Monthly review and performance
During the month of March, market sentiment improved despite ongoing uncertainty. EUR investment grade (IG) spreads tightened by 15 bps on the month, after peaking around 160 bps in early March, a level that typically reflects markets pricing in a recession. Sentiment during the month was mainly driven by news flow around the Ukraine-Russia conflict. Nevertheless, better sentiment remains overshadowed by macro headwinds, for example with rising inflation expectations and GDP forecasts revised downwards. Central banks’ rhetoric remained hawkish, which led to further upwards pressure on rates – with the 10-year German Bund yield up by more than 40 bps on the month. This weighed on total returns, as spread tightening only partially offset higher rates, with total returns on EUR IG at -1.2% in March. As markets were risk-on, the more subordinated parts of the capital structure outperformed, with additional tier 1s (AT1s) delivering positive total returns, and banks’ Tier 2 close to flat.
Issuance of green bonds of European financials was very light at around EUR 1 billion, both in senior format from Banco Sabadell and the Co-operative Bank. This compares to EUR 4.6 billion in February 2022 and EUR 7.1 billion in March 2021, a steep decline due to more challenging market conditions. Nevertheless, we expect issuance to pick up going forward, especially as market conditions have improved for issuers.
March marked the end of the results season, with several banks and most insurers reporting full year results. These continued to be supportive, with strong solvency positions (supported by profitability and higher rates) and robust earnings. For example, AXA reported a 14.7% return on equity for 2021, and a solvency ratio of 217%, up 17pp year-on-year. The group’s excess capital improved to a rock solid EUR 33.4 billion, up EUR 6 billion on the year. AXA also announced that it will be merging its holding company (AXA SA, bond issuer) with its internal reinsurance entity, making AXA SA the group’s internal reinsurer. This is credit positive, as it means that the holding company has become an operating company, and therefore has direct cash flows to service debt (previously relied on dividends from subsidiaries). As a result, AXA’s ratings (including subordinated debt) are expected to be upgraded, and are now on positive watch at all three agencies.
We continue to see strong value in green bonds of European banks and insurers. With an average yield of 2.4% on the fund and 183 bps of spread, we are capturing around 1% pick-up in yield compared to 1.55% on IG corporate bonds. We remain biased towards high quality issuers (BBB+ average bond rating).
Project Corner : BBVA
- Project type: renewable energy – onshore wind
- Location: Spain
- Project owner: Copenhagen Infrastructure Partners (CIP) and Arjun Infrastructure Partners Limited
- Total financing amount: EUR 380 million
- Total installed capacity of 487MW. Expected to generate approximately 1.5TWh of renewable power annually.
12 wind farms located in the Aragon region in Spain, providing enough energy to power 460,000 Spanish households
One of the largest renewable energy investments made in Europe
The project already has Power Purchase Agreement (PPAs) in place for 10 years at a fixed price per MWh generated
BBVA acted as sole bookrunner, structuring bank and green loan coordinator for this project finance transaction. Alongside BBVA, five other EU banks participated in the transaction.
BBVA’s sustainability strategy highlights
Net zero commitment by 2050 including the group’s lending portfolio
Granular approach to the group’s net zero pathway, focus on sectors with the most impact: BBVA is targeting the decarbonisation of its loan portfolio in 2030 for the most CO2-intensive industries: power, automobile, steel and cement
Pledged to channel EUR 200 billion towards sustainable financing during the period 2018-2025, with EUR 86 billion (43%) realised to date
BBVA was part of the “Katowice Banks” (BBVA, BNP Paribas, ING, Société Générale, Standard Chartered) that pledged to develop an open source methodology to steer their portfolios to the Paris Agreement targets.