Market backdrop
Sentiment remained strong in July, as the theme of disinflation coupled with a soft landing made a
comeback. Spreads on EUR IG corporates were c15 bps tighter on the month to 147 bps. EUR IG corporate total returns were positive on the month (1.05%) as tighter spreads were partially offset by higher rates.
Performance
The fund’s NAV during the month (Z class, EUR) was up 1.71%. Performance has been driven by the outperformance of financials compared to nonfinancials (spreads 22 bps tighter compared to 10 bps tighter on non-financials) and Additional Tier 1s (AT1s) and Tier 2s of banks in particular. GBP-denominated bonds also outperformed EUR-denominated bonds, as UK rates rallied over the month and spreads tightened significantly on UK names.
Positioning
Issuance was very light in July, with EUR 1 billion of green bonds issued from the European financial sector in a seasonally calm month (EUR 0.5 billion of supply in July 2022). Earnings were the key focus over the month, as a large number of European banks reported second quarter results. As expected, these have been strong, reflecting the tailwind from higher rates in terms of earnings and fortress balance sheets in the banking sector. As an example, BBVA reported a net profit of EUR 2 billion in Q2, which was up 11% year-on-year and 10% compared to Q1 – leading to a 16.9% return on tangible equity for the first half 2023
Common Equity Tier 1(CET1) was around 40 bps higher compared to end-22 at 13.0%, equivalent to ~EUR 15 billion of excess capital over regulatory requirements. The bank’s asset quality metrics remain sound, with no signs of significant deterioration
as Non Performing Loans remain low at 3.4% and loan loss provisions were stable compared to Q1. Customer deposits were up 2% compared to end22 at EUR 402 billion. We continued to see positive ratings action over the month, as Bank of Ireland was
upgraded by Fitch to BBB+, the second upgrade over the past two months. This brings the bank’s Tier 2s comfortably into Investment Grade (IG) territory, now both average IG and with two out of three IG ratings – fully eligible for IG indices. Deutsche Bank has also been upgraded by Fitch in July to A-, the fifth upgrade Marketing material for professional / institutional / accredited investors GAM Star Fund plc – GAM Sustainable Climate Bond of the bank since 2021 – highlighting the strong progress made around its turnaround
Outlook
We remain positive going forward – with upcoming Q2 earnings from European banks expected to remain a catalyst for the sector. Earnings are expected to be strong, reflecting robust capital, resilient asset quality, the uplift in earnings from higher rates, and no issues around liquidity or deposit outflows. In brief, we believe the European financial sector remains one of the strongest sectors from a bondholders’ perspective.
With a yield (to next call) of around 5.8% and an average spread (G-spread) of circa 300 bps on the fund (compared to 4.4% / circa 160 bps for the EUR IG corporate market), we see this as an opportunity to capture high income with upside potential from tightening spreads. This is despite the high-quality bias of the fund (average bond rating of BBB+ / average issuer rating of A) and lower duration compared to EUR IG corporates (4.4 versus 4.5).
Green Product in focus
CaixaBank – Sydney Light Rail
Project features
- Project type: Clean Transport
- Location: Sydney, Australia
- Project owner: Transport for NSW
- Loan size: USD 700 million (CaixaBank’s portion unknown, refinancing)
- Route length: 25 km
- Estimated emissions avoided due to the project: 22,100 tons of CO2 per annum for 30 years
Interesting snippets
- The project will generate economic activity of around AUD 4 billion and create 10,000 jobs
- The green loan is to refinance the USD 700 million debt facilities of the project
- The green loan is the first in New South Wales for a “Public-Private Partnership”
- The green loan is the first Sustainable Financing signed in the APAC region for CaixaBank
CaixaBank’s sustainability strategy highlights - Net Zero commitment by 2050 including the group’s lending portfolio
- Granular approach to the group’s net zero pathway, including a focus on sectors with the most impact: Electricity (-30%
emissions intensity by 2030 from 2020), and Oil & Gas (-23% financed emissions by 2030 from 2020) - CaixaBank’s insurance subsidiary is the first Spanish insurance company to join the Net Zero Asset Owners Alliance
