Europe’s Banks Get a Cash Boost From ECB Credit Moves

Europe’s Banks Get a Cash Boost From ECB Credit Moves

Region’s lenders are booking higher revenue from a central-bank program to support the economy

The European Central Bank wants to make sure credit is flowing into Europe’s economy to support its recovery as the pandemic drags on. Banks are cashing in.

Eurozone banks are making money from an ECB program that basically pays them to lend, boosting their earnings and helping offset some of the costs associated with the continent’s long-running negative interest rates.

The program shows the extent the ECB has been willing to keep economies in the eurozone afloat during the coronavirus pandemic by unleashing a flood of liquidity to businesses to avoid a credit crunch. Incentives on loans are particularly important in Europe because companies rely heavily on borrowings from banks, as opposed to the U.S., where companies issue bonds more often.

The so-called targeted longer-term refinancing operations, or TLTROs, were created in 2014. The ECB sweetened the deal for banks last year by lowering the interest rate on its loans to as little as minus 1%. So banks get paid to borrow from the central bank. In exchange, lenders must meet lending targets.

Many banks are borrowing even though they are flush with cash to take advantage of the deal. In the latest round of the program in June, banks took some €110 billion, the equivalent of $129 billion, from the ECB. That brought the total amount outstanding under TLTRO to more than €2 trillion, compared with less than €1 trillion before the rate cut. That is roughly half of the total excess liquidity in the eurozone banking system.

“For banks, a funding cost of minus 1% is very difficult to beat,” said Marco Troiano, co-head of financial institutions at rating firm Scope Ratings.

In the first half of the year, both small and big banks logged gains from the program. Italy’s UniCredit SpA booked €429 million in revenue from it. Deutsche Bank AG made €282 million. The German lender has said it expects revenue from its corporate banking business to be flat this year, partly thanks to TLTRO gains. Dutch lender ING Groep NV also booked revenue gains of €316 million so far this year.

“This quarterly benefit from our participation in the [program] is very welcome, but it provides only limited relief against the loss of income due to the prolonged negative rate environment,” a spokesman for ING said, adding that banks continue to face a severe margin squeeze between what they charge customers for loans and how much they make on deposits.

A spokesman for the ECB said TLTROs also reduce the need for lenders to tap the market for funding. For those that do sell bonds, the cost tends to fall because of the limited supply.

Tom Kinmonth, a fixed income strategist at Dutch bank ABN AMRO Bank NV, said issuance of covered bonds, the cheapest form of bank debt, has collapsed this year to €52.6 billion so far, well below redemptions of €97 billion.

TLTROs have been particularly important for northern European countries over the past year because they have been hit harder by a 0.5% interest rate that the ECB charges banks to hold their extra reserves. The ECB started charging in 2014 as a way to motivate banks to lend more.

While the rates applied to all banks in the eurozone, it hit northern lenders more because they were more flush with extra funding. Their struggling peers in southern countries such as Italy, Spain and Portugal have historically taken more advantage of TLTROs.

Since last year, banks in Germany, the Netherlands and France have been able to offset costs from ECB deposits with gains from TLTROs, according to Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

“No doubt the program has helped mitigate the impact of negative interest rates on banks,” Mr. Ducrozet said. “That said, the ECB’s monetary policy remains a drag on their income.”

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