Tom Criqui
Hello and welcome to the RBC Capital Markets DCM Roundtable audiocast, where we explore macro, sector, and product specific themes impacting the global fixed income market. Today, we focus on the Financial Institutions sector, and we are recording this conversation today at RBC’s Global Financial Institutions Conference in New York on March 5, 2025. I'm Tom Criqui. I'm a Managing Director of RBC U.S. Investment Grade Syndicate Desk, and I'm joined today by two leading voices from our Debt Capital Markets franchise. Catherine Awong, Managing Director of Debt Capital Markets for our Financial Institutions Group in the U.S., and Peter Riera, Head of our Financial Institutions Originations business in Europe. It's great to have you on. Welcome to the podcast.
Catherine Awong
Thanks for having us.
Peter Riera
Thanks, Tom. Great to be here.
Tom Criqui
Yeah, listen, this conference is really coinciding with a very interesting period in the markets right now. We're experiencing extreme macroeconomic volatility. There's the threat of tariffs. There's been a significant rally in rates, and there's the expectation of changing regulatory environment. Peter, I guess I'd ask you, what are some of your main observations, and what are your clients saying right now? I think one thing that's notable to me is just how resilient the credit markets have been amidst this environment.
Peter Riera
I think that's right. Tom, and I think to look at it from the sector perspective and listening to what we've heard about over the past two days here in New York, the sector feels like it's in a very strong position. Business lines are performing well across the board. Capital and liquidity are strong, and access to capital markets, to your point, has rarely been better. Companies therefore want to engage with investors today and other events from a position of strength. And if you take a look at this conference this year, it's a larger and more diverse attendance than ever before. More than 150 companies and from Europe, some of the biggest global banks are here and using this event to engage with us investors post their full year results. It's an honor for RBC to be the partner of choice for those conversations. And if I were to reflect on the mood, I'd say it's one of cautious optimism. For sure, that's been challenged in recent weeks, but the companies presenting here remain focused on growth, on investment and of the opportunity to return capital where appropriate to investors.
Tom Criqui
And Catherine, I'll turn it to you. What are the macro factors that are impacting the domestic space right now?
Catherine Awong
Yeah, so from a macro perspective, if you look at 2024, that was really the year for rebuilding and repositioning balance sheets coming out of the 2023 SVB, regional banking crisis, right? So, following the recent change in administration, there was a lot of optimism with the view that 2025 was going to be the year for growth post what has been a very tepid loan growth environment for the regional banking space. So we started out the year with a lot of optimism in the domestic bank space. I would say, animal spirits very much alive and well to start the year; the new administration really meant to bring more rational regulation with a focus on growth. You know, if you look at and read all the regional bank earnings transcripts from January for Q4 of 2024 and you sampled the largest regional banks and what they have to say, the word optimistic, for example, showed up over 30 times, right? If you rolled back to Q4 of 2023, and what that earnings cycle brought, the word optimistic showed up less than 10 times. And I think the tone is still very much optimistic, as we heard from our issuers today, but a lot more balanced around risks, right? Elevated and volatile yields, a mixed economic data, there's been a lot of talk again coming out of what stagflation could potentially mean for our broader markets, political implications on tariffs and just really lack of clarity on the regulatory side have all weighed on sentiment. And so Tom, I would actually like to turn the question back to you, what are you hearing from investors, and how has sentiment been from the fixed income investor side?
Tom Criqui
I think sentiment has been mixed, and I'd say over the course of this last two weeks, we've definitely seen a backup in spreads. I think there's been a confluence of factors that have weighed on the market. You've had very heavy corporate bond issuance volumes. You've got historically tight valuations. You've had the significant rally in Treasury rates, where the 10-year has rallied by upwards of 50 basis points, and as a result, you've seen interest rate buyers or rate sensitive buyers, kind of absent from the market of late. We have seen a widening in spreads. We have seen more pronounced new issue concessions required in the new issue market. But that being said, the markets are still functioning and are still affording very favorable execution from a valuation standpoint. And the coupons that are afforded right now at the rate rally are also very, very low right now. You know, Peter just playing on that regulatory dynamic, maybe you could talk about, how the regulatory changes are impacting the ways that banks will look to manage their capital and funding plans?
Peter Riera
From a European perspective, it's a matter of public record that regulators in Europe and around the world have either already taken steps to pause the introduction of new regulations or are in consultations to do so. And the key driver there has been a desire to assess the direction taken in the U.S. and to ensure its level of playing field as possible for European and international banks. Europe's banks already demonstrated, Tom, their resilience through the volatility of 2023 which Catherine already alluded to. The contagion from Silicon Valley Bank and Credit Suisse in Europe was minimal, and the sector emerged, perhaps for the first time since the financial crisis, as something of a comparative safe haven compared to U.S. banks, and this manifested itself in several ways, including in the debt space, seeing European banks outperform some U.S. counterparts at times, and affording, therefore European issuers ongoing access to capital at attractive costs. If I turn to today, we're therefore starting from a very high standard of regulation, and moreover, of investor comfort with the European banking sector. What impact does that all have on debt issuance strategies for European financials? I'd say the most pronounced way, Tom, is that companies are able to achieve attractive costs of capital at or near historic lows, to your point. Consequently, they're able to call and refinance their debt efficiently. They're able to reduce their cost of capital in the long run, and in many cases, turm out that issuance so as to lock in low costs for longer.
Catherine Awong
I think domestic banks are in a tough spot, right? They're in regulatory purgatory in some ways. The way that banks were preparing their funding and capital and liquidity frameworks a year ago is very different than the way that they have been approaching that framework today, under very different assumptions, right? So, as I said, tariff and rate implications on growth also very uncertain. That said, clearly banks are still very optimistic that the environment that we are in today is very still much pro-business and with a lighter touch on regulation. Now, Basel 3 end game is a big topic that is expected to be a lot more capital neutral for the industry. Items like long-term debt expected to be watered down, if not rolled back completely, and going back to what was said earlier, capital positions are incredibly healthy, we're starting from a very high base from a capital perspective. And so, domestic banks in particular, just trying to figure out the best way to optimize their capital stacks under multiple scenarios. But I think today, where we sit, plenty of capital to capitalize on that loan growth, and both in organic and organic opportunities.
Tom Criqui
Great. Thanks, Catherine, we'll keep it with you. Maybe you could just identify where some of the areas of growth are in the financial institution sector at this point?
Catherine Awong
Yeah, maybe I'll approach that from a demand side of the equation. Look, as you said, Tom, investor engagement has been very high across credits, the capital structures, tenors, investors really looking for opportunities where they could receive elevated returns by taking calculated risks. You know, you spoke a little bit about the broader health of the regional bank market as well. We've seen spreads in that space tighten over 150 basis points since June of 2023 and so, taking all of that into consideration, I think investor appetite for more structured products has been very, very high. You're seeing that more specifically with the continued growth of the SRT market, as an example. I think investors are getting a lot more interested in assessing various types of asset classes to use when it comes to that type of product, and a lot more open to looking at different types of structures as well. I think we also need to pay a little bit of attention to what we're seeing in the private credit markets, right? It's hard to ignore how large that sector has grown within the unsecured space, BDC issuance, Business Development Company issuance, had its most active year last year. We had $25 billion of issuance in dollars from the space last year, it's set to be another record year for that sector of issuance. If you look at where that sub sector is as a percentage of the Bloomberg index, for example, today, that is 1%. Back in 2019 that was less than 0.1%. And so that subvertical, I think, will continue to see significant growth, not just in the U.S. dollar market, but more broadly across currencies. We've already seen issuance from that vertical across euros, sterling, Australian dollar, for both investor diversification and net investment hedge purposes.
Peter Riera
One exciting trend for me when we think about growth opportunities, at least from our business perspective, is the search for investor diversification. How can RBC help our clients find new investors and new markets for companies to issue their wholesale funding programs into. This definitely isn't new, but I would say that it's something that in 2025 is becoming more widespread and more deeply ingrained in long-term debt issuance strategies than ever before; and it's something that at RBC Capital Markets we are particularly well placed to advise on with a unique combination of strengths anchored around leadership in North America, with our top 10 U.S. Investment Grade platform and our leadership in the Canadian dollar market, and complemented by a leading ranking in the sterling market, where we're the largest international bank, ranked at number 4 there for many years, and we're also a top 2 player in the Australian dollar kangaroo market. All that is complemented by continuous ongoing investment into Europe, where I'd highlight our recent establishment of a debt syndicate desk in Frankfurt to better connect our clients to German and continental European investors, and also to help us export more European clients, both to euros and further afield. Now, returning to the topic of diversification, Tom, banks have long known that access to a diverse set of investors through various market channels is critical to ensuring ongoing access to wholesale funding through periods of volatility, and to ensure that counterparty risk of certain key investors is mitigated by building large and granular global investor bases. But how is this manifesting differently in 2025? Well, the biggest banks with the largest funding plans are going further afield and diving deeper down into smaller local investors, while even those banks with more modest funding needs are establishing new programs to access new and diverse local markets. We've helped European banks reach new, smaller, more granular U.S. investors in their benchmark dollar assurance with your help Tom and your help Catherine, but we've also taken U.S. insurance companies to the sterling market for the very first time to establish sterling debt curves. We've taken French banks to the to the onshore Australian investor base for senior and subordinated debt issuances, and we've helped Canadian companies build out their presence in the euro market with new and strategically important accounts.
Tom Criqui
Yeah, I think that RBC has a unique combination of institutional and retail distribution, which is differentiating. I think we also have, as you alluded to Peter, competencies across multiple currencies, which enables us to be agnostic in our recommendations. And as I think about ways that RBC differentiates itself, I'd say a lot of it has to do with our investor marketing and dialog with investors. You referenced your meetings in Toronto. At the end of April, RBC will host its eighth annual regional bank conference, where we're going to have 10 issuers who will see upwards of 100 investors over the course of three days. We do in person, physical meetings in New York and Boston, followed by a virtual day. Similarly, we also do a reverse Yankee bank conference where we bring U.S. investors into five different European cities, and they actually meet with the European banks in their home markets. We were the first ones to reestablish that after COVID. And we're also going to be conducting in the next couple of weeks, a mid markets conference, a virtual conference, where we target some of our middle market investors, and I would say that the quality of our dialog with investors is differentiating and enabled us to really, we reopened the category for regional bank space after Silicon Valley Bank, which was a real notable achievement. We also, just recently, this past summer, reopened the market for mid-cap banks.
Tom Criqui
So we’ve obviously are seeing a real unique environment right now. We've got low rates; we've got spreads at historically tight valuations. How are issuers viewing the opportunity in the current market?
Catherine Awong
Yeah, I'll kick it off and Peter, please weigh in here. I think our FIG issuers, who are all very sophisticated funders, are clearly leaning in on this opportunity to issue what has been historically tight spreads, and relatively range bound rates, right? And I think you know, you can see that evidenced by way of the issuance we've seen in the U.S. hybrid and preferred space, that is up 160% year-on-year, our issuers are not only issuing down the capital structure, but also really accelerating their funding plans into what has been a very strong environment for issuers more broadly and ahead of what will potentially be more market volatility. Not only are we seeing our issuers issue down the capital structure, but we're seeing our issuers issue further and longer dated tenors out the curve. So, in the last three months, the money centers are really good example of this, where they've issued $22 billion of senior dollar paper in the 20 and 30 year part of the curve. Historically, they've mostly focused in 3-to-10-year tenors, and it really have been absent from the 30-year part of the curve since, you know, 2021 and early 2022 which were prior cycle tight. So I think it really tells you that our sophisticated bank borrowers in particular are looking to extend duration in this environment.
Peter Riera
And Catherine, I think I'll pick up on your topic there around hybrid issuance and how we've seen a heightened level of activity there from issuers. And if I look to Europe, if we consider what's the most expensive and arguably most strategic part of the bank capital stack, it is that additional tier one debt. And we've been on something of a journey with our clients over the past decade. If I look back to 10 years ago, the focus was on rapidly building up the stock of an issuer's debt in this format. That required us to help create new programs, to educate investors on the product, and execute large size quickly in order to meet regulatory requirements. But if I reflect to where we are today in the AT1 product, the conversations we're having is around optimization. It's about, how can we grow and diversify, to the earlier topic, the now well established investor base, how can we use the Debt Capital Markets toolbox, including liability management, to buy back AT1 securities that were issued at a higher cost are going to be coming up for a call and refinance these securities in the low, incredibly compelling costs that we can achieve across various markets today. Perhaps there's also the opportunity to term out that debt, to your point Catherine, and to the earlier topic of multiple currencies and having a look across markets, RBC has the ability to be plugged into an issuers process early on to advise on whether the best opportunity might exist in the dollar market, in the sterling or euro environment, even, and take all those perspectives around favorable market conditions and our investor relationships to advise our clients for their most strategic deals.
Tom Criqui
All right, last question, guys, you've done a fantastic job. As our conference concludes here, what would be the defining theme of this year's conference?
Catherine Awong
Tom, I'll almost kick it off with where Peter started it earlier, which is one of cautious optimism. We've been two years now removed from the SVB and regional banking crisis. Banks are well capitalized and are in a good spot to deliver on the plans they told their investors that they would at the end of the year, and I don't think that's changed. You know, but that said again, I go back to think that we're a lot more balanced around risks, particularly with tariffs and what that might mean for the broader economy. And so while, you know, I think we're still all very optimistic, you know, I think we're in an environment here, we're going to have to navigate it very cautiously as well.
Peter Riera
I very much agree. Catherine, I think for me, my takeaways from the conference have been around the resilience of the sector, the ambition and the desire to grow broader investor relationships. Our clients have more resilient balance sheets than ever before. Together, we are ambitious for growth, both at an enterprise level and within the debt issuance sphere. And in order to achieve this, we are working with our clients not just to execute mandates, but to grow a more global and more granular network of invested long-term stakeholders in their wholesale funding and capital programs.
Tom Criqui
That's great. Catherine, Peter, we really appreciate your time. Thanks for your thoughts and insight.
Catherine Awong
Thanks for having us again.
Peter Riera
Thanks very much, Tom.