We’re a little bit late to Friday’s note from Citi’s Hans Lorenzen and Aritra Banerjee, but it’s a pretty good assessment of the tensions in European credit markets at the moment:
Without implying causation, corporate credit spreads tend to be highly correlated with European bank stocks. But recently, those conventions have clearly broken down. Most notably, returns on non-financial credit have seemingly decoupled completely from returns on bank equity.
But bank credit returns have also diverged notably from equity returns. And incidentally, the correlation between financial and non-financial credit spreads has broken down too – in case you were in any doubt.
A qualified defense of negative rates effects on banks’ net interest margins, you say?
Go on then.
From Andrew Garthwaite and team at Credit Suisse… Read more
Click for the Bank of Portugal’s announcement of the resolution of Banco Espirito Santo: Read more
Easy to forget now that the crisis-spotters have moved on to EM from the eurozone… but we’re almost coming to the first anniversary of the Cypriot bank depositor bail-in.
Of course, that time has sure flown by. The Bundesbank isn’t even shy about proposing wealth taxes in similar crises any more. But it’s also worth thinking about, given that recapitalisation (and thus, risk in different parts of a bank’s capital structure) is still very much a theme in European bank investing.
Plus, though ordinary Cypriots are still angry about the implosion of the country’s two biggest banks, in that last year or so the country’s economy has probably contracted by less than the double-digit decline expect. Exchange controls and the deposit freeze at Bank of Cyprus have also been (very gradually) lifted over time.
Which is why it’s interesting to look at a trade recently in a Cypriot bank which didn’t see investors get bailed in: Hellenic Bank. Read more
…. are being answered. The European Banking Authority has graced us with the “key features of the 2014 EU-wide Stress Test”. You can find them here and the FAQ here. Read more
A useful chart from Citi on Thursday morning (which you may click to enlarge), on the recent rise in bank holdings of sovereign debt. Read more
That’s because it’s ghostly and hard to spot. (And it is All Hallows’ Eve.)
First it was the buried announcement that Irish banks with government share ownership are about to get Spanish-style flexibility on deferred tax assets… (though not nearly as far as the Spanish proposal for tax-credit conversion) H/T Lorcan
Next it was Bank of Ireland’s stock rising by more than 4 per cent in Dublin late on Thursday. Read more
Click for the ECB’s official introduction to its year-long “supervisory risk assessment… asset quality review and a stress test” for 124 European banks (who are all listed)…
The capital ratios to be used have already been leaked, but here it is in full from Wednesday’s note — it seems there’s a significant wriggle: Read more
FT Alphaville began writing in detail about emergency liquidity assistance in the eurozone — that is, national central banks lending to stricken, but supposedly solvent banks on highly secretive terms, against collateral not accepted at the ECB — some two and a half years ago.
Throughout that period, the ECB’s precise oversight of this liquidity assistance remained in the dark. Despite the risk being taken by taxpayers, and despite the fact ELA effectively stopped the Greek, Irish and Cypriot banking systems from going under at various points. And despite procedures having been in place since 1999 for the ECB to restrict ELA by a national central bank if it endangers the rules of the euro (as used in Cyprus). Read more
There are a few ways to greet the news that eurozone banks are more exposed to their sovereigns than ever. One’s to note that this just means more human shields to deal with (somehow) in a restructuring… Read more
This is one way to respond to the mess Euroland is in over who should make the calls for recapitalising banks…
The European Banking Authority is delaying its next banking stress test to 2014, to wait for both new asset-quality reviews and the ECB’s Single Supervisory Mechanism (so is it to wait for Wolfgang Schaeuble?): Read more
There’s been some thought-provoking revisionism floating around about Cyprus lately.
The gist seems to be this: Why not push bank bail-in policy in the eurozone much harder, right into uninsured depositors if need be, if Cyprus has not (yet?) budged most gauges of bank funding from their current calm. And more importantly, when there is a vicious circle to resolve. Read more
That’s a very small €3.7bn take up by banks participating in the European Central Bank’s three-month Long Term Refinancing Operation on Wednesday. We’d expected more. Read more
LTRO repayment chat is speeding up the closer we get to the fateful day at the end of January when Euro-banks might actually start sending back once cheap cash to the central bank. How much will be repaid, by whom and when are the questions that need to be answered.
Thing is, it seems that by at least one measure, the market is mispricing the amount of cash that’ll flow back to the European Central Bank. And maybe ignoring the ECB’s motives in this whole debate. Read more
Things have gotten so good recently for European banks that the idea of them repaying their LTRO cash early is getting more attention as the first date at which they can do so — January 2013 — creeps up. And there’s certainly more bank debt being issued, even by the peripherals:
Nothing like systemic risk to bring the banks together. The crisis at times left little between them. Eventually though, the market will start to differentiate more. As Huw van Steenis and his colleagues at Morgan Stanley put it in a recent note Read more
What happened with all that European bank deleveraging?
Some of it is over with, says Barclays — leaving, by our estimates of their estimates, about €650bn* of deleveraging yet to be carried out among the major European banks they cover**. Quite big, but much less than the €1.5tn – €2.5tn being discussed late last year. Read more
Basel catches European bank capital legislation letting big cross-border lenders play a bit too fast and loose with zero risk-weighting of government bonds for its taste, the FT says.
Well, here’s the key para… Read more
It relates to government-guaranteed bank bonds. In plain English — this appears to be tightening banks’ future use of them as collateral but with exceptions for some banks.
From Tuesday’s decision: Read more
Portrait of a bank capital-counting model in trouble – charts via Barclays Capital:
Many banks in the eurozone have a significant international presence. The diversification is a positive if the home market is suffering disproportionately. That being the case, perhaps one could expect further investment in less sickly markets abroad?
Maybe. Read more
Charts via Nomura’s European bank analyst, Jon Peace:
Fund managers have been shunning European bank and retail stocks for quite some time now, but there are signs that things are beginning to change. At least that’s what the global equity strategy team at HSBC found when they looked at the latest (March 2012) data on international fund holdings. Three European trends stood out.
Amazingly, European banks are coming back into favour. Well… more like slightly less out of favour (emphasis ours): Read more
In the recent years, the financial crisis has led to a marked deterioration in European financial integration…
You might say that’s a statement of the obvious from the ECB’s latest report on financial integration in the eurozone. Read more
The ECB has some room to further lower the policy rate, given that inflation is projected to fall appreciably below the ECB’s “close to but below” 2 percent inflation target over the medium term and that risks of second-round effects from high oil prices or tax and administrative price hikes appear small––WEO projections see headline consumer price index inflation falling to about 1½ percent by 2013, below the ECB’s target. Low levels of domestic inflation can hinder much-needed improvement in debtors’ balance sheets and stand in the way of much-needed adjustments in competitiveness. The ECB’s unconventional policies need to continue to ensure orderly conditions in funding markets and thereby facilitate the pass-through of monetary policy to the real economy.
Plus: “The Bank of England can further ease its monetary policy stance,” according to the Fund. Read more
The average maturity of a euro of liquidity provided by the ECB on December 1 was 46 days. Today [March 5] it is 942 days, an increase of 20 times
– Lorcan Roche Kelly of TrendMacro, on the ‘time quality’ of €1.1tn LTRO funding Read more
Banks including Barclays, Lloyds and Credit Agricole will use funds they borrowed from the ECB’s three-year liquidity operation to prop up subsidiaries in the economies of the eurozone periphery, the WSJ reports. Barclays’ Spanish and Portuguese units tapped funding in the February LTRO, while Credit Agricole partly borrowed through its Greek offshoot. In getting subsidiaries to fund from the ECB in this way, parent banks will be able to limit exposure to the units if the local economies falter, or even leave the euro altogether. Meanwhile, there are fears that banks will use LTRO cash to redeem so much bank debt in the next year that corporate debt markets could sharply contract, says the FT.