(The following statement was released by the rating agency)
Jan 29 - Stronger banks in northern Europe are more likely than their peripheral eurozone peers to contribute to the EUR137bn of three-year long-term refinancing operation funds due to be repaid this Wednesday, Fitch Ratings says. Peripheral banks are more likely to make smaller, perhaps symbolic repayments this year, but hold onto most of their European Central Bank funding as insurance.
The banks that are repaying are those that have good, open access to funding markets at low cost and are generally placing their ECB borrowings back with the ECB. Many of the LTRO-takers in southern Europe are using the relatively cheap source of funds to buy time to deleverage their loan books. Alternatively, they are using the funds to boost revenue from carry trades of higher-yielding sovereign bonds, which help offset their need for heightened loan impairment charges on deteriorating asset quality. We do not expect banks to change their strategies for either of these uses of LTRO funds.
There is still a lot of work to be done in terms of restructuring balance sheets and stabilising funding structures for the medium term, especially in many of the medium-sized banks. As the uncertain economic outlook could delay this recovery, it makes sense for these banks to hold onto their cheaper LTRO funds.
Spanish and Italian banks received around two-thirds of the total LTRO funding. With the improvement in market conditions, several Italian and Spanish banks have been able to issue medium- and longer-dated senior unsecured bonds. But funding costs are still higher than ECB rates, and so repaying a significant amount of their LTRO funding in early 2013 is unlikely. We do not expect more than a very small amount of repayments even among the stronger Italian banks ahead of the national elections in February.
The number of banks (278) taking advantage of the first opportunity to repay LTRO funds is in line with the positive developments in the funding markets for the start of 2013. Liquidity and funding pressures have eased significantly since this time last year.
The first repayment represents 28% of the first tranche of EUR489bn made available, within our expectation range. If the funding markets remain open, we believe this level could be sustained as repayments start for the EUR530bn under the second LTRO, although we would not be surprised to see lower repayments.