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Any Scenario Possible For Spanish Bank Funding, Says Jpm

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Analysts at JP Morgan have just published a 100-page Spanish banking extravaganza.

There are some big and useful numbers in the report, which deals (in detail) with the funding models of Spanish retail banks. We’ve stuck the whole thing in the usual place, but here’s a quick summary.

The note centers on this number: €64bn.

That’s JP Morgan’s estimate for how much Span’s domestic banks need to roll over in market funding this year. It roughly equates to 46 per cent of their total market funding. In 2009 it was 41 per cent, or €48bn.

Of that €64bn, €21bn corresponds to net interbank positions, €19bn to commercial paper instruments, and €24bn to the expiry of medium- and long-term debt instruments.

The problem according to JP Morgan, is we may well be getting to the point where it becomes costly — or downright impossible — for Spanish banks to roll those positions over. Think a “Spanish liquidity premium” like Japan’s in the late 1990s, which could cause Spain’s financials to cut their lending.

Here’s what they say:

… but prospects are uncertain at best, no scenario can be ruled out

All the above analysis appears to underpin our long held view about Spanish banks holding a reasonably solid starting liquidity position, at least one that is currently supported by deposits and not over reliant on short-term instruments to fund more illiquid customer lending business, hence avoiding the challenges of having to address inoperative wholesale markets with more frequency than current conditions recommend.

That said, under existing conditions, no refinancing exercise can be taken for granted (neither in short term instruments not in longer tenors), and the c.€64bn figure that needed to be theoretically rolled over by YE10 is substantial enough to raise concerns about the implications of a worst case scenario (i.e. inability to refinance) could have on banks’ balance sheet management, earnings, and solvency.

More importantly, we are growing increasingly concerned about what lies ahead in terms of funding for Spanish banks, with medium-term prospects having darkened at an accelerated pace alongside the rapid intensification of sovereign risks. Our reservations have a threefold nature:

* • It seems increasingly clear that sovereign and banks’ funding capabilities (and costs) are now inextricably linked. The Spanish government’s heavy refinancing requirements in coming months, coupled with additional leverage derived from FROB’s attempts to restructure the troubled savings banks sector, is a clearly unhelpful environment for domestic banks to address funding markets. Unsurprisingly, sovereign yields have been picking up again in recent weeks, with Spain’s premium vs. German bund widening to a maximum 200bps level. Banks require those yields to return to more normalized levels before thinking about issuing additional debt, but there seems to be consensus about Spain’s bond yields staying materially above pre-sovereign crisis levels.

* • Conceptually, we struggle to see how market confidence on property prices reaching adequate levels in Spain can be achieved in the foreseeable future, this having a fairly negative effect on banks’ potential plans to issue covered bonds in the future. As mentioned above, property backed bonds are the main wholesale funding instruments the sector has used in recent years, hence the importance of that channel being closed and showing no signs of reactivation anytime soon. If that closure is permanent, alternative medium/long term debt instruments (mainly unsecured/EMTN bonds) will probably prove materially more expensive, given the lack of collateral, and are likely to shorten banks’ funding duration.


* • The combination of these two factors (sovereign over-indebtedness and uncertain about realistic property prices) creates in our view a particularly cautious atmosphere around anything related to Spain, with investors’ risk aversion having a more “localized” nature than that seen in H208 around Lehman’s demise, when funding constraints were shared by banks in general rather than by specific regions within the sector.

The main message we want to transmit is one where no particular scenario about Spanish banks’ future funding capabilities can be ruled out, as unthinkable as it would have been six months ago, before Greece’s crisis. Though a highly fluid situation given the possibility of additional intervention by European political and economic authorities, we have assumed that the inability to fund themselves through medium/long term instruments at economic prices is permanent for now, and tangible evidence about a reactivation of those channels will be needed to change this viewpoint.

A feasible scenario if conditions do not improve is related to a faster than expected deleveraging as banks are forced to shrink their lending/asset bases as funding becomes unachievable. This needs to be seen as a worst case for the sector, as it would create a vicious circle of reduced lending supply leading to a sharp decline of economic activity, which would give way to higher delinquencies and lower banking earnings. In this scenario, we also see chances of deposit bases coming under pressure, which would exacerbate the negative spiral effects.

Ah, vicious circle.

We’d ask how to say that in Spanish, but we already know the answer.

Thank god everyone isn't competing for non existent capital....

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€64 bn sounds pretty low comapred to us

Isn't it £300 bn needed next year in the UK?

So far UK house prices have held up, therefore on paper we have the equity/asset value to back up the loan.....

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So far UK house prices have held up, therefore on paper we have the equity/asset value to back up the loan.....

And therein lies the government desperation.........

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