Lucky Spain.
Spanish banks’ funding via European Central Bank repo facilities dwindled late last year as the financials made use of a new (repo) agreement with LCH.Clearnet.
From Morgan Stanley:
Unlucky Spain.
Declining ECB funding has been replaced in part with covered bond issuance (a natural progression given new regulatory emphasis on longer-term funding).
Unfortunately, funding-by-covered-bond is getting more expensive for them.
As Morgan Stanley notes, there’s been a rather significant increase in the cost of funding for Spanish banks in the covered bond market this month.
BBVA, for instance, managed to get away a €1.5bn three-year covered bond but at a spread of 225 basis points over mid-swap. Meanwhile Santander did a €1bn five-year covered bond at a 225bps spread. For context, in January last year, the banks were funding similar-sized programmes at just 50bps over swaps.
True the Spanish covered bond (or cedula) deals took place in a general January rush to issue, but there remain plenty of concerns about the strength of the offers. Demand for the bonds was relatively low, and according to The Cover, more than half of the Santander buyers were banks — not the so-called ‘real money’ bid, then.
By some accounts, Spanish banks are already responding to more expensive longer-term funding by pulling back on their loan books and increasing their use of market repo funding. Morgan Stanley, however, see more of the former:
In the face of rising funding costs, we expect that the main source of funds will stem from incremental balance sheet deleveraging, especially in the peripheral countries. The effect of this, however, will be to place direct pressure on lending volumes, resulting in lower [net interest income] margins and lower growth rates in the wider economy.
Or, la liquidity trap.
Related links:
More Spanish banking negativity - FT Alphaville
Spanish banking negativity – FT Alphaville
Spanish banks’ financing costs spur doubt on profit - Bloomberg
Spain is all about the banks – FT Alphaville