UniCredit’s new head of corporate and investment banking, Gianni Franco Papa, tells Michael Watt about what he says are good times for Europe’s capital markets, and the worry of over-regulation on the horizon.

Over the past five years, observers looking for good news from the global economy have had little joy out of Europe. Growth has ranged from weak to downright non-existent, with markets dragged down by budgetary crises in a succession of peripheral economies. The continent’s politicians have done just enough to stave off disaster, but a pattern of dysfunctional decision making has damaged confidence.

It is strange, then, that European capital markets are currently in a buoyant mood. Gianni Franco Papa, a three-decade veteran at Italy’s UniCredit, and since January the head of the bank’s corporate and investment banking (CIB) division, paints a positive picture of current trends.

“The situation in Europe is good. Growth figures from major countries such as Germany and Italy have been solid in the first quarter of the year, and we expect that to accelerate in the coming months,” he says. “The relative weakness of the euro has meant an increased appetite for European exposure from North American and Asian investors.”

Good times

The numbers appear to bear this out. In the first four months of 2015, Italy received €20bn in foreign direct investment from outside Europe, the third highest national figure on the continent and equal to the amount it received for the whole of 2014.

All this is good news for European capital markets. Globally, equity issuance had an exceptionally strong 2014, posting the highest volumes seen since the pre-crisis years. Europe itself saw a 22% increase in equity capital markets (ECM) issuance, and according to Mr Papa, 2015 has seen no let up in this pace.

“Demand for equity issuance has been just as high, if not higher, in the first four or five months of this year than throughout 2014,” he says. UniCredit has been particularly active, ushering through a number of major deals.

In late February, the bank acted as joint bookrunner for a partial sale of the Italian government’s equity stake in Enel, the country’s largest energy supplier. Just over 5% of the firm’s book value was offered to the market in a transaction valued at €2.2bn, reducing public ownership from 31.2% to 25.5% in an effort to reduce the national debt. This was the biggest accelerated book-build to come out of Italy since 2003.

UniCredit has also shown the breadth of its client coverage in Europe by acting as joint bookrunner on an initial public offering (IPO) by Polish media company Wirtualna Polska that hit the market in late April with a value of 294.2m zlotys (€72.4m). It has also been enlisted as an advisor to the planned IPO of Croatian national grid operator Hrvatska Elektroprivreda, as the country's government seeks to offer 25% of the state-owned utility to the market.

On the debt capital markets (DCM) side, UniCredit acted as joint bookrunner on a €2bn, seven-year convertible bond issued by Telecom Italia, an opportunistic transaction embarked upon to take advantage of the firm’s strong share price and the continued low-interest-rate environment. The final coupon came in at 1.125%, and the deal itself was the largest single-tranche senior unsecured convertible bond issued by a European corporate in the past 12 years.

A shift in the balance?

European capital market participants have often looked toward the US in envy, where roughly 70% of corporate financing is provided by ECM or DCM issuance and the remainder mostly through bank loans. In Europe, the situation is almost exactly reversed. Corporates secure barely 30% of their financing through capital markets, with such activity dominated by large multinationals.

That appears to be changing, however. “We are not yet at the US model where most financing is capital markets based. Perhaps we never will be. But, we’re seeing more and more activity shifting to capital markets thanks to low rates, ample liquidity and increased investment advice offered by banks,” says Mr Papa. Many large companies are now eschewing traditional bank loans in favour of capital markets issuance, and the flood of new investment money into Europe means that this form of financing is within reach for smaller companies too.

Mr Papa believes UniCredit is well placed to take advantage of this shift. Its corporate loans book weighs in at about €300bn, one of the heftiest in Europe, and is comprised of more than 400,000 clients of every size from every sector. It has a strong physical presence in 17 European countries, and has been expanding strongly in central and eastern Europe over the past decade. Between January and the end of April this year, UniCredit was bookrunner to the second highest volume of euro-denominated syndicated loans in the Europe, Middle East and North Africa region, with an outstanding notional of €6.1bn. In the same period, it came third in terms of bonds, overseeing 148 issuances with a value of €27.1bn, and first in ECM transactions with an overall volume of €1.2bn.

The bank has recently attempted to upgrade its corporate client service by pulling its loan syndication and capital markets businesses under one roof. The reorganisation, announced in mid-May, is designed to introduce more co-operation between the two teams and offer clients a one-stop financing shop. "We can present a unified front to customers to assess what they actually need. The liaison is led by our country coverage teams, not the guys that look after individual products,” says Mr Papa.

Investor reach

On the other side of the coin, the bank has taken steps to improve its reach with investors, signing a ‘strategic alliance’ with brokerage firm Kepler Cheuvreux in 2011. The agreement significantly scaled up UniCredit’s research capabilities, and its access to all tiers of the investment world.

This is increasingly the role that banks are being boxed into – a conduit between investors and clients, rather than being market participants with their own money on the line. This in itself has been a factor in the shift towards capital market activity in Europe. Thanks to stringent new capital rules brought in by Basel III and other regulatory initiatives, banks are simply unable to devote as much of their balance sheet to old-fashioned lending.

For Mr Papa, the rate of this change has been overstated, but he recognises the direction of travel. "Lending is still the main activity of banks. There will always be a role for it. There must be a role for it. But the form of lending will change as banks are driven to capital-light activity. Supply-chain financing, trade financing, advisory services, that sort of thing,” he says.

Over-regulation worry

UniCredit’s common equity Tier 1 capital ratio currently stands at a healthy 10.1% of risk weighted assets (RWAs), far above the 8.5% minimum set by Basel III. However, if new recommendations from the Financial Stability Board (FSB) on total loss-absorbing capacity (TLAC) come to pass, this could end up being far from adequate. The FSB wants global systemically important banks (G-SIBs) to hold loss-absorbing capital equivalent to 16% to 20% of RWAs, raising concerns of over-regulation.

"We, like everyone else in the sector, are concerned about the TLAC recommendations. If they are to be adopted, they must be implemented equally for all banks so as not to create a competitive disadvantage for some of the banks,” says Mr Papa.

Some capital market participants see the TLAC proposals as a boon for the sector, as banks in Europe alone would have to issue hundreds of billions of euros in new capital. However, Mr Papa is more pessimistic. "There is nowhere near the demand in the market for the kind of capital market issuance that an implementation of TLAC would require from the banking sector,” he says. At the moment, the proposals are designed for G-SIBs only, but the expectation is that they will eventually trickle down to the smaller banks, too. This would tip the required capital raise for European banks into the trillions of euros.

There is still a long way to go before the proposals are settled upon and implemented. As with the Basel III recommendations, any recommendations made by the FSB must be translated into EU law before being implementation by banks. Given the likely size of the TLAC capital hurdle, the industry will also be given a decent grace period for the necessary issuance. The implementation timetable for Basel III, after all, has been strung over the best part of this decade.

"I believe that banking is becoming over-regulated. If the changing regulatory environment is not properly adapted to the economic context, this could affect the real economy, impacting banks' core activity of assisting growth," says Mr Papa.

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