April 19, 2013 / 3:00 PM / 5 years ago

Spanish banks broaden ECB LTRO-inspired carry trades

LONDON, April 19 (IFR) - Spanish bank treasuries are beginning to target other peripheral financial institutions’ debt to profit from their own cheap ECB funding and to diversify away from their home market.

A EUR250m tap from Italy’s Intesa Sanpaolo this week - the first peripheral FIG issuer since the Cyprus bailout - provided the first real evidence of this.

Spanish accounts bought 43% of the deal and banks were the largest investor type, taking the lion’s share of the deal at 58%. Iberian interest was notably higher than the 12% seen in Intesa’s previous euro bond in January.

“Investors in Spain and Italy have always been the main supporters of their domestic bond deals, but now they are looking to match their funding costs by achieving a positive carry away from their own banks,” said a London-based syndicate banker.

Looking at the figures of Spanish bank borrowing from the ECB, the logic behind the shift is clear.

Spanish banks took roughly EUR260bn of ECB loans through the central bank’s EUR1trn twin LTROs. So far, they have said that they either have, or will, pay back a total of just under EUR50bn this year, according to Reuters data.

That’s leaves EUR210bn of liquidity in bank coffers that needs to be put to work.


Spanish and Italian banks have ploughed excess liquidity into high-yielding domestic sovereign bonds in carry trades that reinforce the linkages between state and financial sectors.

By broadening that strategy to include national champions in other peripheral countries, bank investors can also pick up attractive yields.

In the case of Intesa, bank investors would have earned a little under 1% on the bond that priced at 3mE+150bp with a 1.7% yield (current Euribor rates). The ECB now lends cash to banks at a rate of less than 0.75%.

“They certainly aren’t going to be getting these kinds of profits from Nordic banks,” said a banker.

“Investors’ move to diversify is just another twist on that quest for higher net interest margins but the concern is they won’t find sufficient volume to meet their demands.”

There hasn’t been a single new benchmark bond issued from a peripheral bank since the Cyprus bailout. Spanish, Italian, Irish and Portuguese banks are focused on deleveraging, and because they can obtain cheap funding through the ECB, they are unlikely to rush to capital markets where funding is more expensive.

“There is certainly demand for names like Intesa, but they (issuers) might not be willing to pay the necessary spread,” he said.

“Investors are going to be looking for compensation for the risk they are taking.”

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