Expect EU25b-EU75b of Liquidity Drawn Over Four TLTRO-IIs: HSBC
(Bloomberg) -- ECB’s new liquidity is unlikely to initiate a sharp pickup in loan growth but it may help strengthen banks’ profitability, offsetting negative deposit rates and a lack of investable assets, HSBC strategist Subhrajit Banerjee writes in client note.
- Anticipate a total of around EU25b-EU75b of new liquidity being drawn in the four TLTRO II operations running until March 2017, some of which may find its way into government bonds
- This will effectively put the total TLTRO-related liquidity (including roll-overs from the previous version) at around EUR450bn-EU500bn by the end of March 2017
- Given that TLTRO II costing is tied to depo/repo rates at the onset of the liquidity program, banks may hold back on borrowing new liquidity in the June operation as some may believe ECB could cut policy rates at the forthcoming meetings
- Though this is indeed a possibility, the ECB’s public acknowledgment of the side effects of a deeper negative depo rate may diminish the holding-back intent
- Skeptical that TLTRO II is going to lead to a complete turnaround in lending growth in Europe
- Lack of lending growth in Europe is a function of the lack of credit-worthy demand as well as increased bank capital requirements, and cheapening banks’ borrowing costs by up to 40bp for part of their funding profile isn’t going to suddenly increase their risk appetite
- Given that the distribution of excess reserves is skewed toward core banks, don’t anticipate a big new intake of liquidity from these institutions
- However, some banks, like those in France, can get substantial rebates on existing TLTRO funds if they manage to expand loan books in the near term
- Peripheral banks, however, are set to benefit from a likely cheapening of their ECB liquidity and some new pockets of carry trades developing on the Spanish and Italian curves
- NOTE: Additional borrowings by banks at ECB’s new-format TLTRO this month may be capped given the abundance of liquidity already in the system, analysts say
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HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Subhrajit Banerjee (HSBC Bank PLC)
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