News


10/10/2016


Flagstone Bank Credit Update 10 October 2016

Weekly Headlines:

• Disappointing figures from the industrial sector and a widening of the trade deficit have broken a run of good data for the UK economy since the vote to leave the European Union.

• The UK’s trade deficit in goods and services increased more than expected rising to £4.7 billion in August while UK Industrial output fell unexpectedly in August by 0.4%.

• The official data appears to be at odds with the latest Markit/CIPS services purchasing managers’ index for September which indicates that the UK services sector continued to recover last month.

• The Services PMI findings appear to cast doubt on the need for more stimulus action from the Bank of England as analysts believe the risk of recession in the second half of 2016 has all but disappeared.

• The IMF has again cut its UK growth forecasts for 2017 on the back of the Brexit vote, down to 1.1% from 1.3% predicted in July, while revising up this year’s growth forecast to 1.8% from 1.7%.

• The odds of a U.S. interest rate rise in November have lengthened after the latest official figures showed that U.S. companies hired fewer employees than expected in September.

• Data compiled by S&P indicates that Europe’s leading banks look generally well-placed to meet global standards on leverage that is due to be implemented at the start of 2018.

• Deutsche Bank has started negotiations with the Department of Justice (DoJ) to try to substantially reduce the claim for mis-selling toxic products linked to US sub-prime mortgages to around $6 billion.

• The ITRAXX Europe Senior Financials 5-year CDS index improved by 2.5% to 100bps from 102bps as the spreads of most major banks reduced on hopes that Deutsche Bank can negotiate a lower claim.

• Despite the Deutsche Bank situation, the FTSE 350 Bank Index rose by 4.4% over the week as investors continue to hope that the final Deutsche Bank settlement with the DoJ will be substantially lower.

General Commentary:

Official figures from the Office for National Statistics (ONS) indicate that the UK trade deficit has widened as industrial output appears to have slowed. Disappointing figures from the industrial sector and a widening of the trade deficit have broken a run of good data for the UK economy since the vote to leave the European Union (EU).

The UK’s trade deficit in goods and services increased more than expected rising to £4.7 billion in August which was up by £2.5 billion since July, driven by the value of imports rising by 5.5% while exports rose by 0.1%.

UK Industrial output – a measure of how well manufacturers, miners and utilities are performing – fell unexpectedly in August, dropping by 0.4% in the month after a 1.0% increase in July, while manufacturing output grew at 0.2% after the post-Brexit vote slump of 0.9% in July. However this was offset by North Sea oilfield shutdowns during the month which caused a 3.7% fall in the mining and quarrying sectors.

However the official data appears to be at odds with the latest Markit/CIPS services purchasing managers’ index (PMI) for September which indicates that the UK services sector continued to recover last month after a sharp drop in activity following the Brexit vote. The Index stood at 52.6, down from August’s 52.9, but above the 50 level which indicates expansion. In addition the manufacturing sector recorded its best PMI for two years. The latest findings appear to cast doubt on the need for more stimulus action from the Bank of England (BoE) as analysts believe the risk of recession in the second half of 2016 has all but disappeared.

The International Monetary Fund (IMF) has again cut its UK growth forecasts for 2017 on the back of the Brexit vote. As a reaction to the Brexit decision, the IMF had previously cut its 2016 GDP growth forecast in July from 1.9% to 1.7% and the 2017 forecast from 2.2% to 1.3%. In its latest forecast, the IMF has trimmed the 2017 forecast further to 1.1% although it has revised up this year’s growth forecast to 1.8% on the back of stronger than expected growth in the second quarter of the year. The IMF has also revised down its medium term GDP growth potential forecasts for the UK from 2.1% to 1.9% due to the expectation that lower migration, trade and capital flows will take a toll. The latest forecasts from the IMF are close to those of the OECD’s latest projections which were updated last month. All projections were predicated on the assumption that the UK’s Brexit negotiations with the rest of the EU proceed smoothly and that there is only a limited increase in economic barriers.

The odds of a U.S. interest rate rise in November have lengthened after the latest official figures showed that U.S. companies hired fewer employees than expected in September. Employers outside the farming sector added 156,000 staff to their payrolls in September, fewer than the 171,000 expected and the smallest improvement since May. Meanwhile unemployment rose slightly to 5.0% which was above the 4.9% that had been predicted. Although Janet Yellen, chair of the US Federal Reserve, declined last month to rule out a rate rise in November, economists believe that the chances of the Fed opting to increase the cost of borrowing in November were next to zero with December the likely date for an increase

Data compiled by Standard & Poor’s (S&P) indicates that Europe’s leading banks look generally well-placed to meet global standards on leverage that is due to be implemented at the start of 2018. However, S&P cautions that compliance could be tested should regulators implement buffers for the biggest banks. Globally systemically important banks (G-SIBs) will have to go beyond the 3% Basel minimum, but the format and quantum of the additional requirement have yet to be finalised.

Deutsche Bank has started negotiations with the Department of Justice (DoJ) to try to substantially reduce the settlement claim for mis-selling toxic products linked to US sub-prime mortgages from an initial claim for $14 billion (£12.6 billion) to around $6 billion (£5.4 billion). The share price and the 5-year CDS spread have improved slightly over the week after recent adverse movements. The outcome of the negotiations is likely to influence the level of claims made by the DoJ against Barclays Bank and the Royal Bank of Scotland who were allegedly involved in similar activities.

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Weekly Movements
Date: 10th October 2016
5-Year CDS Spreads (bps) Equity Share Prices 
Financial Institutions 7-Oct-16 30-Sep-16 Chg 7-Oct-16 30-Sep-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 18.57 18.42 +0.8%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.83 1.68 +8.9%
Irish Sovereign
Allied Irish Banks 60 60 0.0% 5.75 6.00 -4.2%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.44 15.00 +2.9%
Aust and NZ Banking Group Ltd 66 67 -1.5% 28.26 27.63 +2.3%
Banco Bilbao Vizcaya Argentaria S.A. 127 130 -2.3% 5.43 5.38 +0.9%
Parent: Barclays plc
Barclays Bank plc 101 101 0.0% 1.74 1.68 +3.6%
BNP Paribas S.A. 75 77 -2.6% 49.31 45.77 +7.7%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.61 13.57 +0.3%
Credit Agricole S.A. 74 75 -1.3% 9.11 8.78 +3.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 138 138 0.0% 21.13 21.62 -2.3%
Deutsche Bank AG 220 226 -2.7% 12.09 11.57 +4.5%
Parent: HSBC Holdings plc
HSBC Bank plc 78 75 +4.0% 6.19 5.79 +6.9%
Parent: ING Groep N.V.
ING Bank N.V. 67 65 +3.1% 11.24 10.99 +2.3%
Intesa Sanpaolo S.p.A. 141 149 -5.4% 2.00 1.97 +1.5%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.91 4.66 +5.4%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 90 88 +2.3% 0.53 0.55 -3.6%
 
Metro Bank plc n/a n/a n/a 26.86 27.47 -2.2%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 72 70 +2.9% 90 85 +5.9%
Parent: RBS Group plc
Royal Bank of Scotland plc 135 131 +3.1% 1.82 1.79 +1.7%
Ult. Parent: Banco Santander S.A.
Santander UK plc 83 82 +1.2% 3.97 3.95 +0.5%
Shawbrook Group plc n/a n/a n/a 2.48 2.33 +6.4%
Societe Generale 75 75 0.0% 32.87 30.78 +6.8%
Parent: Standard Chartered plc
Standard Chartered Bank 116 118 -1.7% 6.74 6.28 +7.3%
Svenska Handelsbanken AB 66 65 +1.5% 119 118 +0.8%
Unicredit  S.p.A. 179 186 -3.8% 2.12 2.07 +2.4%
 
FTSE 350 BANK INDEX n/a n/a n/a 3729 3572 +4.4%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 100 102 -2.5% n/a n/a n/a

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