For banks, ECB policy experiment opens north-south split

Frankfurt / Reuters

As the European Central Bank moves into an unfamiliar world of negative interest rates and incentives to encourage banks to make loans to businesses and consumers, a north-south divide is opening up between euro zone lenders.
In the north, anaemic demand for loans and a financial system already flush with cash mean banks see mostly costs. They must pay the ECB to deposit funds overnight and they have little need for the easy money on offer.
In the south, lenders are keen to take advantage of the loans programme and many are set to get an instant boost to their profit margins when it takes effect in June.
Under the ECB scheme, four-year loans will be offered at an interest rate of zero. Banks lending on more than a prescribed amount of that money to households and companies will get a reduction worth up to the deposit rate – in other words they will be paid to borrow.
The north-south split highlights the challenges of a one-size fits all monetary policy for 19 nations.

THE ALPS DIVIDE
The ECB can point to data showing lending in the euro zone is rising at its fastest pace since 2011 to justify its policies. But banks in the likes of Germany say they are penalised by measures that only bring benefits to their counterparts in southern Europe, and warn they could cause cheap money to flow to the wrong parts of the economy.
An ECB spokesperson said the programme’s goal was to spur bank lending into the real economy. “It is up to individual banks across the euro area to decide whether to participate.”
Commerzbank’s chief financial officer Stephan Engels said earlier this month that no bank “north of the Alps” would take the ECB’s money, a position exemplified by the experiences of Gemany’s fifth biggest bank HypoVereinsbank (HVB) and Spain’s Banco de Sabadell.
At Munich-based HVB, chief financial officer Francesco Giordano said the bank was taking a direct hit from the ECB’s negative deposit rate, first introduced in 2014 and cut further below zero this month, because it adds to the cost of cash management – the business of looking after money the bank and its clients need to access easily.
HVB’s view mirrors banks across Germany, Europe’s biggest economy, where loan demand has been largely flat for the past five years because firms see only limited scope for investment given global risks to the economy and weak growth at home.
HVB’s deposit base grew 7 percent last year, outstripping the 3.5 percent growth in its loan book. That means the bank sees little reason to take part in the ECB’s programme, known as TLTRO2. At the same time, HVB is feeling the full force of negative rates because it has little choice but to park its surplus funds with the central bank.
In Spain, the ECB’s loan programme is getting a more positive response.
While banks are not expected to sign up for billions of euros of new loans right away, credit demand is growing as Spain recovers from the worst of the euro zone debt crisis, a crisis that left Germany largely unscathed.
The Spanish economy is expanding at its fastest rate since before 2008 – last year GDP grew 3.2 percent – and lenders are looking to roll over existing loans from the ECB into loans at new, more preferential rates.
Banco de Sabadell SA, based just outside of Barcelona, saw its total gross lending to clients grow 21 percent during 2015. The bank could borrow as much as €21 billion through the ECB programme, though it expects to take a much smaller amount.
Sabadell plans to roll over around €5.5 billion worth of existing loans from the ECB on to this new scheme, a move that would shave off around 30 million euros from their borrowing costs. The ECB will be able to deploy as much as €1.6 trillion worth of funds through its four-year loan scheme. Analysts at Morgan Stanley estimate around €100 billion to €200 billion of that will be drawn, mainly by banks in southern Europe.
Bankers agree that lenders in southern Europe – those in Spain, Italy and Portugal in particular – are the clear winners from the programme, particularly the smaller lenders in those
countries.