News


19/04/2016


Bank Credit Update 19 April 2016

Monthly Headlines:
  • The 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 OBR at the time of the March budget
  • The IMF has also cut 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.
  • Slight improvement of 3% in the Europe Senior Financials 5-year CDS Index to an average of 89bps
  • The FTSE 350 Bank Index remains around 20% below the level posted at the start of the year
  • 30 global systemically important banks are required to meet a minimum total loss-absorbing capacity of at least 16% of the resolution group’s risk-weighted assets by 1st January 2019
  • A number of European banks – including Deutsche Bank – have issued 10-year bullet maturity Basel 3 compliant, tier-2 subordinated bond deals
  • S&P has downgraded BNP Paribas on fears that it may not be able to build a large enough TLAC buffer
  • 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 its regulatory capital
  • NBNK has announced that it would return all its remaining cash to investors as part of an orderly wind down of the company due to no realistic potential for an acquisition
  • The future of Manchester Building Society is in doubt after the society admitted that it had “material concerns” for its future
General Commentary:

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.

     

See below for 5-year CDS spread and share price movements for the last month.
5-YEAR CDS SPREADS AND SHARE PRICES
Monthly Movements
   Date: 19th April 2016
5-Year CDS Spreads (bps)    Equity Share Prices (LCL)
Financial Institutions 15-Apr-16 14-Mar-16 Chg    15-Apr-16 14-Mar-16 Chg
   Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a    1.95 2.10 -7.1%
Irish Sovereign
Allied Irish Banks 64 66 -3.0%    9.01 8.90 +1.2%
   Parent: Arbuthnot Banking Group      plc
Arbuthnot Latham & Co. n/a n/a n/a    14.59 13.27 +9.9%
Aust and NZ Banking Group Ltd 118 126 -6.3%    23.85 25.42 -6.2%
Banco Bilbao Vizcaya Argentaria S.A. 121 124 -2.4%    5.93 6.52 -9.0%
   Parent: Barclays plc
Barclays Bank plc 125 120 +4.2%    1.67 1.66 +0.6%
BNP Paribas SA 78 85 -8.2%    45.16 48.7 -7.3%
   Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a    12.50 12.80 -2.3%
Credit Agricole SA 78 84 -7.1%    9.71 10.67 -9.0%
Parent: Credit Suisse Group AG
Credit Suisse AG 138 139 -0.7%    17.19 15.98 +7.6%
Deutsche Bank AG 176 174 +1.1%    15.35 18.34 -16.3%
   Parent: HSBC Holdings plc
HSBC Bank plc 98 102 -3.9%    4.51 4.51 0.0%
   Parent: ING Groep N.V.
ING Bank N.V. 64 68 -5.9%    11.07 11.81 -6.3%
Intesa Sanpaolo S.p.A. 119 122 -2.5%    2.45 2.73 -10.3%
   Parent: Investec plc
Investec Bank plc n/a n/a n/a    5.19 4.92 +5.5%
   Parent: Lloyds Banking Group plc
Lloyds Bank plc 102 89 +14.6%     0.68 0.70 -2.9%
Metro Bank plc n/a n/a n/a    20.48 22.00 -6.9%
Nationwide Building Society 81 67 +20.9%    n/a n/a n/a
Nordea Bank AB 75 86 -12.8%    78 91 -14.3%
   Parent: RBS Group plc
Royal Bank of Scotland plc 124 120 +3.3%    2.35 2.30 +2.2%
   Ult. Parent: Banco Santander S.A.
Santander UK plc 79 85 -7.1%    4.06 4.45 -8.8%
   Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a    2.80 2.75 +1.8%
Societe Generale 78 84 -7.1%    33.84 36.79 -8.0%
   Parent: Standard Chartered plc
Standard Chartered Bank 141 169 -16.6%    5.21 4.68 +11.3%
Svenska Handelsbanken AB 61 65 -6.2%    103 117 -12.0%
Unicredit  S.p.A. 159 181 -12.2%    3.44 4.05 -15.1%
FTSE 350 BANK INDEX n/a n/a n/a    3231 3245 -0.4%
SNR FIN ITRAX CDS 5-YEARS 89 92 -3.3%    n/a n/a n/a

       

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 advisors, 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.

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