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Break the bank: mega BNP Paribas block heralds wave of European bank trade

  • Privatisations in focus with Natwest, Caixabank, AIB and ABN Amro
  • Higher rates prompt investors to rotate to bank stocks

Last week’s EUR 2.2bn sell-down in BNP Paribas [EPA:BNP] by the Belgian government is expected to be the first of many big bank block trades in EMEA, as investors seek to top up their exposure to the sector to benefit from higher interest rates.

The deal for 33.3m shares was priced at EUR 64.96 apiece, at a 1.8% discount to the previous close. Bookrunners ran the deal without wall-crossing, covering books in around 40 minutes, two sources previously told this news service.

Under ION Analytics’ Price of Liquidity model, the deal came at a liquidity cost of 0.67x, a very strong result for the issuer compared with trades in January and through most of 2022.

The trade also involved an innovative forward structure to allow Belgium to lock in a share price but keep a dividend due in around four months’ time.

Placing EUR 2.2bn of stock overnight is no mean feat and although shares traded down initially, the shares have since recovered to just below issue price.

Two ECM bankers said the deal was likely to be a precursor for other bank blocks.

Government sell-downs in NatWest [LON:NWG], ABN Amro [AMS:ABN], CaixaBank [BME:CABK] and Allied Irish Bank [DUB:AIB] are now all expected soon, the bankers and one investor said.

“This is the first time in years that governments can sell down these stakes at socially acceptable levels,” the investor noted.

NatWest has previously been reported as a possible block candidate and ABN Amro is on the docket as a possibility, following the Dutch government’s announcement of a trading plan to reduce its holding to below 50%. The bank has also announced a new share buyback programme.

“The buyback and trading plan are two of the three levers used by UK and Irish governments in sell-downs of NatWest and AIB; the fact that the Dutch government has tapped two of the three same tools means I would not rule out a block trade,” said one of the bankers.

The Irish and Spanish governments did not respond to requests for comments. The Dutch government declined to comment.

Outside of state sell-downs, there is also a possibility that Cerberus Capital Management could continue to exit German banks Deutsche Bank [ETR:DBK] and Commerzbank [ETR:CBK], last sold in early 2022.

While Commerzbank’s shares are well above the last sale price of EUR 7.50, trading at EUR 11.82 on Monday, March 6, Deutsche Bank’s shares are trading at EUR 11.72, below the EUR 14.15 price Cerberus sold at last February.

Cerberus did not respond to requests for comment.

Interest rate play

Several European bank stocks have ridden a wave that has seen the Stoxx 600 bank index rise by over 40% since last October.

The boon for bank stocks is driven primarily by investor positioning on global interest rates. In a world where rates are higher for longer, there are few beneficiaries like banks, given higher rates mean higher revenues.

The good fortune for banks is working for big European giants like BNP Paribas as well as smaller, once troubled institutions, like Italy’s Monte Dei Paschi [BIT:BMPS], with a block in the name sold on February 27, by insurer AXA [EPA:CS].

The 7.94% stake was sold at a 13% discount which, while wide on the face of it, was only a 1.63x liquidity cost according to ION Analytics Price of Liquidity model, only just over the average for all blocks in February.

The deal was multiple times covered, according to a source close to the deal, with hedge funds sitting alongside long-only investors and a few sovereign wealth funds in the book.

AXA did not respond to requests for comment.

Considering the trouble that has been associated with BMPS, securing such strong demand for a block in the name is a remarkable sign of the depth of the underlying support for the sector.

Recent data also suggest that interest rates might remain high for longer than investors had thought at the start of the year.

Data released in February showed inflation lowering in the US at a slower rate than had been expected. In Europe, the Harmonised Index of Consumer Prices sat at 8.6% in January, down from a peak of 10.6% last October but still well above the norm.

This makes banks one of the few thematic investments in European ECM.

“Lots of investors, long-onlies in particular, have been underweight on European banks and now need to play catch-up,” said the investor.

While the general environment does seem to benefit banks, investors do have to be wary of the risks ahead.

Higher interest rates over a longer period will lead to higher bank revenue, but also bring the risk of defaults, particularly in Europe after ten years of almost negative interest rates and rampant corporate debt issuance.

A rush to exit doors, and more sellers attempting to lock in sale prices like the Belgian government did with BNP Paribas, could raise the question of whether block sellers see longer-term credit risk down the line.

But for now, European bank stocks are certainly back in vogue.