This report collates timely information on EU GSIBs’ prudential capital, leverage and liquidity ratios with updated information as at 30 June 2018. It also illustrates the recent performance of the debt and contingent convertibles (CoCo) markets and the funding structure for banks in Europe. Among the main findings of this report: The weighted average CET1, liquidity coverage ratio and leverage ratios for EU GSIBs stood broadly unchanged against the ratios reported in 1Q2018 EU GSIBs end-point CET1 ratio stood at 13.09% in 2Q 2018, almost unchanged from 13.15% in 1Q18. Earnings retention contributed 25bps to the CET1 ratio variation. This increase was offset by an increase in RWAs (-4 bps). FX variation and other bank-specific factors such as litigation and conduct charges and pension costs by one bank and share buy-backs by another bank also contributed to fully offset the contribution of profit retention (-26bps). End-point Tier 1 ratios slightly decreased to 14.8% in 2Q 2018, from 14.9% in 2Q 2018. End-point Leverage ratios (LR) stood at 4.69% in 2Q 2018, almost unchanged from 4.71% in 1Q 2018. Liquidity Coverage Ratio (LCR) slightly improved at 145.2% on a weighted average basis in 2Q 2018, from 145.1% in 1Q 2018. Box 1 of this report (pages 19-24) summarises a recent AFME report on Capital Markets Union (CMU) Key Performance Indicators: Measuring Progress and Planning for Success. This report is the first publication in annual series which will review developments in the CMU project. The report finds that although some capital markets areas have shown encouraging improvements over the last years, EU corporate issuers continue to be over reliant on bank finance, the flow of capital continues to be fragmented along national lines, and capital markets need further scale and depth to support economic growth and innovation. Capital raising from markets decelerated from a year ago. The amount of new capital raised during the first nine months of the year by EU banks totalled €17.1bn. This compares with €49bn raised during the same period of 2017 and €57.5bn in 2017 full-year (FY). The largest contribution to total capital raising from markets was from CoCos, with a total of €15.3bn, and less significantly from secondary offerings (€1.4 bn). Higher debt servicing costs for new CoCos. Average coupon rates for newly issued CoCos have increased during the year, from record-lows observed in the first quarter of 2018.

This report provides a comprehensive data source with updated statistics of the Government bond primary and secondary markets in Europe (EU28). Average daily trading volumes of European government bonds decreased by 12% YoY during 2Q18, driven by a significant decrease in German (-16%YoY) and French (-18% YoY) trading, only partially offset by increases in UK (17% YoY) and IE (78% YoY). 2Q18 saw the lowest trading volume for a second quarter since 2013.The 12% annual fall in government bond trading during 2Q18 is of smaller magnitude than the annual decline in investment-grade corporate bonds (-17% YoY according to Trax), but larger than European equities (-1% YoY according to CBOE markets) and contrasts with the annual increase in high yield corporate bonds (+1% YoY according to Trax) and global FX trading (+16% YoY, according to CLS). European Government bond and bills gross issuance declined by 12% compared to 1Q18 and was 5.8% below the volume issued in 2Q17. The second quarter of the year saw 3 long-term credit rating upgrades for EU countries (after 8 upgrades in the first quarter) and no downgrades. This reflects significant credit quality improvements of European sovereign issuers, particularly of southern European and CEE countries, bringing the year to date total to 14 upgrades and 0 downgrades (3 further upgrades so far in 3Q18).

Main findings: In Q2 2018, EUR 67.2 billion of securitised product was issued in Europe, an increase of 14.8% from Q1 2018 but a decline of 8.0% from Q2 2017. Of the EUR 67.2 billion issued, EUR 37.7 billion was placed, representing 56.1% of issuance, compared to the 55.1% of issuance in Q1 2018 and the 54.2% of issuance in Q2 2017. CLO refinancing (“refis”) activity continued in the second quarter of 2018; according to Thomson Reuters LPC, the combined amount of European CLO resets and refinancings totalled EUR 5.1 bn in Q2 2018 (EUR 4.3 bn in Q1 2018). Outstanding volumes rose slightly to EUR 1.2 trillion outstanding at the end of Q2 2018, an increase of 0.7% QoQ and an increase of 8.0% YoY. Credit quality: In Europe, upgrades outpaced downgrades in Q2 2018, with upgrades concentrated in prime RMBS. European asset backed commercial paper (ABCP) issuance was EUR 109.4 billion in Q2 2018, an increase of 60.3% QoQ (from EUR 68.2 billion in Q1 2018) and a 59.8% increase YoY (from EUR 68.4 billion in Q2 2017). Multiseller conduits continue to dominate as the largest category of issuer in the ABCP market, particularly from France and Ireland in the second quarter. Regulatory update: On 30 July 2018, the EBA published its final draft Regulatory Technical Standards (RTS) on risk retention and homogeneity, which, together with ESMA’s technical standards on disclosures and STS Notification, form key parts of the STS Securitisation reform. The final drafts of the EBA’s and ESMA’s technical standards will be submitted for the European Commission’s endorsement and are later subject to the scrutiny period by the European Parliament and the Council. Therefore, it is possible for these RTS to enter into force before the 1 January 2019 start date of the STS regime, but this is by no means a certainty, especially in case of the RTS on disclosures. Liquidity Coverage Ratio (LCR): On 13 July 2018, the Commission published the final text of revisions to the Liquidity Coverage Ratio (LCR) Delegated Act which, disappointingly, falls short of improving the treatment of STS securitisations (which remain classified as Level 2b assets).

The report contains European leveraged finance market trends for the second quarter of 2018, which includes issuance and credit performance figures for the high yield and leveraged loan markets. Key highlights: European leveraged finance issuance (leveraged loans and high yield bonds) decreased to €48.3 billion in 2Q’18, a 31.9% decrease from €70.9 billion in 1Q’18 and a 41.1% decrease from €82.0 billion in 2Q’17. The issuance volume for 2Q’18 was the lowest quarterly total since 1Q’16. Primary high yield issuance totalled €24.2 billion on 58 deals in 2Q’18, a 0.6% decrease from €24.4 billion on 68 deals in 1Q’18 and a 29.9% decrease from €34.5 billion on 86 deals in 2Q’17. The proportion of USD-denominated issuance decreased to 20.0% of all issuance in 2Q’18, down from 44.0% in 1Q’18 and from 42.7% in 2Q’17. High yield issuance for refinancing and/or repayment of debt in developed market Europe increased to €5.4 billion in 2Q’18, representing 24.0% of all issuance in 2Q’18, an increase of 2.8% from €5.2 billion (27.8% of total) in 1Q’18 and up 7.0% from €5.0 billion (21.1% of total) in 2Q’17. In emerging market Europe, €0.3 billion (14.0% of total) in high yield debt was issued for refinancing and/or repayment of debt in 2Q’18, a 38.8% decrease from €0.4 billion (7.4% of total) in 1Q’18 and unchanged from €0.3 billion in 2Q’17. Leveraged loan issuance, including first lien, second lien, and mezzanine financing, decreased to €24.1 billion in 2Q’18, a 48.3% decrease from €46.6 billion in 1Q’18 and a 49.3% decrease from €47.4 billion in 2Q’17.Refinancing and/or repayment of debt were the largest use of proceeds in 2Q’18 with €8.5 billion, followed by leveraged buyouts with €8.3 billion or 34.6% of total, and acquisitions with €6.9 billion or 28.7% of total.Pricing spreads for institutional loans tightened by 3 basis points (bps) q-o-q and by 32 bps y-o-y, while spreads for pro rata loans remained unchanged q-o-q and tightened by 53 bps y-o-y. Credit quality: As of June 2018, S&P reported the trailing 12-month speculative-grade default rate at 1.8%, a decrease from 2.1% end-March 2018 and from 2.1% end-June 2017. Moody’s reported the trailing 12-month speculative-grade default rate in June 2018 to be 2.2%, down from 2.8% end-March 2018 and from 2.8% end-June 2017.Six bond-related defaults were reported in the second quarter of 2018, four in developed market Europe and two in emerging market Europe. The most common reason for default in 2Q’18 was distressed exchange.According to S&P, in 2Q’18 upgrades exceeded downgrades in developed market Europe (31 upgrades to 26 downgrades), a slightly better ratio than 22 upgrades to 20 downgrades in 1Q’18 and compared to 29 upgrades to 26 downgrades in 2Q’17. In emerging market Europe, there were 4 upgrades and 5 downgrades by S&P in 2Q’18 compared to 11 upgrades and no downgrades in 1Q’18 and 4 upgrades and 5 downgrades in 2Q’17.

Key highlights: In Q2 2018, EUR 67.2 bn of securitised product was issued in Europe, an increase of 14.9% from Q1 2018 (EUR 58.5 bn) and a decrease of 7.9% from Q2 2017 (EUR 73.0 bn). Of this, EUR 37.6 bn was placed, representing 56.0% of the total, compared to EUR 32.2 bn placed in Q1 2018 (representing 55.0% of EUR 58.5 bn) and EUR 39.6 bn placed in Q2 2017 (representing 54.2% of EUR 73.0 bn). In Q2 2018, PanEuropean CLOs led placed totals followed by UK RMBS and German Auto ABS.- PanEuropean CLOs increased from EUR 11.7 bn in Q1 2018 to EUR 15.2 bn in Q2 2018. According to Thomson Reuters LPC, the combined amount of European CLO resets and refinancings totalled EUR 5.1 bn in Q2 2018 (EUR 4.3 bn in Q1 2018).- UK RMBS increased from EUR 5.6 bn in Q1 2018 to EUR 9.7 bn in Q2 2018- Germany Auto ABS decreased from EUR 3.3 bn in Q1 2018 to EUR 1.9 bn in Q2 2018

This report provides an update on the performance of the equity market in Europe in areas such as primary issuance, Mergers and Acquisitions (M&A), trading, and valuations. Key highlights: Equity underwriting (IPOs, follow-ons and convertibles) on European exchanges accumulated a total of €78.8 bn in proceeds in the first half of 2018, a 39% decrease from the value originated in 1H17 (€129.0 bn). Notwithstanding the year-to-date decline, IPO issuance in 1H18 increased by 19% against the amount issued in the first half of 2017. Completed Mergers and Acquisitions (M&A) of European companies totalled €496.0 bn in 1H18, a decrease of 1% from 1H17 (€ 499.3 bn). This included large megadeals such as Bayer-Monsanto, which represented 12% of the total deal value (€59.1bn). The amount of announced M&A deals totalled €674.1 bn, a 45% increase from 1H17. This includes large megadeals such as Takeda Pharmaceutical -Shire plc (€65bn) and Walt Disney-Sky (€30bn). Equity trading activity on European main markets and MTFs generated a total of €6.2 tn in turnover value in 1H18, an increase of 4% from 1H17 (€6.0tn) MiFID II dark trading caps: On 7 March 2018, ESMA published the double volume cap (DVC) data files specifying the securities that surpassed the MiFID II limits of dark trading on EU venues. The files are updated on a monthly basis based on trading activity on EU venues for all equity-like instruments in the EU during a 12-month rolling period - From a Universe of 23,105 equity-like securities traded in the EU, 1,024 are currently suspended (as of July 2018) from dark trading either on specific EU venues (69 securities) or on all EU venues (955) after surpassing the MiFID II dark trading thresholds (4% of the total activity on a single dark venue, or 8% of total trading market-wide for suspension at EU level). - The number of banned instruments has increased during the year from 755 in March 2018) - The total of 1,024 instruments suspended from dark trading at the EU or trading venue level represents 4% of the Universe of equity-like instruments on ESMA’s DVC files (23,105) -The proportion of dark trading as a percentage of total turnover sharply decreased after the introduction of the MiFID II dark trading caps (from c9.5% of order book transactions in Oct-17 to below 4.5% in Jun-18). Domestic market capitalisation of European listed shares stood at € 13.3 tn at the end of 1H18, a decrease of 0.2% from the market value at the end of 4Q17 (€13.4 tn) Annual variation of European Equity activity (EU28 member countries and Switzerland): 1H18 vs 1H17

This report provides a comprehensive data source with updated statistics of the Government bond primary and secondary markets in Europe (EU28). Some highlights include: EU government bond trading volume fell 17.6% year-on-year, with France, Sweden and Finland showing the largest reductions. Although there was a quarterly increase in government bond trading from Q4 2017, which was part driven by seasonal factors, this is the lowest trading volume for a first quarter since 2013. French government bonds auctions have shown a ‘green yield premium’, allowing the French government to issue 21 and 22 year green OATs at yields similar to 16 year non-green OATs. Of the five countries that saw the largest increases in weighted average maturities of outstanding government bonds in the last quarter, four were CEE countries. Sweden experienced the largest increase of over 8%; however, it is still the only country in Northern and Western Europe with a weighted average years-to-maturity of less than 5 years. The continuous convergence of CDS spreads in the EU from Q1 2017 to Q1 2018, ended in Q2 2018 as the Italian election caused credit risk to increase in Spain, Portugal and Italy, and to cease the decline in Greece.

AFME is pleased to circulate its Q1 2018 Prudential Data Report. This report collates timely information on EU GSIBs’ prudential capital, leverage and liquidity ratios with updated information as at 31 March 2018. It also illustrates the recent performance of the debt and contingent convertibles (CoCo) markets and the funding structure for banks in Europe. Among the main findings of this report: The weighted average CET1, T1 and leverage ratios for EU GSIBs slightly declined during the quarter, due in part to permanent factors such as the implementation of the new accounting standard (IFRS9). The new accounting standard, effective from 1 January 2018, had a direct impact on classification and measurement of financial instruments’ fair values and impairment methodology. EU GSIBs decreased their end-point CET1 ratio to 13.1% in 1Q 2018, from 13.4% in 4Q 2017. The implementation of IFRS9 in 1Q18 had a weighted average impact of -24 bps on CET1 ratio. This impact is estimated assuming full adoption of the new accounting standard (notwithstanding that some banks have adopted transitional measures). End-point Tier 1 ratios decreased to 14.9% in 1Q 2018, from 15.1% in 4Q 2017. End-point Leverage ratios (LR) declined from 4.9% in 4Q 2017 to 4.7% in 1Q 2018. Liquidity Coverage Ratio (LCR) improved at 143.3% on a weighted average basis in 1Q 2018, from 140.3% in 4Q 2017. Box 1 of this report (pages 22-26) summarises a recent AFME - PwC study on the “Impact of Regulation on Banks’ capital markets activities: an ex-post assessment”. Capital markets assets at a global level fell 39% from 2010 to 2016, with a more significant impact in some product segments like rates (-47%), credit (-50%) and equities (-43%). According to the study, regulation accounts for 67% of the total explained shrinkage in capital markets balance sheets of the banks in the study. Additionally, capital markets regulation costs 14 percentage points to banks’ capital markets ROE. EU banks have raised a total of €10.9 bn in new capital in the form of follow-on offerings, contingent convertibles (CoCo), and other convertible securities in the first five months of the year. This compares with €35.7bn raised during the first five months of 2017. EU GSIBs have continued to issue bail-inable senior non-preferred bonds, accumulating a total stock of €59.1bn as of 25 May 2018 (€26.4bn in 3Q17), as banks continue to prepare for the implementation of TLAC/MREL requirements.

Main findings: In Q1 2018, EUR 57.4 billion of securitised product was issued in Europe, a decline of 22.7% from Q4 2017 but an increase of 42.7% from Q1 2017. Of the EUR 57.4 billion issued, EUR 31.5 billion was placed, representing 55.0% of issuance, compared to the 42.6% of issuance in Q4 2017 and the 42.0% of issuance in Q1 2017. CLO refinancing (“refis”) activity continued in the first quarter of 2018; according to Thomson Reuters LPC, the combined amount of European CLO resets and refinancings totalled EUR 4.3 bn in Q1 2018 (from EUR 4.8 bn in Q4 2017). More notable was the debut sukuk UK RMBS deal from Al Rayan in February 2018, Tolkien Funding Sukuk 1. Outstanding volumes declined slightly to EUR 1.20 trillion outstanding at the end of Q1 2018, a decline of 2.3% QoQ and a decline of 3.9% YoY. Credit quality: In Europe, upgrades outpaced downgrades in Q1 2018, with upgrades concentrated in European CMBS and prime RMBS. European asset backed commercial paper (ABCP) issuance was EUR 68.2 billion in Q1 2018, a decline of 9.1% QoQ (from €75.0 billion in Q4 2017) and a 17.1% decline YoY (from €82.3 billion in Q1 2017). Multiseller conduits continue to dominate as the largest category of issuer in the ABCP market, particularly from France. Regulatory update: After the publication of the “Simple Transparent and Standardised” (STS) securitisation Package in the Official Journal of the EU on 28 December 2017, the attention has turned now to the implementation and development of the related secondary legislation, including technical standards and guidelines. Solvency II: On 15 April 2018, the EC draft delegated regulation on Solvency II revision was published for a short consultation and it has been subsequently adopted by the EC on the 1 June 2018. Although there have been some positive developments in terms of lowering the capital charges for the STS senior positions (which are now comparable to those applying to corporates), the treatment of non-senior STS tranches and non-STS securitisation remains highly problematic and does not provide any incentives for insurer investors to return to the ABS market.

The Report contains European leveraged finance market trends for the first quarter of 2018, which includes issuance and credit performance figures for the high yield and leveraged loan markets. Key highlights: European leveraged finance issuance (leveraged loans and high yield bonds) decreased to €62.8 billion in 1Q’18, a 39.9% decrease from €104.5 billion in 4Q’17 and a 30.6% decrease from €90.5 billion issued in 1Q’17. The quarterly decrease in 1Q’18 was driven by both a 41.5% decrease in leveraged loan issuance and a 37.1% decrease in high yield bond issuance. Primary high yield issuance in 1Q’18 totaled €24.3 billion on 77 deals, a 37.1% decrease from 4Q’17 (€38.6 billion on 103 deals) and a 31.1% decrease from 1Q’17 (€35.3 billion on 88 deals). The proportion of USD-denominated issuance increased to 43.8% of all issuance in 1Q’18, up from only 18.7% in 4Q’17 and up from 37.5% in 1Q’17. High yield issuance for refinancing and/or repayment of debt in developed market Europe decreased to €5.2 billion, representing 27.9% of all issuance in 1Q’18, down from €14.3 billion (40.3% of total) in 4Q’17 and from €27.1 billion (30.9% of total) in 1Q’17. In emerging market Europe, €0.4 billion (7.4% of total) in high yield debt was issued for refinancing and/or repayment of debt in the first quarter of 2018, a decrease from €1.1 billion (34.4% of total) in 4Q’17 but up from no issuance for this purpose in 1Q’17. Leveraged loan issuance, including first lien, second lien, and mezzanine financing, decreased to €38.5 billion in the first quarter of 2018, down 41.5% q-o-q (€65.8 billion in 4Q’17) and down 30.2% y-o-y (€55.2 billion in 1Q’17). Refinancing and/or repayment of debt were the third largest use of proceeds in 1Q’18 with €10.2 billion, following acquisitions with €15.1 billion or 39.1% of total, and leveraged buyouts with €10.4 billion or 27.0% of total. In the first quarter of 2018, pricing spreads for institutional loans tightened by 2 basis points (bps) q-o-q and by 40 bps y-o-y while spreads for pro rata loans tightened by 18 bps q-o-q and by 133 bps y-o-y. Credit quality: As of March 2018, S&P reported the trailing 12-month speculative-grade default rate at 2.1%, a slight decrease from 2.4% end-December 2017 and unchanged from 2.1% end-March 2017. Moody’s reported the trailing 12-month speculative-grade default rate in March 2018 to be 2.4%, down from 2.6% end-December 2017 and from 2.5% end-March 2017.Three bond-related defaults were reported in the first quarter of 2018, all from U.K. based companies. Two defaults were due to distressed exchange and one firm filed for Chapter 11.According to S&P, in 1Q’18 upgrades exceeded downgrades in developed market Europe (22 upgrades to 20 downgrades), a slightly worse ratio than 47 upgrades to 26 downgrades in 4Q’17 and than 37 upgrades to 16 downgrades in 1Q’17. In emerging market Europe, there were 11 upgrades and no downgrades by S&P in 1Q’18 compared to 5 upgrades and 7 downgrades in 4Q’17 and no upgrades and 4 downgrades in 1Q’17.