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Creval 2027: an undervalued euro bond

In this period it is increasingly difficult to identify bonds with an attractive yield, but by patiently looking for some opportunities you will find them. Today we review a subordinated bond in euros with a yield of 6.5% gross.

The issuer

Credito Valtellinese (Creval) is an Italian banking group based in Sondrio.

Over the last few years, Creval has worked hard on reducing bad loans and strengthening its capital. During 2018 it successfully pursued a capital increase of 700 million euros. At the end of the year the bank boasted a strong improvement in CET1 (13.5% fully loaded) and in the NPE gross ratio (11.0%).

In 2019 a new management was set up. In June it presented a new business plan that envisages a further de-risking of non-performing loans (NPE target Gross Ratio <7% in 2021, and <6.5% in 2023) maintaining a solid capital position (target CET1 >14% in 2021/2023). Other significant measures are the cost / income improvement plan (target 65% in 2021, 59% in 2023; in 2018 it was 68.3%), the focus on households and businesses in the bank's territories, and the plan to reduce its exposure to Italian sovereign bonds. In a note, Moody's considered this plan to be "credit positive" and that it could facilitate a possible aggregation with other banks in next future.

The results of the first half of 2019, released last week, show a net profit of 23.8 million euros, a CET1 (fully loaded) improved to 14.0%, and non-performing loans coverage increased to 58.9% (from 55.9% of December 2018).

An undervalued bond

In the early months of 2017, during a difficult period for Creval, a subordinated bond was issued for 150 million euros, with a gross annual coupon of 8.25%. In particular, it is a tier-2 subordinated bond maturing on 12 April 2027, and callable from 2022. It pays a fixed annual coupon of 8.25% until April 2022, and subsequently, if not called up, a variable coupon equal to 8.55% + EURCMS5Y (5-year swap rate). Unfortunately the minimum denomination is 100K euros. It is listed on the Luxembourg Stock Exchange and on EuroTLX. All the details in the XS1590496987 card.

At the time of writing, the last price on EuroTLX is 103.76. The book has a 103.75 in buy and a 105.40 in sell. In Luxembourg Stock Exchange the last price was 104,118.

Assuming you could buy it at 104, if not recalled, it would have a yield to maturity around 7.4% gross per year; if recalled in April 2022, the gross yield at maturity would be around 6.5%. Considering the asset position of Creval, and the yields of the subordinated tier-2 of equivalent banks, this obligation seems very undervalued.

Moreover, having a very high coupon rate, I would not be surprised if in April 2022 Creval decided to call it back, as it could probably issue a new one at better conditions for the issuer.

Don't understimate the risks

It is important to remember that this is a subordinated bond, therefore very risky, that the minimum amount does not make it accessible to everyone even in a logic of investment differentiation, that the long-term maturity makes it exposed to strong price changes.



Bonds, Corporate, Financials, Banking, Europe developed, Italy, EUR, Fixed Floating Rate, Income, Ideas


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