Austrian banks have been at the forefront of record covered bond issuance, tackling the end of TLTROs and APP while navigating a crowded and temperamental market. Issuers large and small joined sponsor DZ BANK in Vienna for our 2023 Austrian covered bond roundtable to discuss the factors shaping funding strategies, credit quality and sustainable activity.

Participants in the roundtable, which was held on 23 May (above, left to right):

Philipp Heim, director, DCM origination, DZ BANK
Katharina Hofmann, head of long term funding and IR, Raiffeisenlandesbank Niederösterreich-Wien (RLB NÖ-Wien)
Katarzyna Kapeller, head of Head Office ALM, Raiffeisen Bank International (RBI)
Michael Blenke, head of treasury, Hypo Tirol Bank
Neil Day, managing editor, The Covered Bond Report, and moderator
Robert Musner, head of treasury, Oberbank

You can also download a pdf of this roundtable here.

Neil Day, The Covered Bond Report: We’ve seen record issuance in euro benchmarks this year and last, and Austrian banks have joined in that trend. What are the dynamics behind that?

Philipp Heim, DZ BANK: Austrian issuance in particular has developed significantly in the last two years, with an absolute increase in volumes. To put it into context, previously we had an average of around 10 transactions a year for an aggregate of €5bn, plus or minus a few transactions. Then in 2022 we had 29 transactions for more than €16bn in total, so a tripling of volumes, which is remarkable. Although Austria is a relatively small jurisdiction, we still see new issuers entering the market — BTV last week and last year Raiffeisenverband Salzburg. And activity hasn’t slowed this year. We have seen the busiest ever first half, with 21 transactions until the end of May for over €10bn, as well as some interesting taps.

There are a few factors behind this, but one of the main drivers is the TLTROs. They have been an important funding tool for banks’ liquidity and their refinancing is important. There has also been a precautionary element to the level of activity we have seen, reflecting the view that liquidity might subside a little and not be as ample and as cheap as it was in the past. Austrian issuers therefore started refinancing early.

Day, The CBR: Turning to the individual issuers, does that chime with what you have been doing? What role have covered bonds played in your funding strategy? Katharina, I believe RLB NÖ-Wien has been more active than ever before since the beginning of last year.

Katharina Hofmann, RLB NÖ-Wien: Yes, definitely. As Philipp said, the TLTRO was a very supportive tool for our refinancing in the past and we now have to pay back all the remaining tranches. We started by returning to the market last year, issuing €2.6bn, and that’s pretty much the same amount that we plan to do in 2023. We have already issued almost €2bn of covered bonds this year, so we plan to come to the market once more after the summer, or at least by year-end. Of course, our funding needs for the second half of the year will be dependent on the further development of the loan business.

Day, The CBR: Have you faced any challenges in raising these volumes at a time when overall issuance is higher and the market has faced various disruptions?

Hofmann, RLB NÖ-Wien (pictured): It is getting harder to find the right execution window for a transaction. Last year, we had the ECB buying in primary, and it was a little easier to issue. Now, we’ve seen so much supply out of Austria that investors are telling us they are not so bullish on Austrian covered bonds anymore. So it’s quite challenging to find the right timing and the right execution strategy. The market is still working, but it’s not getting any easier.

Day, The CBR: Michael, how have covered bonds fitted into Hypo Tirol Bank’s strategy?

Michael Blenke, Hypo Tirol Bank: We are a small issuer, but covered bonds have played an important role in our history — our historical name is Landes-Hypothekenbank Tirol, so real estate financing is one of our core businesses. We try to issue a large transaction every year, and have done so in the last three years.

In 2021, we issued our first social bond. That was a major transaction for us, in being the first benchmark social covered bond in Austria. And this year, we have issued our first green bond. So we try to do a lot of work in the ESG segment, to differentiate ourselves from the other issuers.

We have already fulfilled are funding plans for 2023, so we have nothing further to do. We have experienced very strong demand from retail investors, also in covered bonds, due to the higher level of interest rates now.

Regarding TLTROs, they were not a significant factor. We participated in TLTRO III to take advantage of the opportunities it offered, but we did not need it from a liquidity perspective. After the issuance of the €300m green bond, we paid back around €1bn of TLTRO III, so we only have a small part remaining.

Day, The CBR: Philipp mentioned that there have been some concerns about conditions getting more challenging over time — was that a factor in getting your deal out of the way relatively quickly this year?

Blenke, Hypo Tirol Bank: Yes, that was a major factor. Our plan was to issue in March, but we saw the wave of issuance at the beginning of January and decided to bring our issuance forward to January. It has indeed been difficult to find the right timing for a new issue and we had a lot of discussions with our partners to find the right window. We had the green factor as an additional selling point, so we were quite confident that the deal would go well, and ultimately it did.

Day, The CBR: Robert, has Oberbank’s experience been similar?

Robert Musner, Oberbank: We are also a small issuer and the covered bond is important for us. Roughly a quarter of the whole funding we need in a year we do via covered bonds, and we have already done that this year. TLTROs have not been an issue for us — we have sufficient liquidity at the national bank, and already received a lot of new deposits from our clients. But monitoring what other banks have been doing, we can see that Austrian banks have been at the forefront of anticipating developments: in light of the coming end of CBPP3 buying and the repayment of the TLTROs, Austrian issuers made an early start last year and have been continuing this year. This means that we had to monitor the market closely to find a window which would provide the best opportunity. We managed to find this in February and were able to issue €250m with a term of seven-and-a-half years. We were very happy with this trade as we always look for longer maturities, if possible, and this was the longest-dated issue out of Austria and longest sub-benchmark in Europe. We have no further issuance plans for the time being, but if the market improves and funding levels get much cheaper, we could return to the market, even if we don’t need to.

Day, The CBR: Last, but not least, RBI has also been very active in covered bonds in the last year. Katarzyna, what’s been driving that level of activity and the way you have approached the market?

Katarzyna Kapeller, Raiffeisen Bank International: In the past, we mainly used covered bonds as retained issues, as collateral for the ECB. We also did collateral switches with various market participants. Covered bonds were a very opportunistic tool to be used as efficiently as possible.

We then decided some time ago to start issuing covered bonds into the market. Already when we participated in the TLTROs, we knew at some point we would need to repay them, of course. So we made an early start on establishing our issuance activities a few years ago.

We had already paid back more than two-thirds of our TLTRO outstandings by the beginning of this year, so we are more or less done with the refinancing of the TLTRO. With the emerging market volatility around Silicon Valley Bank and Credit Suisse we decided to continue to turn our retained covered bonds into long term market funding to further strengthen our liquidity profile. That has been the driver for our level of issuance.

What we find today is that, for RBI, it can be more difficult to place a covered bond in certain market environments than a senior bond or even capital. As a bank, we can face greater volatility due to our eastern European and Russian footprint — that’s why we have suffered under various crises and especially the Russia-Ukraine crisis. Our cover pool is also different than other Austrian issuers’, being mainly commercial real estate, with a mix of countries, including eastern European exposures, which makes it more difficult. The investor base for covered bonds is a more conservative one and we don’t tick the boxes of certain investors. Looking at our senior order books, we are very much bought by the London-based investors, by French asset managers, and a bit less by the Germans — who are the main covered bond investors. So we are a bit of a different animal and we need to be even more careful when considering timing.

Heim, DZ BANK: It is worth noting that issuance from Austria has not been uniform across different issuers and sectors this year and last. There was a lot more issuance out of the Raiffeisen sector than in previous years, while Bawag has emerged almost out of nowhere as one of the biggest issuers in terms of volume. Volumes from the Hypo sector and Oberbank have meanwhile been more stable. We have therefore seen a bit of tiering going on in Austria, where it’s easier to place paper from those issuers who are not so frequent, but getting harder for those who have issued a lot already.

Day, The CBR: Even before Silicon Valley Bank, there were questions about the stickiness of deposits, particularly those that built up during Covid, and with the anticipated rise in rates. Has that prompted any rethinking of strategy?

Musner, Oberbank (pictured): I can only speak for Oberbank, but in the context of this banking crisis, we had more inflows into savings accounts — some money came back from Switzerland — so the clients understand us to be a stable bank.

The big risk is reputation. You can fulfil all your regulatory requirements, but if you have a bank run, it’s over — there’s nothing you can do to prevent it, even if you try to shift to more stable funding. But of course, you have to be ready with retained covered bonds or something else to have access to central bank facilities.

Despite having very stable funding via savings accounts and deposits, we want to increase the share of long term funding through issuance of covered bonds in the next few years. We are growing by roughly €1bn on the loan side each year so we have to fund this, and will increasingly do this with long term funding, although this development will be gradual, rather than happening from one year to the next.

Hofmann, RLB NÖ-Wien: We also have to discuss a little the definition of a bank run, because we all have in our mind the picture of people standing in line in front of a bank, but that’s not how a modern bank run works. With online banking, it’s a digital bank run, and you don’t see it at all.

Musner, Oberbank: And it’s getting much faster. That’s the big, big risk.

Day, The CBR: So are you rethinking the role of deposits?

Hofmann, RLB NÖ-Wien: Yes, but it’s not just because of Silicon Valley Bank. In general, we all have to think about customer deposits and their importance, and especially in times of rising interest rates. The battle for customer deposits has started and will get fiercer through the year. So it’s indeed a very important topic.

Blenke, Hypo Tirol Bank: Like Oberbank, our deposits have grown during this crisis. We also saw a renaissance of interest in the Sparbuch (savings book). Our customers want to have a real Sparbuch because they like to have something in their hands, including young clients. So whereas we had decided to have only online savings products, we have now launched a Kapitalsparbuch. It’s stickier, because clients have to go to the bank if they want their money back. The process is a little more expensive for the bank, because of the technology necessary, but given the stickiness of the funds, it’s a good development.

Heim, DZ BANK: This wasn’t such an important topic when there was ample liquidity, with the central banks having flooded the market. But as they are less active in the coming months, the interbank lending system will regain importance. Trust between banks will therefore be important, but some are a bit nervous. Few had envisaged Credit Suisse collapsing — they had some of the best capital ratios out there under a super-strict regulatory regime, but it didn’t prevent the wealthy deposit-holders withdrawing their money. I also anticipate more of a push into wholesale funding, to have liquidity on the books, rather than relying on deposits. They may have been sticky so far, but while it might be too early to describe it as a war, increases in deposit rates have begun and we will see more of that in the next six to 12 months.

Day, The CBR: Going back to your covered bond issuance and accessing the market, you’ve all mentioned timing being challenging amid the heavy supply. How have you coped with that?

Kapeller, RBI: We have been trying to do more investor work on covered bonds. That’s something banks didn’t need to do in recent years because there was a big buyer in the market who didn’t need any investor work and the rest just followed. But this has been more difficult than expected. When we have investor calls, they tend to mostly ask about OFAC or Russia and Ukraine — discussions around the cover pool are very limited. Meanwhile, the classic covered bond investors don’t have much to discuss at all. We have nevertheless had quite a few investor meetings, especially at the beginning of the year.

With new issues, we need to be more careful with the pricing. Books are not as big as they used to be and you need to generate more interest in your trades, so you need to be a little bit more generous and then hope for more tightening. We understand that wider pricing is not great for investors, either, because their holdings are marked wider, but that’s just how we have to approach the market these days.

Hofmann, RLB NÖ-Wien: It’s the same for us. We recognise that investor relations are becoming more and more important, and we have already done a lot of work on that front. Because we have issued so much, some investors’ credit lines are already full, so we have to engage with investors to perhaps increase the size of their credit lines, or work to get some new accounts on board.

Regarding execution, there’s definitely been a learning process among issuers that spreads levels are now on a different basis than a couple of months ago. So as Katarzyna said, we need to have a more generous starting point.

Heim, DZ BANK: Maybe to add in respect of that point, DZ BANK was number two bookrunner in the covered bond space last year and has preferential access to the co-op banks, DZ treasury, Union Investment and the insurance arm R+V.

We are coming from an issuers’ market, where it was possible to issue at any point in time with zero to very low new issue premium — investors were forced to buy, despite levels being very low, with the big hoover in the market sucking up 30% of issuance. We have been shifting away from that. We are seeing high volumes and a re-emergence of pricing power for investors. They see the widening trend and know that what they buy in January might be wider by March, so they require a certain new issue premium to protect against the risk of widening. Issuers have therefore had to be more careful and show quite generous new issue premiums, especially at IPTs. If the transaction is going well, you can tighten, sometimes 4bp or 5bp. But the investors need to be listened to and if an investor tells you their limit, they might disappear without any further notice, which is something we hadn’t seen for a while.

Musner, Oberbank: We started issuing in 2018 and since then it was always important for us to do investor work, because we are not famous, we are small. That can give us a little bit more power — if we have a good feeling what investors are buying, then we can challenge our lead managers regarding maturity and spread. When we come to the market we are confident that investors will have lines for us and be ready for the issue.

Blenke, Hypo Tirol Bank (pictured): As a small issuer and not a frequent issuer, we have a similar approach to Oberbank — sometimes we have even crossed paths with Oberbank on our roadshows. It’s not easy to get the timeslots from the investors, so we also challenge our partners to get us meetings with investors so that we can tell them our credit story. We have to do double the work so that credit lines are available. But we have invested a lot of time and energy in this to ensure that our transaction was successful. We also included the green aspect, which gave us additional confidence that the deal would go well.

We have issued both benchmarks and sub-benchmarks, and benchmarks are much easier. A lot of investors tell us they can only buy benchmarks, so if you have a sub-benchmark, a big part of the investor base falls away. But we are not able to issue only benchmarks because for our maturity profile it’s not great to have a €500m slot in one year. So there’s always a tough discussion whether to go for a benchmark or sub-benchmark.

Day, The CBR: The winding down of Eurosystem participation in new issues and ultimately the market overall has already been mentioned. To what extent was that a factor in the timing of your issuance?

Blenke, Hypo Tirol Bank: That was one reason for issuing the deal in January and not in March, because we saw the 20% order size and we wanted to benefit from it. But it was just one reason.

Day, The CBR: RLB NÖ-Wien issued last summer just after the Eurosystem had cut its order size — although not by as much as expected. How easy has it been to navigate their behaviour?

Hofmann, RLB NÖ-Wien: Before the cut in the ECB order size, everybody came to the market, so the window was super-busy and issuers had to pay higher new issue concessions. On balance, it therefore made no difference issuing afterwards, because there was less primary market activity and we could achieve a comparable result.

Day, The CBR: It’s quite interesting how smooth the end of APP has been, despite some earlier fears to the contrary, particularly regarding the crowding-out of investors who might not return, and the ability of the market to absorb supply — were these overdone?

Heim, DZ BANK: To a degree, yes. An adjustment period has been necessary — you can’t ignore the fact that an investor responsible for packing away large parts of issuance volumes has exited; this has to be absorbed over a period of time. But I’m a believer in the market. It worked well before and I think we will see a fully-functioning market without the ECB.

I also think we are approaching an inflection point now. We have been in a rising rate environment, a rising spread environment, with high issuance volumes, and this is a bit of a toxic mix for spreads, because they keep adjusting upwards. But we will reach the peak in interest rates very soon and have also seen mortgage generation declining in most countries. Therefore, covered bond supply will go down to an extent, and the pressure on spreads will ease. At that point, you will get new investors coming in who like to buy longer covered bonds, who want to lock in the high rates that are still available. We already see that to a degree, with asset managers linked to insurance groups, for example, but also expect more of that because of the large inflows into Union Investment covered bond funds. So I expect to see the emergence of new buyers to further replace the ECB.

Day, The CBR: We’ve discussed the high level of supply from Austria and the drivers of that. What can we expect going forward?

Musner, Oberbank: As we have discussed, the TLTRO and the related pre-funding was the main reason for more issuance from Austria — in 2022, Austrian banks were in third place in Europe, after Germany and France, in the covered bond segment, so a really high share! But it’s perhaps overdone and we will see more balanced issuance in the future. We have seen in many cases shorter dated issuance, meaning that the banks will need to return earlier, but in general volumes should go down a little bit after this year.

Meanwhile, the investors will be there. We have lost the big buyer, the ECB, but we returned to very interesting spread levels — so investors will come back. And they see the general level of rates right now — 3.5% or 3.75% — as interesting.

Kapeller, RBI: At least for RBI, we are now more or less done with our funding plans in covered bonds for the next one to two years. We have also used up our cover pool — we maintain a buffer against volatility in the volumes, depending on how mortgage markets and our business develop.

Blenke, Hypo Tirol Bank: We try to issue every year as we want to keep the lines from investors open, so our plan is to issue a covered bond next year. And in general we like to issue in the first half of the year. That is our goal.

Hofmann, RLB NÖ-Wien: I also expect supply to balance out a little. But it’s indeed interesting that we’ve seen a lot of shorter tenors — all these issuances will only contribute to NSFR for so long, and it’s a spinning wheel, because we then have to do another transaction to maintain our ratios.

Heim, DZ BANK: It’s good that the participants today represent all the sectors in Austria and it’s fair to say that we won’t see the peaks of this year and last again. Austrian supply will return to more normal levels — not back to what they were before, because of the various reasons cited, shorter maturities and so on; but I don’t expect to see a volume of €16bn in the coming years.

Day, The CBR: As alluded to, supply could depend to an extent on lending volumes. House prices and mortgage lending have been hit in some countries by the rise in rates and other economic factors. How is the Austrian market holding up?

Hofmann, RLB NÖ-Wien: In recent years, we’ve seen a very dynamic development in the housing market. But now, because of the high interest rates and the quite high housing prices, there is not much turnover at the moment. We will have to wait and see what happens next. It’s also very different depending on what area in Austria or even within Vienna you are looking at. So it will be interesting to see how things develop.

Blenke, Hypo Tirol Bank: It’s the same picture in our area, Tirol. The residential real estate market has declined sharply, for two reasons. Firstly, rising interest rates — we have a lot of floating rate loan demand in our region, also across the whole country. And secondly, the KIM-Verordnung regulation to tighten lending standards, which is making it much more difficult for clients to get loans. These two effects were responsible for the sharp decline in demand. So funding needs will go down for all banks in Austria, as we all face the same situation in the real estate market.

Musner, Oberbank: Additionally, we see the number of construction permits has fallen sharply, so again, demand for loans is really low. And we have seen house prices falling a little from quarter to quarter. We don’t know exactly how things will develop this year. We don’t anticipate any big fall in prices, but the higher prices will maybe moderate a little. We expect to see very stable prices, but with much lower turnover.

Day, The CBR: Are any of those negative developments feeding through to your cover pools at all yet?

Musner, Oberbank: We haven’t seen any impact yet. Rates have risen and clients with floating rates have to make bigger payments, and of course energy is more expensive and so on. But up to now we haven’t seen more defaults. There is also a decent buffer in the pool so that even if there is an increase in defaults, it wouldn’t have any influence on the cover pool.

Day, The CBR: Katarzyna, as you mentioned, your loan book and cover pool includes not just Austria but other areas — how are these different parts developing at the moment?

Kapeller, RBI (pictured): Approximately one-third of our cover pool is from the Raiffeisen Bausparkasse, residential mortgages, where we face the same issues as our colleagues here, namely lower demand. We will see how that develops, but we have contractual agreements that every maturing loan in our cover pool needs to be replaced by new ones as long as the funding to the Raiffeisen Bausparkasse is outstanding, so this is not an issue for our cover pool.

Regarding commercial real estate, we are more strict in our lending criteria and that may reduce the pipeline. But just this week I was told that we hit a record high in our cover pool — but we want to be cautious and that’s why we hold a buffer of close to a billion that we don’t issue long term against.

Heim, DZ BANK: Commercial real estate is the topic of the day for various reasons, while residential is much more stable and perceived as safer by many investors. We are hearing a lot more questions for issuers on commercial real estate: How much exposure do you have? What assets do you have? And where are they? Because it seems that currently not many people want to have commercial real estate exposure outside of the main cities and certain asset classes.

Blenke, Hypo Tirol Bank: We had some investor meetings in Helsinki where the investors were very worried about commercial real estate. Only a third of our pool is commercial real estate, but they said that’s too much for them to buy us, which was quite an interesting experience. They asked if we can split our cover pool into residential and commercial, but we are too small to do that and it’s not market practice in German-speaking areas. But they’re really afraid about commercial real estate.

Day, The CBR: Katarzyna, you mentioned that investors have been focusing on Russia and CEE developments, and you have the OFAC sanctions inquiry. What are you communicating about this and the sale or spin-off of the Russian business and its impact?

Kapeller, RBI: I had a lot of discussions around the OFAC topic but this has now died down in our investor meetings. People had been concerned that we could face large fines or be cut off from US dollar clearing. But this is the third OFAC enquiry and we hope that it will be resolved just like the previous two, when everything was cleared. We have been supplying the data they requested and are on track to deliver the final information to them in June. More generally, there is also an understanding that, irrespective of the conflict, there is still the need to be able to make international payments into Russia and to take money out of the country.

We explored many options for the Russian business and are now working on a spin-off, with a stock split and total deconsolidation of the Russian entity — all existing investors will receive one “core” RBI share and one share in the Russian entity, which can then be traded from the next day, meaning that shareholders can get rid of the Russian risk if they want to. In parallel, a sale is still being investigated.

Finally, in both options, the capital base and liquidity profile of RBI remain very strong.

Day, The CBR: Katharina, RLB NÖ-Wien is the biggest shareholder of RBI. Has this been a topic you have faced?

Hofmann, RLB NÖ-Wien: With a 22.6% stake in RBI, we naturally get a lot of questions about this in our investor meetings. It’s different for covered bond investors than for a senior or Tier 2 investor, for example, but we still do get questions.

Because of our stake in RBI, we took a large impairment last year, but even after that, our capital ratios are very high. Our common equity tier 1 ratio is 18.1% and our total capital ratio is 20%. This shows investors that we can manage the holding and any associated risk.

Day, The CBR: Robert, Michael, what aspects of your credit story are key in your meetings with investors?

Musner, Oberbank: Our results came out recently, and we also have a strong capital base. I’m not worried about the Austrian banking sector — we’re well capitalised and in a strong position, I would say, even if there will be more defaults. We had record earnings last year and in the first quarter we achieved close to half the earnings of last year, so very strong earnings right now, partly because of the net interest income we’re enjoying. So it’s really fine.

From the investor side, the main thing we are getting questions on at the moment is the commercial real estate exposure: What are the LTVs? What’s the default ratio in the portfolio? So they’re definitely a bit more cautious about the development of the cover pool. They’re not asking too many about the banks.

Blenke, Hypo Tirol Bank: After Silicon Valley, investors very quickly asked about any hidden losses in our portfolio, while the rating agencies sent us a template about hidden losses that we had 24 hours to complete. In this respect, we are in a very comfortable situation, because we didn’t take any fixed interest rate risk in the era of zero interest rates, so our fixed interest rate profile was nearly zero. That was a very conservative and good decision by the bank and we have now received the fruits of this strategy, because we see high margins in the savings portfolio on the deposits. And now we can buy some fixed rate at 3%, not at 0%. So we’re in a very comfortable position.

Day, The CBR: Since last July you have been issuing under the updated Austrian covered bond legislation. Has this made a significant difference in any respect?

Hofmann, RLB NÖ-Wien: In my experience, investors are pleased that we have just one law now. In the past, having three laws was a little bit confusing and needed some explaining. Now we have one law and it’s compliant with the EU directive, so everybody’s happy.

Kapeller, RBI: There are also some small improvements. For example, we now have a new, paid trustee, whereas in the past we were assigned one by the state, and this works better, as they are more diligent and responsive.

Taking in all the new regulations and applying for the new licence last year was quite painful, but we worked on this across departments within the bank, and now that it is done, there is a greater understanding of the requirements and division of responsibilities internally, and an improvement in our processes. That helps a lot, even if investors don’t focus on that but more on features such as the liquidity buffer.

Musner, Oberbank: You have more clarity now, greater transparency and the liquidity buffer — these are the main topics for investors.

Heim, DZ BANK: As Katharina said, investors are happy that they don’t have to go into the particularities of three covered bond laws, especially given that Austria is anyway quite a fragmented market. Those who invested previously got to know the three laws, but having one is more efficient.

Day, The CBR: Let’s focus more on ESG topics now. Michael, you’ve mentioned how green and social issuance has allowed you to differentiate yourself in a busy market. Is that’s what’s driving your ESG activity, or is the bond issuance secondary to what you are already doing within the bank?

Blenke, Hypo Tirol Bank: ESG is a big topic for us as a bank. We want to become a green bank, and so on the refinancing side, we first worked on the social bond and now green bonds. We want to green the cover pool. But it’s very hard work, because of the lack of data, which is currently the main topic in the green sector. Like every bank, we have to struggle to get the data from our clients in the new loan origination business, and do a lot of work with our sales staff so that they get the energy certificates that we can then store in our systems. And we are now working on the impact reporting and have to construct a workaround with an external advisor for the older loans in the pool to calculate their impact.

Day, The CBR: Do you offer promotional rates on green loans or something like that?

Blenke, Hypo Tirol Bank: Not yet. There’s an ongoing discussion about this. There is already tough competition in our region and we don’t see any spread advantage when issuing a green covered bond, it’s just to reach a broader investor base — maybe there is a greenium on the senior side, but we haven’t issued green senior bonds. So where should the advantage for the client come from? It would be a marketing tool.

Day, The CBR: As the ECB exits and spreads decompress, could there be more room for a greenium in covered bonds?

Heim, DZ BANK (pictured): The wall of money in recent years made the differentiation between, say, Germany as the benchmark and France or Austria very narrow, and we do now see greater differentiation between different issuers, jurisdictions and mortgage cover pools. In terms of ESG, there are still inflows into ESG funds, and as long as this persists, we will see investors that are looking for and buying green senior and covered. Particularly in an investors’ market, such as we see today, the differentiation may be that there are more investors in the book, enabling an issuer to tighten a basis point that wouldn’t have been possible without green. But indeed, it hasn’t been paying off with, say, 5bp in the covered space, and it involves a lot of work. The benefit of ESG may be more visible in the secondary market and there is generally more stability in bonds that are green — maybe you can find a buyer when there would be none for a conventional product.

Day, The CBR: Are green covered bonds something that could be interesting for RBI?

Kapeller, RBI: We were the first Austrian bank to issue green bonds in benchmark format. We issued our first green bond in 2018 but so far we have only issued in senior and Tier 2. Regarding covered bonds, first of all, we have a limited portfolio of green assets, and in our case it’s more important to use the advantage these offer in the senior and capital spaces. We see a pricing benefit in green bonds because you have a bigger order book and hence better dynamics and more pricing power. I would expect to see this in covered bonds, too, but would the benefit of, say, 2bp be worth it? In Tier 2, depending on the day, it can be more than 10bp, so there it makes more sense. And given the special credit profile of RBI, it is also welcome to be able to have this topic to focus on.

Green bonds involve an enormous amount of work. Even in commercial real estate, we have customers who are not willing to provide data because they ask, why should I provide you the data if I can get the loan somewhere else anyway? On the residential side, it’s even more cumbersome, because in Austria we do not have the data available in a single database — the EPC databases are regional and all differ, the data is not all there, and banks don’t even have access to them. We asked the government to support work on this a few years ago, but nothing has come of it.

Internally, the treasury has incentivised green assets since 2019, because we see the benefit in senior and capital issuance. Separately, the different business lines also have incentives to support green lending and motivate salespeople to go the extra mile to get the information we require.

And issuing a green bond can also be a catalyst within the bank. As you adapt your processes and people hear about the project, the bank experiences a dynamic that it wouldn’t have undergone without the green bond. Because you don’t change anything just by talking; it is by getting things done that you transform the bank. This is why we started issuing green retail bonds and have introduced a sustainable deposit product for corporate customers. The salespeople have a green bond to offer to investors, corporate and retail customers, and they learn what it involves as they do the marketing around it.

Hofmann, RLB NÖ-Wien: We also expect the ESG topic to remain in focus going forward. In our medium term funding plans, we would like to issue social bonds, green bonds, or ESG bonds in general. As we’ve heard, the challenges for us are definitely the data. And what we’ve experienced is that you have to transform every process across the entire company, which involves a lot of work internally and simply takes time. But we know it’s necessary and we are focusing on that.

Day, The CBR: Robert, Oberbank issued the first Austrian green covered bond — how do you see things developing?

Musner, Oberbank: It’s really a kind of revolution for the banks. In former times, we looked into the figures, the balance sheet and the business model. Now we have also to look into the CO2 emissions, what pollution there is, and that’s completely new for our colleagues who work with the clients.

Indeed, we issued the first green covered bond from Austria. This was great from a marketing perspective, but it was quite tough — we made it compliant with the Taxonomy and that was challenging. Roughly two-thirds of our business is corporate loans and that’s more difficult than commercial real estate, for example, where we could get energy certificates and so on. With corporates, we have to look at their overall activities and work with them on the transition. For example, we have a major stake in Voestalpine, Austria’s biggest steel producer, and we are supporting them in changing their production so they no longer work with coal in the future but use other energy sources. We have joined PCAF and are joining the Science Based Targets initiative — where RBI was the first Austrian bank which joined. So we are doing a lot, both to get hold of the data and to convince clients to invest in climate-friendly measures. The covered bond was in a way a first step, but everything else is much more important. It’s nevertheless important to highlight to investors that you are working hard on this topic, and the covered bond helped do that. We did not issue the bond to improve our sustainability ratings, but the establishment of processes necessary for this also has a positive influence on the ESG rating.

Blenke, Hypo Tirol Bank: If you read the Taxonomy, it’s very, very complicated. We as a bank are expected to fulfil things we can’t do in practice. For example, we have to audit the regulations for water-saving in a new house, but how can we do so? It has to be fixed in the building regulations. So how can I judge if a new house is EU Taxonomy-compliant or not? Furthermore, we are in a region where water supply is not even a topic.

Heim, DZ BANK: I believe we will see more banks issuing green covered bonds going forward. It is a lot of work, but the topic is too important and will be done regardless. We try to support the issuers with the expertise of the in-house ESG team to keep track of the many developments going on.

Day, The CBR: We’ve talked mostly about energy efficiency and transition measures. But there’s also the potential physical impact of climate change and its economic consequences to consider. The lack of snow for winter sports made headlines this year — what does the future hold for such areas?

Blenke, Hypo Tirol Bank: It’s a big topic for us in Tirol. We didn’t have a lot of snow this winter, but it wasn’t a problem for skiers because we have snow-making machines in nearly every skiing area in Tirol. Without snow-making, it is difficult to have a viable winter season. The local university has studied the outlook for winter tourism and found that as long as there are good snow-making machines available, there can be around 90-day winter seasons for the next 20 to 30 years, so in the medium term there’s no problem for ski tourism. But in the longer term, we could face problems, so tourism areas need to plan for this. In this respect, we have a big asset, the mountains, and we have seen a big summer tourism push in our region — with bike parks, for example, and downhill slopes. This is really a growing business and summer tourism is the topic our region must tackle.

Musner, Oberbank: In upper Austria, we are already closing some ski resorts because the average temperature is much too high. And so just like Voestalpine, they need to look for ways to change their business model — how do you develop a summer tourism business? And if you are a bank who is financing them, then there is more risk. It’s therefore good that we are focusing on this aspect, looking at who is taking the right action.

You can also download a pdf of this roundtable here.