The International Monetary Fund (IMF) has cut its growth projection for the UK this year from 2.2% to 1.9% which is more pessimistic than the 2.0% forecast by the Office for Budget Responsibility at the time of the March budget. The IMF has blamed uncertainty over the EU referendum for its decision to cut the growth forecast. The downgrade was the second largest after Japan among the advanced economies, though the UK is still expected to grow faster than all leading nations, except the US and Spain.
After the upheaval in the first quarter of the year, financial markets appear to be in a more reflective mood as they come to terms with the fact that there is no ‘silver bullet’ to resolve the ongoing slowdown in the global economy. The International Monetary Fund (IMF) has reinforced this view by cutting its latest global growth forecast to 3.2% from 3.4% while warning world political leaders to prepare for the worst as the global economy slips into a low-growth trap. The IMF outlined the wide array of risks facing the world, from economic weakness in China to financial instability in emerging markets to terrorism and the migrant crisis through to Brexit, while cutting its global economic forecast for this year for the second time in six months.
Most economists believe that the gradual weakening of the global economy is unlikely to cause the imminent failure of any major banks – as evidenced by the further slight improvement of 3% in the ITRAXX Europe Senior Financials 5-year CDS Index to an average of 89bps. However both the financial markets and the three main independent credit rating agencies are concerned about the longer-term effect on the ability of major banks to generate sufficient profits to enhance their capital bases in order to meet the more stringent regulatory capital requirements from 2019 onwards while incurring significant business restructuring costs and (in many cases) grappling with negative Central Bank interest rates on reserve balances. This is reflected in the FTSE 350 Bank Index which remains around 20% below the level posted at the start of the year.
The need for additional capital is particularly acute for the 30 global systemically important banks (G-Sibs) that are required to meet a minimum total loss-absorbing capacity (TLAC) of at least 16% of the resolution group’s risk-weighted assets (RWA’s) by 1st January 2019, increasing to at least 18% from 1st January 2022. The TLAC must consist of instruments that can be written down or converted into equity in case of resolution such as capital instruments (i.e. CET1, AT1 and T2), as well as long-term unsecured, subordinated and senior debt. New Basel regulations disqualify old-style amortising tier-2 bonds with less than five years remaining to maturity to count towards these ratios. As a consequence, in February and early March, a number of European banks issued 10-year bullet maturity Basel III-compliant, tier-2 (B3T2) subordinated bond deals, as they seek to create a new market for these lower cost TLAC-eligible instruments. These banks included: BNP Paribas; Credit Agricole; Deutsche Bank; and Société Générale. However the ability to generate sufficient CET1 will still be challenging while investors remain cautious about financial sector investment.
The above capital concerns are reflected in some of the credit rating agency changes announced during the month with S&P downgrading BNP Paribas on fears that it may not be able to build a large enough TLAC buffer; while both S&P and Moody’s have downgraded Standard Chartered Bank to reflect doubts about its ability to generate strong profits over the next 2/3 years to boost capital. On the positive side, Fitch has upgraded the long-term credit rating of Commerzbank by one notch to reflect the Bank’s improved capitalisation and profitability while reducing non-strategic risk exposures and balancing its business portfolio toward stable revenues.
Six years after it was admitted to AIM, NBNK has announced that it plans to return all its remaining cash to investors as part of an orderly wind down of the company after talks aimed at looking for new opportunities failed to turn up a realistic potential for an acquisition. The cash ‘shell’ was backed by some of the country’s largest fund managers and had aspirations to become a vehicle for consolidating smaller banks.
The future of a British mutual is in doubt for the first time since the run on Northern Rock in 2007 after Manchester Building Society wrote to customers warning them to keep balances within the £75,000 limit covered by the official compensation scheme. The society admitted that it had “material concerns” for its future as it posted a £4.9 million loss for 2015, compared with a profit of £4.5 million for the previous year. The Society’s difficulties first came to light in 2013, when it emerged that interest-rate swaps that it had used to offset some of the risk incurred in its fixed-rate mortgage lending had not been correctly reported in its accounts, which had hugely overvalued its loan book. The lender was forced to restate its reserves, which significantly reduced its retained earnings and resulted in losses for 2011 and 2012.
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