The already famous TLTROs, or ECB credit lines to European banks, have for years regulated bank liquidity. We are talking about some 725 billion euros in financing for European banks, of which 170 billion corresponds to Spanish banks. These are the financing lines which are little by little being reduced. It is still not known if they will be withdrawn completely. According to analysts at Morgan Stanley, replacing this quantity of TLTROs would not be a panacea for the banks. They believe that the ECB will adjust the TLTROs, but it will be insufficient to solve the financing problems. Moreover, it will not be offered until the middle of 2019 and will have much less generous terms: it will be limited to 2 years and linked to the repo rate.
The banks will seek financing out of the ECB and could increase the supply of senior bonds (they estimate 258 billion euros) in a more difficult credit market in 2019. The consensus has lower figures and will have a negative impact on the cost of financing. The credit markets have deteriorated, the spreads for non-preferred senior bonds and 90 bp higher than the beginning of 2018 and increase the pressure on financing costs. In the next three years there will be emissions over 1 trillion euros.
This increase in financing costs will reduce profit forecasts by between -1% and -9%. Meeting the requirements of MREL and TLTRO will reduce the NII -4% in 2021 and affect especially midcap and periphery banks.
The analysts at Morgan Stanley prefer banks with high ROE and dividend: Santander, HSBC, KBC, Credit Agricole and Caixabank. They remain cautious about Italian banks, the most affected by the increase in financing costs (average impact -10% in NOO 2021). In Spain Sabadell is the most exposed bank.