ECB Virus Treatment for Banks Seen Falling Short of Lasting Cure

(Bloomberg) --

The European Central Bank’s move to shield banks from coronavirus risks received mixed reviews, with some analysts praising greater flexibility on capital while others worry that it sends the wrong message to investors.

Letting banks draw down their capital buffers and not cut deposit rates was seen as a useful step in dealing with the immediate impact of the crisis, though some said it would raise questions about the long-term outlook for banks and the health of their balance sheets.

European stocks saw their worst day ever on Thursday as the impact of the coronavirus pandemic spread and the ECB’s moves failed to calm the market. Bank shares rebounded on Friday, with the Euro Stoxx Banks Index outperforming the broader market with a gain of as much as 14%. The index was up 9.2% as of 3:31 p.m.

Here’s some of the reactions to the ECB’s moves:

Goldman Sachs

While the ECB’s measures are positive for the sector, “we do not see this as a circuit breaker,” analysts led by Jernej Omahen said in a note. The market is instead looking for a fiscal response to the crisis, the analysts said.

Greater flexibility to fulfill capital requirements with certain lower quality types of debt will especially benefit banks that have issued those securities before, including Deutsche Bank AG and Raiffeisen Bank International AG, they said.

Citigroup

The ECB lifeline is “marginal positive,” though its important that banks use the additional flexibility to support the economies and not increase shareholder payouts.

Using debt instead of equity to meet capital requirements will nevertheless help lenders deal with the implementation of new standards by the Basel Committee on Banking Supervision, which will be gradually applied in Europe over the coming years, according to a note sent to clients.

JPMorgan

The package won’t help sentiment for European banks as hopes for a balance-sheet cleanup are fading quickly, analyst Kian Abouhossein said. Lenders may be stuck in a “vicious circle” of low profitability and a large amount of bad loans for even longer, he said in a note.

“The relaxation sends the wrong signal as investors rightly or wrongly view the scale of capital relief being offered as a proxy for potential credit losses to come,” he added.

Axiom Alternative Investments

“This package is almost everything the banks wished for,” Jerome Legras, head of research, said by phone. While the ECB refrained from a rate cut, it offered “enormous” relief both on the capital side and through improved terms for long-term loans to lenders.

The flexibility on capital will help banks deal with many of the problems stemming from the virus, like loan losses and a rise in risk-weighted assets, he said. “It’s a way of telling them ‘you don’t need to worry about this, what you need to worry about is your customers, the SMEs and you need to support them.’”

To contact the reporter on this story: Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen

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