The ECB’s quantitative easing programme is unlikely to materially boost eurozone banks’ earnings or kick-start lending in the bloc, Fitch Ratings says. But it does reduce downside risk from prolonged deflation. Any positive impact on banks is likely to be temporary unless their balance sheets are freed up for more lending or structural reforms raise real and sustainable economic growth.
We think QE is unlikely to stimulate lending in the eurozone’s crisis-hit economies, despite the start of rebalancing and recovery in some countries. The economic outlook is still fragile, so demand for credit is likely to remain subdued, and tighter regulatory requirements are making loan growth more difficult for banks.
Banks have to hold an increasing amount of regulatory capital against the loans they extend as Basel III rules are phased in. The bar is also being raised by the ECB in its role as the new single supervisor – it recently communicated its Pillar 2 expectations for buffer capital to each of the banks. They will also have to build debt and capital buffers to meet new total loss-absorbing capacity (TLAC) and minimum requirement for own funds and eligible liabilities (MREL) rules. Gearing up bank balance sheets through loan expansion runs contrary to these regulatory pressures.
Some banks may be able to generate more trading income, as the ECB’s accommodative policy should push down bond yields and encourage trading flow. Gains on any sales of sovereign bond holdings by banks are likely to be limited because yields have continued to fall in recent months. Any revenue benefits from sovereign bond sales and trading will probably be offset by lower margins from a flatter yield curve, so the balance is likely to be neutral or even slightly negative for profitability.
Many banks in northern Europe are already awash with liquidity, so lower bond yields would only distort credit pricing there even more. Weaknesses in some of the economies, such as Germany and France, which grew 1.2% and 0.4%, respectively, yoy in 3Q14, are likely to keep investment appetite, and therefore loan demand, muted, especially for good-quality corporates, despite even cheaper potential funding rates.
Southern European banks could benefit more from QE, but the impact would depend on the pricing of their sovereign debt portfolios and the extent to which these are booked as held-to-maturity assets. But there could be some rebalancing of sovereign debt portfolios and banks are likely to look to lock in some gains. Loan expansion is even less likely in southern Europe, as most banks there are still strengthening balance sheets, gradually reducing impaired loans and dealing with legacy assets.
If the ECB’s actions do not ward off deflation, eurozone banks would come under more pressure from dampening earnings, increasing non-performing loans and weakening collateral values.
