Portugal's banks favour cheap ECB cash over bonds

Fri May 10, 2013 5:50am EDT

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By Aimee Donnellan

LONDON, May 10 (IFR) - Portuguese banks should be forging a comeback to the debt capital markets after their sovereign staged a grand return this week, but treasurers are not convinced, saying spreads are too high and that cheap ECB funding is just too good to turn down.

In the aftermath of Portugal's EUR3bn 10-year bond, bankers and investors are inundating the country's financial institutions with requests for them to follow suit.

But as spreads on Portuguese bank bonds continue to plummet, adding to a rally of more than 250bp already over the past six months, issuers are choosing to hold off for what they think will be even better conditions in the months ahead.

Even a EUR10bn-plus order book for Portugal's sovereign bond - its first benchmark since its bailout two years ago - is not enough to wean them off the ECB drip.

"The issue now is that spread levels are still too high, and that we expect them to fall further," said Isabel Almeida, director general, department of finance and markets at Banco Espirito Santo (BES).

"The success of the sovereign is certainly encouraging, but does not come as a surprise to us considering the feedback we are getting from investors and the number of reverse inquiries we are receiving."

If anything, recent data show that Portuguese banks are relying on ECB cash more heavily now than at the start of the year, despite the improvement in market conditions.

In April, Portuguese bank borrowing from the ECB ticked up some 4%, reversing a trend that had seen borrowing fall for five successive months.

The amount banks owed the ECB peaked at EUR60.5bn in June last year, when worries about bailed-out Portugal left them unable to borrow commercially and almost entirely reliant on the central bank for liquidity.

Although that has fallen substantially, it still stood at EUR49.8bn at the end of April, up from EUR47.8bn in March, a 13-month low.

UNINTENDED CONSEQUENCES

The ECB's three-year LTROs, which ploughed some EUR1trn into the market, were aimed at warding off a liquidity crunch in the banking sector, but they were not supposed to be a perpetual crutch for Europe's troubled lenders.

At some point, banks will have to stand on their own two feet, but it remains hard to justify taking those steps now.

"Net interest margins are under a lot of pressure from low yields, wider credit spreads and increased capital requirements. As a result, banks are focused - more than ever before - on the cost of funding and capital," said Emil Petrov, head of capital solutions at Nomura.

"Portuguese banks are in a particularly difficult spot due to their sovereign risk premium."

BES, its holding company ESFG, and Caixa Geral have made tentative steps back into the market and have proved they have access, but Santander Totta, Millennium BCP and Banco BPI have remained absent.

The elevated borrowing costs, however, have limited supply to just EUR2.7bn from both covered and senior bonds over the past year, IFR data show.

An issuer like BES, for example, can borrow from the ECB at 0.5%, but ESFG paid 10 times that amount last month in a public bond deal despite the market increasingly thawing for peripheral borrowers.

"There's certainly an opportunity for Portuguese banks," said Keval Shah, head of FIG syndicate at Citigroup, "though I sense none of them are in any hurry, given a number accessed the market prior to the sovereign, so have proven market access in both senior and covered format."

Treasurers are taking a calculated gamble. If spreads do not continue to grind tighter, they will pay the price for holding off.

Syndicate bankers are not helping the situation, as their views on appropriate pricing levels vary so widely.

"Portuguese banks are continuously watching what their spreads are doing, but are being inundated with syndicate bankers offering them a divergence of funding levels," said a FIG syndicate official.

"They'd like to see a bit more consolidation in the levels before they think it's the right time to access the market." (Reporting by Aimee Donnellan, additional reporting by John Geddie; Editing by Matthew Davies, Natalie Harrison and Julian Baker)

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