On February 20, Intesa Sanpaolo was boasting about the success of a €1 billion five-year senior unsecured Eurobond, claiming it was the first such issue from a eurozone peripheral bank with a longer maturity than the European Central Bank's (ECB) three-year long-term refinancing operation (LTRO).
The bank was keen to convey the narrative of a financial institution restoring access to conventional funding markets and setting aside the crutch of subsidized ECB funding to stand on its own feet.
Carlo Messina, the group’s general manager and CFO, said: “The ECB’s LTRO facilities are highly appreciated, but we look for structural, sustainable sources of funding and this issuance is an important vote of confidence of the market."
A senior FIG DCM banker tells Euromoney: “A lot of peripheral banks made use of the first LTRO but became aware of a business risk arising from market perception that they might be excessively dependent on it.”
So banks had some incentive to reduce their use of the second LTRO completed on Wednesday, especially when some of the stronger eurozone banks started beating their chests about not having to use it.
Come Wednesday morning’s second LTRO, banks were again big users of the ECB’s subsidized lending facility, with the gross allotment of €529 billion towards the higher end of consensus estimates.
Analysts at Barclays Capital point out: “There will likely be no official detail on the take up by the banking system, or individual banks in the coming weeks. The three-year LTRO indeed settles on March 1, so it will be reflected only in the end of March national central banks balance sheets data, which are typically released from early April onwards [and this may be delayed by Easter this time].”
However, within hours of the announcement, news wires had reported comments from Enrico Tommaso Cucchiani, chief executive of Intesa, that the Italian bank had raised €24 billion at the second LTRO.
What happened to that return to sustainable sources of market funding?
It might be that the bank is weighing the perceived stigma of using the LTRO against the substantial financial benefits. The ECB supplies funding at 1%, which the bank can put into Italian government bonds at a fat margin in a classic carry trade or even lend to the real economy.
On the five-year bond of which it was so proud, the bank paid a spread of 355 basis points over mid-swaps. That might be a good demonstration of market access but it doesn’t do a whole lot for net interest margin.
Euromoney goes back to the FIG DCM banker who was espousing the benefits of reduced use of LTRO funding. Doesn’t such high use at the second LTRO send a worrying signal to investors in bank debt?
Showing a remarkable capacity to see the positive, the banker argues that a high take-up at the second LTRO is a potential positive for bank bond investors, and not just because of the obvious boost to bank earnings from subsidized funding.
“The conversations I have had with investors suggest that while they would see a small take-up as a positive because of banks’ reduced need for ECB support, they also see a big take-up as a technical positive because it means there will likely be much reduced issuance of bank bonds and as well as high spreads, they will have some scarcity value,” says the banker.
Let’s see if bond investors swallow this extraordinary line. At least the high take-up of the second LTRO has not dampened bankers’ mood if they can come out with this kind of nonsense.
