The last of our Barclays Capital’s European bank special is a funding finale.
This is, of course, something which has been mentioned before.
The withdrawal of cheap central bank liquidity, a wall of short-term debt that will need to be refinanced and the continued weakness in the securitisation market, mean it’s very much expected that banks will experience a hike in funding costs in the coming years.
And while BarCap sees the additional burden as “manageable” they are talking pretty big numbers:
Banks spent the last decade radically shortening the maturity profile of their senior unsecured bond funding – from around six years to nearer half that today. This runs against prudent management as well as forthcoming regulation. We estimate that in the next three years, c€850bn will need to be re-financed at longer, more expensive maturities. Massive central bank liquidity support (c€875bn in Europe) will also be progressively withdrawn and replaced by funding at higher commercial rates, adding to these pressures.
(For an illustration of the funding issue, click here to view a few of the Barclays charts).
The interesting point, which Barclays highlights. is the potential discrepancy between maturity profiles and funding costs of banks. To wit, the below chart, showing their estimate of banks’ residual bond maturity (that is, assuming they don’t issue any new ones):
You can see there’s a rather wide range, consequently producing some very different funding requirements.
BNP Paribas, for instance, has the second-longest maturity on its remaining bonds of nine years. That means, according to BarCap, that to replace the €16bn of maturing bonds over 2010-12 and to ensure a blended average maturity of 6.3 years requires the bank to issue new bonds with an average 5.2 years maturity.
By contrast, for SocGen, the residual maturity of its issued bonds is just one year, which means that replacing its €8.6bn of maturing bonds over the 2010-12 periods would require new issues to have a longer, more expensive, maturity of 8.8 years.
And that’s just the maturity, funding costs between weak and strong banks also vary significantly obviously. The difference between the 10 narrowest and 10 widest bank CDS spreads, for instance, is now at about 100bps. That’s lower than the 250bps it was at the height of the crisis, but still very much above its pre crisis norm of 10bps or so.
Overall, BarCap estimates an overall impact on post tax profits of €7bn, or about 6 per cent of its net profit forecast for 2012. But within that, the numbers vary very much by bank.
About a third (HSBC, NBG, Standard Chartered), for instance, see almost no impact, while another third (Bank of Ireland, Alpha Bank, BankInter, etc.) see their earnings impacted by over 15 per cent.
Back to BarCap:
That, we believe, is the key message. The forthcoming normalisation of funding is likely to result in a range of strategic and financial responses across the sector.
The good news is that quality is actually starting to count in the bank debt market:
At the same time, we will see greater divergence in bank funding costs than before . . . For the first time in more than a decade, there is a major strategic advantage from being a well funded, “strong” name in the debt market.
But ironically, at the potential expense of that other issue covered by BarCap on Tuesday — Too Big To Fail:
In practice, weaker banks don’t always need to accept higher funding costs: they can shrink. But that’s the point; weak banks will struggle to execute their strategic goals if they are unable to get sufficient funding at economical terms. This will only be accentuated as banks look to replace the c€875bn of central bank funding. Ironically, just as some of Europe’s biggest banks might be impacted by “too big to fail” regulations, those same large, wellfunded banks – HSBC, BNP Paribas, BBVA and the like – may well have the funding base that allows them to grow bigger at the expense of their weaker rivals.
Related links:
Banks don’t just have an asset problem, says Moody’s - FT Alphaville
Banks face hike in funding costs – FT
BarCap calculates the cost of `Too Big to Fail’ – FT Alphaville
BarCap’s `credit surprise’ snapback – FT Alphaville
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