- Full allotment extension is a positive "The ECB has opted to keep the full allotment stance on bank liquidity supply. This is important as a switch to a competitive auction would be unwelcome news for liquidity ‘have nots’, as we believe it would introduce scope for triggering a sharp increase in funding costs and hence bank COE for the European bank sector as a whole."
- Sharp fall in ECB use for the core’… "Not all European banks are in need of the ECB facilities. In fact, its aggregate use has fallen sharply, driven by a remarkable decrease in use by banks based in the European ‘core’. For these banks, we believe this trend will continue since:
1. Market rates allow for cheaper funding when compared to the cost of ECB facilities, both for euro and US dollar funding.
2. Funding markets have partly re-opened, with the amount of unsecured issuance picking up
significantly;
3. The deposit gap continues to shrink, structurally reducing the reliance on wholesale funding."
- … but the ‘periphery’ has no other funding options "In contrast, the reliance of the Greek banks on ECB funding continues to grow and now stands at the equivalent of 20% of sector assets (European ‘core’ at 1.1%). These banks continue to have limited access to the wholesale funding markets, with the ECB facility a critical funding avenue, the importance of which continues to grow. A switch from full allotment to a competitive auction would result in a spike in the cost of funding, adding further pressure on these institutions, in our view."
- Our preferred sector positioning "We recommend being positioned within the (few) banks that we expect to exhibit positive volume growth trends (eg Unicredit, Erste Bank), to benefit from structural change (eg Lloyds), while we recommend avoiding banks on the ‘periphery’, most notably domestic Spanish, Italian and Greek banks."
- Sharp fall in ECB use for the core’… "Not all European banks are in need of the ECB facilities. In fact, its aggregate use has fallen sharply, driven by a remarkable decrease in use by banks based in the European ‘core’. For these banks, we believe this trend will continue since:
1. Market rates allow for cheaper funding when compared to the cost of ECB facilities, both for euro and US dollar funding.
2. Funding markets have partly re-opened, with the amount of unsecured issuance picking up
significantly;
3. The deposit gap continues to shrink, structurally reducing the reliance on wholesale funding."
- … but the ‘periphery’ has no other funding options "In contrast, the reliance of the Greek banks on ECB funding continues to grow and now stands at the equivalent of 20% of sector assets (European ‘core’ at 1.1%). These banks continue to have limited access to the wholesale funding markets, with the ECB facility a critical funding avenue, the importance of which continues to grow. A switch from full allotment to a competitive auction would result in a spike in the cost of funding, adding further pressure on these institutions, in our view."
- Our preferred sector positioning "We recommend being positioned within the (few) banks that we expect to exhibit positive volume growth trends (eg Unicredit, Erste Bank), to benefit from structural change (eg Lloyds), while we recommend avoiding banks on the ‘periphery’, most notably domestic Spanish, Italian and Greek banks."
GoldmanSachs Europe Banks 20100902
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