• Two months on from the historic Brexit decision to leave the European Union (EU) financial markets remain relatively calm, partly due to the European holiday period.
• Both the ITRAXX Europe Senior Financials 5-year CDS Index and FTSE 350 Bank Index have improved over the month.
• Early sentiment surveys such as the preliminary ‘flash’ estimate from the Markit Purchasing Managers’ Index (or PMI) have pointed to a significant deterioration in UK economic activity.
• The latest BDO monthly survey indicates that business confidence has fallen by less than expected after the Brexit decision while shoppers have largely shrugged off the outcome.
• The Bank of England has taken a number of decisive measures to cushion the impact of the Brexit vote, with its first cut in Bank Rate since 2009 (to 0.25%).
• Interim results for the four major UK banks were all down compared with the same period in the previous year and coincided with release of the European Banking Authority (EBA) stress test results.
• UK “challenger” banks that are listed have seen a significant fall in their share price since the Brexit decision but most have reported strong interim results.
• The UK’s construction sector slipped back into recession for the first time in four years suggesting that the third-largest part of the economy was already on a bad footing when the UK voted to leave the EU.
• U.S. retail sales were unexpectedly flat in July as consumers cut back on discretionary spending.
Two months on from the historic Brexit decision to leave the European Union (EU) financial markets remain relatively calm, partly due to the European holiday period. Given that the activation of Article 50 to leave the EU is unlikely to occur until early next year and may not be implemented until 2019, key indicators such as the ITRAXX Europe Senior Financials 5-year CDS Index have improved over the last month to 87bps from 96bps while the FTSE 350 Bank Index is up 10% to 3,468 points.
Market attention remains firmly focused on the UK with economists looking for signs as to the potential impact of the Brexit decision on economic activity. Early sentiment surveys such as the preliminary ‘flash’ estimate from the Markit Purchasing Managers’ Index (or PMI) have pointed to a significant deterioration in UK economic activity not seen since the aftermath of the financial crisis. The Index recorded a fall to 47.7 in July – the lowest level since April 2009 – with a reading below 50 indicates contraction. However the latest BDO monthly survey indicates that business confidence has fallen by less than expected after the Brexit decision while shoppers have largely shrugged off the outcome. The latter is supported by the July retail sales figures from the British Retail Consortium which were up 1.9% year-on-year.
As widely expected the Bank of England (‘the Bank’) has taken a number of decisive measures to cushion the impact of the Brexit vote with its first cut in Bank Rate since 2009 (to 0.25%) and has also sanctioned another £60 billion tranche of conventional quantitative easing (QE) bringing the total to £435 billion. The Bank also announced a new £100 billion Term Funding Scheme (TFS) to encourage commercial banks to lend. The latter is expected to reduce banks’ costs by an estimated £500 million per annum and help offset the lower returns they will earn on customer loans.
This is welcome news after the release of the interim results for the four major UK banks which were all down compared with the same period in the previous year due to difficult trading conditions. This coincided with the release of the results of the European Banking Authority (EBA) stress tests which included an Adverse Baseline Scenario to 31st December 2018.
Barclays was one of 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. 15 banks (including Barclays & RBS) suffered falls in their CET1 ratio on a fully applied Basel III basis of more than 4.0%.
Although markets remain wary of Deutsche Bank and the cost of restructuring (as evidenced by its high 5-year CDS spread price of 197bps) the Bank achieved a reasonable score of 7.8% in the EBA stress test. The main concern was Monte dei Paschi di Siena that saw its capital wiped-out and is currently the subject of a high-stakes rescue plan which involves the creation of a good and bad bank. Concerns are growing for the health of the Italian banking sector in general which is weighed down with a massive problem of non-performing loans (NPLs), worth €360bn (£307bn). This equates to a fifth of the country’s annual economic activity.
Although any so-called UK “challenger” banks that are listed have seen a significant fall in their share price since the Brexit decision, most have reported strong interim results. This includes Shawbrook Group which reported good results despite having to book an additional impairment charge of £9.0 million in the second quarter due to some irregularities in its asset finance business.
Official economic figures have revealed that the UK’s construction sector has slipped back into recession for the first time in four years. The disappointing construction figures suggest that the third-largest part of the economy was already on a bad footing when the UK voted to leave the EU. Construction output fell by 2.2% in June compared with a year earlier after a 1.6% drop in the previous month. Annual output has fallen every month this year causing concern that the weak performance in the sector signals a wider downturn.
U.S. retail sales were unexpectedly flat in July as consumers cut back on discretionary spending. Analysts believe that this points to a moderation in consumption that could temper expectations of a sharp pickup in economic growth in the third quarter.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||15th August 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.41||1.41||0.0%|
|Allied Irish Banks||61||71||-14.1%||6.80||6.40||+6.2%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||16.18||14.24||+13.6%|
|Aust and NZ Banking Group Ltd||69||84||-17.9%||26.56||24.85||+6.9%|
|Banco Bilbao Vizcaya Argentaria S.A.||120||134||-10.4%||5.27||5.35||-1.5%|
|Parent: Barclays plc|
|Barclays Bank plc||93||125||-25.6%||1.63||1.50||+8.7%|
|BNP Paribas SA||71||77||-7.8%||44.68||42.78||+4.4%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.42||11.34||+18.3%|
|Credit Agricole SA||70||76||-7.9%||8.25||7.84||+5.2%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||128||144||-11.1%||21.58||21.53||+0.2%|
|Deutsche Bank AG||197||213||-7.5%||12.75||13.02||-2.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||71||83||-14.5%||5.45||4.79||+13.8%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||61||66||-7.6%||10.58||9.78||+8.2%|
|Intesa Sanpaolo S.p.A.||122||144||-15.3%||1.98||1.93||+2.6%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.96||4.49||+10.5%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||82||118||-30.5%||0.55||0.56||-1.8%|
|Metro Bank plc||n/a||n/a||n/a||22.99||18.97||+21.2%|
|Nationwide Building Society||88||100||-12.0%||n/a||n/a||n/a|
|Nordea Bank AB||65||67||-3.0%||79||73||+8.2%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||112||135||-17.0%||1.96||1.84||+6.5%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||83||87||-4.6%||3.84||3.81||+0.8%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||1.98||1.67||+18.6%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||113||123||-8.1%||6.57||6.00||+9.5%|
|Svenska Handelsbanken AB||61||64||-4.7%||108||104||+3.8%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3468||3164||+9.6%|
|SNR FIN ITRAX CDS 5-YEARS||87||96||-9.4%||n/a||n/a||n/a|