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Bond Market News
Performance of European Bank AT1s and Tier 2s
December 21, 2023
Bank capital forms a key part of private clients’ bond portfolios and 2023 saw its fair share of banking-led credit events. March of 2023 saw the collapse of Silicon Valley Bank in the US and the historic $17.3bn write-off of Credit Suisse’s AT1s following its government-led takeover by UBS. The events sent tremors across global bond markets and put the spotlight on risks associated with AT1s, a favorite among private clients owing to their juicy yields.
As the year progressed and credit spreads tightened, senior bonds performed inline with the broader IG universe, ending higher over the year. AT1s and Tier 2s however saw an impressive recovery from the March lows. For instance, European banks’ dollar AT1s delivered returns of 5.1% this year. In the table below, we have compiled a list of AT1s and Tier 2 bonds from popular European banks, sorted by change in credit spreads through the year. Make sure to switch between AT1s and Tier 2 via the tabs below the title. While page 1-3 lists bonds that saw the most tightening in spreads, page 4 includes bonds that witnessed a widening in spreads.
Our data shows that European Tier 2s outperformed AT1s with a greater spread compression. European AT1 spreads compressed by 5bp on average while Tier 2s compressed by 45bp and senior notes by 49bp. One major theme that stood out was the rally in Italian banks' bonds, on the back of tightening seen in the BTP-Bund spread, a widely followed risk measure, that has compressed 50bp this year to 163bp, near its tightest levels since early-2022. Further, Moody's revised its outlook on the sovereign from negative to stable while affirming its IG-rating of Baa3. Among Tier 2s, Italian banks led the list with Banca Monte, UniCredit and Intesa among the top gainers as seen in the table below. Other gainers in this space included Greece's Alpha Bank and Piraeus Bank that also rose by over 15% this year. Among European AT1s, again Italian banks including Intesa, UniCredit and Banco BPM led the gainers. Julius Baer's AT1s widened the most among European AT1s, following its disclosure of having large exposures to European conglomerate Signa, requiring additional loan loss provisions. Their notes have partly recovered since the announcement.
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