Liquidity, funding challenges for Spanish banks, despite positive signs

Despite market activity gaining momentum early in 2013, funding and liquidity pressures will persist for Spanish banks over the coming months, Moody's Investors Service said Wednesday.
A number of larger Spanish banks accessed the capital markets with senior and covered bond issuances last month and the largest (and strongest) banks announced the early repayment of part of their European Central Bank long-term refinancing operation (LTRO) borrowings.
"Spanish banks' early repayments of LTRO borrowings has decreased the overall banking sector's reliance on ECB funding by around EUR 41 bln, representing 11.5% of the system's total outstanding ECB borrowings as of end-December 2012," said Pepa Mori, author of the report.
Another positive signal, she added, is that retail funding from resident households and corporates have proven resilient since the onset of the financial crisis, and remain the main source of funding for Spanish banks.
"However, we still consider that liquidity and funding will continue to constrain banks' credit profiles over the coming months. Whilst recognising the decline in the system's overall financing requirements, Spanish banks continue to display wholesale funding reliance at a time when accessibility to long-term wholesale markets, although improving, has not normalised" explained Mori.
During 2013, it is very likely that some Spanish banks will have the opportunity to tap the capital markets, but the rating agency still considers that these would be subject to sporadic periods of lower market volatility and not to a sustainable recovery of banks' access to wholesale funds.
This view is underpinned by Moody's expectations of negative operating conditions for the Spanish banking sector and sovereign over the next 12 months, which will continue to weigh on market confidence and therefore prevent the return of normalised funding conditions for the system.