巴黎银行-欧洲-投资策略-ALM对冲可能加剧复苏-20190718-12页 (2).pdf

|FOCUS18/07/20191FOCUS|EUROZONE18 July 2019ALM hedging likely to intensify the rallyKEY MESSAGESFalling interest rates in Europe are challengingbanks ALM models with increasing mismatches,particularly for retail banking.Banks are actively receiving long swaps in the 10+-year sectors.We believe this is linked to thehedging of non-maturing deposits linked to retailaccounts.As rates go lower and curves flatten,core depositsincrease in size and“modelled”maturity increasesbanks ALM hedging needs.If loan growth does notaccelerate,banks will be pushed to hedge longerand longer with rates falling,in our view.Banks are complex institutions with numerous sourcesof funding and types of investment.The consumersegment of banks in the eurozone is one of thelargest,representing 23%of liabilities(deposits)and19%of assets(loans),according to the May 2019ECB Statistics Bulletin.Falling interest rates in Europe are challenging banksassetliabilitymanagement(ALM)modelswithincreasing mismatches,particularly for their retailoperations.Please refer to important information atthe end of this reportFig.1:EU household loans vs deposits(EURtrn)Source:ECBG10 INTEREST RATESKaushik Banerjee,Head of Global Macro Research,|BNP Paribas London BranchRetail banking carries unique risks unlike corporate bankingandmonetaryfinancialinstitutions(MFIs).Assetsandliabilities created via households carry optionality unlikeorigination from other segments.The bulk of household liabilities(deposits)is termed as non-maturingdeposits(NMD),astheydonothavefixedmaturities.Since banks are reluctant to pass on negativerates to retail customers,there is an implied floor of 0%onhousehold deposits,unlike corporate and MFI deposits.On the asset side,households have an option to prepay(orrefinance)mortgage and consumer loans.As interest ratesfall,there are two major effects on the household asset andliability side of eurozone banks.On the asset side,loans are prepaid or refinanced,leading toa loss of income as loans are either extinguished or ifrefinanced,the coupons are adjusted to lower market levels.Ontheliabilityside,thereisempiricalevidencethathousehold deposit growth accelerates as interest rates fallinto negative territory.In this note,we focus on the asset and liability risks and mismatches arising solely from the household sector and how they impact markets.TRADE IDEASThis dynamic supports our existing trade ideas:Rec Eur 5y5y swapSell 10y20y Bund ASW tightener(sell 30y BundAsw,Buy 10y Bund Asw in equal notional)EUR 1y x 5/30 flattener versusUSD 1y x 5/30Steepener30y BTP/Bund compression|FOCUS18/07/20192In the eurozone retail sector,household depositshave been consistently larger than household assets.The gap between assets and liabilities declined from1997 until the global financial crisis in 2008 and sincethen it has increased on an accelerating trend.Banks have to invest the excess liquidity fromhouseholds into markets and generate an adequatereturn to service these liabilities.We also note that the share of overnight deposits hasincreased sharply since the announcement of QE inEurope.As short rates(proxied by 3m Euribor)have fallenbelow zero,the accumulation of retail deposits hasaccelerated.A similar trend was observed in Japan,where timedeposits decreased and demand deposits increasedfrom 2000-12 in a period of falling interest rates(Survey on Core Deposit Modeling in Japan:BOJ,March 2014).Figure 3 suggests a close relationship between thelevel of negative rates and deposits.It makes economic sense for households to movebalancesawayfromnegative-yieldingdebtinstrumentswithcapital/marketriskintohigher-yielding,liquid,zero-floored bank accounts with nomark-to-marketing(MTM)risk.The households shift into deposits is not an issue ifthese liabilities are matched by household loangrowth.But,as we have seen earlier,deposit growthhas not been matched by loan growth.If we plot the household asset and liability gap,thereis an even better fit between the gap and the level ofrates(proxied by 10y euro swap)at the aggregateeurozone level since 2008.(Figure 4).Eurozone household deposits outweigh assetsG10 INTEREST RATESSource:ECBFig.2:EU overnight deposits to total deposits ratioSource:ECB,BloombergFig.3Source:ECB,BloombergFig.4:Household interest rate gap versus 10y ratesKaushik Banerjee,Head of Global Macro Research,|BNP Paribas London Branch|FOCUS18/07/20193Risks from household depositsRisks from household depositsBanks follow complex behavioural models to model NMD and consumer loans.The ECBs 2017 stress test of theInterest Rate Risk in the Banking Book(“IRRBB”)of eurozone banks provides an insight into these risks.The stresstest covered 111 significant institutions and approximately 70%of the sample banks total assets.In the eurozone,NMD and retail transactional core deposits exhibit the highest stability and longest duration(4.9years in 2017)of all bank deposits(Figure 5).Bank for International Settlements(BIS)standards(April 2016)caps the proportion of NMD,which can be modelledas core deposits,at 90%of retail deposits and up to a maturity of five years.A more recent paper from the Bundesbank estimates the duration of a replicating NMD portfolio at 6.4,with riskweights of 20%in Euribor 3m and 80%in 8 years(Interest rate pass-through to the rates of core deposits a newperspective,Heiko Sopp,Deutsche Bundesbank).If we turn our attention from the regulatory treatment of NMDs and focus on the market characteristics,we can modelcore NMD as a strip of 0%interest rate floored deposits.The value,DV01/forward deltas of the 0%implied floor inthe NMDs,increases as rates fall below 0%.Both the DV01 risk and the duration of the NMDs rise as the yield curveturns increasingly negative.Although BIS guidance stipulates a 5-year cap on the duration of retail deposits,theactual MTM duration is significantly larger.G10 INTEREST RATESKaushik Banerjee,Head of Global Macro Research,|BNP Paribas London BranchFig.5:Breakdown of non-maturing deposit modelsSource:ECBBhttps:/www.bankingsupervision.europa.eu/press/pr/date/2017/html/ssm.pr171009.en/ssm.pr171009_slides.en.pdf).Aggregate information related to the full sample of 111 significant institutions.Each institution was asked to report the five mostrelevant deposit models for each of the four categories above.Information is related to EUR positions only(*)For the purpose of the exercise,core deposits were defined as the stable part of NMDs which is unlikely to reprice evenunder significant changes in the interest rate environment(BCBS IRRBB Standards definition)(*)For the purpose of the exercise,the expected pass-through rate was defined as the proportion of a market interest ratechange that the bank will pass to its customers in order to maintain the same level of stable deposit balances under a certain IRshock.Banks were asked to measure the pass-through rates in response to a shift in interest rates over a one-year timehorizon.Repricing maturity of core deposits(years)Share of core deposits over modelled deposits(%)*Total amount modelled NMDsRetail Transactional4.977%1.9 trillionRetail non-transactional3.668%1.5 trillionOnline accounts3.157%0.1 trillionWholesale deposits3.255%0.9 trillionSample average/total4.169%4.5 trillion|FOCUS18/07/20194Risks from household loansRisks from household loansTraditionally,retail banks hedge the rate and duration risk of NMDs by raising assets(mortgages,consumer loans)and investing in highly liquid,high-grade instruments such as sovereign bonds,SSAs(sovereigns,supranationalsand agencies)and swaps in the 5-year sector.Mortgage loans in France,Germany,Netherlands,Spain and Italy tend to be 20y principal and interest repayments.While France,Germany,Netherlands have traditionally been fixed-rate markets,Spain and Italy have been Euriborreferenced markets.Recently,with rates very low,Spanish banks have started to originate fixed-rate mortgage loansand we estimate that this is 70%of new origination.A similar pattern is evident in Italy.Most fixed-rate mortgagescarry prepayment risk.As rates fall,households refinance their mortgages and prepay.Loan prepayment models are the second mostrelevant model used by eurozone bank ALMs to calculate the duration of their mortgage holdings.If we look at theuniverse of household loans,durations were modelled at 4.1 years in the ECBs 2017 IRRBB stress test.(Figure 6).With rates falling,prepayments pick up,but consumers often roll into new mortgages and the reduction of duration inold pools is offset by duration in new pools.However,there is an income impact as older,higher-rate loans arereplaced by at market loans.At current market levels,we estimate the DV01 of a generic 20-year mortgage isapproximately 7.9 5%,6.9 7.5%and 6.0 10%CPR.When aggregated across all vintages and differentregions,we estimate that the universe of mortgage loans has a duration between 7 to 8 years.G10 INTEREST RATESKaushik Banerjee,Head of Global Macro Research,|BNP Paribas London BranchFig.6:Overview of loan prepayment modelsSource:ECBBhttps:/www.bankingsupervision.europa.eu/press/pr/date/2017/html/ssm.pr171009.en/ssm.pr171009_slides.en.pdf).Duration before modelling(years)*Duration after modelling(years)*Conditional prepayment rate(%)*Total amount modelled loansFixed rate mortgages7.65.67.5%1.9 trillionFloating rate mortgages0.80.74.3%0.5 trillionConsumer lending2.82.114.3%0.3 trillionOther loans4.43.35.4%0.7 trillionSample average/total5.54.17.1%3.5 trillionAggregate information related to the full sample of 111 significant institutions.Each institution was asked to report the five mostrelevant loan prepayment models for each of the four categories above.Information is related to EUR positions only(*)The weighted duration of the modelled loan refers to the weighted average remaining time until repricing in years before andafter application of the model(*)The conditional prepayment rate(CPR)is measured as the share of outstanding modelled loans that is expected to berenegotiated or paid back within one year under the current interest rate environmentRisk management of household asset/liability mismatchHurdle rate/balance sheet costs:As deposit growth outpaced loan growth across the eurozone,bank ALMdepartments had to invest the excess deposits in other assets to generate income to pay the deposit liabilities.The choice of asset(consumer loans,mortgages,sovereign bonds etc.)determines the minimum hurdle rate thatneeds to be achieved on top of the 0%floor to meet the minimum capital costs for a bank.The cheapest risk-weighted asset(RWA)with the cheapest cost of risk(CoR)for banks is sovereign bonds(RWA0%,CoR 0%).Assuming a leverage ratio of 4%,a cost of equity(CoE)of 10%and a funding cost of 0%(fromdeposits),the implied hurdle rate is 0.40%.Duration and risk:We assume that we need to achieve a minimum return of 0%plus the hurdle rate to reduce theincreasing gap risk every year.Assuming that the gap is hedged with 0%RWA,this gives us a target yield of 0.40%.|FOCUS18/07/201951.Static method:The asset liability gap from eurozone households has grown steadily since 2012.This trend isapparent across all of the big four economies in the eurozone,with Germany leading the trend.We can estimate the annual hedging requirements by computing the annual growth rate of the asset liability gapfrom a simple linear fit(Figure 7).We compute the hedge amount using 3 estimates of duration:i)4.1 years from the ECBs IRRBB sensitivity test;ii)4.5 from the BISs IRRBB guideline(90%of NMDs at a maximum of 5 years);and iii)6.4 years,as estimatedby BUBA.G10 INTEREST RATESKaushik Banerjee,Head of Global Macro Research,|BNP Paribas London BranchRegionLiquidity gap/yrHedge 4.1Hedge 4.5Hedge 6.4EurozoneEUR124bn52m/bp57m/bp81m/bpGermanyEUR42bn17m/bp19m/bp27m/bpFranceEUR15bn6m/bp7m/bp10m/bpItalyEUR27bn11m/bp12m/bp118m/bpSpainEUR32bn5m/bp5m/bp21m/bpFig.7:Annual hedging requirements(static method)To generate a 40bp yield(deposit floor+minimum hurdle rate)over the past few years has necessitated longer-dated hedges as rates fell.The hedging points have moved from 6-to 7-year maturity euro swaps in 2018,to 12-to 15-year maturity this year.Source:BNP ParibasFig.8:Tenor of gap hedgeSource:Bloomberg,BNP Paribas2.Dynamic method:Another way of estimating the hedging requirement is to model the NMDs as a strip of 0%floors and compute the delta and maturity of the required hedges.While it is unlikely that bank ALM departments will use floors to hedge,option pricing allows an accuratedynamic model of the underlying risks.These hedge numbers are larger in risk and duration than static estimates,as they depend on interest-ratelevels.While banking books are not MTM,anecdotal flow information leads us to believe that hedge volumesfrom the bank ALM sector are now larger and longer than has been the case historically,as would occur in adynamic model.Risk management of household asset/liability mismatchWhile there are similarities to Japan,there are some key differences in the US.The Fed sets IOER above thelower bound of Fed funds,thereby offering an implied arbitrage to banks,unlike in the eurozone and Japanwhere deposits are floored at 0%and interest on excess reserves is negative.Moreover,evidence suggests that the portfolio balance channel may be impaired by negative rates.O/N risk-free deposits are attracting larger inflows as rates get more negative.Why would a household invest in low tonegative yielding risky bonds when deposits offer a safe and stable haven at no cost.As core EGB yields fall,banks are likely to be forced to switch to longer maturities and semi-core/peripheralsto hedge the ALM mismatch.This increases the risk of the hedges.Eurozone banks can overcome this ALMtrap if:a)loan demand(including corporate loans)picks up;and b)inflation expectations(and rates)increase.Unfortunately we are not forecasting a pick-up in loan demand or an increase in interest rates.If the ECB cutsrates further,it may exacerbate the negative dynamic above.With negative interest rates,accelerating retail deposits will continue to be a drag on bank earnings and bankstocks in eurozone.The ECB research bulletin no.60(16 July 2019)states“When interest rates are verylownegative rate surprises reduce banks stock prices.This negative impact is larger for banks whosefunding relies more on retail deposits than other sources of funding.”Market implicationsThe impact of the ALM hedging,in isolation of other market factors,implies that in a falling rate environmentbanks are forced to hedge the ALM mismatch by extending further out the yield curve.They are alsoincentivized to switch to lower rated,zero RWA assets(peripherals)from core EGBs.This would supportcurve flattening,and peripheral-core spread compression.Investors agreeing with us could consider:Rec Eur 5y5y swapSell 10y20y Bund ASW tightener(sell 30y Bund Asw,Buy 10y Bund Asw in equal notional)EUR 1y x 5/30 flattener versus USD 1y x 5/30 Steepener30y BTP/Bund compression|FOCUS18/07/20196Risk management of ho