BNP Paribas SA and Societe Generale SA may begin repaying three-year loans from the European Central Bank within weeks after access to funding markets improved, two people with knowledge of the matter said.
The banks, France’s largest by market value, are considering starting to reimburse the funds gradually as early as Jan. 30, when the Frankfurt-based ECB begins accepting repayments for its long-term refinancing operation, said the people, who requested anonymity because the matter is private.
European banks borrowed about 1 trillion euros ($1.33 trillion) during two three-year loan allotments in December 2011 and February 2012 as the ECB sought to prevent the euro area’s sovereign-debt crisis from spawning a credit crunch. Funding conditions have since improved, reducing the extra yield investors demand to hold European financial company bonds compared with German government debt to the lowest since February 2008, Bank of America Merrill Lynch’s Euro Financials Index shows.
“Whilst many banks have been reticent to disclose their plans, if any, regarding the repayment of ECB funding, we believe that the lion’s share will be confined to national champions from the northern euro zone and the U.K.,” Morgan Stanley analysts led by Huw van Steenis in London said in a Jan. 15 report.
A spokesman at BNP Paribas and a spokeswoman at Societe Generale declined to comment.
Banks’ net borrowing in the LTRO amounted to about 510 billion euros, with French lenders accounting for about 45 billion euros, or 9 percent of the total, the Morgan Stanley analysts estimated. Europe’s banks may reimburse as much as 200 billion euros this year of the net amount, with French banks repaying at least 25 billion euros, the analysts wrote.
With French sovereign yields near record lows and investors’ concern over the euro-area debt crisis receding, France’s largest banks have been able to sell bonds at yields competitive with the cost of the ECB’s loans.
On Jan. 3, Societe Generale sold 2 billion euros of two-year notes yielding 48 basis points more than three-month Euribor. BNP Paribas today added 1 billion euros to its floating-rate notes due December 2014 at 33 basis points more than three-month Euribor, according to data compiled by Bloomberg. A basis point is equivalent to a hundredth of a percentage point.
LTRO borrowers must pay interest equivalent to the average rate of the ECB’s main refinancing operations over the life of the loan. The central bank’s benchmark rate currently stands at 0.75 percent, down from 1 percent when the loans were made.
Not all banks will rush to repay the funds. Spanish and Italian banks will remain “heavily reliant on ECB money,” the Morgan Stanley analysts wrote. The 12 billion euros borrowed by BNP Paribas’s Italian unit is likely “to remain untouched,” the analysts said.
Italian banks may hold onto ECB funds as other financing is still more expensive.
“We are not planning to repay the LTRO in the short term,” said Victor Massiah, the chief executive officer of Unione di Banche Italiane SCPA, which borrowed 12 billion euros in the LTRO. “Given the current costs of funding, it’s more profitable for Italian banks to do arbitrage using ECB facilities,” he told reporters in Milan today.
Italian lenders are using low-cost funds borrowed from the ECB to invest in the nation’s short-term government bonds. Italian sovereign debt held by banks in the country increased 64 percent to 344 billion euros in first 11 months of 2012. That helped income from trading more than double at UniCredit SpA and Intesa Sanpaolo SpA, Italy’s biggest banks, in the first nine months of last year, according to company reports.
Intesa General Manager Carlo Messina said in November that “it is absolutely our convenience to maintain the LTRO,” while UniCredit CEO Federico Ghizzoni said today he will wait until the last minute to decide on reimbursing the funds.