The financial markets appear to have settled down again after the upheaval of the previous month which was sparked-off by fears that the Deutsche Bank financial loss for the fourth quarter of 2015 and the related restructuring cost implications may have a significant adverse effect on its capital position. While financial markets still have some concerns about the financial health of Deutsche Bank – as evidenced by its 5-year CDS spread retracting slightly but remaining at a relatively high level of 174bps (as at 14th March) – the ITRAXX Europe Senior Financials 5-year CDS Index improved by 34% over the month, falling to an average of 92bps. In addition the FTSE 350 Bank Index rose by 7% over the month but remains -19% below the level at the start of the year.
While it would appear unlikely that any of the major banks are in imminent threat of collapse, significant challenges still remain. One of the key challenges that divides analyst opinion is the application of negative interest rates by central banks to excess cash reserves placed with them in order to try to encourage banks to lend more to each other and to businesses. Sub-zero interest rates are now in place for countries accounting for almost a quarter of global gross domestic product (GDP). During the month the European Central Bank (ECB) cut its interest rates again and now charge banks -0.4% per annum to hold their excess cash reserves overnight. There are mixed views among analysts about the effectiveness of this strategy with many concerned about the possible unintended consequences of a prolonged period of negative interest rates and warning that commercial banks may be forced to follow suit and extend them to their customer base in order to maintain financial viability.
Another key challenge is the ongoing need to find ways to stimulate the global economy with the International Monetary Fund (IMF) indicating a few days ago that it may cut its 2016 global growth forecasts again in the coming weeks and calling on policymakers to take comprehensive measures to strengthen their economies. The IMF urged countries to continue with unconventional monetary policies if these are accompanied by structural reforms and low inflation. For the UK, the possibility of Brexit after the June referendum has been the dominant issue during the month but financial markets appear to have recently come to terms (for now) with the uncertainty it creates. Focus has now shifted to the UK budget expectations on Wednesday, 16th March.
There were only a few credit rating agency changes during the month. S&P applied a “Negative” outlook to Standard Chartered Bank to reflect its weakening financial performance, its ongoing transformation, and challenging economic environment in emerging markets which raise doubts about its ability to generate strong profits over the next 2/3 years. Moody’s improved the outlook for Nationwide Building Society to “Positive” to reflect the potential for increased senior and subordinated debt issuance which would result in lower expected loss levels for the Society’s deposits and senior unsecured debt. Moody’s also changed the outlook for the China Construction Bank and the Industrial and Commercial Bank of China Ltd (ICBC) to “Negative” as part of a general rating action on 25 Chinese financial institutions, following its recent decision to change the sovereign outlook to “Negative” on its Aa3 rating of China.
On the 10th of March, Metro Bank plc successfully floated on the London Stock Exchange which raised £400m of capital from investors. This values the Bank at circa £1.6 billion making it the largest IPO of the year in London. The additional capital will be used to finance further expansion of the bank.
Challenger banks are calling for the Competition & Markets Authority (CMA) to recommend that the payment of credit interest on current account balances be made mandatory and set at base rate as a minimum as part of moves to drive competition in retail banking.
Flagstone has not independently verified the information or data used in the Update which is based solely on publicly-available information. Neither Flagstone nor any of its advisers, representatives, officers or agents makes, or is authorised to make, any express or implied representation, warranty or undertaking as to the accuracy or completeness of the Update.