Goldman Sachs Group Inc. strategists upgraded European bank debt back to overweight, reversing an earlier decision even as a rout in lenders’ riskiest bonds continued in the wake of Credit Suisse Group AG’s bailout.
(Bloomberg) — Goldman Sachs Group Inc. strategists upgraded European bank debt back to overweight, reversing an earlier decision even as a rout in lenders’ riskiest bonds continued in the wake of Credit Suisse Group AG’s bailout.
A so-called neutral weighting on the sector is no longer warranted as UBS Group AG.‘s takeover would provide clarity on Credit Suisse’s future path, Goldman strategists including Lotfi Karoui wrote in a note Sunday. But they warned that sentiment toward Additional Tier 1 bonds, the riskiest form of bank debt, may remain weak after a Swiss regulator said $17 billion of such notes from Credit Suisse will be wiped out.
“In particular, the liquidity and loss guarantees provided by the SNB and the Swiss government are likely to act as dampeners for tail risk and help close the recent valuation gap between European banks and non-financials,” they wrote.
Goldman’s rapid U-turn followed a frenetic weekend that saw the Swiss government-brokered merger aimed at restoring confidence in a crisis-hidden banking sector. It also came after the Federal Reserve and five other central banks announced coordinated action Sunday to boost dollar liquidity to ease strain in the global financial system.
“In both the USD and EUR markets, the excess premium that investors had been demanding to hold European bank credit risk now has room to compress,” the Goldman strategists wrote.
The strategists on Friday lowered their view on the region’s bank debt to neutral from overweight, citing a lack of clarity around Credit Suisse and pressure on the continent’s lenders.
But Goldman’s restored optimism doesn’t include AT1 bonds, after the prospect of a complete write-down on such notes issued by Credit Suisse has caused a selloff that spread to Asia Monday, with some of the debt falling by a record in the region.
“Whether investors treat this decision as a one-off or whether they rethink the asymmetry of their risk-reward at times of elevated financial distress remains to be seen,” the strategists wrote, referring to the Swiss regulator’s decision on Credit Suisse’s AT1 bonds. “But in our view, it has become harder to assess the attractiveness of the current historically large spread pick-up provided by AT1 bonds vs. their HY corporate counterparts.”
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