Wholesale funding costs are likely to be one of the casualties arising from the Credit Suisse bailout, according to JP Morgan.
Bondholders have vented their fury at being treated worse than shareholders following US$17bn worth of AT1 loans being scrubbed as a part of the deal.
Credit markets are reflecting the uncertainty that decision has caused, said the US bank.
Most AT1 bonds (CoCos) were paying 8-10% coupons before the Credit Suisse move, but now this is likely to head to double digits, JP Morgan believes.
“This implies even more pressure on funding costs and deposit betas and is likely to reduce net interest income sensitivity further in our view.
"Overall, we expect a higher cost of equity for the sector, moving well into double digits as AT1 costs move up materially from here.”
In short, European banks might look cheap, but JP Morgan is cautious.
Bank shares across Europe were higher today nonetheless as investors welcomed the commitment of monetary authorities to support the sector.
Lloyds Bank shares were up 4%, NatWest 6%, Soc Gen by 6% and Credit Suisse merger partner UBS by 8%.