path to privatisation of icelandic bankspath to ... · differential: 67.5 bps (down 74% from peak)...

Corporate Banking & SecuritiesDeutsche Bank

Path to privatisation of Icelandic banksPath to privatisation of Icelandic banks –an international debt and equity investor perspectiveperspective19 September 2013

Jan Olsson CEO Nordic RegionJan Olsson, CEO Nordic Region

Stephen Westgate, Head of Nordic Financial Institutions


Five observations supportive of international investor interest in Icelandic Banks

Jan Olsson CEO Nordic RegionJan Olsson, CEO Nordic Region

European bank sector deleveraging1

Euro 0.7tn

7.1% leverage

Euro 2.3tn

8.9% leverage

Euro 1.3tn

6.5% leverage

25.0

30.0

u o 0 u o 3

CAGR 5%CAGR -3%

20.0

ons

CAGR 8%

10.0

15.0

€tri

llio

-

5.0

7 8 8 8 9 9 9 0 0 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 0 0 0 1 1 1 2 2 2 3 3

Sep-

1997

Jan-

1998

May

-199

8Se

p-19

98Ja

n-19

99M

ay-1

999

Sep-

1999

Jan-

2000

May

-200

0Se

p-20

00Ja

n-20

01M

ay-2

001

Sep-

2001

Jan-

2002

May

-200

2Se

p-20

02Ja

n-20

03M

ay-2

003

Sep-

2003

Jan-

2004

May

-200

4Se

p-20

04Ja

n-20

05M

ay-2

005

Sep-

2005

Jan-

2006

May

-200

6Se

p-20

06Ja

n-20

07M

ay-2

007

Sep-

2007

Jan-

2008

May

-200

8Se

p-20

08Ja

n-20

09M

ay-2

009

Sep-

2009

Jan-

2010

May

-201

0Se

p-20

10Ja

n-20

11M

ay-2

011

Sep-

2011

Jan-

2012

May

-201

2Se

p-20

12Ja

n-20

13M

ay-2

013

Euro zone banks aggregate assets (€ trillions)

Jan Olsson / Stephen WestgateLandsbankinn investor conference / 19 September 2013Corporate Banking & Securities

Deutsche Bank

9/18/2013 2010 DB Blue template

2

Source: Deutsche Bank, using ECB data

European bank wholesale funding2

FIG senior EUR benchmark supply versus redemptions (€bn)FIG senior EUR benchmark supply versus redemptions (€bn)

304300

350

253

205

248

196

224234

261

250

126

155

186196

142134

119

168 164

148150

200

90 9480

72

40

56

9098

108

50

100

820

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Issuance Redemptions


Deutsche Bank


3

Bank Spread compression / differentials in risk i (1)

3premia (1)

Itraxx Snr and Sub PerformanceItraxx Snr and Sub Performance

Peak spread differential(25 November 2011):

258 bps

700

Current spread

258 bps

500

600

Current spreaddifferential: 67.5 bps

(down 74% from peak)

300

400

Last

Px

100

200

0

100

Sep-2008 Feb-2009 Jul-2009 Dec-2009 May-2010 Oct-2010 Mar-2011 Aug-2011 Jan-2012 Jun-2012 Nov-2012 Apr-2013

SNRFIN CDSI EUR GEN 5Y Corp SUBFIN CDSI EUR GEN 5Y Corp


Deutsche Bank


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Source: Bloomberg, Dealogic, 13 September 2013

SNRFIN CDSI EUR GEN 5Y Corp SUBFIN CDSI EUR GEN 5Y Corp

Bank debt spread compression / differentials in i k i (2)

3risk premia (2)

Itraxx Snr and Sub Performance vs Iceland CDSItraxx Snr and Sub Performance vs Iceland CDS

Peak spread differential1600

(10 October 2008):1,365 bps to senior1,272 bps to sub

1200

1400

Current spreaddifferential:

800

1000

Last

Px

(1) bp to senior(77) bps to sub

400

600

0

200



Deutsche Bank


5


SNRFIN CDSI EUR GEN 5Y Corp SUBFIN CDSI EUR GEN 5Y Corp Iceland Sovereign 5yr CDS USD

Regulation / bank sector stability4

Basel III / CRD IV / CRR— Basel III / CRD IV / CRR

— CETI ratio and buffers

— Leverage ratio

— National super-equivalence

— Risk weights

— ECB Asset Quality Review

— EBA stress tests

— Crisis Management Directive / ‘bail-in’— Crisis Management Directive / bail-in

— Recovery and Resolution Directive

— Ongoing BCBS consultations e.g. trading book, leverage ratio

— Single Supervisory Mechanism

— Credit rating agencies / sovereign support


Deutsche Bank


6

European Bank sector equity valuation5

2.2120

1.8

2.0

2.2

100

120

1.2

1.4

1.6

60

80

P/BV

an

0.6

0.8

1.0

40

60

nd P/TB

V

0.2

0.4

0.6

20

Note FTSE Eurofirst 300 Banks Index composed of HSBC, Santander, UBS, BNP Paribas, Barclays, BBVA, LBG, Standard Chartered, DB, Credit Suisse, Nordea, SocGen, Unicredit Swedbank Intesa Sanpaolo Svenska Handelsbanken DNB Danske Bank SEB KBC RBS Commerzbank Credit Agricole Julius Baer Erste Group

0.00Jan-2007 May-2008 Sep-2009 Feb-2011 Jun-2012

FTSE Eurofirst 300 Banks Index (re-based to 100) (LHS) FTSE Eurofirst 300 Banks Price/Book value (x) (RHS)


Deutsche Bank


7

Unicredit, Swedbank, Intesa Sanpaolo, Svenska Handelsbanken, DNB, Danske Bank, SEB, KBC, RBS, Commerzbank, Credit Agricole, Julius Baer, Erste Group, CaixaBank, Natixis, and Raiffeisen Bank International

Source: FactSet, 13 September 2013


International Investor Perspectives on Icelandic Banks

St h W t t H d f N di Fi i l I tit tiStephen Westgate, Head of Nordic Financial Institutions

Discussion topics

Post crisis landscape for investing in European banks – where are we?1

Competition for investor interest – recent privatisations, re-accessing of public bond markets and privatisation pipeline2

‘Glide path’ to exit from state support3

Icelandic banks – an external view4

Path to privatisation for Icelandic banks – the road ahead5

Corporate Banking & SecuritiesDeutsche Bank Jan Olsson / Stephen Westgate

Landsbankinn investor conference / 19 September 2013

9/18/2013 10:38:11 AM 2010 DB Blue template

9

Post crisis landscape for investing in European b k h ?

1banks – where are we?

Banks covered and unsecured debt— Banks covered and unsecured debt

— New issue premiums at multi-year lows

— Secondary spreads compressed

— Market volatility elevated

— Bank capital

— Strong new issuance volumes as investors look for yield by moving along credit spectrum

— New style instruments attracting attention

— Spread differential to IG narrowed

— Bank equity

Equity markets and bank sector indices at multi year highs— Equity markets and bank sector indices at multi-year highs

— Strong new issuance pipeline




10

Competition for investor interest R t i ti ti / i b d k t l

2Recent privatisations / re-accessing bond markets - examples

January 2012— Sold by UK Government to Virgin Money for up to £1bnbillion (o/w £747m in cash)

— After Northern Rock nationalisation in 2008, business restructured into ‘good bank’ (Northern Rock plc) and ‘b d b k’ ( ff f t l i UKAR)

January 2012

‘bad bank’ (run-off of mortgage loans in UKAR)

— Rights issue to repay €14.3bn Government SilentParticipation

June 2011

May 2013— Rights issue to repay residual Government Silent Participation and strengthen Basel 3 CT1 ratio

May 2013

— €5.2bn recapitalisation, including rights issue and sell-down from Irish Government to institutions

July 2011down from Irish Government to institutions

— Irish Government sell-down of €1bn convertible contingent capital Tier 2 notes

— €500m covered bond sale, secured on Irish mortgages€500 i d f di t ti ( ’

January 2013

March 2013May 2013— €500m senior unsecured funding transaction (group’s

first fully unguaranteed senior unsecured term funding transaction since June 2006)

May 2013

— UK Government £3.2bn sell-down of 6% shareholding September 2013


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from 39% to 33%

Competition for investor interest P i ti ti i li l

2Privatisation pipeline - examples

— New management expected to continue strategic plan of reducing leverage risk— New management expected to continue strategic plan of reducing leverage, risk and business stretch through sale of non-core assets

— UK Government due to report on a possible good/bad bank split in Autumn— Current share price still well below UK Government’s in-price (361p vs. 502p),

which retains 81% economic ownership following £45.5bn capital injectionsp g p j

— Programme of UK Government sell-down expected to continue— Shedding non-core assets, reduced international presence, and focus on UK retail

German Federal Government retains a 17% stake in Commerzbank— German Federal Government retains a 17% stake in Commerzbank— Optimising capital base by exiting certain business areas, and reducing assets in

non-core portfolio; reducing costs and investing in core bank

— Irish Government retains €1.8bn preference shares and a 15% equity stake— Bank of Ireland repaying ECB funding and accessing public markets funding,

reviewing options on 2009 Preference Shares and addressing pension deficit

— Irish Government holds 99.8% equity stake in AIB and €3.5bn in preference shares— Strategy focused on cutting costs, developing technology, and returning to gy g g gy g

profitability during 2014,

— Following €18bn recapitalisation in 2012, BFA-Bankia strategic plan to increase profitability and drive €1.2bn of net profits by 2015 through balance sheet management and efficiency improvements


Deutsche Bank


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— Management have stated desire to begin privatisation process in 2014/15

‘Glide path’ to exit from state support3Evolution of investor base over time

Crisis Distress/stabilisation Recovery Normalisation

State support Distressed investor interest Private equity interest Macro fund interest Long only

Equity wiped / — Asset price stability— Equity wiped / significantly diluted

— Debt bail-in / burden sharing

— Loan portfolio focus (NPLs)

— Limited liquidity

— Equity participation

— Limited liquidity

— Sovereign & macro recovery / market access

— Banking sector recovery / consolidation

— Asset price stability

— Clarity on business model / profit evolution

— Increased liquidity

P bli k tconsolidation

— Banking sector as leveraged bet on economic recovery

— Public market access

— debt/capital

— equity




13

‘Glide path’ to exit from state supportIrish experience

3Irish experience

2012Sovereign re-

accesses international bond market (€4.2bn,

2013Sovereign re-accesses

international bond market (€5bn 10Y

2013Bank of Ireland re-accesses

international senior unsecured bond market (€500m 3Y May 2013)

2013Bank of Ireland sell-

down of Tier 2 instrument from Govt

2012Bank of Ireland re-

accesses public funding market (€1bn

2011Reduction in Govt

equity participation / new strategic

2014Privatisation of Govt stakes?

5Y, Jul-2012) Mar-2013) market (€500m 3Y May 2013)(Jan-2013)3Y covered Nov-2012investors (Jul-2011)

1800

2000

0.40

0.45

1200

1400

1600

0.30

0.35

800

1000

1200

0.20

0.25 bpsS

hare

Pric

e (€

)

400

600

0.10

0.15

Ban

k of

Irel

and

S

0

200

0.00

0.05

Jan-2011 Apr-2011 Jul-2011 Oct-2011 Feb-2012 May-2012 Aug-2012 Dec-2012 Mar-2013 Jun-2013

B k f I l d Sh P i (LHS) B k f I l d EUR 5Y CDS (RHS) I i h G USD 5Y CDS (RHS)




14


Bank of Ireland Share Price (LHS) Bank of Ireland EUR 5Y CDS (RHS) Irish Gov USD 5Y CDS (RHS)

‘Glide path’ to exit from state supportOb ti f I i h i

3

Sovereign access to public funding markets an important precondition to bank investors

Observations from Irish experience

1 Sovereign access to public funding markets an important precondition to bank investors returning

— Positive correlation with senior spreads and equity valuation

1

Asset price stability

— Positive correlation between improvement in senior spreads and equity valuation

2

External validation important to investor sentiment

— Stress tests / capital + liquidity reviews

3

Valuations not necessarily on same basis as European peers

— Premium for restructuring story if credible

4

— Premium for market consolidation

— Premium for 3 – 5 year view on returns


Deutsche Bank


15

‘Glide path’ to exit from state supportIceland

3Iceland

2013Arion accesses international

funding market (NOK 500 F b 13)

2014 / 15Sell-down of Government and old bank equity participation in

b k ?

2013 / 14Further Icelandic bank

issuance into international f di k t

2011 / 12Sovereign re-accesses international bond

markets($1b 5Y J 11) ($1b 10Y M 12) (NOK 500m Feb-13) new banks?funding markets($1bn 5Y Jun-11) ($1bn 10Y May-12)

1400

1600

1000

1200

600

800

1000

Last

Px

200

400

600

0

200


Iceland 5yr Sovereign CDS




16

‘Glide path’ to exit from state support The case for strategic interest important considerations

3The case for strategic interest – important considerations

— Overall regulatory environment putting pressure on capital, funding and liquidity

— Potential for national subsidiarisation

— Balance sheet size / relevance to inorganic growth

— Currency risk


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Icelandic banks – an external view4

— What do international debt investor debt investors care about?

— What do international equity investors care about?


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Icelandic banks – an external viewWhat do international debt investors care about?

4What do international debt investors care about?

M k t t t iMarket structure issues— Capital controls

— Winding up proceedings of the old banks and the trading value of debt in old banksWinding up proceedings of the old banks and the trading value of debt in old banks

— HFF

— Sovereign rating / sub-IG rating of bank senior unsecured given deposit guarantee and subordination of senior unsecured / depositor preferred status

— Political risks, e.g. mortgage relief debate and credit valuation uncertainty

— High levels of household and corporate indebtedness

— Limited perceived sovereign support and precedent of forcing losses on bondholders

— FX volatility, especially for secured lenders given currency mismatch

— Macro recovery story / progress / outlook




19

Icelandic banks – an external viewWhat do international debt investors care about?

4

B k ifi i

What do international debt investors care about?

Bank-specific issues

— Sub-IG rating of bank senior unsecured

— Bank balance sheet size / ongoing balance sheet workout

— Bank financial metrics— Bank financial metrics

— Limited reporting history and ongoing extraordinary items

— Limited recent engagement with international investor community

Irregularity / infrequency of issuance— Irregularity / infrequency of issuance

— Low liquidity of new issues




20

Icelandic banks – an external viewWhat do international equity investors care about?

4

Stable balance sheet

What do international equity investors care about?

1 Stable balance sheet— Deleveraging progress / net lending growth / asset valuation transparency— Loan to deposit ratio— Wholesale funding dependence / funding profile

1

g p g p— Central bank funding dependence — Strong capitalisation / clear trajectory / normalisation of capital structure — LiquidityCredible outlook for return to profitability— Income growth / NIM expansion— Impairments stabilised / improving

E it t t t / li i t f

2

— Exit state support / eliminate fees— Cost reduction plan /CIR improvement— Mitigation of outstanding risks e.g. legacy assets, pension deficitMarket access3 Market access— Wholesale funding markets— Bank capital markets

3


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Path to privatisation for Icelandic banks Th d h d

5The road ahead

The international funding markets are open to Iceland’s new banks albeit at a price— The international funding markets are open to Iceland s new banks, albeit at a price

— As near-term uncertainties are resolved, we would expect a meaningful spread compression to more normalised levels

— We also expect Icelandic bank debt to attract a spread premium for the foreseeable future as investors differentiate sovereign and bank credits more aggressively than in the past

— In a more normalised environment, we also expect traditional fixed income investors to heighten their focus on Icelandic bank debt

— As the funding environment normalises, equity investors will again focus on Icelandic banks. Early interest will come from private equity-style investors willing to take on illiquid exposure to the macro recovery story

— Subject to clarification on resolution of several important structural issues, in particular capital controls, we would expect increased focus on Icelandic banks by international traditional fixed income investors in 2014 and an increase in international equity investor focus over the course of 2014 and into 2015


Deutsche Bank


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of 2014 and into 2015

path to privatisation of icelandic bankspath to ... · differential: 67.5 bps (down 74% from peak)...

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