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 2014. 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 +45 45 13 20 21 perni@danskebank.dk Analyst Anders Vestergård Fischer +45 45 13 66 41 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 5,690 398 310-125 -26-151 Germany 1,350 95 66 4-1 3 France 1,099 77 54 5-3 2 Netherlands 414 29 20-5 -3-9 Belgium 140 10 7 0 0 0 Austria 219 15 11-1 -1-2 Finland 98 7 5 4 1 5 - Core countries 3,319 232 163 7-7 -1 Italy 1,075 75 68-40 -3-44 Spain 769 54 48-68 -12-80 Greece 139 10 9-5 -1-6 Portugal 120 8 8-7 -1-8 Ireland 110 8 7-6 -2-8 - Pheriphery countries 2,213 155 139-128 -19-146 - Other EA countries 157 11 8-4 0-4 *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. www.danskeresearch.com
Timeline of the LTRO maturity and eight TLTRO auctions LTRO 1 31 Jan 2012 Banks took EUR1,019bn LTRO 2 28 Feb 2012 TLTRO 1 2014 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 2016 2016 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 2014. 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 5,690 398 310 Germany 1,350 95 66 France 1,099 77 54 Netherlands 414 29 20 Belgium 140 10 7 Austria 219 15 11 Finland 98 7 5 - Core countries 3,319 232 163 Italy 1,075 75 68 Spain 769 54 48 Greece 139 10 9 Portugal 120 8 8 Ireland 110 8 7 - Pheriphery countries 2,213 155 139 - Other EA countries 157 11 8 *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 2014 www.danskeresearch.com
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 2014. 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 2014. 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 2014 www.danskeresearch.com
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 2012. 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 1,000 530 1,019 800 600 489 400 586 432 MRO acts as buffer 200 DB estimate of 300 0 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 2016. 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 EUR140-170bn 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 11--14 National Central Banks inform banks about their borrowing limit Will the ECB disclose overview of participation? 17--14 Deadline for banks to submit bids 18--14 Allotment on TLTRO 1 Excact amount of TLTRO 1 known 24--14 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 2014 www.danskeresearch.com
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-14-14 - Dec-14 Mar-15 Jun-15-15 Dec-15 Mar-16 Jun-16 Loans outstanding 1350 1,353 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 0 0 0 0 0 0 0 Excess over benchmark 2 3 4 5 6 7 3x excess over benchmark 7 10 12 15 17 20 Maximum take-up Total 102 104 107 109 112 114 Spanish banks are assumed to not increase their net lending Spain Benchmark TLTRO 1-2 TLTRO3 TLTRO4 TLTRO5 TLTRO6 TLTRO7 TLTRO8 EUR bn Apr-14-14 - Dec-14 Mar-15 Jun-15-15 Dec-15 Mar-16 Jun-16 Loans outstanding 769 769 769 769 769 769 769 Annual growth rate 0% 0% 0% 0% 0% 0% TLTRO 1-2 7% of total amount of loans 53.8 TLTRO 3-8 Benchmark -80.2-60 -80-80 -80-80 -80 Excess over benchmark 60 80 80 80 80 80 3x excess over benchmark 180 241 241 241 241 241 Maximum take-up Total 234 294 294 294 294 294 5 4 July 2014 www.danskeresearch.com
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