Nordic FIs and Covered 1

NORDIC FIs& COVERED

INSIDE:3 Q&A: Handelsbanken’s Edholm discusses funding diversification4 CA Cheuvreux: Nordic banks outperform expectations in Q26 Nordic euro FI spread data

Svenska Handelsbanken sold a Eu1bn 10 year fixed rate senior unsecured bench-mark into a buoyant market this (Thurs-day) morning, as syndicate officials declared covered bonds open after Uni-Credit sold the first Italian benchmark in a year on Tuesday.

Leads Crédit Agricole CIB, Natixis, Société Générale and UniCredit priced the Eu750m long five year obbligazione bancarie garantite almost 100bp inside Italian government bonds after building a book of Eu2.2bn, making the deal the first covered bond ever to be priced clearly through the respective sovereign.

Handelsbanken’s issue — which had a book of Eu1.8bn — came amid a flurry of senior unsecured issuance, with BFCM having sold a Eu900m 10 year deal and ANZ a £250m three year on Tuesday, and BNP Paribas also tapping the market today, with a Eu1bn seven year benchmark.

Leads Bank of America Merrill Lynch, Credit Suisse, HSBC, JP Morgan and Handelsbanken went out with IPTs of the 85bp over mid-swaps area for the new

issue, and set the final spread at 80bp. A syndicate official away from the leads said that this compared with a secondary level for Handelsbanken’s outstanding October 2021 paper of 73bp bid.

“Svenska Handelsbanken did a three year senior unsecured benchmark back in July at mid-swaps plus 60bp,” he said, “and they were trading in the context of plus 30bp this morning. BNP Paribas has meanwhile tightened from 150bp to 80bp, so spreads have halved in the past two months.

“Both deals are going very well today,” he added.

UniCredit’s landmark deal was the first benchmark covered bond since a Eu1.5bn seven year ABN Amro Bank transaction on 24 July.

“The timing was decisive as the deal was launched in the context of a lack of supply and a much better market backdrop and investor mood after Draghi’s supportive comments in early August,” said Vincent Hoarau, head of covered bond syndicate at bookrunner Crédit Agricole CIB.

(Continues on page 2)

Basel III prompts Nykredit to open Danes’ auction season early

Thursday, 16 August 2012 Issue 1

In association with

Handelsbanken sells senior as UniCredit shows covered open

Nykredit will kick off the latest Danish auction season on Wednesday when it opens Dkr105bn (Eu14.1bn) of sales af-ter bringing forward the start of its re-financings of adjustable rate mortgages (ARMs) ahead of the implementation of Basel III.

Among other Danish mortgage credit institutions, Realkredit Danmark will not be involved in the refinancing season, but Nordea Kredit will be holding auctions on 4-6 September, DLR Kredit is expected to announce sales and BRFkredit to sell bonds for refinancing.

Nykredit’s auctions — for Nykredit Realkredit and Totalkredit — will comprise Dkr97bn of fixed rate mortgage bullets and Dkr7bn in floating rate mortgage bonds, with sales in Danish kroner and euros. Most will be SDOs out of capital centre H, but it will also be selling ROs out of capital centres G and D.

Morten Bækmand, head of investor relations, group treasury at Nykredit, said that the auctions are starting earlier this year in light of Basel III.

“We have moved them forward a little in order to start to at least partly comply with the LCR requirement so the auctions are finished and we have the money 30 days before the old bonds mature on 1 October,” he said.

(Continues on page 2)

Latest Nordic FI benchmarks

Senior unsecured (z spreads mid)NDASS 2.25% 10/17 39bpNDASS 3.25% 07/22 79bpSHBASS 1.50% 07/15 34bpDANBNK 2.50% 07/15 145bp

Covered bonds (asw spreads mid)DNB 1.875% 06/19 20bpTERBOL 2.00% 06/19 43bp

Source: CA-CIB trading 15/08/12

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Produced by NewType Media,publisher of

The CoveredBond Report

Neil DayManaging Editor

[email protected]+44 20 7428 9575

Susanna RustDeputy Editor


news.coveredbondreport.com

In association with

Vincent HoarauHead of Covered Bond Syndicate


Julian BurkhardHead of FI DCM Nordics & UK


Florian EichertSenior Covered Bond Analyst


(continued from page 1)“The covered bond squeeze in the

secondary market, the level of redemptions in covered bonds, as well as the overall lack of investment alternatives also made the deal possible at this level.”

Syndicate officials said that in the wake of UniCredit’s reopener other issuers will now be looking to issue sooner rather than later.

“The Nordics are back and there is also interest from France, so a pipeline is building up and mandates are being awarded,” said one. “With the success of UniCredit, all the issuers are aware that the market is there.

“This puts them in a position where they do not have to wait too long and face a queue in September.”

Hoarau said that issuers would be well advised to take advantage of the issuance window given how quickly volatility can return and market conditions deteriorate, potentially as the summer break draws to a close. He said that SSA supply in September and a potential repricing of that sector could stop the global credit rally and indirectly weight on covered bond spreads.

“Headlines risks will increase significantly when everyone get back

to their desks,” he said. “Smart issuers might anticipate that and decide to catch the issuance window in the second half of August.”

Nordic banks would be appropriate candidates, he suggested, given their recent good secondary spread performance — even if their needs are not high.

“They are all very well-funded and advanced in their programme for the year,” said Hoarau. “Danish, Swedish and Norwegian issuers also benefit from a huge portion of their funding activity being executed in their own currencies.

“Nevertheless, given the absolute spread levels all could now achieve in the primary market, some could decide to adopt an opportunistic approach and tap the market shortly.”

The last benchmark Nordic covered bond was a Eu650m seven year transaction for Terra BoligKreditt issued on 12 June.

(continued from page 1)The Dkr105bn Nykredit is auctioning

compares with some Dkr80bn a year ago and Dkr136bn last December — the month that has historically seen a concentration of Danish auctions. The group has been building up its March and September auctions in a bid to spread its refinancings more evenly through the year and satisfy pressure from regulators and rating agencies.

“Last year we were in the process of building up this September refinancing,” said Bækmand. “It’s relatively recently that we started to issue bonds with a maturity on the 1 October to get even-sized refinancings.

“So far we have three per year and eventually we expect to have one in June as well, so that we have quarterly auctions — but we haven’t implemented that yet.”

Lars Mossing Madsen, head of bond trading at Nykredit, said that he expects the auctions to be “business as usual”.

“If you look at the secondary market, the bonds are trading very well,” he said. “Against swaps, I’d be surprised if we don’t come flat to secondaries.

“The one year is at around Cita plus 33bp, so it would be realistic to expect around 35bp.”

Anders Aalund, chief analyst at Nordea Markets, said that he expects the auctions to be “a walk in the park”. He said that the only potential problem had been a fear of an increase in the volume of longer dated bonds being auctioned, but that this had not materialised.

“There has been a discussion in Denmark about the mortgage credit institutions trying to move their clients from one year to longer dated ARMs,” said Aalund. “So there was a little fear that you would get a larger amount of long dated bonds, which could have caused some problems during the auctions.

“However, that discussion seems to have ended a bit, so there is only about Dkr20bn in three and five year bonds.”

He said that he expects these, as well as the one years, to be in demand.

“In the last half year the three and five year bonds have widened and they will be very attractive to investors,” said Aalund. “The one years are currently trading on a Cita basis at around 31bp and given the low interest rates at the moment, this level also seems very attractive.”

‘Walk in the park’seen as fears of Danish long dated push ease

Nordic covered prospects eyed after UniCredit reopens market

Nordic FIs & Covered Bonds

“All the issuersare aware that the market is there”

Page 3

Thursday, 16 August 2012Issue 1

In conversation with:Bengt Edholm, head of treasury, HandelsbankenWhat factors led to Handelsbanken subsidiary Stadshypotek issuing the only Swedish euro benchmark covered bond of the year?

We want to have a curve in euros, but not at any price. This year the domestic market has been very, very effective from a pricing perspective. If you look at the spread to Libor, the euro market has been as good as the domestic market, but we are not allowed to have any form of currency risk in the balance sheet, so we have to swap everything back to the Swedish currency, and so we are always monitoring both the spread and the basis swap, and it is the swap market rather than the bond market that has been the bigger challenge.

What happened when we did the trade in March was that for once the swap was nice and we could move very quickly as we had everything ready.

Of course, being a rather big issuer we want to have diversification, but we will not upset the domestic investors with paying too much all-in in euros, because the Swedish investors can then buy our euro transactions, and then that will inflate our domestic yield. And I think that’s why other Swedish banks haven’t been in the euro market as well.

What has been your strategy in senior unsecured issuance, where you have launched four benchmarks?

We want to have a diversification, considering factors such as asset encumbrance. We want to have a mix between covered and senior in all of our currencies, both in dollars and euros. And when we do a senior transaction, we are not obliged to swap it because we have assets in other currencies. So it is more spread than swap sensitive when we do a senior transaction.

We have communicated very clearly to the market that we want to be ahead of our funding needs, so we did these transactions to be well funded for the rest of the year. We are funded more than one year ahead. We have seen a tightening during the summer, but that doesn’t bother us because we have done the deals and you never know when the windows will close.

Are your considerations regarding dollar issuance similar to euros?

Yes, they are. We look at the all-in to the Swedish currency. We are willing to pay a bit,

but not too much, so that’s the same thinking.We have already done one dollar covered

bond and we would very much like to be a more regular issuer in the US. We have an individual in New York doing investor relations every day, meeting with potential investors in both senior and covered. I believe we are one of the few banks that has that set-up. We have a 144A covered bond programme, which we update every quarter to be ready to come to the market, so that’s in our plans, to be visible in that market.

Have you considered the 3(a)2 format for covered bonds?

In the senior space, we have a 3(a)2 programme already, and we hear from investment banks that we save give or take 10bp-15bp. It hasn’t been clear for us that in the covered space it actually pays so much to have 3(a)2 because it isn’t clear that index eligibility is so much better when it comes to covered. It isn’t yet clear how to set up that structure when it comes to covered because we don’t have any mortgages on our balance sheet in the US. But we are looking at that as well.

What are your plans for the Kangaroo programme you established late last year?

In that country, the docs process is quite smooth. We now have the programme, we have done the travelling, we have met with investors, but we came to the same situation as in the euro market, that the all-in price was too high. At that time we also got the impression that Aussie investors were a bit frightened of Europe, as such.

We don’t need to push a transaction at the wrong price, so we are waiting for sentiment in Australia to improve a bit before we issue.

You issued a yuan bond in 2011 — what was the rationale for that?

We have a tiny balance sheet in China and we saw a window to support that business with that renminbi transaction. Our balance sheet is now growing, not so fast, but we see that we can do a potential second transaction in the near future.

We see it more as marketing, actually. We can show other investors that we even have access to the yuan market. And in our euro and dollar trades in senior and covered we have seen a lot of interest from Asian investors — more than 30% of placement at times — and part of that could be because we did this renminbi transaction, that we are visible in that part of the world as well.

Coming to investor relations, we think it is very important to have a professional debt IR team, so we have more manpower in debt IR than equity IR at the bank. As well as our man in New York we have one sitting here in Stockholm whose only job is to travel in Asia.

We have also been in Thailand looking at a Thai baht transaction. We are always trying to tap smaller markets for diversification, so we have had discussions with the authorities in Bangkok to have a green card to issue in Thailand as well. We are also looking long term to have prudent Samurai documentation in Japan, initially for senior.

Have you considered sterling?In the UK the bank has a big presence on

the street with more than 100 branches, so we are actually a British bank as well. Long term we therefore have a big interest in being an issuer in sterling, in senior and covered.

The problem is kind of a luxury problem: because the British banks’ ratings have fallen, they pay more. We have done two senior in sterling this year, but as we see it today, the euro and dollar markets give us better pricing.

“We have more IR manpower in debt

than equity”

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Nordic BanksOutperforming marketexpectations in the second quarterWith a majority of European banks having reported second quarter re-sults including the six major Nordic banks — Nordea, Danske Bank, Han-delsbanken, Swedbank, SEB and DNB — the divergence between regions are apparent. The results from the Nordic banks surpass market expectations in general, while many continental Euro-pean peers appear to struggle.

The table below depicts unweighted average line items of particular interest from the six Nordic banks. Pre-tax profit stands out as they exceeded expectations by 28%, while the results have increased on average 36% over the last quarter and 11% over the same period last year.

Looking beyond the numbers one finds that Danske Bank more than doubled its profits, albeit from a very low level, but still remains well below Nordic peers, driving the unweighted average up. The largest Danish bank gained considerably from financial transactions after the drop in interest rates during the quarter. Yet, what is most encouraging is the steady decline of loan loss provisions following the first quarter where especially Denmark and Northern Ireland appear to be in recovery mode.

Overall, our impression is that Danske Bank continues to be on the right path

after some difficult years due to high losses in both Denmark and Ireland. The recovery which is now underway can be rightfully compared to Swedbank and SEB’s Baltic venture after the financial crisis.

However, even when excluding Danske Bank, the five other Nordic banks’ results came out ahead, all well above market expectations, with SEB, DNB and Nordea reporting pre-tax profits of 20%, 15% and 14%, respectively. Handelsbanken and Swedbank, being the more defensive banks in the region and thus with less volatility in revenues, delivered results more in line.

In general, net income from financial transactions was the main driver for the Q2 results compared with the previous year, with few exceptions. Simultaneously, banks show weak net commission income due to the subtle performance of capital markets. However, traditional retail banking revenues, such as payment commission, continue to grow on the back of increased card usage and declines in cash handling.

Loan loss provisions have differed greatly between the Nordic banks during the last years. The Swedish banks, Handelsbanken, Swedbank and SEB are characterized by very low loan loss

provisions amounting to only a few basis points. All the other big Nordic banks report higher numbers, with Danske Bank heading for a notable improvement with 73bp reported in Q2 compared to 93bp in Q1 and 113bp in Q4 2011.

Loan loss provisions for DNB and Nordea are currently at 21bp and 26bp, respectively. Both national champions suffer from problems in the shipping industry but have recently managed to increase prices to customers in this segment. Hence, the shipping divisions remain profitable despite elevated levels of provisions. Nordea is also obliged to reserve capital for potential loans in arrears in the struggling Danish economy, which also holds true for Danske Bank.

Concluding this section, the single most important factor in the buoyant Nordic results stems from the positive development in net interest income, which was up by 10% YoY (unweighted average).

Nordic banks appear to successfully compensate for not only cyclical deposit

Summary of the big six Nordic banks

Deviationfrom exp. QoQ change YoY change

Net interest 1% 2% 10%

Commissions 1% 2% -1%

Net items 17% -79% 22%

Total income 5% 8% 9%

Costs 0% -1% 1%

Loan losses -1% 17% -28%

Pre-tax profit 28% 36% 11%

Source: Cheuvreux, Company, SME

DNB: improving capital ratios at a much quicker pace

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margin pressures due to falling interest rates, but also the increasing regulatory costs, with marginal increases in lending. However, “the jury is still out” with regards to the increasing cost of regulation.

Swedes lead on Basel IIILooking closer at capital adequacy requirements, Swedish regulators are at the forefront of implementing enhanced Basel III guidelines of a 10% Core Tier 1 ratio in 2013 and ultimately 12% in 2015. All four Swedish banks are well on track to meet the requirements stated above and we even believe that the 12%-mark will be accomplished by January 2013, i.e. two years ahead of schedule and well in advance of continental European peers.

Sweden’s neighbouring country in the west is lagging, though, but with Norwegian regulators speeding up the regulatory process DNB is improving its ratios at a much quicker pace than in previous years.

We are working from the assumption that the Nordic regulators are well calibrated in their view of financial stability and the requirements that they impose on domestic banks. The Nordic countries’ banking sectors are highly integrated and each country’s banking system is dominated by a few large banks, implying they are systemically important. Bear in mind that current

regulatory requirements and the banks’ capital situations in the Nordic region are well ahead of most of their continental peers, with Switzerland possibly being the only exception. The fact that the Nordic requirements are more stringent and combined with sound public finances will assist both banks and end customers to benefit from significantly lower funding costs than in many other countries and as a result stimulate their economies.

Not to forget, there is a great deal of uncertainty in terms of size for the future net interest income and thus the banks’ overall profitability. Meanwhile, I as a banking analyst have good faith that the capital requirements imposed to ensure financial stability can and will be combined with healthy profitability for the shareholders, as the two go hand in hand. Stable earnings are the first and most powerful line of defence against financial instability and all the negative consequences it may have on the broader economy.

Journey has only begunThe Nordic banks are unique in a European context. Overall, Swedish banks delivered resilient results in the second quarter of 2012, while at the same time operating with strong balance sheets.

Nevertheless, the journey has only begun in terms of balancing the costs

of new capital requirements as well as navigating the uncertain economic outlook due to the European debt crisis. DNB appears to have responded quickly to its national regulator’s stricter requirements and we believe its capital ratios will soon match those of its Swedish neighbours.

On the other hand, Danske Bank continues to struggle due to its geographical diversification, exposures to Denmark and Ireland, with what turned out to be expensive acquisitions in the economic boom leading up to the financial crisis.

However, it appears that there is some light in the long tunnel, our assessment is that the recovery has started, and that Danske Bank with a new management team find themselves in a similar situation to Swedbank’s in the fall of 2009.

Mats AndersonBank Equity Analyst

Research disclosures are available at www.cheuvreux.com

Danske: Most encouraging is the steady decline of loan loss provisioning

“The Nordic banks are unique in a

European context”

http://www.cheuvreux.com

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ISIN Coupon Maturity Mid SpreadAKTIA

XS0432877610 4.125% 11/06/2014 -3bpXS0493511603 3.000% 11/03/2015 31bpXS0640889803 3.125% 22/06/2016 45bp

DANBNKXS0456413847 3.250% 07/10/2015 22bpXS0601855652 3.250% 09/03/2016 25bpXS0437056954 4.500% 01/07/2016 31bpXS0501663099 3.500% 16/04/2018 45bpXS0469000144 4.125% 26/11/2019 53bpXS0519458755 3.750% 23/06/2022 56bpXS0431725901 4.750% 04/06/2014 110bpXS0802067636 2.500% 09/07/2015 146bpXS0627692204 3.875% 18/05/2016 156bpXS0751166835 3.875% 28/02/2017 169bp

DNBNOXS0502969388 2.750% 20/04/2015 -12bpXS0576372691 2.625% 11/01/2016 -2bpXS0691355282 2.500% 18/10/2016 5bpXS0478979551 3.375% 20/01/2017 9bpXS0728790402 2.375% 11/04/2017 6bpXS0537686288 2.375% 31/08/2017 9bpXS0794233865 1.875% 18/06/2019 20bpXS0637846725 3.875% 16/06/2021 28bpXS0759310930 2.750% 21/03/2022 29bpXS0371409292 5.875% 20/06/2013 -14bpXS0430768332 4.500% 29/05/2014 15bpXS0522030310 3.875% 29/06/2020 90bpXS0595092098 4.375% 24/02/2021 103bpXS0732513972 4.250% 18/01/2022 111bp

LANSBKXS0637812313 2.625% 16/06/2014 -20bpXS0496605295 2.875% 23/03/2015 -3bp

NDASSXS0632992607 2.500% 02/06/2014 -25bpXS0559068662 2.250% 16/11/2015 -11bpXS0672636262 2.375% 02/09/2016 -2bpXS0478492415 3.500% 18/01/2017 6bpXS0731649660 2.375% 17/07/2017 8bpXS0778465228 2.250% 03/05/2019 15bpXS0591428445 4.000% 10/02/2021 27bpXS0428007081 4.500% 12/05/2014 6bpXS0590179692 3.625% 11/02/2016 43bpXS0489825223 3.750% 24/02/2017 42bpXS0801636571 2.250% 05/10/2017 39bpXS0728763938 4.000% 11/07/2019 60bpXS0520755488 4.000% 29/06/2020 70bpXS0801636902 3.250% 05/07/2022 80bp

POHBKXS0467956529 3.125% 19/11/2014 -15bpXS0517466784 2.375% 15/06/2015 -4bpXS0611353086 3.250% 01/04/2016 4bpXS0785351213 1.625% 23/05/2017 6bpXS0646202407 3.500% 11/07/2018 16bpXS0429965139 4.500% 22/05/2014 35bpXS0497507060 3.125% 25/03/2015 42bpXS0576922271 3.125% 12/01/2016 51bp

ISIN Coupon Maturity Mid SpreadXS0758309396 2.625% 20/03/2017 63bpXS0540216669 3.000% 08/09/2017 59bp

SAMBNKXS0565041174 2.625% 02/12/2015 13bpXS0693226978 2.750% 19/10/2016 20bpXS0640463062 3.875% 21/06/2021 44bp

SBAB XS0483829320 3.000% 03/02/2015 -14bpXS0619631624 3.375% 20/04/2016 0bpXS0498316255 3.250% 30/03/2017 8bpXS0616865688 3.500% 10/13/2014 46bp

SEBXS0518441570 2.500% 17/06/2015 -11bpXS0580613106 3.000% 20/01/2016 -1bpXS0548881555 2.625% 16/10/2017 7bpXS0614401197 4.125% 07/04/2021 29bpXS0427065585 5.500% 06/05/2014 26bpXS0538031211 2.500% 01/09/2015 41bpXS0628653007 3.750% 19/05/2016 59bpXS0730498143 3.875% 12/04/2017 66bpXS0592695000 4.250% 21/02/2018 77bp

SHBASS XS0455319029 3.000% 01/10/2014 -22bpXS0501715311 2.750% 30/04/2015 -13bpXS0625427215 3.375% 11/05/2016 -1bpXS0760243328 1.875% 21/03/2017 6bpXS0418783477 4.875% 25/03/2014 4bpXS0802019231 1.500% 06/07/2015 34bpXS0592450232 3.625% 16/02/2016 43bpXS0490111563 3.750% 24/02/2017 42bpXS0732016596 3.375% 17/07/2017 37bpXS0794225176 2.250% 14/06/2018 44bpXS0693812355 4.375% 20/10/2021 69bp

SPABOLXS0519708613 2.500% 23/06/2015 -10bpXS0707700919 2.375% 22/11/2016 7bpXS0495145657 3.250% 17/03/2017 14bpXS0738895373 2.750% 01/02/2019 27bpXS0587952085 4.000% 03/02/2021 40bpXS0674396782 3.375% 07/09/2021 45bp

SPNTAB / SWEDAXS0432619087 4.125% 09/06/2014 -25bpXS0603232165 2.750% 10/09/2014 -15bpXS0517421920 2.500% 15/06/2015 -7bpXS0673599097 2.250% 07/09/2015 -5bpXS0581062675 3.000% 21/01/2016 5bpXS0455687920 3.625% 05/10/2016 9bpXS0496542787 3.375% 22/03/2017 12bpXS0491438429 3.125% 04/03/2013 -19bpXS0794246925 1.750% 18/06/2015 34bpXS0768453101 2.375% 04/04/2016 55bpXS0740788699 3.375% 09/02/2017 69bp

TERBOLXS0537088899 2.125% 31/08/2015 17bpXS0736417642 2.250% 25/01/2017 29bpXS0794570944 2.000% 19/06/2019 43bp

Source: Crédit Agricole CIB Trading, Bloomberg — See disclaimer on page 7

Euro Nordic covered bond & senior unsecured secondary spreadsNordic benchmarks: covered versus ASW, senior unsecured (shaded) versus Z spreads. Close of business Wednesday, 15/08/12.

Page 7


Disclaimer

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Nordic FIs and Covered 1