LTRO 2 - Goldman's Take

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a "positive." We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is "fade", at least until the next major crisis.

Banks take out ECB “funding insurance”


The ECB has today – through its long-term refinancing operation (LTRO) – fully allotted €529 bn of 3-year funds to 800 banks. Together with the first auction, the ECB has now injected €1 trn of 3-year funds into the system. This is an extremely high amount and equals, for example, 131% of total (249% unsecured) European bank bond maturities in 2012 and 72% (130% unsecured) for 2012 and 2013 combined. European banks are now effectively pre-funded through to 2014.


Funding stabilized, revenues supported


Large take-up is an important positive. Key reasons are: (1) banks are now largely insulated from shocks in the funding market, having prefunded through 2014; (2) consequently, the costs of bank and sovereign funding have now been detached; (3) pressures for forced deleveraging should reduce (first evidence of this is visible in the recent ECB loan data); (4) deposit pricing pressures should fall (this too is already taking place), resulting in a positive revenue effect.


Country aggregates in coming weeks


While the focus is on the aggregate take-up, we see country aggregates as arguably more important. Over the course of the next weeks, we will get disclosure of country aggregates where we expect the Spanish and Italian take-up figures to be high.


ECB’s actions expand the investable group


We derive our group of ‘investable’ banks by: (1) incorporating P&L effects of ECB action; and (2) overlaying these estimates with ‘extreme’ credit losses (as per the EBA stress test). Within this group, our Eurozone top picks are Erste Bank, BBVA, BNP Paribas (all Conviction Buy), and Intesa Sanpaolo (Buy).


We identify banks likely to be “disproportionate beneficiaries” of the ECB LTRO including: Banesto (Buy), Banco Popular Espanol (Not Rated), BancoPopolare, Banca Monte dei Paschi di Siena and UBI Banca (all Neutral).