Daily Insight
Group Economics Macro & Financial Markets Research
28 September 2016
Bank worries weigh US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Global Markets: Bank concerns hit European markets – European equities continued their decline, reflecting investor concern about the health of Deutsche Bank (see comment below). At the same time oil prices fell, as prospects for a supply cut faded after Iran said it would not freeze its oil output at current levels (a pre-condition for Saudi Arabia to reduce output). Investor sentiment was also undermined, as German bank NordLB followed Lufthansa in postponing a bond issue due to difficult market conditions. The deterioration in investor sentiment also left its mark on the government bond markets. Core bond yields dropped further, with the 10y Bund yield reaching around -15bp. There was also a widening of peripheral government bond spreads relative to Germany, with Portugal (+10bp) and Italy (+7bp) being most impacted. Portugal faces the risk of a downgrade from DBRS in October, which would make its bonds ineligible for ECB purchases, while Italy is surrounded by political risks given the constitutional reform referendum in December. In contrast, the deterioration in investor sentiment was hardly reflected in the currency markets. We think there is further room for German government bond to rally, as well as for a further widening of peripheral spreads. This reflects our expectation of ECB QE extension, on the one hand, and political and growth risks in the periphery, on the other.(Nick Kounis) Euro Banks: Major Deutsche Bank asset sales necessary to prevent cash call - Equity investors are fearful they will have to be called upon to support the capital position of the ailing Deutsche Bank (DB), with equity prices down by around 64% since October 2015. At a CET1 of 10.8%, DB trails almost all European peers. Crucially, despite restructuring, continual low and even negative net income quarters are draining the ability DB has to naturally increase its capital position. Its capital position needs to be improved, and the ability of it to achieve this naturally is being severely questioned. Significant restructuring, including major asset sales, will likely be needed if DB wishes to achieve an increased capital position without calling on shareholders. Meanwhile, AT1 coupons are potentially at risk dependent on the timing/amount of the recent Department of Justice fine. Anything over EUR 6bn will cause real problems for the payments. At present, we judge the bank could weather short term capital issues for AT1 write-downs not to be an issue. The going concern for the company should be maintained provided the payment of the litigation charges is not demanded in the short term. We see a demand for the fines to be paid urgently as an unlikely scenario. It is both in the interest, of the bank to continue to function, and of the authorities to receive payment. A more detailed note, for professional clients – see disclaimers in document - will be published shortly. (Tomas Kinmonth) Euro Macro: Bank lending growth levels off reflecting sluggish demand -The ECB’s report on monetary developments in the euro area showed that the annual growth rate in loans (adjusted for sales and securitisation) to non-financial corporations (NFCs) stabilised at 1.9% in August, while growth in loans to households stabilised at 1.8%. The monthly flows in loans tend to be very volatile, so we have looked at the 3-month moving average. The 3m average flow in loans to NFCs declined from EUR 9bn in July to EUR 6bn in August, while that in loans to households stabilised at EUR 11bn. The decline in loans to
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