Bloomberg News

Savings Wars From Italy to Portugal Drive Bank Costs Higher

November 02, 2011

Oct. 21 (Bloomberg) -- Spanish fireman Antonio Casado kept 80,000 euros ($110,000) in cash at Banco Popular Espanol SA for a year and was looking for a place to put it. He had no shortage of offers.

The Popular branch manager in Madrid tried to sell him a 10-year subordinated bond paying 8.25 percent, Casado, 41, said in an interview. Other options include commercial paper sold by Bankia SA or two-year Spanish government notes that pay about 4 percent.

“There are so many offers on savings in the market now,” said Casado, who added he would shun products sold by banks and instead invest in Telefonica SA shares, which offer a dividend yield approaching 10 percent. “It’s probably a good idea not to have your money tied up for too long.”

Banks in Portugal, Italy and Spain, countries on Europe’s southern periphery that have been pummeled by the debt crisis, are competing to raise funds from savers such as Casado in a process that risks eroding the margins of lenders and lumbering economies with higher borrowing costs that will further slow growth.

The average interest rates on new retail deposits for up to one year have jumped almost 60 percent in Portugal and 72 percent in Italy this year, a sign of how Europe’s debt crisis is driving up the cost of capturing savings.

Deposit Rates Rise

“Everyone is chasing your money now, from the banks to the government,” said Javier Santoma, a professor of financial management at IESE business school in Barcelona. “The only way this can really stop is when the underlying problem is addressed and public finances are put in order.”

The rate paid on new bank deposits for up to a year has climbed in Portugal to 4 percent from 2.56 percent in December and in Italy to 2.41 percent from 1.40 percent, according to data from the European Central Bank. Banco Espirito Santo SA, Portugal’s biggest publicly traded bank, is offering a 4.83 percent average annual return on three-year deposits of more than 1,000 euros.

In September, Intesa Sanpaolo SpA, Italy’s second-largest bank, sold two-year bonds yielding 4.5 percent to customers transferring cash from competitors.

Spain Checks Rates

In Spain, the government acted in May to penalize banks that offered what it deemed to be overly aggressive deposit rates by requiring them to make extra contributions to deposit guarantee funds. Average rates for new bank deposits have held steady this year in Spain at about 2.6 percent.

That hasn’t stopped banks from competing to lure savings with products such as the commercial paper that Bankia is selling to retail clients to raise 1 billion euros. Governments, both national and regional, are in on the act after states including Catalonia and Andalusia offered bonds for sale.

“Competition for retail deposits for Spanish banks is probably tougher now than they envisaged it would be six months ago,” said Daragh Quinn, an analyst at Nomura International in Madrid.

The higher retail funding costs of banks are a symptom of a lock-down in wholesale debt markets that has stoked competition for customer savings as lenders shrink their balance sheets to show investors their funding bases are secure.

Wholesale Funding

The five largest banks in Italy, Spain and Portugal combined have more than 200 billion euros in medium- and long- term debt maturing before 2013, according to data compiled by Bloomberg.

The last time a Portuguese bank tapped wholesale debt markets was in March 2010, while Banco Santander SA’s 1 billion- euro sale of bonds in June was the most recent by a Spanish lender. UniCredit SpA, Italy’s largest bank, paid a record spread for Italian covered bonds in August when it raised 1 billion euros from a sale of 10-year notes that yielded 215 basis points more than the benchmark mid-swap rate.

Banco Espirito said in August that it trimmed lending by 3.1 percent from a year earlier and boosted customer funds by 23 percent to bring its loan-to-deposit ratio down to 155 percent from 198 percent a year earlier. A lower loan-to-deposit ratio is a sign the bank is less reliant on sources of funding such as bond sales to fund its business.

Santander expects lending at its Spanish branch network to shrink 3 percent a year through 2013 after it brought down the loan-to-deposit ratio at the unit to 134 percent from 159 percent in 2009.

‘Banks Are Suffering’

“Regarding the increasing rates by Portuguese banks on deposits, the situation is difficult, but it has an easy explanation: no bank has been able to go to the wholesale debt markets since spring last year,” said Andre Rodrigues, an analyst at Caixa-Banco de Investimento SA in Lisbon. “It’s a sign of how the banks are suffering.”

The economies of the three countries are bearing the brunt of the rising financing costs as the banks pass them to customers by increasing interest rates on loans.

The average interest rate on new loans in Portugal of up to 1 million euros to companies jumped to 7.23 percent in August from 5.9 percent in December, according to ECB data, while in Spain it climbed to 4.6 percent from 3.8 percent. In Italy, they increased to about 4.1 percent from 3.2 percent.

Credit Drying Up

“The banks are re-pricing massively and all this is also having a negative impact on lending volumes,” said Ronny Rehn, a banking analyst at Keefe Bruyette & Woods Ltd. in London. “It’s going to be another factor that will help drag Italy into recession next year.”

In Spain, deposits of euro-area residents fell 0.4 percent from a year ago, according to ECB data. In Portugal, deposits rose 5.7 percent and 4.3 percent in Italy, the ECB said.

For Casado, the Spanish fireman, banks competing for his savings mean more choice of products, not necessarily greater peace of mind.

“I have doubts about the health of the Spanish banks,” he said. “There could be some negative surprises in the months to come.”

--Editors: Steve Bailey, Frank Connelly.

To contact the reporters on this story: Charles Penty in Madrid at; Sonia Sirletti in Milan at

To contact the editor responsible for this story: Frank Connelly at

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