Taking three-year loans from the European Central Bank no longer is seen as a sign of weakness, according to the CFO of Milan-based Intesa Sanpaolo, Italy’s largest retail bank. Praising the ECB for the support it has given euro zone banks, Carlo Messina said in an interview, “I think there will be a strong take-up of the new long-term refinancing operation (LTRO) on February 29, and Intesa Sanpaolo may decide to apply.”
His remarks follow comments in recent weeks about the “reputational” issues surrounding ECB loans by Josef Ackermann, CEO of Deutsche Bank, and Jan Hommen, CEO of Dutch bank ING Groep. Draghi responded vigorously on February 9, insisting there was “no stigma whatsoever” and that certain bankers whom he did not name were simply making “statements of virility.” The ECB’s first round of LTROs on December 20 injected €489 billion ($637 billion) of liquidity into 523 euro zone banks, and Mario Draghi, president of the ECB, said on February 9 that the next round was likely to be equally large. The 1 percent loans have been highly effective in boosting liquidity and general market confidence, allowing a number of the stronger banks, including Intesa, to reenter the important senior unsecured market.
“The ECB support means that a liquidity crisis has been avoided,” said Messina. European banks are refinancing some €600 billion of term debt maturing in 2012, Dealogic figures show, and with the senior unsecured market all but closed because of the sovereign debt crisis in the second half of 2011, funding pressure had been growing. There were fears of a huge and hasty deleveraging amounting to several trillions of euros, but these fears have subsided, at least for now.
Intesa took a loan of €12 billion from the ECB in December, a figure that covers its entire wholesale funding needs for 2012.
Messina argued that the LTROs were helping to create a positive mood that was spreading across the markets, even if there was still work to do. “There is still some way to go before there is a full recovery. The next stage is a reduction in the funds deposited by banks at the ECB. I believe this money will return to the markets soon. The turning point will be the return of the money market funds to investing in banks. I think they will soon realize that there is a good risk-reward balance in investing in solid European banks.” Falling sovereign bond yields have been an important part of the story: Italy’s 10-year bond now yields well below 6 percent, compared to over 7 percent in late November. Of course that may be too high to sustain an economic recovery, which is why Messina’s optimism is guarded.
On February 1, Intesa became the first Italian bank to issue a benchmark senior unsecured bond since July. It launched a fixed-rate 18-month €1.5 billion bond, with a 4 percent coupon and priced at 295 basis points over mid-swaps. This was not cheap compared with its last issue of May 2011, a 30-month fixed rate bond with a coupon of 3.5 percent and priced at 110 basis points over mid-swaps. But Messina said, “Accessing the senior unsecured market was a way of diversifying our funding sources, and the cost was broadly in line with that of retail funding.” The retail market, in the form of deposits, is normally a bigger source of funding for Intesa and it is still likely to issue €10 billion of retail bonds this year.
On February 7, Intesa CEO Enrico Tommaso Cucchiani said the ECB money would be used to provide credit to clients and to purchase Italian government bonds.
