Credit Suisse cuts predictions of bank earnings growth from LTRO

Credit Suisse cut its forecast for the effect the European Central Bank’s cheap three-year loan program will have on 2012/2013 bank earnings by nearly one third, from an uplift of 2.1%, to an uplift of 1.5%.

However, heavier borrowing by Spanish and Italian banks means LTRO will still benefit their earnings by 6% and 3% respectively, the Swiss bank said.

As allotment of the second tranche occurs this week, Credit Suisse said the ECB’s Long Term Refinancing Refinancing was “encouraging, but not necessarily the end game”.

It foresees a headline take-up of €470bn in February’s tranche.

Credit Suisse also predicted there could be additional three-year LTRO facilities after this one, “and in fact they could even have longer duration if the market conditions are necessary.

“Given the success of the three year December facility we think that it has not been necessary to widen the terms of the pool of collateral in order to achieve the desired effect.

“We believe the December round of three year LTRO has achieved in large part what the programme set out to do, that is to stabilise the European banking system and increase confidence at a critical time for the sector.”

As European banks put some of their LTRO cash into their domestic sovereigns since December, yields on one-year Spanish debt fell by 52%; on two- and five-year paper by about 20%; and on 10-year by 2%. For Italian debt the fall on one-year paper yields has been 60%; on two years by 46%; on five-year debt by 37%; and on 10-year by 20%.

While Spanish and Italian banks are expected, again, to use LTRO the most this month, Credit Suisse still prefers shares in “the larger non direct LTRO users such as Barclays and Deutsche Bank”.

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