• The Bank of England is expected this week to unveil a stimulus package to boost the economy, including a rate cut and a possible further round of money printing.
• The UK economy grew faster than expected in the three months to the end of June with GDP growth of 0.6% in the run-up to the vote to leave the EU.
• The prospect of an imminent rise in U.S. interest rates has receded after the first estimate of GDP growth for Q2-2016 came in at 1.2%, significantly below the 2.6% expected by economists.
• The Eurozone recovery showed signs of stalling in the three months to June as GDP growth halved and the French economy ground to a halt.
• The EBA stress test results of 51 major European reveal that 9 banks had a CET1 capital ratio below 7.5% and 15 banks suffered falls in their CET1 ratios of more than 4.0%.
• Profits at Barclays fell by 21% in the first half of the year as the bank set aside a further £400m to compensate customers mis-sold PPI and also by a loss of £1.9bn on non-core parts of the business.
• Barclays plans to complete the process of splitting its business in two over the 2018 Easter weekend in order to meet the legal requirement to hive off its retail bank from its riskier investment bank.
• Deutsche Bank’s 5-year CDS spread price of 209bps remains very high reflecting its disappointing Q2-2016 operational performance and potential risks associated with its £35 trillion derivatives portfolio.
• Challenger banks, Shawbrook, Metro Bank and Virgin Money all reported strong first-half results thanks to a surge in lending to both individuals and companies.
• Both the The ITRAXX Europe Senior Financials 5-year CDS index and the FTSE 350 Bank Index improved over the week as many financial markets enter the summer holiday period.
The Bank of England (BoE) is expected this week to unveil a stimulus package to boost the economy, including a rate cut and a possible further round of money printing. The Governor, Mark Carney, has repeatedly said that the BoE may be forced to act to prevent the country sliding into recession following the European Union (EU) referendum. The Monetary Policy Committee (MPC) had surprised many economists and investors by keeping rates on hold last month. A cut in the Base Rate to 0.25% is now regarded as a near certainty by investors. Many economists are also predicting a new £50 billion round of bond-buying, also known as quantitative easing or money printing. The BoE amassed £375bn of government debt in the aftermath of the 2008 financial crisis.
The UK economy grew faster than expected in the three months to the end of June with gross domestic product (GDP) growth reported of 0.6% in the run-up to the vote to leave the EU. Economists had estimated second-quarter growth would be about 0.5%. However by far the strongest growth was in April followed by a sharp easing off in May and June. On a yearly basis the economy grew by a healthy 2.2%. The pick-up in economic activity was boosted by the biggest upturn in industrial output since 1999, particularly from car factories and pharmaceutical firms as well as strong growth across the services sector, particularly retailing. Chancellor Philip Hammond said the better-than-expected figures showed the fundamentals of the UK economy were strong and would mean that the UK could enter negotiations to leave the EU from a position of economic strength. However he cautioned that it was far too early to say how the economy has responded to the referendum result.
The prospect of an imminent rise in U.S. interest rates has receded after the first estimate of GDP growth for Q2-2016 came in at 1.2%, significantly below the 2.6% expected by economists. Strong consumer spending failed to outweigh low levels of investment from American companies that appear to have reduced spending in response to a strong dollar, trouble in the oil industry and sluggish growth abroad. In addition, first-quarter growth of 1.1% was revised down to 0.8% which means GDP annualised growth has been well below 2.0% for three successive quarters. Economists believe that such a tepid level of growth is likely to dampen down speculation that the Federal Reserve (Fed) will increase interest rates this year.
The Eurozone recovery showed signs of stalling in the three months to June as GDP growth halved and the French economy ground to a halt. The 19-member currency bloc expanded by 0.3% in the second quarter with growth in France collapsing from 0.7% in the first quarter to zero partly due to industrial strikes. However Spain maintained its rapid recovery with growth of 0.7%. The slowdown was widely expected but raises concerns that the eurozone economy was already losing momentum before the UK voted to leave the EU. Brexit is expected to compound any weakness with the International Monetary Fund (IMF) having previously cut its Eurozone growth forecast for next year from 1.6% to 1.4% due to Brexit contagion factors.
The results of the latest stress tests of 51 major European banks undertaken by the European Banking Authority (EBA) were published last week with no official failures. However the exercise did reveal 9 banks that had common equity Tier 1 (CET1) capital as a proportion of their risk-weighted assets (RWAs) below 7.5% under the EBA’s toughest stress test scenario. There were also 15 banks that suffered falls in their CET1 ratio on a fully applied Basel III basis of more than 4.0%. There were 6 banks that fell into both camps, namely: Allied Irish Banks; Bank of Ireland; Barclays Bank; Commerzbank; Monte dei Paschi di Siena; and Raiffeisen Landesbanken. The other lenders that fell short of a CET1 ratio above 7.5% were: Banco Popular; Société Generale; and UniCredit. Other banks that saw falls in their CET1 ratios of more than 4.0% included: Royal Bank of Scotland; Landesbank Baden-Wuerttemberg; and ABN AMRO Bank.
Profits at Barclays fell by 21% in the first half of the year to £2.0bn from £2.6bn caused by the Bank setting aside a further £400m to compensate customers mis-sold payment protection insurance (PPI) and by a loss of £1.9bn on non-core parts of the business that the Bank is looking to sell. The new charge for PPI means the mis-selling scandal has so far cost Barclays a total of £7.8bn.
Barclays also took the opportunity at its interim results press conference to advise that it plans to complete the process of splitting its business in two over the 2018 Easter weekend in order to meet the legal requirement to hive off its retail bank from its riskier investment bank. HSBC and Lloyds banking groups have since advised that they are working to different timetables which they have declined to disclose while analysts understand that the Royal Bank of Scotland group has not yet picked a date.
Deutsche Bank’s 5-year CDS spread of 209bps remains very high, when compared with other major European banks, reflecting its disappointing operational performance for the second quarter with pre-tax profit down 98% from a year earlier, hurt by low interest rates, restructuring costs and weaker performances by its big trading and investment-banking operations. However, the high CDS spread also reflects wider concerns that the restructuring plan will require to be significantly more ambitious to return the group to a consistent profit position while de-risking the balance sheet. The Bank is regarded by many analysts as the riskiest bank in the world with a derivatives portfolio of £35 trillion – which is more than half the size of the global economy – while the International Monetary Fund (IMF) has warned that the Bank is so entwined with other big banks that its failure could bring down the global banking system.
Challenger banks remain committed to their existing lending practices in spite of warnings over risky loan exposure arising from the vote to leave the EU. Shawbrook, Metro Bank and Virgin Money all reported strong first-half results, thanks to a surge in lending to both individuals and companies. Shawbrook reported interim pre-tax profits up by 14% to £38m compared with the same period in 2015, after taking into account a £9.0 million irregular charge revealed last month for bad debts. Meanwhile, Metro Bank’s losses shrank to £12m in the first half from £16m last year and expects to generate a monthly profit later this year, while Virgin Money reported a 53% rise in pre-tax profits to £102m. Challenger banks have come under the spotlight following a report by the BoE last month that warned of the impact of perceived riskier lending, such as buy-to-let, SME lending and commercial property as in an economic downturn these sectors would be harder hit.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||1st August 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.39||1.36||+2.2%|
|Allied Irish Banks||67||69||-2.9%||6.50||6.50||0.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.86||14.60||+1.8%|
|Aust and NZ Banking Group Ltd||78||81||-3.7%||25.84||25.31||+2.1%|
|Banco Bilbao Vizcaya Argentaria S.A.||129||120||+7.5%||5.23||5.25||-0.4%|
|Parent: Barclays plc|
|Barclays Bank plc||117||109||+7.3%||1.55||1.52||+2.0%|
|BNP Paribas S.A.||77||73||+5.5%||44.36||43.40||+2.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.58||12.22||+2.9%|
|Credit Agricole S.A.||76||72||+5.6%||7.92||7.90||+0.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||135||134||+0.7%||21.26||21.57||-1.4%|
|Deutsche Bank AG||209||202||+3.5%||12.03||13.09||-8.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||84||78||+7.7%||4.95||4.94||+0.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||61||60||+1.7%||10.00||10.13||-1.3%|
|Intesa Sanpaolo S.p.A.||134||126||+6.3%||1.97||1.96||+0.5%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.44||4.58||-3.1%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||97||90||+7.8%||0.53||0.54||-1.9%|
|Metro Bank plc||n/a||n/a||n/a||20.71||18.62||+11.2%|
|Nationwide Building Society||98||98||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||64||64||0.0%||76||75||+1.3%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||126||118||+6.8%||1.92||1.89||+1.6%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||86||86||0.0%||3.79||3.88||-2.3%|
|Shawbrook Group plc||n/a||n/a||n/a||1.88||1.66||+13.3%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||122||109||+11.9%||6.05||6.13||-1.3%|
|Svenska Handelsbanken AB||62||62||0.0%||103||103||0.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3214||3211||+0.1%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||89||92||-3.3%||n/a||n/a||n/a|