 2.0 2.5 2012 2013 2014 2015 2016 2017 (%)
Loan Impairment Charges / Gross Loans
Median values, 2012-2018f
Source: Banks' financial statements, Fitch
Operating returns show a slight improvement despite low rate environment Key driver are lower loan impairment charges, which are currently at unsustainable low levels
Benelux DE ES FR IT Nordics UK Average trend line Average trend line
40
Focus on GTUBs
10 11 12 13 14 15 16 17 MS HSBC DB UBS CS BARC Citi JPM BNPP BAC SG GS End-1Q18 Average end-1Q18 End-2016 (%)
CET1
Fully phased-in basis
Source: company reports
2 4 6 8 Citi BAC JPM MS GS HSBC CS UBS BARCBNPP SG DB End-1Q18 Average end-1Q18 End-2016 (%)
Regulatory Leverage Ratio
Fully phased-in basis
US: Fully-loaded supplementary leverage ratio;Europe: Basel III fully-loaded Tier 1 leverage ratio Source: company reports
5 10 15 20 25 DB CS UBS BARC HSBC SG BNPP AT1 T2 Senior holdco Senior non-preferred Total at end-2016
Note: Senior holdco debt issued by Barclays and HSBC Holdings is not yet downstreamed in a subordinated manner to the opcos. Source: Fitch, banks
Debt Buffers
End-1Q18 or latest, as % of fully-loaded RWAs (%)
41
European approaches to accommodate “Total Loss Absorbing Capacity” (TLAC) regime
Directive confirms grandfathering of existing TLAC (under national law) – ie, German-bank “vanilla” senior unsecured is pari passu to non- preferred senior (NPS) Effectively “preferred” senior unsecured is the new debt class in Germany, in contrast with the rest of the EU Questions remain on national implementation of instrument criteria (re FSB TLAC: ie, prohibiting set-off, acceleration, etc.) No default? Bailed-in Bailed-in Bailed-in Wiped-out No default? Bailed-in Bailed-in Bailed-in Wiped-out No default? Bailed-in Bailed-in Bailed-in Wiped-out Structured notes, conterparties, deposits etc. Vanilla senior debt (existing & new) T2 AT1 CET1 Germany (from 1 January 2017) ‘Preferred’ senior debt, structured notes, counterparties, deposits, etc. Non-preferred senior debt T2 AT1 CET1 EU Commission (“French-Style”, 2017) All deposits Non-preferred senior debt T2 AT1 CET1 Italy – Deposits from 2019 (Draft Budget Law 2018, Oct ’17) ‘Preferred’ senior debt, counterparties No default?
Source: National legislation, Fitch
Björn Norrman, Senior Director, EMEA Financial Institution Ratings
Strong Fundamentals, But Not Without Challenges
43
30 40 50 60 70 80 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 (%) Denmark Finland Norway Sweden EBA average
Source: European Banking Authority
Average Cost to Income Ratio Per Country
0.0 5.0 10.0 5 10 15 20 25 Denmark Finland Norway Sweden EBA Ave
Source: European Banking Authority
Fully Loaded Capital Ratios
End-2017 (%) (%) 0.0 1.0 2.0 3.0 4.0 5.0 Denmark Finland Norway Sweden EBA Ave 2015 2016 2017
Source: European Banking Authority
NPL Ratios
(%) 5 10 15 20 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 (%) Denmark Finland Norway Sweden EBA average
Source: European Banking Authority
Average RoE per Country
European average
44
Household Indebtedness
Property Prices
Wholesale Funding
Oil Prices
Growth Prospects
Title
Source: Fitch
45
46
100 200 300 400 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (%) Denmark Sweden Norway The Netherlands United Kingdom
Source: OECD
Households’ Debts in a Sample of Other Countries
Percentage of net disposable income 70 90 110 130 150 Jun 05 Jan 06 Aug 06 Mar 07 Oct 07 May 08 Dec 08 Jul 09 Feb 10 Sep 10 Apr 11 Nov 11 Jun 12 Jan 13 Aug 13 Mar 14 Oct 14 May 15 Dec 15 Jul 16 Feb 17 Sep 17 (Units) Denmark Finland Norway Sweden
Source: National sources, BIS residential Property price database (http://www.bis.org/statistics/pp.htm)
Residential Property Prices
(2010 = 100) 40,000 80,000 120,000 160,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f New housing unit starts Population growth New housing units needed
Source: Sveriges Riksbank, Statistics Sweden, Boverket
Swedish Residential Real Estate
5,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Statistics Norway
Norway: Completed Residential Dwellings Less New Households
47
Swedish and Norwegian Mortgage Markets
Competition is increasing, both from other banks (SBAB, Danske) and from start-ups (Stabelo, Enkla) Competitive pressure exacerbated by housing slowdown Top 4 market share in Sweden down to 76% at end-June 17 (end-14: 79%). A similar, slow, development in Norway
5 10 15 20 25 Swe Banking Baltics LC&I
C&BB Wholes. LC&I C&PB Baltics Personal SMEs Large Corp & Intern. Swedbank Nordea SEB DNB Bank 2017 2016 (%)
Return on Allocated Capital
Source: Banks Financial Statements
Strong mortgage profitability
48
Nordic banks well prepared, but payment services likely to become less profitable over time Opportunity for banks to improve service and customer satisfaction Rating consideration: Franchise, business model, risk controls and deposit stability Second EU Payment Service Directive (PSD2). Introduces two third party providers: Payment Initiation Services (PISP) and Account Information Services (AISP). Banks must give non-discriminatory access Customer Customer Customer Bank 1 Customer Bank 1 AISP AISP Customer Bank 2 Customer Bank 2 Customer Bank 3 Customer Bank 3 AISP Model PISP executes bank Transfer Customer Customer Merchant Merchant Customer Bank Customer Bank Merchant Bank Merchant Bank PISP PISP PISP Model Customer / cardholder Customer / cardholder Merchant Merchant Issuer / Customer Bank Issuer / Customer Bank Acquirer / Merchant Bank Acquirer / Merchant Bank Card network (eg Visa) Card network (eg Visa) Traditional Card Payment Flow
49
Continued Earnings Challenge for European Banks Asset Quality Improving, but continued North/South divide persists Stronger capitalisation and build up of bail-in buffers. Nordics Strong fundamentals, healthy operating environment. Some notable challenges and risks, in particular property prices, but also a growing competitive threat.
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4 5 6 7 8 2 3 1
Anchor Notching
Covered bonds Maximum +12 IDR uplift: + 2 uplift if exempt from bail-in, +8 ‘Payment Continuity Uplift’ (PCU), up to +2 for superior
Deposits (Uninsured) Typically +1 if preference leads to superior recoveries (US) and/or reduced default probability (Germany) Derivative liabilities Derivative Counterparty Ratings (DCRs) typically assigned +1 if sufficient buffer subordinated senior and a well- developed resolution framework (Germany) Senior Preferred Typically in line with IDR but can be notched up to reflect lower default risk once sufficient non-preferred TLAC / MREL buffers are built up HoldCo Senior May be notched down from OpCo IDR to reflect double- leverage and resolution strategy Senior Non- Preferred Typically in line with the IDR unless recovery prospects are weaker than average (but ‘high burden of proof’) Tier-2 1-2 notches below VR anchor reflects below-average or poor recoveries (legacy instruments notching can vary) AT1 At least 5 notches below VR anchor; 2 for loss severity, 3 for non-performance
Notching Approach Liability – Notching Rating Anchor
a The OpCo IDR may be uplifted up to 1 notch above the VR (or more at lower rating levels) if there is a sufficient ‘qualifying junior debt’ and/or (deployable eg, down-streamed) Bank Holding Company
(BHC) buffer (normally close to pillar 1 requirement in size) Source: Fitch Regulatory Tier - 2 Regulatory Additional Tier-1 Senior Preferred Covered Bonds Deposits (uninsured) Derivative liabilities Senior Non-Preferred HoldCo Senior
OpCo IDR HoldCo IDR VR
52
Issuer/Anchor Liability – Notching
AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB
(Reflects RAC Dated 28 September 2017)
OpCo Rating Rationale
(Uninsured) deposit rating A+/F1 SG’s deposit rating is 1 notch above the IDR to reflect the preferential status of deposits and the buffer of qualifying junior debt (QJD) and senior non-preferred senior debt Derivative liabilities A+(dcr) Derivative counterparty rating (DCR) is 1 notch above the IDR to reflect the preferential status of derivatives and build-up of subordinated buffers Senior Preferred A+ 1 notch above the IDR to reflect the bank's large buffer of QJD and senior non-preferred debt (QJD and senior non-preferred debt at end-1H17 was equal to about 8.2% of risk-weighted assets (RWA) Senior Non- Preferred A In line with IDR. Under its criteria, Fitch requires a high burden of proof to notch senior debt up or down from the IDR based on recovery prospects, particularly at high rating levels Tier-2 A- Notched down once from the VR AT1 BB+ 5 notches below VR; 2 for loss severity, 3 for non-
(eg, hybrid capital) differs Viability Rating (VR) a SG’s VR reflects stand-alone strength Issuer Default Rating (IDR) A SG’s IDR is in line with its VR
Source: https://www.fitchratings.com/site/pr/1029929 VR a OpCo IDR A Tier-2 AT1 Senior Non- Preferred Derivative Liabilities
Uninsured Deposits / Senior Preferred
53
GTUB Global Trading and Universal Banks NPL Non Performing Loans
Cosme de Montpellier Senior Director, Covered Bonds
13–15 June 2018
Outlook for Covered Bonds – Low Risk Should not Lead to Complacency
55
Low Risk, Favourable Regulatory Treatment 2
The Underestimated Role of Overcollateralisation 7
Adverse Scenario Analysis 14
House Prices Sensitivity 17
56
57
Risk Mitigants
Full recourse to issuing financial institution Secured by high quality collateral Over-collateralisation Protection against liquidity gaps Supervisory oversight
Regulatory Benefits
Undertakings for Collective Investments in Transferable Securities Directive (UCITS) Capital Requirement Regulation (CRR) Collateral framework for monetary operations Liquidity Coverage Ratio (LCR) Bank Recovery and Resolution Directive (BRRD)
58
20 40 60 80 100 120 140 2008 2010 2012 2014 2016 1Q2018 AAA AA category A category BBB category Non-investment grade (Number of rated programmes)
Historical Development
31 March 2018 Source: Fitch
10 20 30 40 50 60 70 80 90 100 Positive/RWP Stable Negative/RWN Banks issuer default Ratings Covered Bonds Ratings (%)
Ratings Outlook
31 March 2018 Source: Fitch
59
18 24 34 15 30 45 If 1 Notch IDR downgrade If 2 Notch IDR downgrade If 3 Notch IDR downgrade (No. of programmes)
CVB Downgrades Subject to IDR Downgrade
Note: Data is shown on a cumulative basis as at 31 March 2018 Source: Fitch
60
Bail-in Exemption for CVB Norway, Canada Bail-in Exemption for CVB Norway, Canada EU Harmonisation: Mandatory Liquidity Provisions for CVB Austria, Finland, Hungary, Spain, Sweden EU Harmonisation: Mandatory Liquidity Provisions for CVB Austria, Finland, Hungary, Spain, Sweden Update in CVB Legislations Slovakia Update in CVB Legislations Slovakia
61
62
100 200 300
None of the above, prices are too compressed Covered bonds maturity type Protection by
Type of assets Bank Rating Cover pool credit quality Legal framework Covered bonds Rating Country of the issuer
OC Not a Major Price Driver
Source: Fitch
20 40 60
Reduction in
Rating volatility Underlying collateral performance Sovereign risk Health of banking sector Interest rate hike Geopolitical risk Lack of secondary market liquidity Regulatory treatment European quantitative easing
Lowest on Challenges’ List
Source: Fitch
Is Regulatory OC Sufficient?
Yes 42% No 58%
Source: Fitch
63
4% Fitch AAA Floor 3% Minimum Leverage Ratio 8% MREL 5% European Banking Authority 10% Basel III 2% EMIR Individual Value Set by Regulator?
Covered Bonds Regulation Banking Regulation Other?
64
5 10 15 20 25 30 South Korea Belgium Netherlands Germany Switzerland New Zealand UK France Canada Australia Norway Singapore (%)
Comparison Between Rating Agencies: Fitch vs Moody’s
Source: Moody’s Global Covered Bonds Monitoring Overview 1Q17; Fitch 1Q17 Global Covered Bonds Surveillance Snapshot
OC Consistent with Aaa Total "Cover Pool Losses" Fitch AAA Breakeven OC
65
5 10 15 20 25 30 Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 OC consistent with Covered Bonds Rating Total "cover pool losses" (%)
OC for Moody’s CVB Ratings Increase with Decreasing Senior Unsecured Debt Ratings
Source: Moody’s Global Covered Bonds Monitoring Overview 1Q17
(Senior unsecured debt Rating of Covered Bonds issuer)
66
Issuer Default Issuer Default
Issuer Rating Deterioration Issuer Rating Deterioration Higher Reliance
Higher Reliance
When is it Too Late to Expect More Overcollateralisation? When is it Too Late to Expect More Overcollateralisation? AAA AA A BBB BB B CCC CC C AAA AA A BBB BB B CCC CC C
67
68
100 80 75 75 20 10 20 30 40 50 60 70 80 90 100 Cover pool 100 property value 125 LTV 80% Covered Bonds Cover pool 100 property value 100 LTV 100% Covered Bonds
Impact of Property Valuation on Regulatory OC
Source: Fitch
20% Market Value Decline 20% Market Value Decline
Cover Pool Value for Regulatory Purposes No Credit to Part >80% LTV (CRR)
69
Lower OC Higher Mortgage Rates Higher Funding Costs Higher Defaults Higher Encumbrance Pool Top-Up
70
71
2 4 6 8 10 12 14 1Q91 3Q91 1Q92 3Q92 1Q93 3Q93 1Q94 3Q94 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 (%) Norway Sweden Denmark
Source: Fitch
Interest Rates on Mortgages
72
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1Q92 3Q92 1Q93 3Q93 1Q94 3Q94 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 (NOKm)
Source: Fitch
Norway
Mortgage loan repayable with 1/3 of average income at current interest rate Average house price
73
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 (DKKm)
Source: Fitch
Denmark
Mortgage loan repayable with 1/3 of average income at current interest rate Average house price
74
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 (SEKm)
Source: Fitch
Sweden
Mortgage loan repayable with 1/3 of average income at current interest rate Average house price
75
Norway Denmark Sweden 2010
LTV cap at 90% (guideline)
2011
Guideline LTV cap at 85% (repayment loan) and 70% (IO) Stressed interest rate at origination (+5pp) LTV cap at 85% Amortisation requirement for loans with LTV above 75%
2012 2013
15% RW floor for mortgages
2014
Supervisory diamond for mortgage banks Limits on deferred amortisation and ARM with short frequency
Amortisation on loans with an LTV above 70% RW floor at 25%
2015
Regulation LTV cap at 85% (repayment loan) and 70% (IO) Stressed interest rate at origination (+5pp) “Speed limit” of 10% 5% down payment requirement
2016
Guidance on mortgaging of homes in growth areas (Copenhagen and Aarhus) Amortisation on loans with an LTV above 50%:
2017
Regulation Max LTV 60% for IO loans, credit lines, loans secured by secondary homes in Oslo Max LTI at 500% “Speed limit” of 10% (8% for Oslo) Guidelines for housing loans to households with high debt Limit the access to borrow for borrowers with high LTV and LTI ratios (debt of 4 times income).
2018
Increased amortisation for borrowers with LTI > 4.5: they will need to amortise an additional percentage point compared to the current regulations
Source: Fitch
76
Examples of Mitigants
Examples of Mitigants
However
However
77
OC Overcollateralisation; difference between the cover pool and the covered bonds, expressed in percentage of the covered bonds Breakeven OC for the Rating OC below which the covered bonds Rating would be downgraded LTV Loan-to-value EMIR European Market Infrastructure Regulation MREL Minimum requirement for own funds and eligible liabilities FX Foreign exchange MO Mortgage loans PS Public sector assets
Source: Fitch
Angelina Valavina Senior Director, EMEA Corporates
13-15 June 2018
EMEA Corporate Credit Outlook
79
Corporate Rating Outlook 2
What Could Upset the Balance? 13
European Leveraged Finance Outlook 27
80
81
2017 Sector Outlook 2018 Sector Outlook EMEA Chemicals Stable Stable EMEA Oil & Gas Stable Stable Global Mining Stable Positive EMEA Telecommunications Stable Stable EMEA Airlines Stable Stable Global Shipping Negative Negative EMEA Utilities Stable Stable EMEA Retail Negative Negative EMEA Consumer Food, Beverage and Tobacco Stable Stable EMEA Property and Real Estate Stable Stable EMEA Building Materials & Products/ Engineering & Construction Stable Mildly Positive
Source: Fitch
82
Stable Outlook 80% Negative Outlook 13% RWN 2% Positive Outlook 4% RWP 1%
EMEA Outlook and Watch Balance, October 2016
Source: Fitch
Stable Outlook 81% Negative Outlook 7% RWN 2% Positive Outlook 9% RWP 1%
EMEA Outlook and Watch Balance, May 2018
Source: Fitch
83
Stable Outlook 82% Negative Outlook 10% RWN 2% Positive Outlook 5% RWP 1%
DM EMEA Outlook and Watch Balance, October 2016
Source: Fitch
Stable Outlook 82% Negative Outlook 7% RWN 2% Positive Outlook 8% RWP 1%
DM EMEA Outlook and Watch Balance, May 2018
Source: Fitch
84
Stable Outlook 76% Negative Outlook 18% RWN 1% Positive Outlook 4% RWP 1%
EM EMEA Outlook and Watch Balance, October 2016
Source: Fitch
Stable Outlook 80% Negative Outlook 7% RWN 2% Positive Outlook 11%
EM EMEA Outlook and Watch Balance, May 2018
Source: Fitch
85
5 10 15 20 25 30 Commodities Utilities & Transportation Consumer & Healthcare Industrials TMT (Nr)
Negative Outlooks and Rating Watch Negative by Sector
December 2016 May 2018
Source: Fitch
86
5 10 15 20 25 30 35 40 45 50 Mar-2014 Mar-2015 Mar-2016 Mar-2017 Mar-2018 (Nr)
LTM Up / Downgrades
Upgraded Downgraded
Source: Fitch
87
2 4 6 8 10 12 14
2 4 6 8 10 12 14 16 18 Commodities Consumer & Healthcare Industrials TMT Utilities & Transportation (Nr)
Upgrades & Downgrades by Sector 1Q17 to 1Q18
Upgrades Downgrades Negative Outlook Positive Outlook
Source: Fitch
88
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% All EMEA Corporates Industrials Aerospace & Defense Auto & Related
Property/Real Estate Diversified Services Commodities Energy (Oil & Gas) Natural Resources Chemicals Consumer & Healthcare Retailing Pharmaceuticals Health Care Utilities Transport TMT (%)
2018 EBITDA Margin Forecasts 1Q17 vs 1Q18
1Q17 1Q18
Source: Fitch
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Commodities Consumer & Healthcare Industrials TMT Utilities & Transportation (x)
EMEA Corporate FFO Leverage Evolution
2015 2016 2017 2018F 2019F 2020F
Source: Fitch
89
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 1 2 3 4 5 6 2015 2016 2017 2018F 2019F 2020F (x)
EMEA Corporate Leverage and Capex Evolution, 1Q18 (Medians)
FFO Adjusted Net Leverage Developed (LHS) FFO Adjusted Net Leverage Emerging (LHS) Capex/CFO Developed (RHS) Capex/CFO Emerging (RHS)
Source: Fitch
90
10 20 30 40 50 60 70 80
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC CC C RD D (Nr)
EMEA Corporate Rating Distribution
Mar-18 Mar-17
Source: Fitch
1 2 3 4 5 6 7 8 9 B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ (Nr)
Nordic Corporate Ratings and Credit Opinions Distribution
Source: Fitch
91
92
Hot Topics Timescale Direction Magnitude Interest rate normalisation Medium term Negative Negative in pockets — corporates should be able to cope with direct impact of rising rates, key question is refinancing Currency/capital flight Medium term Negative Varies — more of an EM concern Brexit Short to medium term Negative Negative but not disastrous for UK, with effect depending on form
Retail patterns changing Short to medium term Negative Negative for DM names particularly the UK. Online exacerbates
Batteries and electric vehicles Long term Varies Direct if long term threat to oil and peak generators; disruptive but not necessarily bad for autos, utilities North Korea Short term Negative Unclear — depends on escalation Trump/trade — NAFTA/China Short term Negative Base case is relatively benign and pragmatic renegotiation/limited targeted initiatives. Risk rising China growth shock Medium term Negative Base Case gradual deceleration. Commodities Short to medium term Positive Commodities recovery has relieved pressure on many
Source: Fitch
93
100 200 300 400 500 600 700 800 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F Net issuance of government debt securitiesª ECB purchases of government debt (ublic sector purchase programme exc supranationals)
a 2017 to 2019 based on Fitch projections for general government borrowing
Source: EC, ECB, Datastream, Fitch
(EURbn)
Eurozone Issuance of Sovereign Debt Securities and ECB Purchases
94
34 33 16 17 13 5 7 75 10 20 30 40 50 60 70 80 Year one Year two Year three Post year three Dec 12 Jun 17
Refinancing Wall — Jun 17 vs. Dec 12 Snapshot
Volume of debt in Fitch-rated leveraged credits (% of total debt due)
Source: Fitch leveraged credit database
95
Recent External Developments: FX, Trade, Politics ITALY Recent sell-off of Italian HY bonds Political risk aversion H218 new issuance volumes to suffer TURKEY Sharp decline in Turkish lira Increase in leverage Further pressure on liquidity US TARIFFS Limited impact on EU steel/aluminum Manageable for shipping Risks rising RUSSIA Sanctions profound impact State funding may be available Several corporate ratings withdrawn
Source: Fitch
96
97
25 50 75 100 125 150 175 2 4 6 8 10 12 2011 2012 2013 2014 2015 2016 2017E Amazon’s North American net sales (RHS) U.S. dept stores net sales (Fitch-rated) (RHS)ᵃ Average EBIT margin U.S. retailers Amazon op incomeᵇ (%) (USDbn)
US Retailers Suffer from Amazon/Online Threat
ᵃ Dillard’s, GAP, Kohl’s, L Brands, Macy’s, Neiman Marcus, Nordstrom, Sears ᵇ Before stock compensation Source: Fitch
25 50 75 100
5 10 15 20 2011 2012 2013 2014 2015 2016 2017E Europe-based dept stores, apparel stores net sales (RHS)ᵃ Amazon’s Germany/UK net sales (50%-60% of international divisional sales) (RHS) Average EBIT margin European retailers (%) (USDbn)
But Europe is More Fragmented…
ᵃ Debenhams, House of Fraser, Next, M&S, New Look, JD Sports, Cortefiel, H&M, Inditex (Zara) ᵇ Before stock compensation Source: Fitch
98
Shopping Space and Spending, Per Person
Shopping Centre GLA (sq.ft.000’s) 2015a Population (m) GLA/Capita US 7,567 321 23.5 Canada 589 36 16.4 UK 299 65 4.6 France 254 67 3.8 Spain 157 46 3.4 Italy 169 61 2.8 Germany 191 81 2.4
a GLA (Gross Leasable Area); France and Germany 2014
Source: Cowen and Company
99
100
OPEC + shifted market into deficit – for now Venezuela Geopolitics US sanctions on Iran Strong demand (in the short term) US shale growth Lower development and exploration costs New greenfields coming on-stream Lower-than-expected production declines Decelerating/peak demand (in the long term)
101
20 40 60 80 100 120
0.0 0.5 1.0 1.5 2.0 2013 2014 2015 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 (Under)/oversupply (LHS) Brent (RHS)
Source: IEA, Fitch
Global Oil (Under)/Oversupply and Brent Prices
(USD/bbl) (m barrels/day)
102
to rise
Increase in dividends but companies reluctant to increase capex/M&A
confident about future prices: M&A starts, capex revised upward, cost inflation resumes
deals, capex on more marginal projects approved, share buybacks/special dividends
capex, divs & opex; possible asset sales/equity raising to cut debt
103
20 40 60 80 100 120
5 10 15 2013 2014 2015 2016 2017 2018F 2019F 2020F Total (LHS) Shell (LHS) BP (LHS) Brent (RHS)
Source: Fitch
(USD/bbl) (USDbn)
Post-Dividend Free Cash Flow (adjusted for WC changes)
104
3 6 9 12 2011 2012 2013 2014 2015 2016 (USD cents)
Unit Revenue (PRASK) Dynamics
Ryanairª Air Berlin BA
a Data for March 2012 – March 2017
Source: Companies data, Fitch
35 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (%) UK (excl LHR) Germany (excl FRA, MUC) France (excl CDG, ORY) Italy (excl FCO, LIN) Spain (excl MAD)
Source: Anna Aero
LCCs Share of Seat Capacity (Non-Hub Airports)
4 8 12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018F (%)
European Airline Capacity (ASK) and Traffic (RPK) Growth
ASK Growth RPK Growth
Source: IATA
0.0 0.5 1.0 1.5 2012 2013 2014 2015 2016 2017 Ryanair Air Berlin BA NAS
Source: Companies' data, Fitch
Difference Between Unit Revenue (PRASK) and Unit Cost (CASK)
(USDcents)
105
106
50 100 150 200 250 50 100 150 200 250 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sponsor (LHS) Sponsorless (LHS) Fitch projection (LHS) Number of deals (RHS)
Source: Fitch credit opinions database
(EURbn) (No.)
Western European Leveraged Loan Issuance (Excluding US Borrowers and Repricings)
2001–2017
107
2 4 6 8 10 12 14 2001 (56) 2002 (68) 2003 (51) 2004 (96) 2005 (103) 2006 (124) 2007 (132) 2008 (34) 2009 (9) 2010 (34) 2011 (35) 2012 (23) 2013 (43) 2014 (62) 2015 (54) 2016 (43) 2017 (48) EV/EBITDA Total gross debt/EBITDA Senior gross debt/EBITDA EBITDA/interest
Note: Multiples are based on a Fitch EBITDA which may differ from the reference EBITDA used in information memoranda and marketing materials Source: Fitch credit opinions database
(EBITDA x)
Enterprise Value (EV), Leverage and Interest Cover Multiples at Closing (Median)
2001–2017, Primary market LBO/SBO/TBO/QBO (Year (no. of deals))
108
10 20 30 40 50 60 70 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Feb 13 Jun 13 Sep 13 Dec 13 Feb 14 Jul 14 Oct 14 Apr 15 Aug 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 b-*, ccc*, cc* and c* ‘At risk’ portfolio (b-*/Negative outlook or below)
Source: Fitch leveraged credit database
(% of total portfolio)
Evolution of ‘At Risk’ Portfolio
109
ccc* and below Compromised High Negative Unsustainable Uncommitted Excessive Poor b-* Intact Meaningful Volatile High Aggressive High Limited b* Sustainable Moderate Neutral to Positive Deleveraging capacity Some deleveraging Manageable Satisfactory b+* and above Robust Limited Positive Clear deleveraging Committed Limited Comfortable 0% 20% 40% 60% 80% 100% Portfolio Business model Execution risk Cash flow Leverage Financial policy Refinancing risk Liquidity ccc* b-* b* b+*
Distribution of Differentiating Factors for ‘b+*’ and Below Credits — Entire Portfolio
Source: Fitch leveraged credit database
110
2 4 6 8 10 12 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Adjusted Dec 17ª By number of deals By value
a Includes c* and cc* rated issuers as if those had already defaulted
Source: Fitch leveraged credit database
(%)
European Leveraged Loan Default Rates
111
55 60 65 70 75 80 85 3.0 4.0 5.0 6.0 2010 (43) 2011 (53) 2012 (42) 2013 (101) 2014 (144) 2015 (95) 2016 (91) 2017 (124) Senior debt/EBITDA (LHS) Total debt/EBITDA (LHS) Fitch-expected senior recovery rate (RHS)
Source: Fitch
(x)
Median Leverage vs. Fitch’s Senior Recoveries Exectations
Primary market LBO/SBO/TBO/QBO and refinancings (%)
112
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 (60) 2014 (136) 2015 (90) 2016 (81) 2017 (112) Full set Lite Loose
Source: Fitch credit opinions database
Evolution of Cov-Lite Issuance (2013–2017)
As % of total number of deals 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 (23) 2014 (55) 2015 (31) 2016 (29) 2017 (41) Full set Lite Loose
Source: Fitch credit opinions database
Evolution of Cov-Lite Issuance (2013–2017)
As % of total number of deals — debt committed at issuance between EUR200m and 500m 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 (22) 2014 (24) 2015 (20) 2016 (10) 2017 (16) Full set Lite Loose
Source: Fitch credit opinions database
Evolution of Cov-Lite Issuance (2013–2017)
As % of total number of deals — debt committed below EUR200m
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Fitch Ratings’ credit ratings rely on factual information received from issuers and
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