Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 16 September 2014 at 13:43 GMT

The ECB is buying, but which Eurozone banks are selling?

Head of Equity Strategy / Saxo Bank
  • Not all banks will benefit equally from the ECB's purchase programmes
  • Markets have already separated the winners from the losers
  • Deutsche Bank, BNP Paribas poised for post-ECB gains

By Peter Garnry

It has now been nine trading sessions since European Central Bank president Mario Draghi initiated a new push to fend off deflation and repair failing credit transmission in the euro area. The two new tools presented were the
asset-backed securities and covered bond purchase programmes

To what extent these purchase programmes will have a significant impact on the real economy remains to be seen, but they will reduce banks' balance sheets, thus freeing up capacity for new lending and more permissive credit standards. 

But what sort of impact will this have on European banks? And who will benefit the most?

Peripheral banks see no market confidence

Following the ECB press conference, the market has already separated the winners from the losers. The chart below shows the average total return on the 30 banks in the Euro Stoxx Banks Index against the top and bottom performers.

The winners are Commerzbank, Societe Generale and Piraeus Bank, which have outperformed the industry by a wide margin. The market is clearly singling these banks out, and the reason for this likely relates to lower litigation risk (Commerzbank and BNP Paribas) and an increasingly bright outlook (Piraeus Bank). 

Commerzbank and BNP Paribas are especially well-poised to reduce their balance sheets by selling assets to the ECB, and thus to extend new credit to the economy at large.

Commerzbank is on the move as new programmes play to its strengths. Photo: Getty

The market is also clear on who the losers are: BMPS, Banco de Sabadell and Erste Group. These banks are all underperforming for various reasons ranging from a profit warning (Erste Group), exposure to Eastern Europe / Russia (Erste Group) and worsening credit quality ahead of their asset quality review (BMPS and Sabadell).

European banks performance

Irish banks in the penalty box

As for the question of whether Irish banks will be able to offload their most toxic mortgages to the ECB through the ABS purchase programme, ECB vice president Vitor Constancio said that the central bank would need state guarantees in order to lower its requirement for debt rating. 

The issue of whether euro area countries will be allowed to deliver such guarantees will be a hot topic over the coming months, with German policymakers including Bundesbank president Jens Weidmann voicing concerns about such a plan. In the view of its critics, such an approach would eventually lead to unsterilised monetary policies which could potentially produce concentration risk among certain issuers or countries.

Bank of Ireland
Troubled Irish banks remain unable to offload their most toxic assets. Photo: Varsescu / iStock

In this first phase, the most troubled peripheral banks may not be the best bet for traders seeking to profit from the ECB's new purchase programmes. It is probably better to bet on banks where structural demand exists and where fewer toxic assets create uncertainty.

Quant model favours BNP Paribas and Deutsche Bank

To bet on the aftermath of the ECB's new measures is to bet on which banks will get the strongest tailwinds from the new policies. Below, we have listed the two banks that are both favoured by our quant model, but which also have sizeable balance sheets and a suitable degree of transmission into the real economy to allow them to benefit from the post-ECB reduction.

  • BNP Paribas has a high asset-to-equity ratio of 21.6x indicating big potential for asset reduction and subsequent new credit extension. Valuation is on par with the industry. It is a large euro area franchise, and as such will benefit from a general recovery in Europe.

  • Deutsche Bank maintains a high asset-to-equity ratio of 24.4x and a 35% valuation discount to the industry on litigation and derivative risk premia. Deutsche Bank also has large exposure to Germany (and its structural loan demand), so the ABS purchase programme should free up capital for new lending.

-- Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank


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