Morgan Stanley Joins BofA Cutting ABS Outlook Amid Flood of Cash

Jul 09, 2014 5:37 am ET

July 9 (Bloomberg) -- Mario Draghi is undermining his own plan to support asset-backed debt as he floods banks with cheap money, according to Morgan Stanley and Bank of America Corp., prompting them to cut forecasts for sales of the securities.

The European Central Bank President has made a revival of the notes a key part of plans to fuel growth in the region to help boost lending to businesses. The $2 trillion ABS market contracted 32 percent since 2009 as regulators cracked down on the debt they blamed for deepening the financial crisis.

Morgan Stanley analysts led by Srikanth Sankaran cut their estimate of full-year issuance to 72 billion euros ($98 billion) from 78 billion euros, according to a note yesterday. Bank of America analysts led by Alexander Batchvarov said last week annual sales will total 90 billion euros, down from an initial estimate of as much as 140 billion euros.

“Easy access to central bank financing and muted balance sheet growth limit the need for ABS funding across all countries,” the Morgan Stanley analysts said in their report.

Draghi is pumping cash into the 18-nation currency bloc in an effort to bolster credit supply and boost inflation that is running at about a quarter of the ECB’s goal. He estimates that banks can take up as much as 1 trillion euros under targeted longer-term refinancing operations, known as TLTROs.

He has been promoting securities backed by loans to small- and medium-sized enterprises in a bid to increase funding to the businesses that employ about 70 percent of the European Union’s private-sector workers. The ECB is also undertaking preparatory work to buy “simple and transparent” ABS.

Onerous Regulations

The securities package individual loans such as mortgages, auto credit or credit-card debt and sell them on to investors, allowing banks to share the risk of default and encouraging them to offer more credit.

Onerous regulations for the securities, which Draghi said is the main impediment to a functioning ABS market, was also a key reason for Bank of America to cut its forecast. Regulators have been wary of the securities as the complicated structure of some products can obscure the true riskiness of the underlying assets.

“The contrast between favorable political statements and restrictive regulatory measures continues to confuse and discourage securitisation market practitioners, while securitisation keeps shrinking both in primary supply and in investors’ holdings,” the Bank of America analysts said.

Citigroup Inc. and JPMorgan Chase & Co. have maintained their issuance forecasts for ABS from the beginning of the year at 85 billion euros and 78.5 billion euros respectively.