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Will European Banks benefit from ECB’s QE?

Eurozone banks are down 15% in the past 4 months due to the speculation on European Central Bank’s (ECB) quantitative easing (QE) programme.  Question is will the European Banks benefit from the ECB’s move?

No doubt, QE will have some benefits for banks and they are:

  1. According to Morgan Stanley, sovereign bonds account for about 10% of bank assets in Spain and Italy, the highest level in 15 years.  Hence, with the QE, banks’ holdings of sovereign bonds will rise in value.
  2. QE could boost lending – by pushing interest rates down, it ease the supply – making even more attractive borrowing cost.  Further to that, with Euro down, it would encourage exporters to borrow more to grow their businesses.
  3. For banks still have bond trading business, QE could lead to higher levels of trading activity.

On the other hand, the implications are:

Banks have to deal with lower net interest margins, which are already thin.

    1. As longer dated sovereign bonds get bought up, the yield curve flattens and so compresses banks’ margins further.
    2. If QE fails to spur more lending, banks would be left with a nasty combination of lower volume and lower margins.
    3. A weak Euro helps exporters but the banks themselves do not export as much as they used to due to Eurozone crisis making them repatriate back to their home markets. 
    4. QE should drive asset prices, however, they are already pretty high.

What history has told us?  According to Berenberg, US banks underperformed their index during all three periods of QE.  Japanese banks also underformed during QE.  UK’s record was mixed.  The chart below illustrates the impact of QE on US, UK and Japanese banks (Courtesy of Financial Times):

From the above, there is a high probability that the ECB's QE would not have any significant impact on Eurozone banks.

Reference:

Financial Times, Lex, 2015-01-19, "European Banks: Easing the Hard Way"