News


23/05/2016


Bank Credit Update 23 May 2016

Weekly Headlines:
  • The uncertainty caused by the EU referendum is underlined by the wide disparity between the forecasts of economists and those of the financial markets as to future UK interest rate movements.
  • Economists’ view is for a first interest rate rise in November of this year, reaching 1.25% by the end of 2017 the futures markets imply that the date of the next UK interest rate hike will be December 2019.
  • Ahead of the EU referendum vote on the 23rd June, the focus appears to be returning to the economic versus immigration debate.
  • The annual CPI inflation index rose by 0.3% in the year to April 2016, down from 0.5% in the year to March, reinforces the recent subdued outlook for inflation.
  • The strong recovery in the official UK retail sales figures for April, up by 1.3% after the disappointing decline in March, appears to indicate that the UK economy continues to grow, albeit at a slowing pace.
  • Latest U.S. Federal Reserve minutes appear to indicate that Fed policymakers are on the verge of meeting most of the economic conditions that they had set in order to increase interest rates in June or September.
  • The Greek parliament has approved tax increases and a new privatisation fund in exchange for access to bailout loans and debt relief.
  • Concerns about the ability of major banks to strengthen their balance sheets continues to have an adverse impact, with the European index 5-year CDS spreads again rising over the week by 3.1% to 100bps.
  • The FTSE 350 Bank Index rose by 3.1% over the week as bank shares recovered slightly after recent sharp losses caused by the fall-out of lower first quarter profits as a result of the global economic slowdown.
Major News Stories:

The uncertainty caused by the EU referendum is underlined by the wide disparity between the forecasts of economists (including the Bank of England) and those of the financial markets as to future UK interest rate movements. Despite market pricing suggesting there is a 30% chance that interest rates will fall this year, a cut does not appear to be likely. While many economists believe that the possibility of rising inflation will require a hike in interest rates later this year, increases are expected to be more gradual than past tightening cycles as there appears to be plenty of spare capacity in the economy allowing for a pick-up in growth without stoking significant inflationary pressures. The consensus view of economists is for a first interest rate rise in November of this year, reaching 1.25% by the end of 2017. However the money markets continue to paint a significantly different picture with the futures markets implying that the date of the next UK interest rate hike will be December 2019!

With the Brexit debate now entering its final month before the referendum vote on the 23rd June, the focus of the debate appears to be returning to the economic versus immigration argument. It would appear that both the ‘Remain’ and ‘Leave’ camps are concentrating their efforts on promoting the fear factor rather than articulating the positives from their respective positions. It looks like it may become a ‘heart’ decision for many as there appear to be a dearth of facts that are trusted by the electorate on which to make an informed decision.

The UK Consumer Prices Index (CPI) inflation figure rose by 0.3% in the year to April 2016, down from 0.5% in the year to March. Falls in air fares and prices for clothing and vehicles were the main contributors to the decrease in the index. These downward pressures were partly offset by rising prices for motor fuels and recreational goods. After last month’s bigger than expected rise in the inflation rate, economists caution that the fall this month reinforces the recent subdued outlook for inflation and highlights the need for government action to boost business confidence and support growth at a time when the economy faces so many headwinds.

On the positive side, the strong recovery in the official UK retail sales figures for April, after the disappointing decline in March, appears to indicate that in spite of major headwinds the UK economy continues to grow – albeit at a slowing pace. UK retail sales volumes in April were up by 1.3% on the month, and up by 4.3% on the year. However economists point to the contrast between buoyant retail sales and the problems facing other sectors such as manufacturing which highlights the unbalanced nature of the UK recovery. To secure sustained growth economists believe that a more balanced economic structure with a stronger focus on exports, investment and manufacturing is required.

Despite significant global economic challenges, U.S. Federal Reserve minutes from its April rate-setting meeting appear to indicate that Fed policymakers are on the verge of meeting most of the economic conditions that they had set in order to increase interest rates in June or September. Until last week markets were putting extremely low odds on a summer rate increase, in part because of the dovish tone of Fed chair Janet Yellen’s last speech two months ago. To justify a move at its next policy meeting in June, the Fed set itself three tests: to see additional signs of a rebound in the economy in the second quarter; further strengthening in the jobs market; and for inflation to carry on towards the Fed’s 2.0% target. However, policymakers remain divided over whether these conditions will all be met by next month but if not economists believe that a September increase is likely.

The eurozone will be relieved that the Greek parliament has approved tax increases and a new privatisation fund in exchange for much-needed bailout loans and debt relief. It is hoped that the measures will help unlock the funds that Greece needs to repay IMF loans and ECB bonds maturing in July. Talks over the reforms have dragged on for months, mainly due to a rift between the EU and the IMF over Greece’s fiscal progress with the latter sceptical that Greece can achieve a 3.5% surplus target in 2018 unless it gets substantial debt relief and takes upfront measures. It has set both as conditions for its participation in the bailout. To help break the deadlock, Athens has included a contingency mechanism of spending cuts, which will be activated if it is set to miss its bailout targets. These measures are due to be discussed this week at a Euro-group meeting.

 

See below for 5-year CDS spread and share price movements for the week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Weekly Movements
Date: 23rd May 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 20-May-16 13-May-16 Chg 20-May-16 13-May-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.97 1.87 +5.3%
Irish Sovereign
Allied Irish Banks 66 65 +1.5% 6.80 7.60 -10.5%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.60 14.61 -0.1%
Aust and NZ Banking Group Ltd 100 107 -6.5% 25.09 24.11 +4.1%
Banco Bilbao Vizcaya Argentaria S.A. 137 127 +7.9% 5.63 5.51 +2.2%
Parent: Barclays plc
Barclays Bank plc 114 125 -8.8% 1.76 1.65 +6.7%
BNP Paribas S.A. 86 80 +7.5% 45.71 44.02 +3.8%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 12.81 11.76 +8.9%
Credit Agricole S.A. 84 80 +5.0% 8.84 8.65 +2.2%
Parent: Credit Suisse Group AG
Credit Suisse AG 136 133 +2.3% 20.90 19.90 +5.0%
Deutsche Bank AG 181 176 +2.8% 15.14 14.68 +3.1%
Parent: HSBC Holdings plc
HSBC Bank plc 97 101 -4.0% 4.29 4.30 -0.2%
Parent: ING Groep N.V.
ING Bank N.V. 72 72 0.0% 10.49 10.43 +0.6%
Intesa Sanpaolo S.p.A. 133 127 +4.7% 2.31 2.22 +4.1%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.81 4.82 -0.2%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 95 103 -7.8% 0.70 0.66 +6.1%
 
Metro Bank plc n/a n/a n/a 22.12 21.00 +5.3%
 
Nationwide Building Society 76 76 0.0% n/a n/a n/a
Nordea Bank AB 65 65 0.0% 78 76 +2.6%
Parent: RBS Group plc
Royal Bank of Scotland plc 126 134 -6.0% 2.31 2.11 +9.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 76 76 0.0% 4.15 4.06 +2.2%
Shawbrook Group plc n/a n/a n/a 2.80 2.56 +9.4%
Societe Generale 84 80 +5.0% 34.67 33.40 +3.8%
Parent: Standard Chartered plc
Standard Chartered Bank 154 144 +6.9% 5.26 5.07 +3.7%
Svenska Handelsbanken AB 65 63 +3.2% 104 101 +3.0%
Unicredit  S.p.A. 177 180 -1.7% 3.00 2.91 +3.1%
 
FTSE 350 BANK INDEX n/a n/a n/a 3236 3140 +3.1%
 
SNR FIN ITRAX CDS 5-YEARS 100 97 +3.1% n/a n/a n/a
 

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