GAM Star Credit Opportunities (EUR)

 April was a positive month for financial markets. Increases in US interest rates paused although we did see moves higher in gilts and European rates. Our securities continued to show their resilience to those moves and once again demonstrated their low sensitivity to interest rates. Spreads within our securities have tightened, but are still significantly wider than pre-Covid-19. As such, we believe that the securities held within our portfolio should benefit from the accommodative stance by central banks, combined with the gradual reopening of European economies. 

Q1 earnings have begun and the results of financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases. As an example, Lloyds Banking Group took an impairment credit of GBP 323 million, meaning that Lloyds had provisioned too much last year for expected credit losses and was therefore able to release a significant amount of those provisions. Moreover, guidance by banks on cost of risk is relatively low. Therefore, from a credit quality standpoint, we believe that financials are in a strong position as they have large amounts of excess capital, combined with strong earnings, low cost of risk and, in several cases, excess provisions for expected credit losses. 

A number of legacy bonds, some of which we held in our funds, were called during the month of April. This has helped the entire market move up. We expect banks to continue cleaning up their legacy securities this year, buying back some of our holdings at premiums to market levels. 

In conclusion, with strong credit quality, valuations which remain more attractive than pre-Covid and a low sensitivity to interest rates, we believe our securities are well positioned to benefit from the current environment.

GAM Star Credit Opportunities (GBP)

 April was a positive month for financial markets. Increases in US interest rates paused although we did see moves higher in gilts and European rates. Our securities continued to show their resilience to those moves and once again demonstrated their low sensitivity to interest rates. Spreads within our securities have tightened, but are still significantly wider than pre-Covid-19. As such, we believe that the securities held within our portfolio should benefit from the accommodative stance by central banks, combined with the gradual reopening of European economies. 

Q1 earnings have begun and the results of financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases. As an example, Lloyds Banking Group took an impairment credit of GBP 323 million, meaning that Lloyds had provisioned too much last year for expected credit losses and was therefore able to release a significant amount of those provisions. Moreover, guidance by banks on cost of risk is relatively low. Therefore, from a credit quality standpoint, we believe that financials are in a strong position as they have large amounts of excess capital, combined with strong earnings, low cost of risk and, in several cases, excess provisions for expected credit losses. 

A number of legacy bonds, some of which we held in our funds, were called during the month of April. This has helped the entire market move up. We expect banks to continue cleaning up their legacy securities this year, buying back some of our holdings at premiums to market levels. 

In conclusion, with strong credit quality, valuations which remain more attractive than pre-Covid and a low sensitivity to interest rates, we believe our securities are well positioned to benefit from the current environment.

GAM Star Credit Opportunities (USD)

 April was a positive month for financial markets. Increases in US interest rates paused although we did see moves higher in gilts and European rates. Our securities continued to show their resilience to those moves and once again demonstrated their low sensitivity to interest rates. Spreads within our securities have tightened, but are still significantly wider than pre-Covid-19. As such, we believe that the securities held within our portfolio should benefit from the accommodative stance by central banks, combined with the gradual reopening of European economies. 

Q1 earnings have begun and the results of financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases. As an example, Lloyds Banking Group took an impairment credit of GBP 323 million, meaning that Lloyds had provisioned too much last year for expected credit losses and was therefore able to release a significant amount of those provisions. Moreover, guidance by banks on cost of risk is relatively low. Therefore, from a credit quality standpoint, we believe that financials are in a strong position as they have large amounts of excess capital, combined with strong earnings, low cost of risk and, in several cases, excess provisions for expected credit losses. 

A number of legacy bonds, some of which we held in our funds, were called during the month of April. This has helped the entire market move up. We expect banks to continue cleaning up their legacy securities this year, buying back some of our holdings at premiums to market levels. 

In conclusion, with strong credit quality, valuations which remain more attractive than pre-Covid and a low sensitivity to interest rates, we believe our securities are well positioned to benefit from the current environment.

Spotlight: Improving macro picture provides boost to bank earnings

European banks have started the year on a strong footing, releasing earnings that on average handsomely beat analysts’ expectations. Strong earnings were driven by improving macroeconomic scenarios, resilient credit quality of bank lending books and resilient pre-provision profits, despite rates headwinds. Capital ratios continue to remain strong at near all-time high levels, providing bondholders with abundant excess capital. Using Barclays as an example, the group delivered a 14.7% return on equity in Q1 2021, close to a threefold increase year-on-year. Revenues benefited from another strong quarter for the firm’s investment bank, which offset weakness in retail banking due to low interest rates. The bright spot of the results was that Barclays took a charge for loan loss of only GBP 53 million compared to GBP 2.1 billion in Q1 2020. Looking in more detail, the bank released some macro provisions as macro forecasts for the UK and US have improved thanks to strong vaccination campaigns. This shows that provisions have been front-loaded in 2020 and made based on conservative assumptions (likely too much taken). The group’s common equity tier one (CET1) ratio declined slightly to a still strong 14.6%, or GBP 11 billion / 3/5% of excess capital / headroom above the maximum distributable amount (MDA) hurdle. We continue to see strong results as a positive driver for subordinated debt markets, with strong and resilient credit quality as the catalyst for performance.

Sustainability has also been at the heart of bank results – driven by mounting pressure from regulators, investors and other stakeholders. We have seen new commitments to becoming net zero by 2050, more granularity on environmental strategies and environmental, social and governance (ESG) more broadly, including increased targets on green financing. The creation of the Net Zero Banking Alliance, founded on the back of the UN Climate Change Conference of the Parties (COP26) in Glasgow, and regrouping 43 banks representing close to USD 30 trillion in assets reflects the trend towards setting credible net zero targets. As an example, Barclays announced its net zero strategy (covering lending and capital markets) with a granular sector approach and committing to GBP 100 billion of green financing by 2030. 

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