It’s called relationship lending for a reason: once a bank and its customer tied the knot, the two were bound together for better or worse, richer or poorer, in sickness and in health. The bank would extend credit when others might not; the client would display loyalty in turn, offering its lender other, lucrative roles.
That model isn’t dead, exactly, but it’s going through a pretty radical change – particularly for big, long-dated exposures.
“Banks aren’t a good home any more for very long-dated loans. What we’re doing more and more is going out and finding investors who have the appetite for those assets. Effectively, we’re playing the role of a match-maker,” says Anne-Christine Champion, global head of distribution and portfolio management (DPM) at Natixis in Paris.
It’s a role the team is playing because of a radical overhaul. Over the past two years, a classical credit portfolio management function has expanded to incorporate loan servicing and syndication teams – hence DPM instead of CPM.
And it’s paying off. As a match-maker for investors and borrowers, Natixis has been able to originate more business than it could otherwise have done: over the past five years, while holding its risk-weighted assets (RWAs) more or less steady, the bank has doubled the annual volume of loans it originates.
The centrepiece of the match-making strategy is the bank’s partnership programme.
By the end of this year, Natixis expects to have 10 partners in its infrastructure loan-sharing scheme – agreements struck with life insurers that want exposure to super-long-dated loans, but lack the ability to originate such assets themselves. The insurers commit a certain amount of capital; Natixis finds the borrowers.
Today, it has eight of these agreements – the insurers are in Europe and Korea – with €7 billion of capital committed, and €3bn of loans originated so far.
It works for both sides, Champion argues. She gives the example of a recent US deal in which Natixis and another bank were each underwriting half of the exposure. At the end of the process, the other bank withdrew on the basis that it would not be able to hold the 29-year asset to maturity, and had lost confidence in its ability to place the asset with an investor. Natixis saved the deal, underwriting the full amount, and placing a significant portion with its partner, which had been involved in the transaction from the start.
“Without this programme, we couldn’t pitch for some of these deals. Our partners have competitive liquidity, and without the knowledge that we could share the risk, we wouldn’t have taken the risk of underwriting some of them,” says Champion.
The bank always keeps some of the risk, to align its interests with those of the investors, but some of the deals can be broken up in other ways as well. Natixis will often structure the loan into a floating-rate and a fixed-rate tranche, so the latter matches a life insurer’s liabilities.
Another way to achieve this outcome would be a repack, in which the loan is placed into a special-purpose vehicle, and an interest rate swap is used to convert floating-rate loan cashflows into a synthetic fixed-rate note for the end investor. But it comes with hidden problems, says Alexandre Failler, head of DPM execution, solutions and loan distribution.
“The loan will typically have a prepayment option, which makes it uneconomic. You would have to unwind the swap at the same moment the borrower wants to prepay – but an insurance company doesn’t want to take mark-to-market risk on that swap. So instead we’ll structure a specific fixed-rate tranche for our partners,” he says.
Belgian insurer Ageas was the first investor to sign a five-year agreement with Natixis, in 2012. Last year, it extended that agreement for another five years.
“We were looking for an alternative to government and corporate bonds, and an asset class that would be diversifying for us,” says Wim Vermeir, head of investments with Ageas in Brussels. “At the time, banks were becoming a bit more prudent about long-term lending, so we thought there was a chance to team up – we have long-term funding, they have the knowledge of the market. Natixis clearly understood the strategic rationale.”
The bank’s latest move is to extend this kind of logic to a galaxy of smaller investors. In May, it announced a joint venture with Ostrum Asset Management – one of the boutique managers within Natixis’s buy-side division – that aims to raise an additional €3 billion to co-invest in aviation, infrastructure and real estate loans managed by Champion’s team.
“It means we can now offer financing solutions we couldn’t do as an investment bank – the fiduciary responsibility and portfolio construction, for example. It’s the next step in terms of what we offer to investors and to sponsors,” she says.
It’s also a jab at firms such as Allianz and BlackRock, which have tried to muscle in on bank lenders’ turf in the past few years: “They are competitors and have moved into our space over the past few years; now, we are moving into theirs. This is the challenge we all have at the moment – to be agile in a market that is changing rapidly,” says Champion.
Behind all of this is the familiar story of tougher post-crisis regulations. Capital requirements are higher, liquidity costs have to be recognised, and incoming changes will limit the ability of banks to model their exposures. In addition, new accounting rules require banks to set aside reserves for the entire life of a loan once it suffers a significant dip in credit quality.
The combination of these rules drives up the costs for many loans; but the burden is particularly heavy for longer-dated exposures.
“We don’t aim to provide the most competitive balance sheet in terms of size, maturity or pricing, so instead we have to focus on financing solutions,” says Champion.
This realisation hit the French bank six years ago, when the shadows of the financial crisis were still hanging over the industry. To be fair, it hit other banks at roughly the same time – but Natixis has taken it further than most, using it as the logic for a radical transformation of the credit portfolio management function.
That function is now a business. As part of its expanded remit, DPM also has responsibility for the interest income on the loan portfolio – the carry P&L – with the still-separate loan origination teams now charged with focusing on fee income only. Today, servicing fees represent 40% of the bank’s financing revenues, up from 30% in 2013 – a dynamic that has helped improve the return on capital for the business.
All of this explains why Champion sits on the Natixis executive committee, and the management committee for its corporate and investment banking division – an unusual, possibly unique, level of seniority for a loan portfolio manager.
But alongside all these gains, has anything been lost? CPM teams have traditionally been risk and capital managers. At Natixis, DPM is essentially an entire lending business minus origination – so, does wearing a commercial hat make it a less effective risk manager?
Champion says not, pointing to the fact that the three main links in the lending chain have risk as a shared performance metric, in the form of economic value added – defined as net profit minus the capital consumed by the business.
“The ability to manage risk is a cornerstone of the originate-to-distribute model, because that’s what investors are buying. So, when we moved to this structure in 2016, we ensured the cost of risk would remain a KPI – obviously for DPM, but also for origination,” she says.
Distribution of credit risk at Natixis takes more conventional forms as well, including securitisation. The bank puts more stock in offloading the risk immediately after origination – “the best way to reduce risk is to sell it, not hedge it”, says Champion – but has still executed four large synthetic deals in the past four years, saving roughly €2 billion in RWAs.
Risk.net spoke to one large asset manager during the due diligence process for this award that has invested in multiple tranches of Natixis securitisations.
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