European Banks Not Out of the Woods Yet After ECB Tender, Investors Say
European banks are still dependent on life-support from the region’s central bank even after asking it for less money than analysts estimated.
Greece’s Piraeus Bank SA and Spain’s Banco Santander SA were among bank stocks that rose after the European Central Bank said yesterday it lent firms 131.9 billion euros ($161 billion) for three months, less than the 200 billion euros analysts estimated.
The ECB, which didn’t disclose the identities of the 171 borrowers, is trying to wean the region’s lenders off the unprecedented support it provided in the wake of Lehman Brothers Holdings Inc.’s collapse in 2008. Financial firms have been wary of lending to each other after Europe’s sovereign debt crisis fueled concern that governments including Greece, Portugal and Spain may struggle to refinance their debts.
“We’re not out of the woods yet,” said Florian Esterer, who helps manage about $46 billion at Zurich-based Swisscanto Asset Management. “The cajas, the Greeks and maybe the Landesbanken have problems getting short-term refinancing. That is why the ECB is still providing funding.”
Germany’s state-owned lenders, or Landesbanken, are under scrutiny after posting more than $34 billion in losses and writedowns during the credit crisis. As many as 38 of Spain’s 45 savings banks, or cajas, are merging as regulators push them to cut costs and reduce their reliance on wholesale funding.
Bank shares rose on the ECB’s announcement, described by Barclays Plc analyst Simon Samuels as a litmus test for the health of the region’s banks. Banco Santander, Spain’s biggest bank, advanced 3.5 percent to 8.7 euros, while Piraeus, Greece’s fourth-biggest lender, climbed 3.9 percent to 3.49 euros in Athens trading.
“It’s an event that calms nerves but doesn’t change the picture at all,” said Juergen Lanzer who helps manage about $230 billion at Schroders Plc. “Some of the Spanish, Portuguese, Greek and Irish banks still have sizeable balance sheets that they would struggle to refinance without the ECB.”
The banks that borrowed money from the ECB yesterday paid an interest rate of 1 percent, 24 basis points more than the London interbank offered rate for three-month euro money. Banks need today to repay 442 billion euros of 12-month loans they received in June last year. The ECB charged them 1 percent interest, a third less than the London interbank offered rate for 12-month euro money at the time.
Eliminating the loans was part of the ECB’s long-term exit strategy and the bank has taken “every precaution” to avoid a liquidity squeeze, Governing Council member Ewald Nowotny said in Vienna this week.
While the ECB no longer offers banks year-long loans, the debt crisis has forced it to extend some of its other non- standard measures and to start buying the bonds of big-deficit governments. The ECB today lent 78 banks a further 111.2 billion euros in six-day funds and will continue with its regular one- week refinancing operation on July 6.
Yesterday’s tender results were an “encouraging sign” about the health of European banks before regulators publish the results of stress tests on the region’s biggest lenders, Peter Westaway, chief economist at Nomura International Plc in London and a former Bank of England official, wrote in a note to clients yesterday.
“This is a very good signal of the health of Europe’s banks,” said Jaap Meijer, a London-based analyst at Evolution Securities Ltd. “It shows that they need less funding than had been feared. Of course at some point the banking system will have to fund itself entirely. That is still a few months away.”
At last year’s auction, healthy banks borrowed money from the ECB at below market rates and bought higher-yielding government bonds, allowing them to profit from so-called carry trades. Today’s market conditions make the trades unprofitable, said Andrew Lim, an analyst at Matrix Corporate Capital LLP.
“Market rates are lower than the ones being offered at the tender so it’s a bit silly to access that carry trade when you can access funding cheaper in the market,” Lim said.