Third LTRO Put-Back Post-Mortem: €5 Billion Down, €873 Billion To Go

As reported previously, today was the third weekly LTRO putback option for European banks. At just €5 billion it was a far cry from the first week's €137 billion whopper, which as we explained, marked the peak level for the Euro, as it is all liquidity tightening from here (especially once the obligatory dose of bank stigma is thrown in) at least until Draghi shifts from unlimited off-balance sheet guarantees to very limited on-balance sheet expansion once more, a move that will see the EUR plunge. But we'll cross that bridge when we get to it. For now - here is Goldman with a summary post-mortem of what has happened so far in LTROville.

LTRO put-back: Week 3: €5 bn (cumulative repayment €146 bn; €873 bn outstanding)

€5 bn in the third put-back, €873 bn left

Today (February 8) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (third) weekly put-back option. Banks repaid €5 bn, bringing the cumulative repayment to €146 bn or 14% of the initial take-up. The cumulative amount of LTRO cash left in the system now stands at €873 bn.

Weekly put-back tempo of <€5 bn base case

Banks used the initial repayment option to send a "health signal" and repaid €137 bn. Over the past two weeks, the repayment tempo has stabilised, and we see a “repayment corridor” of €0-5 bn per week as a base case expectation.

End February: Next large put-back?

Banks have the option to begin putting back LTRO-2 funds allocation on February 28. We see this as the date of a larger put-back amount, as the banks in the core – which have opted for full repayment of LTRO-1 – get the opportunity to repay the LTRO funds in full.

Signaling and maturity are crucial

Without time pressure, a put-back decision is driven by economics. We believe that for peripheral banks LTRO money continues to offer an attractive reinvestment proposition.

Moreover, we believe the banks will use 4Q2012 results to outline a longer term path of repayments, in order to signal their ‘resilience’.

Finally, with two years remaining, LTRO remains an attractive facility for the majority of banks, which cannot achieve comparable terms in the funding market. But in a year’s time, this is unlikely to be the case. We believe a longer term exit path will be the most likely outcome.

Top bank picks: Growth and self-help

Within the Eurozone, we have a long-standing preference for BBVA and Erste, to which we have recently added BNP and UCG. These banks offer growth options (BBVA, Erste) with restructuring potential (UCG), while they all share attractive valuation levels. Outside of the Eurozone, our preference is for UBS and HSBC.


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