ALIZF - AXA: Immaterial Exposure To AT1 Bonds

2023-03-31 14:08:14 ET

Summary

• AXA SA's investment in bank AT1s only stood at €20 million.
• No impact on Credit Suisse senior bonds investment. AXA has also sufficient liquidity and is well above the Solvency II ratio requirements.
• Higher dividend yield versus its peers (and an ongoing buyback) makes AXA SA a buy.

There were busy weeks at the Mare Evidence Lab tower. Firstly, we decided to investigate the EU banking environment ( ISP , BNP , Crédit Agricole , UniCredit, and SocGen ) and now, we are providing an update on one of our favorite sectors: the insurance one. We started analyzing Aegon N.V. (AEG) with a Rating Upgrade, and today we are looking back at AXA SA ([[AXAHY]], [[AXAHF]]). Why? According to our analysis, the French player is Our Favorite Insurer .

Going back to our analysis, with a joint decision between the Swiss Central Bank and the regulator ((FINMA)), the Switzerland Government decided to burn CHF 16 billion Credit Suisse (CS) AT 1 bond as part of the merger with UBS. This decision shook the EU subordinated debt under stress. As a memo, the European market for AT1s amounts to $275 billion. This instrument was born after the 2008 financial crisis and the ultimate scope was to make European banks more solid. So far, this was a restricted and unregulated market that has worked well up to now. However, after the decision to cancel Credit Suisse's At1 bonds, these values received considerable jolts.

As already explained in our Aegon follow-up, AT1 bonds are debt instruments characterized by a trigger (event) that determines the automatic value loss in the event that one of the key factors of the financial solidity of the issuer falls below a pre-established level. They were designed as a loss-absorbing mechanism. In the event that the bank is faced with a lack of capital, bonds come into play, the devaluation of which strengthens the bank's financial position by reducing its liabilities. The problem with Credit Suisse is that the Government canceled the At1 bonds while preserving the shares, while in the Eurozone hierarchy first the equity is canceled, and then the bonds follow.

Regarding our insurance coverage, here at the Lab, there are 3 insurers that have exposure to CS AT1s. In detail, Allianz SE (ALIZF) with €1 million, Zurich Insurance Group AG (ZURVY) with $2 million, and Aegon with €3 million. What about AXA?

According to Reuters , AXA has no investment in Credit Suisse AT1s. The French insurer has also no exposure to Credit Suisse equity. Looking at AXA's exposure towards CS, we see limited investments in covered bonds and senior bonds for a total amount of approximately €600 million (which are now "more" secured thanks to the CS-UBS merger). In addition, at the aggregate level, AXA's investment in bank AT1s only stood at €20 million.

Since March 2023, the STOXX 600 insurance decreased by almost 9% and AXA was in line with this negative trend. However, we can conclude that the company has an immaterial exposure toward AT1s asset class and related to the other CS asset, the FINMA specified that " other" bond won't be written down.

Why are we still seeing capital appreciation potential in AXA?

1. Thanks to our calculation , insurance enterprises have more than a 10% upside in a recession scenario;
2. Still related to our point 1) in our scenario analysis, AXA is offering the highest dividend yield among the EU insurance companies. In line with the recent results, the company decided to propose a DPS of €1.7 per share (up by 10% on a yearly basis). And again, this provides a gap with Allianz and Zurich which increased their dividend yield by 5.6% and 9% respectively;
3. Regarding the AXA solvency, the SRII ratio was at 215% in December end. This provides a solid margin of safety in case of bond defaults;
4. The company recently released a strategic plan called "Driving Progress 2023" and we believe they are well positioned to deliver an EPS growth rate of at least 3%-7%. This is below last year's results, EPS was up by 12.3%;
5. In our internal estimates, our 2023 EPS growth was set at a conservative 4%, and valuing AXA (in line with the historical average) with an 11x Price Earnings ratio, we continue to overweight the company deriving a buy rating target at €31 per share and $32 in ADR (AXA is currently trading at < €29 per share). Given AXA SA's immaterial exposure toward CS's riskier assets, we are not changing our forecast estimates. In our 12-month visible period, we also consider the company's buyback for a total value of €1.1 billion. So, a 6% dividend yield combined with an 8% upside makes AXA a buy.

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