February 15, 2017

EU Second-Tier Banks Could Get Yield Curve Leg-Up

by Breakingviews

Recent yield curve dynamics do more for French, German and Dutch banks than their peers in other countries. For investors in Credit Agricole and ABN Amro, which on Feb. 15 each posted forecast-busting earnings for the three months to December, this could be good news. They will have to be patient, though.

The better-than-expected fourth-quarter results for Agricole and ABN were down to loan growth, and resilient interest income. But the French and Dutch markets in which they operate have a mix of loans that benefit when short-term interest rates remain flattish and long-term rate expectations rise – just as they did towards the end of last year. In those two countries and Germany, at least 80 percent of outstanding mortgages have fixed rates, whose pricing is determined by the back end of the yield curve. That compares to 25 percent in Italy and 10 percent in Spain and Ireland, according to Deutsche Bank research.

The catch for shareholders is that the positive effect from the loan portfolio mix in the French, Dutch and German markets could take a long time to filter through. The re-pricing of mortgages and other loans there could take five to 10 years, reckons Deutsche.

Short-term market jitters may force nervier investors to look for alternatives rather than holding out for a pot of gold. With far-right candidates in both France and the Netherlands more popular than in the past ahead of elections this year, a political upset could change the macroeconomic outlook. If inflation returned as a consequence, it is conceivable that the European Central Bank could hike short-term interest rates, which would benefit banks with more of a skew to variable-rate home loans.

If the political dog doesn’t bark, ABN Amro and Credit Agricole could benefit. Both banks have pulled in their horns since being laid low by the financial crisis. Credit Agricole has a shorter duration loan book than either Societe Generale or BNP Paribas, implying slightly faster repricing, notes Barclays research, which points out ABN is worse than Dutch peer ING on that score but better than KBC. While each bank’s shares are trading roughly in line with its closest rivals on a forward price-to-tangible book metric, their yield potential argues for more.


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