The outlook for bank funding and capital strategies in a volatile environment

Key takeaways:

• Banks built liquidity during the pandemic from growing customer deposits and quantitative easing.
• These healthy balance sheets, along with diverse financing and tactical funding strategies, will support banks through the next year.
• Evolving regulations are always on the table, but banks have adapted.
• ESG funding will likely move from green bonds to sustainability-linked bonds, but innovation in this area is still new and there will be more to come.

In early June, HSBC held its second Female Leaders in Finance – Financial Institutions Conference in virtual format across the Asian, European and US time zones. With over 600 registered participants globally, the Event brought together a high-profile range of female executives and leaders across the financials space.

Over the course of 10 panel discussions with 30 senior female speakers, a diverse range of global banks, insurers, asset managers and policymakers discussed themes that are shaping the financial institutions landscape. The Conference again highlighted the important role that female executives are playing in the financial sector as well as the continued need to support and expand diversity in the industry.

Banks find themselves in an unusual position today, with both strong driving factors and strong risks in the market. The global economy is poised for a huge bounceback in post-pandemic growth, but the recovery won’t be even across the world. At the same time, the cost of living is increasing, inflation and stagflation threaten various economies, and interest rates will certainly rise.

Banks are entering this uncertain period with strong balance sheets, however, as customer deposits grew during the pandemic and a strong program of quantitative easing supported their business.

The year ahead

Senior bankers showed optimism about forthcoming capital raising, tempered with caution about the environment ahead in 2023.

“In the last few years, we’ve obviously been less reliant on wholesale funding and more reliant on two other sources of liquidity – deposits and central bank liquidity,” said Cecille Hillary, Group Treasurer at Lloyds Banking Group.

“We’ve captured a large share of [customer] deposits in the UK markets and these deposits have proven very sticky. But given the current macro environment, we’re watching very carefully to see how they behave going forward, with the increase in living costs and spending as a result. And then in an environment of quantitative tightening, that creates a different dynamic.”

Elissa Steinberg, Head of Funding at Citi, believes it’s important to pull the right funding lever at the right time.

“What’s important to me is to monitor the market for pockets of stability, make sure that we have a well-supported book and a liquid benchmark that trades well in the secondary market. You never like to leave basis points on the table, but given some of the competing supply and the overall volatility, it can be difficult to time points of entry,” she said.

“That’s part of the benefit of having a variety of different funding levers at different legal entities that allows us to diversify away from specific investor currency structures and meet our investor demand overall.”

Diversification and multiple currencies

Diversification is also a strong part of the philosophy for Nordea, as Petra Mellor, Head of Bank Debt, explains.

“Our target is to issue around EUR20 to 25 billion this year, it’s a relatively normal funding year for us. And roughly half of that is expected to be raised in the Scandinavian market, where we should have a bond on the back of our mortgages in Sweden, Denmark and Norway,” she said.

“Then we also act in the Euro market for around half of the rest and the other half is more in the international markets, where our core currencies are Euros and dollars. We also have some other currencies for diversification, when relative pricing allows, such as Sterling or Japanese yen, thought they are not our core currencies.”

Changing ways of working

Rising customer deposits are not the only way that the pandemic has impacted bank funding and capital strategies. Physical investor roadshows were impossible during lockdowns, so banks were conducting their capital raising virtually and that’s a trend that is likely to continue – but to a lesser degree.

“I think we’ve all learned from the pandemic and, not least for carbon emission reasons, I expect more business to be done virtually,” said Kimberley Bauner, Head of Group Treasury at Danske Bank.

“But we actually recently did some debt investor work in the Nordics and it is so clear to me that people really find joy in meeting each other in real life. So I don’t think that’s gone for good. It will be especially important when we’re out trying to meet new investors for a new product or region.

“I think we’ll see more targeted roadshows, whether they are deal-related or have a specific theme, such as ESG. But, although it’s hard to put a number on it, my guess is our travel will be roughly 50% compared to pre-pandemic.”

The impact of regulation

While dealing with changes from the pandemic, banks are still also continuing to alter the way they work in line with legislation drawn up in the wake of the global financial crisis. Coming in line with the EU’s bank recovery and resolution directive, which requires banks to prepare recovery plans to overcome financial distress, has been a multi-year operation. The directive grants national authorities powers to ensure an orderly resolution of failing banks with minimal costs for taxpayers, a direct response to the costly too-big-to-fail bailouts of the crisis.

However, the regulatory framework is constantly evolving and Lloyds’ Hillary doesn’t see a great impact on balance sheets or capital raising.

The growing influence of ESG

Banks are also increasingly incorporating ESG into their capital strategies, such as the EUR5 billion of green bonds that Nordea has issued to date. While green bonds are relatively well-established, the market is still evolving new solutions, such as sustainability-linked bonds as well.

“I think that investors will increasingly focus on group-wide KPIs in the sustainability space and we will need to be more transparent and more comparable across different banks. And I think it's incredibly important for all of us to do our due diligence in relation to greenwashing or mis-selling for these new products,” said Citi’s Bauner.

“There are also many new funding products right now with an ESG angle, of which sustainability-linked bonds are one. This is an area where both issuers and investors have a bit of room for experimentation. I think the ESG agenda is something that we all want to push forward and we want to push it forward very quickly. And to do that we will need to try new solutions and see what works in the long run. So my hope is that somebody issues a sustainability-linked bond. But I think I'm still uncertain myself as to whether this will really be the real solution in the long run. I think we still have some iterations to go in this space.”

Further insights