Capital-light banks face higher funding costs in 2014

Thu Dec 12, 2013 11:42am EST

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LONDON, Dec 12 (IFR) - Undercapitalised European banks are expected to face higher wholesale funding costs in the coming year as investors start to price in heightened bail-in risk, market experts said at Citigroup's credit conference on Thursday.

Bondholders and large depositors in a failing European bank face taking losses from the start of 2016, two years ahead of schedule, after European Union officials agreed on Wednesday on a provisional deal on rules to spare taxpayers from further bailouts.

Speaking at the Citigroup bank conference in London on Thursday, Rinse Boersma, portfolio manager at Aegon Asset Management, said that bondholders had not fully evaluated the risks associated with haircuts being applied to their unsecured holdings.

"I don't think we will see spreads on high and low-beta names go any tighter and, if anything, next year I think they will widen out. If there are surprise next year with the AQR, I think we may see regulators bring bail-in forward even further."

There has been widespread market speculation that bail-in measures would be brought forward to 2015 instead of 2018, as Jens Weidmann European Central Bank Governing Council and president of Germany's Bundesbank joined a long list of ECB and German government officials pushing for the early introduction of bail-in rules last month.

However, the announcement from European regulators about imposing losses led to some diverging views on how it might impact the market, but issuers say they are prepared for investors to begin looking for capital buffers to protect their senior holdings in 2014.

"We would hope that our strong total capital position would offer comfort to senior bondholders who will start to differentiate our pricing to issuers with lower total capital ratios," said Peter Green, manager of senior issuance at Lloyds.

Danielle Boerendans, head of secured funding treasury at ABN AMRO agreed with Boersma's views and believes that spreads will not tighten further next year and that a surprise from the AQR or stress tests will have a negative impact. For those reasons, the Dutch bank is planning on front-loading its funding and completing a large part of it during the first half of the year.

LOOMING TESTS

The looming ECB review of bank health in the eurozone is unnerving lenders and investors alike and risks undoing the relative calm in the bond markets that has been in evidence over the past year.

On the whole, analysts and investors appear bullish on Europe's largest banks, which are expected to pass relatively unscathed. But the mid-tier, especially in the periphery, is not.

The upcoming AQR is expected to uncover capital shortfalls in some of Europe's most troubled banks and, according to research from RBS analysts, Bank of Cyprus, Abanka, Monte dei Paschi, Banca Carige, Banca delle Marche and Catalunya Banc are among those that would come out worst. They said Muenchener Hypo and IKB in Germany also looked weak.

Their view was shared by Moody's analysts, who said in October that Italian banks in particular looked weak. (Reporting by Helene Durand; Editing by Philip Wright)

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