So far, the European Central Bank’s Long Term Refinancing Operation (LTRO) has turned out to be a great thing for anyone with a deferred stock bonus. Longer term, it may turn out to be a double-edged sword.
Since the first LTRO was announced on December 8th, European banking stocks have soared. As the graph below, from Morgan Stanley, shows, bank stocks across Europe are up significantly more than average.
Source: Morgan Stanley
While the European banking index is up 24% since the inauguration of the LTRO, however, individual banks have done substantially better. Since December 8th, RBS's stock has risen 37%, Lloyds' has risen 43%, Barclays' is up 28% and HSBC, SocGen and BNP Paribas have enjoyed increases of 15%, 19% and 25% respectively.
In reality, however, the beneficial effects of the LTRO may be even more substantial than this. The LTRO was first intimated on November 29th and Bruce Packard of Seymour Pierce suggested yesterday that the real measure of the LTRO-effect is the 65% rise in RBS's share price since late November. Taken from November's low, other bank stocks have similarly soared: Barclays, Lloyds and SocGen have experienced equivalent 60% increases in their share prices.
Clearly, this all feeds through to these banks' deferred stock bonuses from 2009 and 2010, which are now worth rather a lot more than they would have been previously.
Less promisingly, however, any stock issued for 2011's deferred bonuses will have come at these higher prices. And the perpetuation of these prices is dependent on the LTRO's continued success.
Next Wednesday, the second LTRO tranche will be announced. There's disagreement about its potential take-up, with Morgan Stanley predicting another €200bn to €500bn of net additional funding, plus €100bn on a rolling basis, while UBS is expecting €300bn of net new money. If next week's LTRO is below €400bn, Morgan Stanley says it will be viewed, "negatively," and that there will be a refocusing on "defensive" banking stocks, implying that those that have increased substantially in value since December (the "recovery trades") could lose out. For the sake of their deferred compensation, Europe's bankers need to hope fervently that this doesn't happen.