European Investors Expect Further ECB Assistance for Banks
European investors are concerned that the outlook for banks is worsening and expect them to need a repeat of the European Central Bank’s (ECB) €1 trillion long-term refinancing operations (LTRO), according to Fitch Ratings’ quarterly investor survey.
The Q312 survey was conducted between 2 July and 2 August 2012 and represents the views of managers of an estimated US$7.2 trillion of fixed income assets.
The credit ratings agency (CRA) said that majority of 53% of survey respondents believe fundamental credit conditions for banks will deteriorate; an all-time-high and up from 45% in Q212 and 38% in Q112. This reading is level with those in Q411 and Q311 surveys, indicating the end of the temporary LTRO relief following the ECB’s low-interest three-year loans in December 2011 and February 2012. By contrast, only 28% of participating investors anticipate improving conditions for the sector, with the balance (19%) expecting no change.
The survey also reveals that 24% of investors think that banks face the most difficult refinancing challenge, up from 13% in April and 22% in January, but lower than the 49% recorded last October. However, sovereigns continue to be the main sector of concern, according to 60% of participants.
Fitch said that as investors brace themselves for a worsening outlook and commensurately difficult refinancing for banks, they expect more assistance. Eighty two per cent of survey respondents say banks will need another LTRO within two years. Half of these investors (41%) believe this would happen during 2013-14, ahead of the 2011-12 LTROs running off. More urgent action is expected by others, with 33% believing that it will occur before the year-end while 7% say it will happen during this summer. A minority of 18% said they regard the likelihood of another LTRO as low.
Fitch added that it is also in the 2013/14 camp. The CRA does not believe that another LTRO will be needed this year but many banks in southern Europe have become dependent on ECB facilities as their only real source of wholesale funding. If they are unable to de-lever in time, they will likely need some assistance to be able to pay back their LTRO take up.
Bank fund raising has seen major structural shifts since the beginning of the financial crisis. With investors shying away from senior unsecured debt because of macro level concerns and uncertainties regarding future resolution/bail-in legislation, covered bonds have become their main issuance lifeline.
In the first seven months of 2012, total bank debt issuance fell 10% to €421bn from the same period last year. This was entirely due to senior unsecured issuance, hitherto the backbone of bank finance, dropping by 28% to €182bn. At this level, senior unsecured accounted for only 43% of total new debt issued; the first time it has fallen below 50%. Covered bond issuance was up 4% at €209bn. With subordinated debt bucking the trend and almost doubling to €30bn, there is still some appetite for low-ranking debt at the stronger banks.
Fitch believes there is a growing risk that bail-in fears, asset encumbrance concerns and possibly even the eventual introduction of some form of depositor preference represent long-term threats to the supply of senior unsecured debt to many European banks.