Euro benchmark covered bond issuance is likely to increase slightly to some Eu150bn next year, according to analysts, on the back of growth in younger jurisdictions and higher redemptions, although the impact of balance sheet dynamics is seen as harder to call.

Estimates from 12 analysts ranged from Eu125bn to Eu160bn for next year, with the majority forecasting euro benchmark supply of between Eu145bn and Eu155bn.

Such volumes in 2016 would likely represent an issuance in increase from this year, with year-to-date euro benchmark supply standing at around Eu143bn and with the window for issuance expected to close early next week at the latest.

“If so, it will be the third increase in gross issuance volumes since 2013,” said Heiko Langer, senior covered bond analyst at BNP Paribas, “but supply will remain below the levels of 2010, when gross issuance last peaked.”

The analysts cited higher redemptions, increased mortgage lending in a number of countries, preferential regulatory treatment, wider senior-covered spreads, and pressure on private placement markets as being drivers of the increase.

They added that the majority of the issuance will come from the more established covered bond markets, for which volumes are nevertheless expected to remain at a similar level to this year.

Most expect Germany to lead the way, with Eu20bn-Eu30bn of euro benchmark issues (compared to around Eu25bn in 2015 YTD), followed by France with Eu18bn-Eu25bn (Eu20bn), Spain with Eu18bn-Eu23.5bn (Eu20bn), and Italy with Eu9.5bn-Eu16bn (Eu12.5bn).

Few sizeable changes in volumes are expected next year, and analysts said the most significant changes will occur in younger jurisdictions.

“We believe the still relatively young country segments, such as Australia and Canada as well as the new market segments such as Singapore and South Korea, will contribute especially greatly to this growth,” said Jörg Homey, financials and structured credits analyst at DZ, anticipating an overall increase in euro benchmark issuance to Eu150bn-Eu155bn.

Canadian issuance is likely to increase slightly, according to some analysts, on the back of growing mortgage lending, sound demand for new issues and available issuance capacity. However, Barclays analysts noted that $13.25bn (Eu12.1bn) of US dollar-denominated covered bonds issued by Canadian banks will expire next year, while no euro issuance will mature, meaning issuers may favour the dollar market.

Some analysts predict an increase in issuance from the UK, from Eu7.5bn this year to Eu10bn-Eu12.5bn, also on the back of an increase in mortgage lending in the jurisdiction.

“The UK market could be one of the most active markets in 2016 due to the growing wholesale funding activity, i.e. Nationwide, and the high level of redemption for some issuers, i.e. Lloyds,” said Jennifer Levy-Azran, senior analyst, covered bonds and agency markets at Natixis. “Second Tier UK issuers will potentially opt for covered bonds with some jumbo size.

“However, regarding the bigger banks, they are still shrinking their balance sheet and they could decide to concentrate their funding at the HoldCo level, through senior unsecured, rather than at the bank level, where the covered bonds are located, in order to fund the investment banking business.”

Euro benchmark redemptions will increase in 2016, the analysts all stated, but their figures ranged from Eu143bn-Eu152bn. Depending on their supply forecasts and whether they see redemptions at the lower or higher end, they generally put net supply to end up minus Eu7.5bn to positive Eu8bn, although Langer at BNP Paribas forecast positive supply of Eu7bn-Eu17bn and Bernd Volk, head of covered bond and agency research at Deutsche, a net increase of Eu3bn-Eu18bn.

At the bottom end of expectations, BayernLB analysts forecast negative net supply of around Eu19.8bn, seeing redemptions of Eu144.8bn and expecting a fall in euro benchmark supply to around Eu125bn.

“This trend is due to the fact that, although the pressure for the banks to consolidate has eased, very few institutions are nevertheless planning to extend their balance sheets significantly,” said Mara Schulz, covered bond analyst at BayernLB.

“This is compounded by the resolution, cessation of business activity, and merging of individual issuers, and maturing bonds are not therefore being replaced with new issues.”

The country with the highest euro benchmark redemptions will for the second consecutive year be Spain, analysts noted, with these rising from around Eu37bn to Eu40bn. The most substantial increase in redemptions is Italy, up from Eu7.5 to around Eu11.3bn, while analysts also noted that redemptions in Australia will increase to Eu2.5bn, after no bonds matured this year.

Michael Spies, covered bond and SSA strategist at Citi, noted that one-third of maturing bonds will redeem in Q1, followed by 25% in Q2, 22% in Q4 and 19% during the summer.

Analysts noted that redemptions are set to fall substantially in 2017, to around Eu125bn.

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