European Banks Rally as ECB Expands QE More Than Forecast

  • Italian, Spanish, Greek banks among biggest gainers in Europe
  • Cheap loans to cushion blow of negative rates, analysts say

European lenders rallied after the European Central Bank expanded its monthly bond purchases more than economists forecast and signaled banks will be paid to borrow its cash.

All 30 lenders on the Euro Stoxx Banks Index increased, with the benchmark up 3.7 percent at 3:42 p.m. in Frankfurt. That helped pare losses this year to 14 percent. Spanish, Greek and Italian banks led gains, with Eurobank Ergasias SA surging 8.9 percent and UniCredit SpA up 7.5 percent.

While the ECB cut the rate on cash parked overnight by lenders by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero, it increased bond purchases to 80 billion euros ($87 billion) a month from 60 billion euros and launched a new series of long-term loans to banks. Borrowing conditions on the targeted refinancing operations can be “as low as the interest rate on the deposit facility,” President Mario Draghi said at a press conference in Frankfurt, indicating the central bank may pay lenders.

“This is especially positive for banks in peripheral Europe given the concerns over their funding,” said Michael Seufert, an analyst at Norddeutsche Landesbank in Hanover, Germany. “Still, even if the deposit cut didn’t come in quite as bad as some expected, this isn’t a good situation for banks in the long run.”

The Frankfurt-based central bank stopped short of introducing a tiered deposit rate, which had been the subject of speculation before the meeting.

While the targeted refinancing operations “will help to cushion the blow from negative rates,” the absence of a tiered system for deposits at the ECB is “disappointing,” Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, wrote in a note to clients.

The ECB’s four targeted longer-term refinancing operations will bring “funding relief to mid-sized euro-zone banks,” led by Spain’s Banco Popular Espanol SA, CaixaBank SA and Banco de Sabadell SA, which jointly drew more than $40 billion from the TLTRO auctions, according to Bloomberg Intelligence.

“Loan growth is still too low,” Draghi said. The four-year credit “will offer attractive loan conditions to banks to stimulate credit creation. It also provides funding certainty, it’s a four-year operation at an attractive price in an environment of increasing volatility and large upcoming bank bond redemptions. Banks face sizeable funding needs.”

The ECB will also expand bond purchases, starting in April, and said that non-bank corporate bonds are now eligible. Economists forecast an expansion to 75 billion euros a month, according to the median in a Bloomberg survey.

“The bond purchases help banks because it helps their clients and may make corporate financing in the markets a little easier,” said Neil Smith, an analyst at Bankhaus Lampe, said from Dusseldorf. “Still, it feels like these measures have less and less lasting power for stocks, so we need to look back in 24 hours.”

Before it's here, it's on the Bloomberg Terminal.