Monday 16 September 2019

10-year bond deal to test investors' pre-Brexit appetite for Irish risk

Strategy: The European Central Bank is tipped to further loosen lending conditions. Photo: AFP/Getty Images
Strategy: The European Central Bank is tipped to further loosen lending conditions. Photo: AFP/Getty Images
Donal O'Donovan

Donal O'Donovan

The National Treasury Management Agency (NTMA) will test pre-Brexit appetite for Irish financial risk today with a planned auction of €1bn of 10-year government bonds.

Its the most important test of sentiment since September 3, when Bank of Ireland postponed its planned issue of €300m of relatively risky subordinated Tier 2 bonds.

The bank had enough support in the market to place the bonds, but opted to hold off because the low borrowing costs were testing sentiment at or near the limits of bondholder tolerance and with the potential of a hard Brexit only weeks away.

In a volatile market in which the bank might need support down the line, it favoured a softer approach to investors.

Banks including Bank of Ireland are vulnerable to a hard Brexit, German rating agency Scopes has warned in a new report.

A quarter of Irish banks' credit exposures are directly to borrowers in the UK, deepening their vulnerability to a no-deal Brexit, the report said.

"Bank of Ireland and AIB could be hostages to fortune if Brexit turns disorderly," the report states.

"It's clear that the pressures on Irish banks have much to do with the no-deal Brexit scenario," said Jennifer Ray, executive director in the financial institutions team of Scope Ratings.

Banks also face intensifying competition in the mortgage market while struggling to grow profitability amid the European Central Bank's (ECB) lower for longer interest rate policies, she said.

The ECB policy meeting today is widely tipped to loosen lending conditions further, which means lenders are braced for another blow to their profitability.

While the ECB's strategy is to boost growth and inflation by lowering borrowing costs for companies and households, squeezing banks too much could hamper their ability to supply the credit which fuels the economy.

"The interest rate policy is an enormous burden," Christian Sewing, chief executive officer of Deutsche Bank, said at a conference in Frankfurt last week. "In the long run, negative rates ruin the financial system."

Such pleas are unlikely to stop the ECB. It began a two-day meeting yesterday to prepare stimulus to respond to risks including US protectionism and Brexit. The most Sewing and rivals can hope for is accompanying measures to soften the blow.

The ECB's deposit rate used to be the interest banks received for keeping their excess cash at the central bank overnight. Now at minus 0.4pc, it has become a charge, one Deutsche Bank says could cost it hundreds of millions of euro this year.

Many lenders already pass the charge onto corporate and institutional clients, but doing so with ordinary savers - a key source of bank financing - could prompt them to withdraw their cash.

Scope Ratings reckons euro-area banks have incurred €23bn of charges at the ECB since negative rates started in 2014, and are currently paying almost €7bn a year. The ECB's Benoit Coeure called that cost "peanuts", outweighed by the profit on increased lending in a stronger economy.

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