News


30/03/2016


Bank Credit Update 30 March 2016

Weekly Headlines:
  • There was no major official economic data released for the U.K. over the last week.
  • Although the U.S. economy grew faster than originally believed at the end of 2015 thanks to consumer spending, a plunge in corporate sector profits points to some difficult challenges ahead.
  • U.S. consumer spending barely rose in February and inflation retreated, suggesting that the Fed could remain cautious about raising interest rates this year even as the labour market tightens.
  • Major UK banks secretly lobbied for smaller rivals to pay a share of the £2.5 billion-a-year industry levy, making the case that the industry tax involved a cross subsidy from larger banks to smaller banks.
  • Bank of England set to fire starting gun on buy-to-let crackdown amid fears of a new property crash.
  • As the ECB finalises plans to introduce negative interest rates and incentives to encourage banks to make loans to businesses and consumers, a north-south divide is opening up between eurozone lenders.
  • Heightened concerns about the financial strength of major banks is reflected in a general rise in 5-year CDS spreads over the week, with the European index rising by 9.2% to 95bps.
  • The FTSE 350 Bank Index fell by 4% over the week with minimal disparity in the share price movements of European banks compared with recent weeks.

 

Major News Stories:

There was downbeat news on the U.S. economy over the week. Although official data indicated that the U.S. economy grew faster at the end of 2015 than originally believed thanks to more willing spending by consumers, there was a plunge in corporate sector profits (mainly due to the oil price crash) pointing to some key challenges for the world’s largest economy going forward this year. The economy grew by 1.4% in the fourth quarter, slower than the previous period but 0.4% better than the previous estimate. But analysts warn that the sharp fall in company profits could also pose a challenge well into 2016.

These concerns were supported by the latest U.S. consumer spending data. This indicated that U.S. consumer spending barely rose in February and inflation retreated, suggesting that the Federal Reserve (Fed) could remain cautious about raising interest rates this year even as the labour market rapidly tightens. The report from the Commerce Department also indicated that consumer spending in January was not as strong as previously reported. That, taken together with other data showing a widening in the goods trade deficit in February, indicated economic growth remained sluggish in the first quarter. Consumer spending edged up by only 0.1% as households cut back on goods purchases after a downwardly revised 0.1% gain in January. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have increased by 0.5% in January.

A freedom of Information request has revealed that big banks secretly lobbied for smaller rivals to pay a share of the £2.5 billion-a-year industry levy, arguing that they should not have to shoulder the entire burden of the tax. In a confidential report sent to the Treasury in May 2014, some of the big banks called for challenger banks to be hit with the bank levy as they warned that the failure of a small lender could pose a risk to the country’s financial system. They believe that challenger banks should be forced to pay a larger contribution, arguing that the tax should hit all entities that are engaged in an activity which presents risks to the UK. The big banks commented that the Treasury’s levy consultation appeared to assume that smaller banks were less risky, before going on to make the case that the industry tax involved a cross subsidy from larger banks to smaller banks. The effectiveness of the bank’s lobbying was highlighted last July, when George Osborne announced the axing of the levy by 2020 and its replacement with a new corporation tax surcharge on any bank with profits of more than £20 million, drawing many smaller lenders and building societies into the tax net for the first time.

The Bank of England (BoE) appears poised to launch a crackdown on buy-to-let lending amid fears that future rises in interest rates could trigger a property crash. Most buy-to-let loans are interest-only and regulators are concerned that sudden sell-offs by landlords in the event of rate hikes could prove disastrous for the market. Buy-to-let lending has surged in recent years and now makes up 15% of the mortgage markets, with Lloyds Bank and building societies Nationwide and Coventry leading the way. Analysts believe the BoE could rule that the projected future interest rate figure should be pushed up from 5% to 7%. Another option under consideration is to introduce a restriction on the maximum loan size as a percentage of the property price. Lenders typically do not lend out more than 75% of the value of a buy-to-let property.

As the European Central Bank (ECB) moves into an unfamiliar world of negative interest rates and incentives to encourage banks to make loans to businesses and consumers, a north-south divide is opening up between eurozone lenders. In the north, anaemic demand for loans and a financial system already flush with cash mean banks incur mostly costs. They must pay the ECB to deposit funds overnight and they have little need for the easy money on offer. In the south, lenders are keen to take advantage of the loans programme and many are set to get an instant boost to their profit margins when it takes effect in June. Under the ECB scheme, four-year loans will be offered at an interest rate of zero. Banks that lend-on more than a prescribed amount of that money to households and companies will get a reduction worth up to the deposit rate and so they will be paid to borrow. The north-south split highlights the challenges of a one-size fits all monetary policy for 19 separate nations.

See below for 5-year CDS spread and share price movements for the week
5-YEAR CDS SPREADS AND SHARE PRICES
 Weekly Movements    Date: 30th March 2016
5-Year CDS Spreads (bps)    Equity Share Prices (LCL)
Financial Institutions 28-Mar-16 21-Mar-16 Chg    28-Mar-16 21-Mar-16 Chg
   Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a    2.20 2.31 -4.8%
Irish Sovereign
Allied Irish Banks 63 60 +5.0%    9.01 9.80 -8.1%
 Parent: Arbuthnot Banking Group     plc
Arbuthnot Latham & Co. n/a n/a n/a    12.96 13.25 -2.2%
Aust and NZ Banking Group Ltd 118 111 +6.3%    24.02 26.05 -7.8%
Banco Bilbao Vizcaya Argentaria S.A. 129 110 +17.3%    6.00 6.38 -6.0%
   Parent: Barclays plc
Barclays Bank plc 137 115 +19.1%    1.53 1.62 -5.6%
BNP Paribas S.A. 88 75 +17.3%    43.42 45.62 -4.8%
   Parent: Close Brothers Group    plc
Close Brothers Limited n/a n/a n/a    12.48 13.10 -4.7%
Credit Agricole S.A. 88 75 +17.3%    9.67 10.20 -5.2%
Parent: Credit Suisse Group AG
Credit Suisse AG 151 134 +12.7%    15.93 16.77 -5.0%
Deutsche Bank AG 196 160 +22.5%    15.62 17.08 -8.5%
   Parent: HSBC Holdings plc
HSBC Bank plc 109 95 +14.7%    4.38 4.49 -2.4%
   Parent: ING Groep N.V.
ING Bank N.V. 72 61 +18.0%    10.88 11.30 -3.7%
Intesa Sanpaolo S.p.A. 131 110 +19.1%    2.41 2.49 -3.2%
   Parent: Investec plc
Investec Bank plc n/a n/a n/a    4.93 4.99 -1.2%
   Parent: Lloyds Banking Group plc
Lloyds Bank plc 108 89 +21.3%    0.68 0.70 -2.9%
Metro Bank plc n/a n/a n/a    19.00 19.40 -2.1%
Nationwide Building Society 78 73 +6.8%    n/a n/a n/a
Nordea Bank AB 85 87 -2.3%    78 83 -6.0%
   Parent: RBS Group plc
Royal Bank of Scotland plc 137 120 +14.2%    2.24 2.30 -2.6%
   Ult. Parent: Banco Santander S.A.
Santander UK plc 73 78 -6.4%    3.99 4.28 -6.8%
Shawbrook Group plc n/a n/a n/a    3.01 3.00 +0.3%
Societe Generale 89 76 +17.1%    32.88 35.79 -8.1%
   Parent: Standard Chartered plc
Standard Chartered Bank 155 144 +7.6%    4.41 4.94 -10.7%
Svenska Handelsbanken AB 66 63 +4.8%    104 109 -4.6%
Unicredit  S.p.A. 180 157 +14.6%    3.48 3.68 -5.4%
FTSE 350 BANK INDEX n/a n/a n/a    3120 3239 -3.7%
SNR FIN ITRAX CDS 5-YEARS 95 87 +9.2%    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 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.

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