The key chart
Exposure to NFC lending (% total loans) plotted against exposure to HH deposit funding (% total deposits) (Source: ECB; CMMP)
The key message
The impact of ECB monetary policy differs at the country and bank segment levels creating relative winners and losers among banks, savers and borrowers in the process
The transmission mechanism of policy has operated largely as expected but with three striking features – the scale and pace of the policy response, the speed of the pass through to the costs of NFC borrowing, and the limited pass through to the cost of HH overnight deposits.
Current aggregate dynamics are more positive for banking sectors with relatively high exposures to retail funding and NFC lending – the Italian and Spanish banking sectors. They are less positive for banking sectors with relatively low exposures to HH funding and NFC lending – the Netherlands (see key chart above).
Important differences exist between the funding mixes of the Spanish, German and Italian banking sectors (relatively high exposures to HH deposits) and the Dutch and French banking sectors (relatively high exposures to NFC funding). Spanish banks enjoy relatively high exposures to HH ON deposit funding. They have also experienced a below average pass through to the cost of these deposits.
In contrast, French banks have higher than average funding exposures to NFC and HH deposits with agreed maturities (part of M2-M1) and have experienced relatively rapid increases in the cost of these deposits.
Turning to the other side of banks’ balance sheets, Italian, French and Spanish banks benefit from above average exposures to NFC lending. They have also experienced above average increases in NFC lending rates. Spanish banks have experienced above average increases in mortgage rates too.
Spanish dynamics dominate much of this analysis. Recent trends have been negative for Spanish borrowers and savers, but positive for Spanish banks. Spanish borrowers face above average increases in their cost of borrowing, while savers see below average increases in deposit rates. Spanish banks, in contrast, not only benefit from these trends, but they also enjoy business mixes skewed towards lending to NFCs and borrowing from HHs.
The market may not have responded well to Banco Santander’s results yesterday (the share price fell by almost 6%). But the fact that the 46% YoY increase in domestic net interest income was lost in the noise, may not have been a bad thing, at least from a PR perspective…!
The winners and losers from ECB hiking
This final post in the “Passing Through” series examines how the transmission mechanism of ECB monetary policy differs at both the country and bank segment levels and explores why these differences matter. The analysis focuses on the EA’s five largest banking markets – Germany, France, Spain, Italy and the Netherlands. Even in this small sample, the differences are real and meaningful.
Changes in EA policy, market, wholesale and retail rates (ppt) between June 2022 and February 2023 (Source: ECB; CMMP)
The transmission of ECB monetary policy in the current hiking phase has largely followed theory (see chart above). There was a rapid pass through from the policy rate (300bp) to the market rate (288bp). From here the pass through to the cost of borrowing, while incomplete, was more rapid for corporate loans (202bp) than for HH loans (127bp). Similarly, in terms of funding costs, wholesale funding reflected changes in policy rates faster than retail deposits. The key differences between the current cycle and previous cycles are the relatively rapid pass through to NFC lending rates and the relatively slow pass thought to the cost of retail deposits in the current cycle.
Exposure to NFC lending (% total loans) plotted against exposure to HH deposit funding (% total deposits) (Source: ECB; CMMP)
These high-level sector dynamics are positive for banking sectors with relatively high exposures to retail funding and NFC lending (see chart above). Among the largest EA banking sectors, Italian and Spanish banks enjoy above average exposures to both HH deposit funding (63% and 61% of total deposits respectively) and NFC lending (43% and 40% of total lending respectively). In contrast, banks in the Netherlands have relatively low exposures to HH funding (46% total deposits) and NFC lending (32% total lending).
Funding mix: NFC deposits (% total) plotted against HH deposits (% total) (Source: ECB; CMMP)
Note the contrast (see chart above) between the Spanish, German and Italian banking sectors (with relatively high exposures to HH deposits) and the Dutch and French banking sectors (with relatively high exposures to NFC funding). Note also that overnight (ON) deposits represent a relatively large percentage of HH and total deposits in the case of Spanish banks (see chart below).
HH deposits as %age of total deposits by country (Source: ECB; CMMP)
The positive news for Spanish banks does not end though. Not only do they enjoy relatively high funding exposures to HH ON deposits, but they have also seen a below average pass through to the cost of these deposits (see chart below).
HH ON deposits: Pass through plotted against % total deposits (Source: ECB; CMMP)
HH ON deposits represent 57% of total deposits in Spain compared with an average of 35% for EA banks. The pass through to Spanish ON deposits has been only 6bp compared with a EA average of 12bp. Note that while Italian and German banks also enjoy relatively high exposures to HH ON deposit funding, they have also seen above average (but still limited) pass through to the cost of these deposits (16bp and 14bp respectively).
NFC AGR deposits: Pass through plotted against % total deposits (Source: ECB; CMMP)
In contrast, French banks have higher than average funding exposures to NFC and HH deposits with agreed maturity (part of M2-M1) and have experienced relatively rapid pass throughs to the cost of these deposits. NFC deposits with agreed maturity represent 8% of French banks deposits compared with an EA average of 4% (see chart above). The cost of these deposits has risen 2.62ppt since June 2002, versus and average EA rise of 2.41ppt. (Note in passing the relatively low pass through to Spanish bank deposits here).
HH AGR deposits: Pass through plotted against % total deposits (Source: ECB; CMMP)
HH deposits with agreed maturity represent 12% of total French bank deposits compared with an EA average of 8% (see chart below). Again, the increase in the cost of these deposits in France (2.14ppt) have been higher than the EA average (1.63ppt).
NFC loans: Pass through plotted against % total loans (Source: ECB; CMMP)
The good news for the Italian, French and Spanish banking sectors is that they have (slightly) above average exposures to NFC lending and have experienced above average increases in NFC lending rates. NFC loans account for 43%, 41% and 40% of total loans in Italy, France and Spain respectively compared with an EA average of 39% (see chart above). The lowest exposure in this sample is in the Netherlands (32% total loans). The increase in the composite cost of borrowing has been highest in Spain (2.34ppt), then France (2.10ppt) and then Italy (2.02ppt). These compares with an average EA increase of 2.02ppt.
HH mortgages: Pass through plotted against % total loans (Source: ECB; CMMP)
Spanish banks have also experienced an above average increase in the mortgage lending rates (see chart above). These have increased by 2.34ppt since June 2022 compared with an average rise of 1.27pp across the EA.
Changes in EA and Spanish policy, market, wholesale and retail rates (ppt) between June 2022 and February 2023 (Source: ECB; CMMP)
This analysis illustrates how the impact of the transmission mechanism of ECB monetary mechanism varies considerably at both the country and bank segment levels.
The stand out theme here is the impact in Spain. Recent trends have been negative for Spanish borrowers and savers, but positive for Spanish banks. Spanish borrowers face above average increases in their cost of borrowing, while savers see below average increases in deposit rates. Spanish banks, in contrast, not only benefit from these trends, but they also enjoy business mixes skewed towards lending to NFCs and borrowing from HHs.
The market may not have responded well to Banco Santander’s results yesterday (the share price fell by almost 6%). But the fact that the 46% YoY increase in domestic net interest income was lost in the noise, may not have been a bad thing from a PR perspective…!
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.