Investors warm to Spanish banks A gulf is opening between the cost of funding for Spanish lenders and their less trusted Italian counterparts. The two country's banks issued similar volumes of unsecured bonds in the first 10 days of the year - with $4.2bn coming from Italian lenders, according to Dealogic, and Spanish banks issuing $4.1bn. But the difference in the cost of credit between the two is widening. Bonds issued by Spain's Santander, BBVA and Bankia on Thursday and Friday were priced more keenly than expected, in stark contrast to the still relatively elevated coupons payable on similar issues by Italy's banks. The evidence, less than a fortnight into the new year, comes as banks rush to take advantage of investor appetite, both foreign and domestic, for the still decent yields available on bank bonds across the eurozone periphery compared with "risk-free" interest rates. Investors" search for yield is likely to be hardened by last week's insistence by Mario Draghi, European Central Bank president, that it was "premature" to talk of an end to the eurozone's troubles. Mr Draghi hardened his pledge to maintain ultra-low interest rates "for as long as necessary." BBVA, Spain's number two bank, on Friday paid 2.3 per cent for five-year money. On Thursday, local rival Bankia, which remains weighed down by a legacy of bad debts, raised a similar amount in an auction that was 3.5 times subscribed, with a coupon of 3.5 per cent. Also last week, Santander, Spain's biggest bank, paid only 1.5 per cent on a two-year bond. There has also been a five-year covered bond, underpinned by a specific pool of safe assets, issued by a small caja, called Banco Mare Nostrum. The savings bank paid 3.1 per cent for five-year money. The equivalent issuance numbers for Italian banks, according to Dealogic, show only the big two, Intesa Sanpaolo and UniCredit, have been in the market. Intesa paid 5.3 per cent on a 10-year bond, while UniCredit paid 3.3 per cent for seven-year money. Intesa also issued a three-year bond, paying 2.4 per cent. "Spanish banks are financing themselves significantly inside the rates of equivalent Italian banks," said Erik Schotkamp, head of capital and funding at BBVA. That's thanks to an improvement in fundamentals and also the supply-demand dynamic. As Spanish banks continue to shrink, the supply of new bonds will be limited. In addition, Spain's government reforms are seen as deeper and the clean-up of the banks more thorough than in Italy, particularly among second-tier lenders. "The widening [differential] in credit costs reflects an outperformance in Spanish government bonds versus Italians," said Richard McGuire, head of rates strategy at Rabobank. We expect [that] to continue as economic data from Spain has clearly improved while the same cannot be said of Italy. A number of smaller banks from the peripheral eurozone, some of them still struggling, have returned to the markets over the past year, including Spain's Banco Popular, Italy's Veneto Banca and Banca Popolare di Vicenza and Ireland's Bank of Ireland and Allied Irish. "It comes down to the yield environment we're in," said Roberto Henriques, a credit strategist at JPMorgan. Peripheral banks are still offering pick-up over core banks and we're seeing good demand for that risk.