ECB’s last shot ?

In our view, the ECB has fired its last shot. This should remove any obstacle to the continuation of the sector’s recovery.

As expected, the ECB deployed all the promised instruments with the resumption of the APP and the implementation of a deposit-tiered system while the deposit rate was cut, and the LTRO conditions sweetened. Importantly, there is no longer a deadline to the ECB’s accommodative stance. On the other hand, Draghi has closed the door to helicopter money or any other direct lending from the ECB and called for fiscal policy to supplement it.

All these measures were already priced in to banks’ share prices, while the Euribor factors in a higher cut. Cash-rich banks’ valuations will adjust accordingly to the final multiplier (excess reserves will be exempted above 6x the requirements, corresponding to around 6% of deposits).

In our view, Draghi’s call to fiscal policy supplements (substitution?) and the rejection of helicopter money signal that the ECB has reached its limits. Notably, and more importantly for the banks, it will not be able to drive the deposit rate further into negative territory as it reckons on the side effects of such a strategy with increased lending rates to corporates. Recent press papers also showed increasing opposition to the pursuit of ECB’s strategy.

In this context, we believe that banks’ share prices have found a bottom. This should continue to fuel the sector’s recovery, in our view. The extent of the recovery will depend on the macro outcome but we believe that, whatever it will be, the sector should outperform.