OREANDA-NEWS. EMEA financials issuance in 2016 could reach a similar level to this year's total as lending stabilises and banks continue to reduce their pace of deleveraging, says Fitch Ratings in a new report.

The lure of cheaper funding in the Yankee market and a further boost to covered bonds from the ECB's asset purchases could continue to support issuance in 2016 - as has been the case this year -while credit ratings are likely to continue their improvement in 2016.

Outlooks and Watches on Fitch-rated entities are at their least negative net level since the financial crisis, indicating diminished downgrade risk for 2016. The move came as Positive Outlooks have risen to a post-crisis high, while entities on Negative Outlook are close to the lowest level since 2011. The Outlook for developed-market EMEA is Stable, while Russian entities drive the Negative Outlook in emerging markets.

Asset quality remains a challenge in parts of the region (e.g., southern Europe and large parts of Russia/CIS), while we expect further pressure on capital markets earnings for global trading and universal banks.

Issuance rose 24% yoy in 11M15, boosted mainly by covered bonds. A combination of ECB covered bond purchases and greater market volatility provided conditions for borrowers to increase supply. The rise comes after two straight years of declines for covered bonds in which subordinated issuance grew in prominence due to banks' capital buffer-building efforts.

European banks increased their issuance of US dollar-denominated bonds to diversify sources of funds and benefit from a deeper market with strong investor demand for higher-yielding assets, while negative cross-currency basis swap spread made it cheaper for some banks to issue in US dollars and swap the proceeds into European currencies. Yankee bond issuance rose 5pp in 11M15, and the trend could continue in 2016 as the funding dynamics seem set to remain in place.

Additional Tier 1 (AT1) issuance was strong in 11M15, albeit dropping 9% yoy, with UK banks accounting for 29%, compared with 37% in the same period last year. As AT1s become more established, their growing use by smaller entities with weaker balance sheets mean credit ratings on new issues are likely to be lower in 2016 than to date.