Reuters: Bankruptcy News: Italian success to spur Spanish bond resurgence

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Italian success to spur Spanish bond resurgence Oct 25th 2013, 13:54 Share this Email Print Reprints Fri Oct 25, 2013 9:54am EDT * Peripheral banks under pressure to show independent funding * Low funding rates create ideal market conditions * Italian banks turn profit on public funding By Aimee Donnellan LONDON, Oct 25 (IFR) - Spanish banks are to hit the bond market straight out of blackout next week, encouraged by the recent success of their Italian peers across all forms of debt, and pre-empting any volatility spurred by the AQR and stress tests next year. The past few weeks have seen something of an Italian bank renaissance. Over EUR6bn of debt has been sold, ranging from callable Tier 2 notes to covered bonds and senior securities, often at eye-wateringly low spreads. "It's like the return of the dead," said one DCM banker. "The results of the [asset quality review] and stress tests are likely to create volatility in the market next year so it makes sense for these guys to be getting in when the going is good." The ECB will take a snapshot of loans and other assets, including holdings of government debt, from the balance sheets of 128 banks at the end of this year, and scrutinise their riskiness before it takes over as the bloc's banking supervisor late next year. As well as looking at banks' capital position, the ECB will look at lenders' funding and liquidity, so it makes sense that those that have been absent from the primary market would want to demonstrate that they still have access and that they are reducing reliance on the ECB's long-term refinancing operations. "No one wants to see a load of LTRO funding on a bank's balance sheets," said a syndicate banker. "For some of these issuers the level of ECB reliance is staggering, so there is a need to replace some of it with privately placed bonds, particularly as the market is so hot." Spanish and Italian banks have been weaning themselves off LTRO funding. As of the end of September, their respective borrowing from the ECB stood at EUR225.7bn and EUR234bn, down from peaks of EUR337.5bn and EUR272.8bn, according to RBS data. BOMBARDED WITH ORDERS Since the end of September, the iTraxx Subordinated index has tightened by almost 40bp from 213bp to 177bp, and Italian bank spreads have outperformed their Spanish peers' over the same period, tightening by 60bp compared to 40bp. The improving market backdrop encouraged the likes of UniCredit and UBI Banca to access the market, while even the relatively weak Banca Carige was able to upsize a EUR500m five-year covered deal to EUR750m. "Italian trades have gone well given the strong market backdrop coupled with the spread that they offer versus northern European paper," said Hugo Moore, head of frequent borrowers at HSBC. "The strength of the market represents an opportunity for other peripheral issuers." The success of the Italian deals suggests that the country's banks are finally getting to a stage where they can actually book profit from lending against their public funding. For example, Mediobanca paid 150bp over mid-swaps to sell a 10-year covered bond two weeks ago and is estimated by a market source to be making around 300bp over on its lending business. Mediobanca was not immediately available for comment. That 150bp differential can be booked as profit - welcome news for banks that up until recently were largely reliant on the ECB's 0.5% funding provisions. Santander, Sabadell, and Bankinter, which all released third-quarter earnings this week, could be first movers despite all three having seen their net interest income fall in the past year. "It seems to be the Spanish turn now," said Robert Montague, a senior financials analyst at ECM Asset Management. "Investors are generally more comfortable with Spanish risk because [Spanish banks have] already been stress-tested, but Italian banks still trade at a discount which explains the demand we've been seeing." The ECB and national regulators are going to be watching peripheral banks closely in the coming months in preparation for what is considered to be the most extensive health checks of Europe's banks. Spanish banks have even been praised for sorting out their balance sheets. At the end of September, the ECB said Spain's liquidity situation and the financing structure of the country's banking sector have further improved as deposits have been rising and banks are regaining access to funding markets. "Some peripheral banks are now funding at sustainable levels which suggests we are starting to get back to a more normal market," said Montague. (Reporting by Aimee Donnellan, editing by Alex Chambers, Julian Baker) Link this Share this Digg this Email Reprints

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