Whoever you ask, they will all tell you the same thing — UK banks have a serious refinancing problem.
The Council of Mortgage Lenders warned in February of a £319bn funding gap caused by the collapse of the securitisation market and the planned withdrawal of the Bank of England’s Credit Guarantee Scheme and Special Liquidity Scheme.
Last Friday, the Bank of England said that to refinance £800bn of term funding and liquid assets by the end of 2012, the big UK banks would need to issue in the capital markets at nearly double the 2001-2007 run rate — a prospect that seems virtually impossible given market conditions.
On Monday, Nomura analysts gave UK banks a cautious bill of health based on their capital raising and declining impairments, combined with low equity valuations. Yet they echoed the BofE’s warning on wholesale funding, arguing that a “genuine revival in RMBS issuance” was needed, with little sign of it happening.
Lloyds in particular was singled out by Nomura’s analysts, given that wholesale funding makes up £326bn of its liabilities, with much of it maturing in the next three years. Refinancing the government’s support schemes would leave the bank with a £130bn funding gap in three years, the analysts said.
This picture of doom and gloom offers only one side of the story, however. The BofE argued that markets would punish firms which did not take “prompt and determined action... to term out their funding”. On this front, the UK’s banks, and Lloyds in particular, can hold their heads high.
Lloyds was the first European bank to access the public securitisation markets after the bankruptcy of Lehman Brothers and has been the most prolific issuer since last September, tapping three of its securitisation programmes. Other UK lenders such as Santander UK, the Co-Operative Bank and Nationwide have also demonstrated their ability to access the securitisation market, albeit in quite limited volume. Meanwhile UK banks have also been busy in the covered bond markets and in senior unsecured. Only the smaller building societies have so far shied away from unguaranteed issuance.
Contrast this picture with the situation in Spain, for example, where banks are increasingly reliant on the ECB for funding, and the much needed process of taking impairments on real estate exposure and consolidation has barely begun. The country’s banks are reportedly furious at the ECB’s withdrawal of its one year refinancing operation, arguing that the central bank’s job is to provide backstop liquidity to the market.
Indeed it is, but one year funding is not liquidity.
Spain’s banks have yet to even dip their toes into the securitisation market since the crisis, while a brief spate of covered bond issuance in March and April has been virtually the only long term funding for the sector since the start of the year. And short term funding has been declining as CP outstandings shrink. Admittedly, Spanish banks have been successful in growing their deposits to meet some of their funding needs, but competition in lending has delayed the necessary repricing to reflect much higher funding costs.
The UK’s banks face a tougher medium term challenge than most in Europe, but many are adapting to the new reality and grasping the funding bull by the horns. It’s time for others to do the same.