Positive both on the non-financial and financial

A low rate environment and a subdued EMU growth are historically positive drivers for Credit Markets. The monetary cycle is highly supportive as well: the ECB quantitative easing programme will support the Corporate bond markets.

Fundamentally, financial companies continue to gradually reinforce their capital ratios while non-financial companies are preserving their Credit metrics (high level of cash combined with a controlled financial leverage…). In case of a corporate asset purchases program, euro denominated and domiciled issuers should be prime targets. In that context, we keep our overweight mainly on Utilities, Telecom, Automobile and Industrial sectors.
We underweight the Oil & Gas sector which is suffering from the decline of oil prices.

Bottom-up opportunities

After the release of the Asset Quality Review, insurance debts have lagged the rally of the financial sector. We are still positioned to benefit from the likely catch up of subordinated insurance debts versus subordinated bank debts.
In the Hybrid space, we prefer the high quality corporate segment. BBB Hybrid issuers offer 100 basis points of yield pick-up compared to the rest of the BBB universe (Chart 6).
More generally, we prefer BBB issues than higher ratings in a low yield environment with faded spreads.

Stay away from Austrian banks

The CHF floor abandonment adds pressure to already weak Austrian banks. CHF-denominated loans to households and non-financial corporations in the Austrian banking system amount to EUR 29bn at the end of 2014, nearly 11% of total loans. In that context we have reassessed the credit quality of the names the most exposed. In particular Erste Bank: while the CHF impact should be manageable, it adds pressure to an already weak situation: the asset quality is deteriorating, the revenues are very volatile and the business profile is very exposed to Eastern Europe issues.