ECB Research Draghi reveals favourable TLTRO details
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- Arron Williamson
- 6 years ago
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1 Investment Research General Market Conditions 4 July 2014 ECB Research Draghi reveals favourable TLTRO details The ECB has provided additional details about the targeted LTRO (TLTRO) announced at its meeting in June. However, the potential boost to liquidity is still unknown as it depends on future net lending. We note that there are no penalties for using the TLTRO for government bond carry trades (at least until tember 2016) and, in our view, the cost of the refi rate +10bp looks very attractive from a financing perspective. The benchmark, which determines the potential take-up in the TLTROs from March to June 2016, depends on whether the participants are positive or negative net lenders in the 12-month period to April We consider the situation from the perspective of the aggregate German and Spanish banks and conclude that German banks must increase net lending to be eligible for the TLTRO 3-8 while it is more attractive for the Spanish banks, as they on an aggregate level enter the programme as negative net lenders. Even though the final repayments of the current LTROs will occur before the TLTRO 3-8 auctions, we are not overly concerned about the evolution of excess liquidity being squeezed from this date mismatch as the fixed rate full allotment procedure ensures a bridge of this roll of liquidity. We believe the TLTROs to be positive for peripheral banks funding situation and peripheral assets in particular. Furthermore, favourable benchmarks should imply higher excess liquidity and lower rates in the money market. Senior Analyst Pernille Bomholdt Nielsen perni@danskebank.dk Analyst Anders Vestergård Fischer afis@danskebank.dk Assistant Analyst Lars Sparresø Merklin mer@danskebank.dk Maximum and potential take-up of TLTRO 1+2 and net lending benchmarks for TLTRO 3-8 MFI loan stock to TLTRO 1 & 2 Net lending May 2013 May to April 2014*** EUR bn private sector** Initial max. take-up** Assumed take-up NFCs Households**** Total Euro Area 5, Germany 1, France 1, Netherlands Belgium Austria Finland Core countries 3, Italy 1, Spain Greece Portugal Ireland Pheriphery countries 2, Other EA countries *Private sector loans excluding lending for house purchase ** 7% of eligible loan stock *** Gross issurance minus redemptions **** Excluding lending for house purchase Important disclosures and certifications are contained from page 6 of this report.
2 Timeline of the LTRO maturity and eight TLTRO auctions LTRO 1 31 Jan 2012 Banks took EUR1,019bn LTRO 2 28 Feb 2012 TLTRO TLTRO 2 Dec 2014 Initial allowance 7% of eligible loans (up to EUR 400bn) Jan-Feb Maturity of LTRO 1& 2 Excess liquidity will fall banks will use MRO instead TLTRO 3 Mar TLTRO 4 Jun TLTRO 5 TLTRO 6 Dec Additional allowance 3x [Net lending benchmark] (size unknown) TLTRO 7 Mar 2016 TLTRO 8 Jun Repayment TLTRO for banks with no improvement in net lenders vs. benchmark 2018 Final repayment all TLTRO TLTRO 1+2 can boost liquidity by a maximum of EUR400bn In the two initial allowances (18 tember and 11 December 2014), banks will be able to take 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April The total outstanding amount of eligible loans is given and the maximum take on the first two TLTROs is EUR400bn. Considering the periphery and core countries they will be able to take EUR155bn and EUR232bn, respectively. Hence, the first two TLTROs imply a larger potential amount of funding to the banks in the core countries. Nevertheless, the periphery countries are expected to take a larger share of the potential liquidity due to the banks funding situation. We assume the periphery banks take 90% of the potential liquidity while the core countries are assumed to take 70% of the possible amount. The quite high take-up in the core countries is assumed as the TLTRO can be used to carry trades for the first two years and, as Draghi said yesterday (3 July), this opportunity, which, indeed, from a financing viewpoint, looks attractive. Given our assumptions, this will have an overall euro area liquidity effect of EUR300bn before yearend. Potential take-up on TLTRO 1+2 MFI loan stock to TLTRO 1 & 2 EUR bn private sector** Initial max. take-up** Assumed take-up Euro Area 5, Germany 1, France 1, Netherlands Belgium Austria Finland Core countries 3, Italy 1, Spain Greece Portugal Ireland Pheriphery countries 2, Other EA countries *Private sector loans excluding lending for house purchase ** 7% of eligible loan stock Excess liquidity set to increase by EUR300bn before year-end 2 4 July
3 TLTRO 3-8 will give most liquidity to deleveraged banks From March to June 2016, banks will each quarter have access to borrow three times the cumulative amount of their net lending in excess of a specified benchmark. The benchmark depends on whether the bank was a positive or negative net lender in the 12-month period to 30 April For positive net lenders, the benchmarks will be set at zero. This implies positive net lenders only have to continue to expand lending to obtain the TLTROs. For negative net lenders, there will be one benchmark until April which is the average monthly net lending in the year to 30 April 2014 extrapolated for 12 months. From May to April 2016, the benchmark monthly net lending is set at zero. Consequently, the negative net lenders can continue deleveraging but if they do it at a slower pace than in the 12-month period up to April, they are eligible for the TLTROs. The cumulative amount of a bank s future net lending is not known, hence the potential take-up is unknown. In order to get a better idea of the impact on excess liquidity in the additional allowance of the of the six TLTRO (3-8), we consider the aggregate situation in Germany and Spain and make some assumptions in order to get an idea of the potential take-up and their dynamics for positive and negative net lenders (see appendix). In Germany, we assume banks continue their net lending at the same pace as in the 12-month period ending in April This implies German banks on aggregate can increase their funding by around EUR1bn through the TLTRO 3-8. This looks to be an extremely conservative scenario as the German economy is expanding which implies a more healthy outlook for credit demand and supply. However, the case illustrates that German banks must increase net lending to be eligible for the TLTRO 3-8. In Spain, we assume banks do not increase their net lending but maintain their current outstanding loan amount (hence zero net lending going forward). As Spanish banks on aggregate have deleveraged by EUR80bn in the 12-month period ending in April 2014, they will on aggregate be able to extend their funding by EUR241bn through the TLTRO 3-8 in this scenario. In light of the previous deleveraging, this looks a bit optimistic, but it illustrates that the TLTRO 3-8 is most attractive for banks who enter the programme as negative net lenders. Spanish banks have deleveraged up until April 2014 German banks have increased net lending marginally 3 4 July
4 Worried about LTRO run-out and funding gap dont underestimate the power of Fixed Rate Full Allotment There is currently a total of EUR432bn left in the LTROs allotted in 2011 and These will mature at the end of January and the end of February respectively. If these numbers are seen in isolation, this will leave a liquidity gap if our estimate of EUR300bn take-up is realised, and will not even be fully covered with the assumption of maximum drawdown of the two initial TLTROs of EUR400bn. The maturity of both LTROs in early implies that the additional amount of TLTRO liquidity cannot be used for rolling over existing LTRO loans. Development in excess liquidity from LTRO to TLTRO MRO has previously acted as buffer on LTRO changes EUR bn 1, , MRO acts as buffer 200 DB estimate of LTRO 1 (Dec-11) LTRO 2 (Feb-12) LTRO 1 & 2 total amount LTRO 1 & 2 repayments LTRO 1 & 2 outstanding TLTRO 1 & 2 However, this consideration misses the point of the Fixed Rate Full Allotment procedures on the ordinary one-week MRO operations and three-month longer-term refinancing operations (LTROs) that were extended at the June meeting until at least December The ordinary ECB operations could easily be used to roll over the repayment of the existing three-year LTROs and the TLTROs both in size and in timing of allotment. Hence, we are not overly concerned about the evolution of excess liquidity being squeezed from rolling outstanding three-year LTROs into the new TLTROs as the ECB has provided the mechanics to bridge this roll of liquidity. We expect excess liquidity in the euro system to be significantly above the current levels of EUR bn when the TLTROs come into force. What to look for in the coming months In the coming months we will get more information about the participation in the TLTROs and actual allotment in the initial allowances with the first amount settling on 24 tember. In the table below we provide an overview of the upcoming information. When do we know more schedule of the TLTRO Date Comment 28-Aug-14 Banks participating in the TLTRO has to send reporting to sign up to program Potential press comments on bank level on participation National Central Banks inform banks about their borrowing limit Will the ECB disclose overview of participation? Deadline for banks to submit bids Allotment on TLTRO 1 Excact amount of TLTRO 1 known Settlement on TLTRO 1 10-Dec-14 Deadline for banks to submit bids 11-Dec-14 Allotment on TLTRO 2 Excact amount of TLTRO 2 known 17-Dec-14 Settlement on TLTRO 2 March Auctions on TLTRO 3 (additional amount) Excact dates on TLTRO 3-8 not published yet 4 4 July
5 Market reaction Our positive assessment of the TLTRO details for especially peripheral banks was reflected in the market reaction where periphery markets rallied strongly despite upward pressure on core rates following another batch of strong US data. This is not unsurprisingly since, given the construction of the TLTROs, the excess cash can easily be used for carry trades the next years. Furthermore, the favorable benchmarks for both negative and positive net lenders should on the margin imply higher excess liquidity than we had initially expected and therefore slightly lower rates in the money market. However, there are still uncertainties regarding participation and actual liquidity take-up and we believe MFI lending data will be crucial for markets going forward. Appendix German banks assumed to continue current pace of net lending Germany TLTRO 1-2 TLTRO3 TLTRO4 TLTRO5 TLTRO6 TLTRO7 TLTRO8 EUR bn Apr Dec-14 Mar-15 Jun Dec-15 Mar-16 Jun-16 Loans outstanding ,353 1,353 1,354 1,355 1,356 1,357 Annual growth rate 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% TLTRO 1-2 7% of total amount of loans 94.5 TLTRO 3-8 Benchmark Excess over benchmark x excess over benchmark Maximum take-up Total Spanish banks are assumed to not increase their net lending Spain Benchmark TLTRO 1-2 TLTRO3 TLTRO4 TLTRO5 TLTRO6 TLTRO7 TLTRO8 EUR bn Apr Dec-14 Mar-15 Jun Dec-15 Mar-16 Jun-16 Loans outstanding Annual growth rate 0% 0% 0% 0% 0% 0% TLTRO 1-2 7% of total amount of loans 53.8 TLTRO 3-8 Benchmark Excess over benchmark x excess over benchmark Maximum take-up Total July
6 Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of the research report are Pernille Bomholdt Nielsen, Senior Analyst and Anders Vestergård Fischer, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not 6 4 July
7 undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 7 4 July
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