What does the future hold for corporate financing? New situation for corporate clients in light of Basel III and low interest rates

  • UniCredit was ranked in the Top 3 in Eurobond issues in Europe in 2013 again
  • Bank Austria projects rising yields and spreads on corporate bonds starting from the second half of 2014
  • Impacts of Basel III may result in additional momentum in capital market financing toward year-end
  • Loans continue to be a core product in business relationships – by European standards, Austria is a goldmine in terms of interest rates on corporate loans
  • Nevertheless, medium and long-term financing will become more expensive due to Basel III and interest rates will not remain low for years and years
  • Consequently, Bank Austria will work more closely with institutional investors such as insurers and funds which are interested in long-term investment, in order to be able to continue offering long-term financing, and recommends that corporate customers start hedging interest risks now
  • Bank Austria is the first bank in Austria to use Basel III for new corporate product solutions with interest rate benefits on the deposit side. Market reaction has been very positive: around four billion euros in deposits were registered in the last two months

Dieter Hengl, head of Corporate & Investment Banking: "We are proud of the trust that our customers have in us. This once again allowed us to clinch a top position in the League Tables in 2013 again, as is clearly confirmed by UniCredit's excellent showing for Eurobond issues in Europe (No. 3), along with our position in Austria. In 2014, we intend on further reinforcing our top position on the European and Austrian capital market and remaining the best practice market within the UniCredit universe."

Companies turning more and more to the capital market
More and more companies want to be free of sometimes expensive bank financing and are increasingly turning to the capital market. Since 2002, the share of bonds in pure external financing in Austria has more than doubled, rising from 10 per cent in 2002 to 23 per cent in 2012. In 2013, about the same number of companies used this form of financing as in 2012. This once again shows that the subject of bond financing is being monitored very closely, also by companies which are still far from being able to access the capital market. In 2013, 28 Austrian companies took advantage of capital market products such as bond financing or promissory note loans with a higher total volume (compared to 29 in the previous year), and seven of these companies were newcomers on this market. As a "preferred partner" on the credit and capital market, Bank Austria is able to handle large volumes in its books, and also offers access to alternative forms of financing using external capital. These range from international benchmark bonds (volume > EUR 500 mn) to domestic bonds for private investors, hybrid bonds and private placements, to promissory note loans.

"We are at the forefront of a development, in which capital market products will be used to substitute loan products, but will not replace them completely. All in all, our leading role in the capital market segment results in an increase in our business volumes and strengthening of our customer relationships. Loans continue to be the core products in our business relations. The share of bank loans in companies' pure external financing is still at around 56 per cent in Austria, compared to 5 per cent in the USA, and back in 2002 the share of bank loans in Austria was still as high as 74 per cent. The impacts of Basel III may result in additional momentum in capital market financing toward year-end," stressed Hengl.

Moderate rise yields and spreads anticipated from the second half of 2014
The Austrian bond market is now a key pillar of corporate financing. Bank Austria expects stable, high issuance volumes in the years ahead. Redemption requirements total around 6 billion euros in 2014. In Austria, there are around 80 issuers with 140 outstanding bonds (excl. banks and the Republic of Austria).

"The Austrian bond market continues to offer good funding opportunities, marked by historically favourable conditions, such as low spreads, low interest rates and robust investor demand. Starting from the second half of 2014, we expect to see rising yields and spreads, which will be necessary to maintain an attractive overall return in the low interest rate environment. Consequently, we anticipate stronger issuing activity during the first half of the year," summarised Hengl.

Basel III leads to changes in lending opportunities and conditions
With an average interest burden of 2.1 per cent (for corporate loans up to one million euros), Austria is around one percentage point cheaper than Germany and is thus one of the countries with the lowest corporate lending rates in the euro area. Despite subdued demand for loans, the Corporate & Investment Banking Division took a pro-active approach to providing the economy with loans in 2013. In 2014, the volume of loans amounts to around 14 billion euros.

"There's no bottleneck in credit supply, there's a bottleneck in demand. If economic growth continues for six to nine months, demand for loans will also increase. During this phase of the recovery around mid to end-2014, however, we will not only see an increase in credit demand, as many regulations, such as Basel III for example, will also start coming into force. This means that some banks will have to be more selective in their financing activities. We have already made preparations for this: due to the subdued demand for loans and active management of our balance sheet, we have broadened our room for manoeuvre. If the economy picks up again in the months to come, we will be able to quickly provide Austria's companies with lines of credit, in order to play an active role in supporting the economy," Hengl said.

At the same time, medium and long-term financing will become more expensive due to Basel III, and interest rates will not remain low for years and years. Hengl touched upon this, saying, "In order to be able to offer attractive long-term financing in the future, we will be working together more closely with institutional investors, such as insurance companies and funds, which have long-term capital and wish to invest over the long run as well. We also recommend that our customers start hedging longer-term financing, in particular against changes in interest rates."
Medium-term financing (maturity of 5 years) is also affected. In this regard, Bank Austria is actively supporting SMEs in particular, to help them be better able to plan their liquidity and refinancing situation more accurately and more effectively.

Bank Austria uses Basel III to create product solutions offering attractive interest rates for corporate customers
As the first bank in Austria, Bank Austria is letting its corporate customers benefit from the regulatory requirements and offering products (maturity of > 31 days) with attractive interest rates compared to sight deposits (e.g. Dispokonto Plus and time deposits). These offers have been welcomed enthusiastically by the market, as around four billion euros in deposits (maturity of > 31 days) were registered in the last two months.

Enquiries: Bank Austria Media Relations
Martin Kammerer, Tel. +43 (0) 50505 - 52803
E-mail: martin.kammerer@unicreditgroup.at