The coronavirus sparked unprecedented economic turmoil across the world last year, shutting down entire industries almost overnight and threatening to render previously strong companies insolvent. As companies rushed to secure access to liquidity, BNP Paribas, the EU, the largest lender of, has seen liquidity soar at an unprecedented rate: in those heady few weeks between March and April 2020, the lender estimates that € 28 billion was drawn on its credit facilities renewable.
This significated BNPThe credit portfolio management team had to act quickly to contain the capital consumption of its loan portfolio and reduce the risks of the bank’s loan portfolio – not only for good portfolio management, but in order to maintain flows to European companies.
The CPM team achieved new savings of over € 6 billion in risk-weighted assets (RWAs) for the full year, achieved through a combination of huge securitization programs, newly placed hedges, insurance and credit default swaps sold. This allowed the lender to keep his accumulated stock of RWA savings – including the benefit of pre-existing reductions – constant at 25 billion euros. Nowadays, BNP suffered no Covid-related losses in its covered portfolio.
In September alone, BNP reached 3.5 billion euros in RWA savings. The bulk of this amount, 3 billion euros, comes from the fifth iteration of its vast Resonance synthetic securitization program. In addition, it sold three batches of credit insurance on business loans, which together allowed 400 million euros in savings. It also selectively placed credit default swaps in September, resulting in savings of € 100 million.
“In terms of performance, among our peer group, no one is so big in terms of RWA savings during this period ”, explains Thomas Alamalhoda, Head of Portfolio Management Solutions at BNP.
This meant that the bank was able to provide a massive amount of funding to the market at the start of the crisis when its customers needed it most: BNP was the runaway leader in EMEA syndicated loan in the first half of the year, issuing more than 60 billion euros, or double its main competitor, giving it a market share of 16.8% according to Dealogic. All the while the CPM The team kept its balance sheet contained through a combination of intelligent risk recycling and primary market distributions.
Getting the credit flowing has not been easy. The CPM The team had to ensure that borrowers had sufficient financing to cope with the massive withdrawals they were making, while trying to account for the impact of improving massive government lending, forbearance and stimulus programs. In practice, that meant extensive bottom-up, back to basics, analysis of its borrowers’ balance sheets and cash flows – and many sleepless nights, Alamalhoda says.
“We didn’t know how investors would react and at what price we could deliver. We had to combine these conditions to find the right solution to reassure them that our portfolio was doing well and had not deteriorated, ”explains Alamalhoda.
In the early days of the pandemic, the bank responded to dozens of calls from investors asking for details on changes to its internal ratings and provisioning of borrowers in hardest-hit sectors, such as retail banking. retail and aviation. The bank was able to share forecasts from its macroeconomic stress test framework, as well as industry-specific stress scenario results to project loan cash flows to these sectors.
There was daily monitoring of drawdowns, by type of client and by sector, based on the same analyzes used by the asset-liability management function within the bank’s treasury, which was actively engaged in raising funds. through deposits and other sources to support loans.
In terms of performance, among our peer group, no one is so tall in terms of RWA savings during this period
Thomas Alamalhoda, BNP Paribas
Under the IFRS According to the accounting standard, banks are required to project expected losses over the life of loans that have moved from stage one (performing loans) to stage two (non-performing). BNP uses rating downgrades as the main factor in moving loans from phase one to phase two, with ratings assigned on the basis of a lifecycle approach.
However, even though its internal ratings are assigned on the basis of a lifecycle approach, for the purposes of IFRS 9 provisions, the probability of default attached to the rating and used to calculate the provision is one-off, as specified by the company’s migration matrix.
Ordinarily, the crater of GDP between quarters, as well as other macroeconomic indicators that factor into rating decisions, would lead to a massive downgrade in its loan portfolio and a sharp increase in provisioning – but like other banks, BNP decided not to automatically downgrade a borrower without considering the possibility of a structural recovery.
“We will only downgrade if we believe that on a structural basis this customer is weaker in the years to come. When you analyze your portfolio this way, you will have fewer downgrades, ”says Alamalhoda.
BNP credits its integrated capital markets platform, which it rolled out in 2019, for improving its access to a wider range of investors, including among insurers and pension funds. The platform brings together the expertise of its business teams with portfolio management, insurance and structured credit teams – a different model than many banks, says Alamalhoda, where portfolio managers, financial analysts and Securitization teams are often housed in separate organizations.
For Resonance, we knew most risk transfer investors would be looking for a return – [and] it wouldn’t work for us
Anh Berger Luong, BNP Paribas
This translated into very real practical benefits last year, says Alamalhoda, when most of its employees found themselves working from home. For a deal that can take five to six months to come up, the ability to respond quickly to investor demands – requiring a specific concentration in an industry, or an analysis of companies impacted by Covid – thanks to having all the expertise under one roof , often meant the difference to get to the market, or not.
“When you have banks where securitization is on the global market side and you CPM is in the trades, then the reaction time is much longer. Either you pay more or you can’t complete the transaction. It is therefore important to have an integrated model, ”explains Alamalhoda.
Buyers of the bank’s paper agree that this integration offers practical benefits: “Often, banks are siled in the way they think about risk allocation. They [BNP] have a much more collaborative approach and are always looking for a broader, fairly deep reflection on the markets, ”explains a manager of a reinsurance company.
Resonance V was a good example: the transaction was an innovative structure with a hybrid reinsurance tranche, combining both cash and insurance elements, which allowed the bank to price it precisely – and to price it. put her in front of the type of buyer who suited her. The operation, which enabled the bank to insure a second tranche of losses on an 8 billion euro loan portfolio, boasted of an innovative structure, in which the mezzanine tranche was divided into financed protection components. and not funded on a pari passu basis: a bond loan of 324 million euros with a financial guarantee, targeting financed investors; and a € 100 million insurance policy signed with insurers, offering unfunded credit protection.
“For Resonance, we knew that most risk transfer investors would be looking for a return – [and] it wouldn’t work for us. We chose to partner with one of the big pension funds as an investor because they liked our platform and had a long-term approach to asset class and pricing, ”says Anh Berger-Luong, co-head of the securitized products group for Europe, the Middle East and Africa at BNP.
When setting the price of an issue, the bank is frank about the fact that it arrives on the market with a floor in mind: the return it generates – its net cost divided by the capital it releases – dictates the premium it will pay to investors. For credit insurance operations, it examines the ratings of the issuer, LGD recovery rate and other criteria, calculates the capital cost of the facility and sets the price of paper accordingly.
“For insurance solutions used for capital management, we are a price maker, not a price taker. A lot of our competitors go into the market, offer a portfolio, and their investors give them a price – but that’s not how we work. We give them the price, they take it or not, ”says Alamalhoda.
As the year drew to a close on December 17th, BNP closed a synthetic securitization in response to Covid, dubbed Proxima 2. The European Investment Bank guaranteed the mezzanine tranche, allowing the bank to redeploy regulatory capital and finance up to € 515 million in new loans to SMEs and midcaps over the next two years.
True to its historical vision of the house, the bank used CDSs sparingly last year – although where he did, he did it profitably, insists Berger-Luong, paying a low premium to his cost of capital – hence his relatively small of about 600 million euros CDSs. Volatility and relatively high transaction costs are the two reasons for limiting the use of the product, says Berger-Luong.
“It’s not our preferred instrument, because of the market valuation, and it’s less profitable than insurance, but when it makes sense to do it, we will.”
The mega of the bank RWA the total savings for the year would have been even higher had it not been for the obligation to enter into an asset-backed securities transaction involving BNPItalian subsidiary of, BNL, when a change of EUThe capital requirements regulation made the operation economically unviable. Some potential investors have been left behind – but the bank has made it clear it has little choice.
“The regulatory treatment of the underlying has changed due to this quick fix for CRR and we had to relax it, so there was less relief, ”says Alamalhoda