News


11/07/2016


Bank Credit Update 11 July 2016

Weekly Headlines:
  • The Bank of England is set to reduce interest rates this week to 0.25% as it battles to soften the perceived blow to the economy from the EU referendum result.
  • Economists predict a restart of the money-printing quantitative easing (QE) programme this summer along with an extension of the Funding for Lending Scheme (FLS).
  • The BoE has lowered the amount of capital banks are required to hold in reserve, freeing up an extra £150 billion for lending.
  • More trouble ahead for the Eurozone with Italy and the European Commission locked in emergency talks over plans to shore up the country’s ailing banks.
  • U.S. job growth surged in June but analysts point to tepid wage growth and predict that the Federal Reserve will probably not raise interest rates soon.
  • S&P has applied “Negative” outlooks to Barclays Bank plc, Clydesdale Bank plc, HSBC Bank plc, Lloyds Bank plc and Santander UK plc in response to the Brexit decision.
  • Shawbrook Group’s share price has fallen by 18% over the week after the announcement that it expects to book an additional charge of £9.0 million due to irregularities in its asset finance business.
  • The drop in the share prices of major UK banks has slowed over the week after recent sharp falls with the FTSE 350 European Bank Index down by only 0.6% to 3046.
  • The ITRAXX Europe Senior Financials 5-year CDS index has continued its upward trend over the week, up by 5 points to 117 points, with the spreads of major UK banks significantly more expensive.
General Commentary:

The Bank of England (BoE) is set to reduce interest rates this week to 0.25%, or possibly as low as zero, as it battles to soften the perceived blow to the economy from the EU referendum result. The Governor of the BoE, Mark Carney, has said that the UK economy is already showing signs of strain since last month’s vote in favour of Brexit, and has indicated that the BoE would respond this summer. Most economists predict a small interest rate cut to 0.25% this week or next month.

However, many economists argue that such a small shift in borrowing costs would have little effect and expect the BoE to go further. This could see a restart of the money-printing quantitative easing (QE) programme this summer which has been on hold since 2012, along with an extension of the Funding for Lending Scheme (FLS) which provides cheap finance for major lenders in an attempt to get credit flowing.

The BoE has already taken some steps to ensure that UK banks can keep lending and that insurers do not dump corporate bonds in this period of uncertainty following the Brexit decision to leave the European Union (EU). It has announced that it has lowered the amount of capital banks are required to hold in reserve, freeing up an extra £150 billion for lending. In effect three quarters of UK banks, accounting for 90% of UK lending, will now have greater flexibility to supply credit to UK households and firms. This is a reversal of a decision it took earlier this year when it started tightening the reserve requirements of lenders because the UK economy appeared on course for more growth.

More trouble ahead for the Eurozone with Italy and the European Commission locked in emergency talks over plans to shore up the country’s ailing banks with the two sides deeply divided over how to tackle the mounting crisis in the Italian banking system. Italy is seeking to provide billions of taxpayers’ cash to shore up confidence wth the Italian government arguing that it should be allowed to circumvent the new EU framework for ailing banks. However other Eurozone members oppose state bailouts unless private creditors also shoulder the losses. The market turmoil unleashed by the UK’s decision to leave the EU has put more pressure on Italy’s already fragile financial sector. There is concern that, without state support, its banks will buckle under the weight of €360bn (£308bn) of impaired loans and could destabilise the wider Eurozone.

U.S. job growth surged in June, confirming that the economy has regained speed after a first-quarter lull, but analysts point to tepid wage growth and predict that the Federal Reserve (Fed) will probably not raise interest rates soon. Non-farm payrolls increased by 287,000 jobs in June which was the largest gain since last October 2015. However the May figures were revised sharply down to show them rising by only 11,000 rather than the previously reported 38,000. Analysts caution that the June figures precede the UK’s Brexit decision and concerns remain that sustained volatility might hit U.S. companies’ hiring and investment decisions.

During the week there were a number of rating decisions announced by the credit rating agencies but most reaffirmed current long-term credit ratings. However Standard & Poor’s did apply “Negative” outlooks to Barclays Bank plc, Clydesdale Bank plc, HSBC Bank plc, Lloyds Bank plc, Santander UK plc and the major Australian banks, among others.

After last week’s surprise announcement by Shawbrook Group that it expects to book an additional impairment charge of £9.0 million in the second quarter due to some irregularities in its asset finance business, the share price has fallen by 18% over the week. However provided that all irregularities have been identified and the weakness in their governance procedures have been rectified, analysts remain confident that this should not cause lasting damage to their reputation. The drop in the share prices of major UK banks has slowed over the week after recent sharp falls with the FTSE 350 European Bank Index down by only 0.6% to 3046.

The trend in the European 5-year CDS spread Index has continued upwards over the week with the spreads of major UK banks significantly more expensive. Barclays Bank plc is up by 16%, Lloyds Bank plc up by 19% and the Royal Bank of Scotland plc up by 17% on fears that Brexit uncertainty may lead to substantially higher retail and business loan impairments in the short-term.

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: 11th July 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 8-Jul-16 1-Jul-16 Chg 8-Jul-16 1-Jul-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.27 1.22 +4.1%
Irish Sovereign
Allied Irish Banks 75 75 0.0% 6.00 5.51 +8.9%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 13.75 14.03 -2.0%
Aust and NZ Banking Group Ltd 86 83 +3.6% 23.12 23.95 -3.5%
Banco Bilbao Vizcaya Argentaria S.A. 163 158 +3.2% 5.01 5.12 -2.1%
Parent: Barclays plc
Barclays Bank plc 156 135 +15.6% 1.39 1.40 -0.7%
BNP Paribas S.A. 94 89 +5.6% 39.82 39.91 -0.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 10.65 11.37 -6.3%
Credit Agricole S.A. 93 88 +5.7% 7.54 7.65 -1.4%
Parent: Credit Suisse Group AG
Credit Suisse AG 175 159 +10.1% 21.03 21.19 -0.8%
Deutsche Bank AG 248 206 +20.4% 11.76 12.56 -6.4%
Parent: HSBC Holdings plc
HSBC Bank plc 104 94 +10.6% 4.71 4.70 +0.2%
Parent: ING Groep N.V.
ING Bank N.V. 84 82 +2.4% 9.12 9.16 -0.4%
Intesa Sanpaolo S.p.A. 170 153 +11.1% 1.76 1.68 +4.8%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.41 4.66 -5.4%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 136 114 +19.3% 0.53 0.54 -1.9%
 
Metro Bank plc n/a n/a n/a 16.99 17.53 -3.1%
 
Nationwide Building Society 107 95 +12.6% n/a n/a n/a
Nordea Bank AB 72 70 +2.9% 70 71 -1.4%
Parent: RBS Group plc
Royal Bank of Scotland plc 164 140 +17.1% 1.69 1.70 -0.6%
Ult. Parent: Banco Santander S.A.
Santander UK plc 83 86 -3.5% 3.52 3.50 +0.6%
Shawbrook Group plc n/a n/a n/a 1.42 1.74 -18.4%
Societe Generale 94 88 +6.8% 28.00 28.38 -1.3%
Parent: Standard Chartered plc
Standard Chartered Bank 154 141 +9.2% 5.87 5.82 +0.9%
Svenska Handelsbanken AB 74 72 +2.8% 96 101 -5.0%
Unicredit  S.p.A. 225 190 +18.4% 1.91 1.87 +2.1%
 
FTSE 350 BANK INDEX n/a n/a n/a 3046 3065 -0.6%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 117 112 +4.5% n/a n/a n/a

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