(The following statement was released by the rating agency)
Feb 07 - European investors are feeling more optimistic about the outlook for the region’s banks in 2013 than any time in the last two years, according to a Fitch Ratings investor survey conducted in January.
Investors expressed more confidence in a positive outlook trend for financial institution credit fundamentals than for any other sector. A majority 64% said conditions would improve, up sharply on the 42% in the October survey and the strongest reading since early 2011.
This optimism was also evident in survey participants’ views on the voluntary early repayment of the European Central Bank’s EUR1 trillion three-year long-term refinancing operations (LTRO) this year. 42% said banks will prepay up to half the total, as healthy firms do their utmost to wean themselves off the ECB. Another 44% expect the amount to be between 10% and 33%, with banks appreciating the economic sense of cheap money and the de facto insurance policy of the LTRO.
The first repayment window last week saw 278 banks repay 28% of the EUR489bn initially made available; this has been modestly topped up this week. This was within our expectation range - we believe if market conditions remain relatively benign, up to a third of the LTRO funds could be repaid this year.
Although repayments were made by some of the stronger southern European banks (notably EUR24bn by Banco Santander ) many of the LTRO takers in southern Europe are using the relatively cheap source of funds to boost revenue from carry trades of higher-yielding sovereign bonds and buy time to deleverage their loan books. There is still a lot of work to be done in terms of restructuring balance sheets and stabilising funding structures for the medium term. As the uncertain economic outlook could delay this recovery, it makes sense for these banks to hold onto their cheaper LTRO funds.
In the survey, banks were also the second most favoured investment choice, chosen by 24% or respondents, placing them as runners-up behind high yield which was voted top choice by 29% of investors.
The positive attitude to the banking sector is mirrored in survey participants’ views on sovereigns, underscoring the close links between the two sectors in Europe. Banks typically hold substantial amounts of domestic government bonds and are highly exposed to domestic counterparties, meaning profitability and asset quality are vulnerable to adverse macroeconomic and market trends.
The Q113 survey was conducted between 4 and 31 January and represents the views of managers of an estimated USD7.6 trillion of fixed-income assets. We will publish the full survey results in mid-February.