European banks rush in as debt door opens
Grab it while you can. Banks including Société Générale, Danske Bank and Intesa Sanpaolo have rushed to raise debt in the capital markets this week, taking advantage of the positive momentum after European leaders announced they had agreed measures to deal with the eurozone crisis.
Enclosed in the EU agreement was a statement of intent to break the “vicious circle between banks and sovereigns”, a plan to inject directly eurozone funds into Spain’s banks and a move to create a single European banking supervisor to oversee the region’s banks.
The short-term impact on banks has been positive. After a very slow second quarter, European banks have issued more senior unsecured debt in a few days than they did in the entire second quarter and spreads – or premiums versus benchmark debt – have narrowed. The fact that Italy’s Intesa was able to issue a €1bn bond shows how sentiment towards the “periphery” has changed.
Huw van Steenis, banking analyst at Morgan Stanley, says the outcome of the summit marked “a material step forward” and showed that EU leaders were starting “to address the doom loop between banks and sovereigns”.
But he says the gap between what banks in northern Europe have to pay to fund themselves versus their southern European counterparts is sizeable and likely to grow. Worse, that trend is likely to be exacerbated as cross-border lending continues to fall and banks become increasingly reliant on their domestic markets.
“Banks in the south will continue to find funding expensive and will start to look for other sources,” he says.
Kian Abouhossein, analyst at JPMorgan Cazenove, says the proposals appear to be more positive for credit investors than they are for equity investors, who will face the possibility of taking the first losses in any default.
Banks have rushed to issue this week “because people are not sure that the door will stay open for too long,” he says.
But “what people are not focusing on is that, at some point, we will need to hear more of the nitty-gritty on the proposals – how practical it is and what the conditions are for receiving the money”.
Investors remain wary. They believe it will be very difficult to break the link between banks and sovereigns. And they say that the idea that a banking supervisor could be in place by the start of next year is implausible, particularly when many countries are still dealing with the impact of new regulations.
“With individual countries having some leeway to implement various regulations such as . . . resolution regimes across the EU, there is some doubt whether authorities can implement a harmonised regulatory system any time soon,” says Steve Hussey, head of financial institutions credit research at AllianceBernstein.
“So until we see that issue sorted out, we are multi years away from knowing whether last week’s summit is going to be beneficial” to bank bond markets.
The eurozone proposals are a step in the right direction, say analysts, but the long-term issue remains economic growth and whether European countries can grow their way out of the crisis.
Neil Williamson, head of European credit research at Aberdeen, says that if the summit proposals are implemented, they will lead to a genuine mutualisation of risk.
“But the problem with Europe is that it’s made up of a group of disparate nations,” he says.
“[Angela] Merkel may agree something at a summit, but she has to get it past her national parliament and lawmakers. European leaders can say great things, but implementation risk is large.”
There could also be issues over “bail-in” rules, which will force investors rather than taxpayers to pay for rescuing failed banks. The rules will not be in force until 2018.
But the fact that Germany already has bail-in measures could mean that “the pressure to impose losses on failed banks would increase with a central regulator”, says Mr Williamson. “That could mean the cost of funding would go up, because your implicit government support would get less and less.”
The summit was “a turning point “and will have a positive impact on sovereign and bank bond yields”, says Alberto Gallo of RBS. But “the key will be to follow up with implementation and more stimulus from the European Central Bank”.