Context:On the 16th of September the ECB announced a new cut on deposit rates, a new asset purchase package and a new round of TLTRO
Impact for the fund:Positive, rally in subordinated financials debt with EUR AT1 CoCos up close to 1%
and subordinated insurance up c0.5%.
Overall, the ECB was slightly more dovish than expected:
- They cut the deposit rate to -0.5% (from -0.4%)
- Doing QE of “only” EUR 20 billion a month from November. This was a smaller number than expected, however the QE is open-ended (meaning there is no time deadline). This is dovish and plays into our theme of lower rates for longer.
- Tiering: This is a mitigating measure, which will help banks profitability.
- Rates seen at lower level until inflation converges on goal
- Longer TLRO maturities
The ECB announced pretty much what we see as a good outcome both for the macro backdrop and for banks. The rate cut which was broadly as expected (main rate cut by 10bps to -0.5%) and while the asset purchase package was slightly lower than expected at €20bn per month there is no time limit which is positive. Finally, the ECB has announced a new round of TLTRO at very favorable terms (banks can borrow at the main rate if certain lending conditions are met) and deposit tiering where part of banks’ excess liquidity reserves will be exempt from negative rates. This will alleviate some pressure around banks earnings and in tandem with further dovish monetary policy to boost the economy this is a strong positive for financials and hence our fund.
For the moment the effect that this has had is a rally in subordinated financials debt yesterday – with EUR AT1 CoCos up close to 1% and subordinated insurance up c0.5%. Nevertheless spreads remain highly attractive (around 420bps on EUR AT1s CoCos for example) and wide in a historical context and hence we continue to see further price upside.