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.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||11th July 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.27||1.22||+4.1%|
|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%|
|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%|
|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|