A reduction in Spanish borrowing from the ECB can only be a good thing.
Right?
Riiiiiiiiight.
UBS banking analysts Alastair Ryan and John-Paul Crutchley are back to tear apart what improvement there has been in the Spanish banking system. And when they talk we should probably listen. The pair were some of the first to catch on to the eurozone bank-sovereign ‘carry trade’ that helped spark the current crisis.
According to them, Spanish banks’ ECB borrowings have been falling because:
Spanish net ECB borrowing has fallen sharply since the summer – down by €63 billion. However, this does not reflect deposit growth and only partially is explained by term debt issuance. Deposit growth in the period was only €3 billion, below 1% on an annualised basis. Term debt issuance was significant at €30 billion on a gross basis.
However, most was required to meet maturities and the gross was dominated by the (non-Spanish subsidiaries of) Santander. Santander accounted for 48% of issuance compared with 14% of the stock of loans. Moreover, while Santander has reported its group (including Banesto) as a user of ECB facilities, we believe these were and remain in the single-digit billion area. The large drop in Spanish ECB usage must therefore be related to things other than an ability to raise deposits or achieve significant term debt issuance. We attribute it to three factors:
- * A shrinking loan book – down €7 billion in the three months, 2% annualised* An increased use of market repo funding, typically in the one week to one month area. October figures are not yet available, but in August and September, when Spanish ECB usage fell by €32 billion, repo funding for the system rose by over €18 billion, according to the Bank of Spain* A reduction in the carry trade
None of these are really ‘good’ for the Spanish economy.
The first tends to be deflationary — and bad for banks’ income (more on which later). While increased use of short-term repo funding means Spain’s banks will be more vulnerable to any upcoming market shocks. As for that carry trade — which saw banks use ECB liquidity to buy up local (in this case Spanish) govt bonds — ending…
The UBS analysts figure the Spanish banking system has largely avoided reporting much of the impact of declining customer spread (a basic measure of profit made off a banking customer) via its use of that Spanish govt bond carry trade. If that trade is now ending then customer spreads will show up as reduced — even negative.
In fact — there are places where they’re already negative:
In Chart 9, we look at marginal mortgage rates compared with marginal time deposit rates. We note it is possible that from March next year that time deposit rates fall, as initial 4% offers mature. However, on current pricing, go-to customer spreads are now arguably negative, having turned negative over the summer, as the deposit war continued but loan book repricing was muted. Given that the back book is largely at a fixed spread to EURIBOR, this lack of new business repricing is potentially significant.
And even if that carry trade is now limping to a slow finish, higher funding costs via increasing Spanish bond yields still won’t help much. UBS figures there’s a €610bn gap between loans and deposits in the Spanish banking system — and €733bn of those are time or term deposits (money that cannot be withdrawn for a fixed period):
Even Santander, the best funded of the banks, has a funding position in this context different from its international peer, HSBC … Time deposits, as emphasised by the pricing war underway since early this year, are often effectively priced off wholesale funding costs – and may become increasingly expensive if Spanish sovereign costs remain elevated.
Unsurprisingly then, the UBS analysts have Santander, Popular and Sabadell as a Sell. They rate Banesto, BBVA, Pastor and Bankinter as Neutral.
Related links:
The Spanish (asset) Elimination – FT Alphaville
The fight for deposits in Spain – FT Alphaville