TEXT-S&P :Funding is tight for Eurozone banks despite ECB loans

Feb 21 - As the first quarter of 2012 unfolds, the eurozone banking industry faces unfavorable funding conditions, despite a half trillion euros of three-year loans from the European Central Bank (ECB) at the end of 2011, Standard & Poor's Ratings Services noted in a report published today titled ECB Loans Reduce The Risk Of A Funding Crisis, But Won't Stop Banks From Reducing Loan Growth.

We view the Long-Term Refinancing Operations (LTRO) as an extraordinary emergency relief measure that reduces the risk of a funding crisis. Since the operation, wholesale term debt markets have opened, and borrowing conditions have eased. While these developments are positive, we believe, the ECB action in itself illustrates weaknesses in the eurozone banking industry's funding profile.

The interbank market in Europe remains cautious, and risk premiums the banks pay for term borrowings are still high. In our observation, the gap between large banking groups with market access (albeit at wide risk premiums) and banks with little or no ability to tap wholesale funds remains firmly in place. We also see that this tiering of banks in the European Economic and Monetary Union (EMU or eurozone) according to cost of funding and access to wholesale debt markets closely tracks the credit tiering of eurozone governments in the markets.

In our opinion, the links between sovereign and bank credit risk are numerous, and the transmission from one to the other in the debt market is rapid, in both directions. The higher cost of wholesale funding seems a permanent fixture of the brave new world of banking in the eurozone.

In response to the difficult market environment and the weak eurozone economy, the top-tier eurozone banks are positioning themselves defensively, building up stocks of short-term liquidity, paring down risk assets to meet tougher regulatory standards for capital adequacy, and tightening credit standards. We expect the banks to pay down maturing wholesale debt and continue to deleverage, favoring credit to home markets, and cutting back cross-border corporate loans and funding of bank subsidiaries in foreign countries.

The deleveraging is already underway in many countries of the eurozone. The nominal growth of loans of eurozone banks to eurozone residents declined to 1.2% year on year through December 2011. In the second half of the year, annualized nominal loan growth was zero. In several countries--Ireland, Spain, Greece, Portugal, and Belgium--loans declined during the year.

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- European Central Bank, Nov. 19, 2010

-- France's BICRA Unchanged At Group '2'; Various Rating Actions Taken On Six French Banks Following Sovereign Downgrade, Jan. 23, 2012

-- Ratings On Seven Portuguese Financial Institutions Lowered Following Sovereign Downgrade And BICRA Revision, Feb. 14, 2012

-- Ratings On 15 Spanish Financial Institutions Lowered Following Sovereign Downgrade And BICRA Revision, Feb. 13, 2012

-- Mainly Negative Rating Actions Taken On 37 Italian Financial Institutions On Sovereign Downgrade And BICRA Change, Feb. 10, 2012