The new two-tier deposit-reserving scheme: With this measure the European banking sector could save up to c. €4 billion in annual interest costs (based on avoiding the -50bps deposit rate). However, while a large number in absolute terms, this only accounts for c. 2% of earnings on average for the main banks in the sector and therefore has little impact on overall Returns on Equity and profitability metrics.
Asset purchasing programme: Banks’ funding costs should benefit from the new (now open-ended) QE purchase programme. In this regard, we have already witnessed a number of the higher beta peripheral issuers approach the primary market over recent days and successfully price loss absorbing deals at relatively attractive pricing levels. However, a low yield environment will continue to weigh on bank revenues.
The provision of more attractive funding for the sector (per TLTRO III) does also not, perversely, bode well for margins, with the surplus liquidity fuelling further competition (particularly from smaller less viable peripheral banks) in the new lending space. Consequently, front-book asset yields are likely to remain under pressure.
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