TEXT-Fitch: European investors say banks will need another LTRO

(The following statement was released by the rating agency)

Aug 09 - European investors are concerned that the outlook for banks is worsening and expect them to need a repeat of the ECB's EUR1 trillion long-term refinancing operations (LTRO), according to Fitch Ratings' quarterly investor survey.

A majority of 53% of survey respondents believe fundamental credit conditions for banks will deteriorate - an all-time-high, up from 45% in Q212 and 38% in Q112. This reading is level with those in Q411 and Q311 surveys, indicating the end of the temporary LTRO relief following the ECB's low-interest three-year loans in December and February. By contrast, only 28% of participating investors anticipate improving conditions for the sector, with the balance (19%) expecting no change.

The survey also reveals that 24% of investors think banks face the most difficult refinancing challenge, up from 13% in April and 22% in January, but lower than the 49% in October. However, sovereigns continue to be the main sector of concern, according to 60% of participants.

As investors brace themselves for a worsening outlook and commensurately difficult refinancing for banks, they expect more assistance. 82% of survey respondents say banks will need another LTRO within two years. Half of these investors (41%) believe this would happen during 2013/2014, ahead of the 2011/2012 LTROs running off. More urgent action is expected by others: 33% think it will occur before the year-end while 7% say it will happen during this summer. A minority of 18% said they regard the likelihood of another LTRO as low.

Fitch is also in the 2013/14 camp. We don't project that another LTRO will be needed this year but many banks in southern Europe have become dependent on ECB facilities as their only real source of wholesale funding. If they are unable to de-lever in time, they will likely need some assistance to be able to pay back their LTRO take up.

Bank fund raising has seen major structural shifts since the beginning of the financial crisis. With investors shying away from senior unsecured debt because of macro level concerns and uncertainties regarding future resolution/bail-in legislation, covered bonds have become their main issuance lifeline.

In the first seven months of this year, total bank debt issuance fell 10% to EUR421bn compared to the same period last year. This was entirely due to senior unsecured issuance, hitherto the backbone of bank finance, dropping by 28% to EUR182bn. At this level, senior unsecured accounted for only 43% of total new debt issued - the first time it has fallen below 50%. Covered bond issuance was up 4% at EUR209bn. With subordinated debt bucking the trend and almost doubling to EUR30bn, there is still some appetite for low-ranking debt at the stronger banks.

Fitch believes there is a growing risk that bail-in fears, asset encumbrance concerns and possibly even the eventual introduction of some form of depositor preference represent long-term threats to the supply of senior unsecured debt to many European banks.

The Q312 survey was conducted between 2 July and 2 August 2012 and represents the views of managers of an estimated USD7.2 trillion of fixed income assets. Fitch will publish the full survey results in a report mid-August.