Sustainable Banking in 2024: Navigating Slower Growth and Evolving ESG Dynamics
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ESG supply by banks set to stay strong in 2024
ESG primary market activity by banks is set to remain strong in 2024, but isn't likely to be quite as prosperous as in 2023 due to slower lending growth.
Sustainable bank bond supply on track to reach new highs in 2023
Banks remained very active in the sustainable bond market this year. By the end of October, credit institutions across the globe had issued over €70 billion in EUR sustainable bonds. This is more than €10bn ahead of the sustainable supply over the same period in 2022. We expect green, social and sustainability issuance of banks to reach €80bn this year, up €8bn versus 2022. While banks will still issue notable amounts of sustainable debt in 2024, slower lending growth will probably make it difficult for them to continue to issue at the same pace as this year. We expect to see slightly less sustainable supply next year, despite our forecasted modest rise in total bank supply.
Banks issued €19bn in 2023 YTD (27%) in sustainable debt via the covered bond market, €19bn (28%) in preferred senior, €30bn (43%) in bail-in senior and €2bn (3%) in T2 bonds. This confirms the dominant focus of the ESG issuance on bail-in senior this year. This has been more than a reflection of the general supply dynamics alone. Banks printed 31% of their bail-in senior supply with a sustainable use of proceeds. This compares with much lower shares of 19% in preferred senior, 11% in covered bonds and 10% in T2 bonds. The better observable funding cost advantages of sustainable issuance further down the liability structure form one of the reasons. Besides, the broader investor base for sustainable bonds has supported banks in issuing bail-in senior deals against a backdrop of sometimes volatile market conditions.
Sustainable issuance in bank bonds continues to rise
Green issuance continues to dominate, even though the pickup in social supply is probably more noteworthy. At €13bn YTD, social issuance is up €4bn versus last year year-on-year and on track to beat the peak year 2021 (€14bn in social bonds). The YTD rise in social issuance almost matches the €5bn rise in green supply, while green supply is in total four times as high as social issuance. The supply of bonds with proceed allocations to both green and social projects (i.e., sustainability supply) remains low at €2bn YTD.
Social issuance will continue to become more dominant
Factors driving sustainable bank bond supply in 2024
Slower lending growth (-)
Bank lending growth is stagnating against the backdrop of the rise in interest rate levels. This makes it difficult for banks to substantially grow their sustainable loan portfolios. That said, against the backdrop of the evolving ESG regulation and wider investor and societal push for companies and banks to become more sustainable, the sustainable loan books will still see better growth dynamics than the less sustainable loan portfolios.
Few sustainable bond repayments (-)
Redemption payments in the sustainable bank bond segment remain low, with only €18bn in EUR bonds maturing in 2024. This frees up little space for banks to refinance maturing bonds against the same pool of sustainable assets. Moreover, part of the sustainable loans that fall free may not be refinanced via new sustainable bonds. Either because issuers have strengthened their loan eligibility criteria, or because the loans do no longer fall within the look-back periods that issuers apply for new issuance.
