ECB: Expect a large take-up at the final TLTRO II auction – Danske Bank

Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank, suggests that the allotment result of the fourth and final targeted longer term refinancing operations (TLTRO) II auction will be published on Thursday 23 March and they expects a take up of aroundEUR250bn.

Key Quotes

“The utilisation of TLTRO II has so far been EUR507bn, of which EUR401bn has been rolled from the previous TLTRO I. However, the total TLTRO II allowance is EUR1.693bn, implying the final auction has a very large potential take-up.”

“We expect a boost to demand at the final auction due to the following.

1. Banks have more information about the actual interest rate on the loan, as this depends on eligible net lending between February 2016andJanuary2018.

2. It will be the final opportunity to acquire liquidity for four years at an interest rate that will not exceed 0% and is likely to be negative for most banks.

3. Since summer 2016, market expectations have changed in favour of pricing ECB hikes which, if they materialise, makes the TLTRO II even more attractive. The simplest ‘trade’ would be to place the TLTRO take-up at the deposit facility with upside if a rate hike occurs.

4. French banks worried about political uncertainty ahead of the presidential election could demand TLTRO II liquidity on fears of a potential capital flight.”