SocGen profit warning this morning an equity not a credit story. Driven by challenging conditions in capital markets and the accounting impact of disposals, we see this as purely an equity story (stock down 4.0% this morning) as it impacts FY earnings, however from a credit perspective the group’s CET1 ratio will increase Quarter-on-Quarter and asset quality metrics will remain very strong (credit losses guidance unchanged). AT1 CoCos were trading up this morning despite the stock being down, which reflects the credit positive impact of the improved capital position.

BBVA announced the redemption of their EUR 7% AT1 CoCos (callable in Feb 2019) on Tuesday. Although this was widely expected as BBVA pre-financed the call earlier in 2018, the announcement led to positive price action on other BBVA AT1 CoCos (up a point on the day) and is supportive for the wider market.

Brexit/Barclays – despite the current noise on Brexit (May’s deal voted down in Parliament, no confidence vote etc.), UK banks subordinated debt continues to perform strongly with UK AT1 CoCos up c3-4% YTD. This reflects very strong fundamentals (no matter the ultimate Brexit outcome) and the higher likelihood of a market-friendly Brexit outcome. The Brexit premium remains significant and we have taken advantage of this by tactically adding some Barclays Tier 2 instruments at very attractive levels (above 400bps spread to government bonds).

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