Morgan Stanley is not making recommendations about which European banks to invest in. They are just telling you which ones are even worse than other ones, as they go through the exercise of banks deleveraging assets to the tune of somewhere between €1,500bn and €2,500bn. From the introduction of their report published this Friday:
We make no changes to our most/least preferred today, although we are very conscious the call here is more relative than absolute until we see a “regime change” in the way Europe is handing sovereign crisis, given our concerns of bank deleveraging, stress in bank funding, stress in bank capital and fiscal consolidation being very negative for economies and thereby bank earnings.
That is to say that the analysts are concerned that the banks can’t fund themselves, they are dumping assets as a result, the debt they have issued is being battered in secondary markets, and fiscal consolidation in Europe isn’t going to improve the outlook either. And by “regime change” we think they mean that policy-makers opting to take a more pro-active, hands-on approach rather than relying on announcements that ultimately amount to nothing.
One of the key symptoms of the turmoil in the banking sector is its increasing reliance on the ECB for funding. A trend which has picked up rather notably for French and Italian banks lately, as the graph below shows:
(y-axis denominated in euros)
The next chart gives flavour of just how difficult (read: expensive) it is right now for banks to fund themselves in the primary market by issuing any type of debt, especially unsecured debt:
A bit of caution is required:
However, our 2011 funding survey shows that European banks are now 100% funded on average, having frontloaded their issuance in H1. Notably, the Nordics and BNP have prefunded some of 2012.
That’s good news that they’re already funded, but the analysts also note that European banks have €700bn of debt to roll next year. Compare and contrast to the forecast by SocGen that FT Alphaville shared with you earlier this Friday (that covered euro-denominated debt). By way of reminder — SocGen is anticipating less than half of the senior unsecured issuance that was done in 2011 will be done in 2012. Hence it’s hardly any wonder that the ECB is said to be considering offering longer-term financing.
While French and Italian banks have vaulted past those in Belgium and Spain in terms of absolute use of ECB funds and ELA funds via local central banks (as per the first graph), it’s important to keep a sense of perspective by considering how much these amounts are compared to their banking sectors. The below graph shows how relatively easy it is to prop up the smaller banking sectors of Ireland, Greece, and Portugal, while those dramatic increases in ECB funding for Italian and Frence banks in the first chart didn’t move them up the y-axis much at all:
(The small square is for data as of January 2010 and the big square uses data as of November 23rd, where the latest ECB figures are for October 2011, except France which uses a November 11 number. Buzz Lightyear our addition, by the way…)
The graph also demonstrates how, for the periphery in particular, the distress of the sovereign, as measured by the spread over Bunds, correlates with the local banking sector’s increased dependence on the ECB. And of course the worrying and notable trendline is Italy’s, as it has busted out of the orbit of the core. Meanwhile Spain and Belgium appear to have bucked the trend of increased ECB reliance in the face of sovereign distress — for the time being anyway (and we wonder about the possible impact of Dexia here).
Here’s one more way to view the umbilical relationship between banks and their sovereigns:
Which raises the question of how much the ECB is willing to be the middleman. On the one hand, the ECB is not about to offer help to the sovereigns in order to motivate them to exercise budgetary discipline.
Remind us what the excuse is for not taking the same disciplinarian approach with the banks? And how is not doing so consistent with the ECB’s greatly prized narrow mandate?
Morgan Stanley note in the usual place.
Related links:
European banks’ asset sales face disastrous failure – IFR
ECB lending to eurozone banks hits high - Credit Writedowns
The great de-leveraging – FT Alphaville