Irish, Spanish Banks Failing to Kick ECB Habit: Euro Credit

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Irish, Spanish Banks Failing to Kick ECB Habit: Euro Credit
By Gavin Finch and Bryan Keogh - Oct 28, 2010 7:01 PM ET

Irish, Spanish Banks Failing to Kick ECB Habit: Euro Credit

Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding. Photographer: Hannelore Foerster/Bloomberg

Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can't find investors willing to buy their bonds.

Lenders from those three nations took 61 percent of the loans supplied by the European Central Bank at the end of September, up from 51 percent the previous month, data from their respective central banks show. Overall, the region's banks cut their funding to 514.1 billion euros ($716 billion), the least since Lehman Brothers Holdings Inc.'s collapse in September 2008, according to ECB figures.

Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA have sold new debt since regulators stress-tested 91 of the region's lenders in a bid to rebuild confidence in their creditworthiness. By contrast, bonds of all lenders in Portugal, Ireland and Greece are trading as though junk rated, as are a third of banks in Spain, according to data compiled by Bank of America Corp. Their struggle to sell debt will make it harder for the ECB to curb loans to banks on Europe's periphery.

"The ECB is going to have to support these smaller banks for many years to come," said Simon Maughan, an analyst at MF Global Ltd. in London, who has tracked the industry for more than 15 years. "The ECB has to keep these banks alive and hope and pray that the local regulators force them to restructure and make them profitable again."

'Political Construct'

The stress tests haven't restored investor confidence in banks to the levels of a year ago. Financial firms found buyers for $186.6 billion of non-government-guaranteed debt in the three months since the test results were published. While that's up from $130 billion in the preceding quarter, it compares with $223 billion a year earlier, data compiled by Bloomberg show.

"It wasn't really a stress," said Oliver Judd, a credit analyst in London at insurer Aviva Plc's investment unit, which oversees about 250 billion pounds ($399 million). "The debt market generally viewed the stress tests as a political construct."

Senior or covered bonds of half of the 68 banks that passed the tests and have debt trade at yield at least 226 basis points higher than government securities, equivalent to a rating of about Baa3, the lowest investment grade at Moody's Investors Service, according to Bank of America data. The securities, which weren't government-guaranteed, were compared with the average spread for each ratings grade in Bank of America indexes that exclude junior subordinated debt.

Irish, Greek and Portuguese banks have been shut out of the corporate bond market since April. Italian banks fared better as its economy grew 0.5 percent in the second quarter, outpacing expansion in Spain and Portugal.

Santander, BBVA

Spain's two biggest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, have been able to tap the market because they rely less on their home market for revenue than competitors. Banco Santander, Spain's largest lender, gets 25 percent of its profit from Spain, while BBVA gets about 46 percent of its earnings from Spain and Portugal, according to third-quarter earnings reports. The two have sold about $9.8 billion of debt since July 23 after raising nothing in May and June, according to Bloomberg data. Spain's smaller banks only sold $2.48 billion of securities in the same period.

The region's 30 largest publicly traded lenders have met more than 95 percent of their refinancing needs for the year, said Huw van Steenis, a banking analyst at Morgan Stanley in London. BBVA and Banco Santander have completed their funding program for the year, while French banks have completed 75 percent and U.K. lenders have sold 85 percent of the securities they need to this year, van Steenis said.

'Two-Tier Market'

"It's a two-tier market," said Olivia Frieser, a banking analyst at BNP Paribas SA in London. "There are those who can issue without any problems and whose spreads are narrowing, and those who still face difficulties and are reliant on the ECB for funding. For many European banks, especially those on the periphery, it's still very difficult to get any bond issues away."

Borrowing costs for countries, including Ireland and Portugal, have surged on concern the governments will struggle to refinance their debts after bailing out their banking systems. Greece, rated as junk by Moody's Investors Service and Standard & Poor's, pays the highest interest rates in the region on its government debt. Greek 10-year government bonds yield 10.38 percent and similar Irish bonds yield 6.79 percent. The benchmark German bund yields 2.55 percent.

"The higher cost of bank debt in the periphery reflects more about the perceptions of the sovereign and macroeconomic risk than about the individual lender," van Steenis said.

'Zombie Banks'

Investors demand an average yield of 1,010 basis points more than government securities to own bonds sold by Irish banks, according to Bank of America data. That compares with 252 basis points for Spanish lenders and 190 basis points for Italian banks.

That's making it harder for the ECB to remove the emergency measures it put in place following Lehman's failure. The ECB, which ceased giving 12-month loans last year and intended to phase out other liquidity measures earlier, was forced to delay its exit by Greece's debt crisis. In May, the ECB agreed to make an additional six-month loan to banks and extended its offer of unlimited three-month tenders. Banks can borrow as much as they want for periods of between a week and three months.

"There are certain banks in the euro area that have become highly dependent on the liquidity injected by the euro system," ECB council member Mario Draghi said in Rome on Oct. 1. "These banks should be addressed by national authorities otherwise we would have so-called zombie banks for some time."

To contact the reporters on this story: Gavin Finch in London at bkeogh4@bloomberg.net

To contact the editors responsible for this story: Edward Evans at parmstrong10@bloomberg.net

http://www.bloomberg.com/news/2010-10-2 ... redit.html