Europe’s banks may be on the point of a turnaround as economic growth returns to the continent and the European Central Bank prepares to review the industry’s assets, said Kinner Lakhani, Citi Banking Sector Analyst.
The ECB on last Thursday started allotting the first funds under its so-called targeted longer-term refinancing operations (TLTRO). The bank announced that Eurozone lenders had borrowed just €82.6 billion ($106.9 billion) in four-year loans from its new facility, falling short of many analysts’ expectations, Gulf News reported.
“The disappointing auction does not mean that all hope is lost. There are 7 of these auctions in total, so the funds could go … eventually. Added to that, this auction takes place at a tricky time for banks, the results of the ECB’S own bank stress tests, billed as the test to end all tests, are due at the end of next month,” wrote Kathleen Brooks, Research Director UK EMEA at FOREX.com.
No wonder banks are keeping their balance sheets as clean as possible and not engaging as anything that either makes them look like they are lending to risky borrowers, or that they are desperate and need cheap funds from the ECB.
Speculation
Some analysts say this could spark fresh speculation that the ECB will resort to even more drastic stimulus measures.
Lakhani said banks in Europe are at an inflection point and ripe for increased return on capital, as fresh liquidity is pumped into the system through both TLTRO and ECB’ plans to buy asset backed securities later this year. Citi analyst expects the asset buying will eventually include sovereign bonds held by banks that will release funds to banks.
The TLTRO combined with the asset quality review (AQR) and the banking sector stress test are likely to show improved balance sheet health of most banks with a small number of failures expected in the stress test.
“Banking sector is on a recovery path and TLTRO and other asset buying programs should accelerate that process. Post AQR, Lakahni expects significant provision releases for banks in some of markets where asset bubbles happened and banks were forced to take huge provisions against NPLs. With NPLs stabilizing, new NPL creation is also expected to decline.
Criticism
The head of Germany’s Bundesbank has criticized the European Central Bank’s (ECB) recent cut in borrowing costs and its pledge to buy repackaged debt, saying they took pressure off governments to implement needed reforms.
Jens Weidmann told Der Spiegel magazine that the moves went beyond previous attempts to encourage banks to lend more, and could free banks of risk at the cost of the taxpayer.
“In my view the recent decisions by the ECB Council (are) a fundamental change of course and a drastic change for the ECB’s monetary policy,” he said in an interview published on Sunday.
“No matter how you think about the content of the decisions, the majority of the ECB Council members are signaling with it that monetary policy is ready to go very far and to enter new territory.”
