Euro benchmark covered bond supply is expected to ease from this year’s record in 2023 but remain at elevated levels, with analysts’ forecasts averaging €173bn, as the instrument’s competitiveness and resilience again prove valuable to issuers, particularly from southern Europe.

2022 new issuance set a new record of €198.6bn, beating the previous high seen in 2011, while net supply was some €61bn.

Euro benchmark issuance history

Source: NordLB

Estimates for 2023 range from €145bn to €200bn, with the €173bn average based on forecasts from analysts at 15 banks, as listed below. Some €125bn of redemptions are due next year and supply of around €173bn, while short of this year’s record, would still put 2023 towards the top end of historical gross and net supply figures.

2023 euro benchmark supply forecasts

Bank	Forecast (EUR bn)
ABN Amro	165
BayernLB	180
Commerzbank	175
Credit Agricole	172.5
Citi	145
Danske	160
Deutsche	170
DZ	185
Erste	185
Helaba	160
HSBC	200
ING	170
LBBW	165
NordLB	197.5
UniCredit	160

Note: where forecasts were published in the form of a range, the mid-point of the range has been taken; Source: research reports, The Covered Bond Report

As several analysts have acknowledged, 2022 supply vastly exceeded all their expectations. Key among the factors behind this were the competitiveness and resilience of covered bonds in spite of macroeconomic and geopolitical surprises.

“In times of greatest (economic) uncertainty, the risk premiums of covered bonds have widened less than those of unsecured bank bonds (by less than 5bp since the end of June 2022),” said DZ Bank analyst Verena Kaiser, “so that the yield gap between the two bond classes has widened considerably over the course of the year.

“At the same time, neither the Russian invasion of Ukraine nor the economic slowdown prevented banks from issuing covered bonds.”

Covered bond relative value vs. senior and vs. Bund

Source: Refinitiv, LBBW

Analysts see spread differentials and relative value as key variables that could support or depress 2023 supply.

LBBW senior investment analyst Karsten Rühlmann noted that risk premia for unsecured bank bonds fell in the run-up to year-end and said that should crises ease in the coming year, the relative attractiveness of covered bonds could decline – also for investors, with Bund spreads seen widening in such a scenario. Citi covered bond and SSA analyst Jussi Harju meanwhile said that the level of cost savings offered by covered bonds represents the most significant upside risk to 2023 issuance – his €145bn forecast is at the low end of estimates.

A slowdown in mortgage lending is seen as a negative for 2023 covered bond issuance, but some analysts played down the extent of the impact this might have.

“The same way booming mortgage markets have not fed into higher covered bond issuance – namely because of surging deposits and long-term central bank schemes – the slowdown will now not play a major role either,” said Crédit Agricole head of covered bond and SSA research Florian Eichert.

More important, he said, will be the extent to which banks need to replace central bank and/or deposit funding, and how they go about doing so.

Banks’ loan-to-deposit ratios are widely expected to increase, with the numerator and denominator potentially facing opposing pressures.

“Higher (energy) prices and the economic slowdown which is anticipated in many countries could force private households and companies to run-down (and deplete) their reserves and savings, which could reduce the deposit volume held by households and corporates at banks,” said HSBC head of SSA and covered bond research Frank Will. “We would also expect corporates to increasingly draw down their credit lines to cope with the difficult economic situation.”

However, Will and other analysts note that the fate of deposits is unclear after such an unprecedented period, with rising rates and government measures potentially mitigating outflows. Crédit Agricole’s Eichert expects banks to start the year working on the basis that deposits will fall, and that should outflows be less than anticipated, this could result in lower supply later in the year.

The slowdown in mortgage lending is meanwhile not expected to prevent banks from turning to covered bonds to increase market funding as central bank funding recedes.

“The cover assets used by retained covered bonds would thus be available for public deals and, in our opinion, allow for dynamic issuance activity in the euro benchmarks, even if property financing grows much less strongly in 2023 than in previous years,” said NordLB covered bond analyst Frederik Kunze.

TLTROs have been a persistent variable driving covered bond supply levels and will remain so in 2023, although analysts do not expect any dramatic changes in banks’ behaviour, whether due to maturity of the biggest outstanding tranche in June, or changes to the terms announced at the European Central Bank’s October meeting.

“The TLTRO repayments will keep covered bond supply at elevated levels, with covered bonds remaining the financing instrument of choice from a funding cost perspective,” said Maureen Schuller, head of financials sector strategy at ING. “However, supply is not expected to exceed this year’s print as a large part of the TLTRO-III repayments will likely be cancelled out through the excess liquidity in the system.”

The exit from such facilities is nevertheless widely expected to contribute to higher supply from southern Europe than in 2022, notably from Italy and Spain. HSBC’s Will expects as much as €12bn from Spain and €10bn from Italy, but others have more modest expectations, with idiosyncrasies cited as also potentially skewing supply one way or the other: Italians were also held back by implementation of the covered bond directive in 2022, while a single blockbuster €3.5bn (dual-tranche) trade for Santander at the end of August could mean less cédulas supply in 2023, for example.

Joost Beaumont, head of bank research at ABN Amro, expects €10bn of supply from Spain, and a similar figure from the Netherlands and Norway, with the French, Germans and Canadians remaining the most active. Australia is another jurisdiction expected to be increasingly active in 2023 and possibly hit double-figure billions, although, as with Canada, the relative attractive of euros versus alternatives such as US dollars and sterling will need to be weighed.

Few analysts provide non-euro benchmark covered bond forecasts, but Crédit Agricole’s Eichert expects issuance across euros, US dollars and sterling to fall some €40bn to €200bn-€210bn equivalent. Alongside €170bn of euro benchmark supply, he expects $20bn-$25bn, down from around $30bn, and sterling supply of some £17bn supported by an increase in issuance from UK financial institutions, something flagged by a variety of analysts.

The euro market has enjoyed the support of CBPP3 even after the mid-year end of net new purchases under the ECB’s asset purchase programme, but the extent of its ongoing support is unclear, especially after the announcement on 15 December that the central bank intends to reduce its APP holdings by an average of €15bn a month from March 2023.

While the impact on the constituent parts of APP was not outlined, DZ Bank analyst Jörg Homey said he can imagine CBPP3 reinvestments being cut by 50% from March and would not be surprised if covered bond purchases ceased completely in mid-2023.