News


31/05/2016


Bank Credit Update 31 May 2016

Weekly Headlines:
  • A number of economic surveys to be published this week are expected to indicate that the UK economy is slowing down ahead of the EU referendum vote.
  • Economists predict that GDP growth in the second quarter will be limited to 0.2% to 0.3% quarter-on-quarter, which would be the weakest performance since the fourth quarter of 2012.
  • Comments from Federal Reserve Chair, Janet Yellen, suggesting that the Fed may raise U.S. interest rates gradually in the coming months has bolstering the case for a Fed interest rate increase in June or July.
  • The ECB is expected to keep interest rates on hold and reaffirm its focus on implementing the stimulus package announced in March at its policy meeting this week.
  • A lawsuit alleging Libor manipulation has been reinstated by a U.S. court which has the potential to bankrupt 16 of the world’s most important banks (including Barclays, HSBC, Lloyds and RBS).
  • Despite the likelihood of further libor lawsuit provisions hampering the efforts of major banks to strengthen their balance sheets, the European index 5-year CDS spreads improved over the week by 10% to 90bps.
  • The FTSE 350 Bank Index rose by 4.4% over the week as bank shares continue to recover from the sharp falls caused by the fall-out from lower first quarter profits as a result of the global economic slowdown.

 

Major News Stories:

The UK economy is likely to stall ahead of the EU referendum vote. A number of economic surveys to be published this week are expected to indicate that the UK economy is slowing down sharply as businesses put investments on hold before the European referendum in June. Purchasing managers’ surveys for manufacturing, construction and services are expected to show that growth rates have slipped again in May. The last set of these surveys for April suggested the economy slowed to a crawl at the start of spring. Analysts expect little improvement until the referendum uncertainty has been dispelled.

The aforementioned surveys are likely to support the view of many economists that growth is slowing further in the second quarter as the referendum magnifies already appreciable domestic and global economic uncertainties. Economists predict that GDP growth quarter-on-quarter will be limited to 0.2% to 0.3% in the second quarter, which would be the weakest performance since the fourth quarter of 2012 and down from 0.4% for the first quarter of 2016 and 0.6% for the fourth quarter of 2015.

Comments from Chair, Janet Yellen, that the Federal Reserve should raise U.S. interest rates gradually in the coming months “if the economy picks up as expected and jobs continue to be generated” has bolstering the case for a Fed interest rate increase in June or July.  Although Yellen expressed caution about too steep a rise in U.S. rates, economists noted that she sounded more confident than in the past that the U.S. economy has rebounded from a weak winter and that inflation would edge higher toward the Fed’s 2.0% target.

The European Central Bank (ECB) will hold its policy meeting on Thursday after the publication of inflation and lending data earlier in the week. The Eurozone’s central bank is expected to keep interest rates on hold and reaffirm its focus on implementing the stimulus package announced in March. Despite the bounce in oil prices and a continued (albeit modest) recovery in lending, inflation is expected to have remained negative in May. The majority of economists polled by Reuters do not expect the ECB to ease its monetary policy again this year.

A lawsuit alleging Libor manipulation has been reinstated by a U.S. court which has the potential to bankrupt 16 of the world’s most important banks. These include the four largest UK banks – namely Barclays, HSBC, Lloyds and Royal Bank of Scotland – as well as Bank of America, Bank of Tokyo Mitsubishi, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan, Rabobank, Royal Bank of Canada, Société Generale and UBS. A U.S. appeals court last week reinstated a civil lawsuit accusing 16 major banks of conspiring to manipulate the Libor benchmark interest rate. The ruling, which overturns a 2013 decision, could potentially bankrupt the institutions with the judges themselves warning of dire consequences should the case be proven against the banks. If the court were to rule in favour of the plaintiffs, they would be eligible to receive triple damages and attorneys’ fees for any violations.

In litigation that began in 2011, investors accused big banks of suppressing Libor during the financial crisis in order to boost earnings or make their finances appear healthier. However in 2013, Manhattan federal district court dismissed the claims ruling that the banks did not violate anti-trust laws when they colluded to manipulate the Libor benchmark interest rate and that the plaintiffs failed to prove harm from such collusion. At the time Barclays, UBS and Royal Bank of Scotland had already settled cases with more than $2.5bn in penalties. Since then penalties in Libor-rigging probes have climbed to around $9bn, including a penalty of $2.5bn against Deutsche Bank.

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 May 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 27-May-16 20-May-16 Chg 27-May-16 20-May-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.20 1.97 +11.7%
Irish Sovereign
Allied Irish Banks 64 66 -3.0% 6.90 6.80 +1.5%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.42 14.60 +5.6%
Aust and NZ Banking Group Ltd 96 100 -4.0% 25.85 25.09 +3.0%
Banco Bilbao Vizcaya Argentaria S.A. 119 137 -13.1% 6.06 5.63 +7.6%
Parent: Barclays plc
Barclays Bank plc 101 114 -11.4% 1.86 1.76 +5.7%
BNP Paribas S.A. 78 86 -9.3% 49.77 45.71 +8.9%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.58 12.81 +6.0%
Credit Agricole S.A. 75 84 -10.7% 9.09 8.84 +2.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 125 136 -8.1% 20.13 20.90 -3.7%
Deutsche Bank AG 162 181 -10.5% 16.29 15.14 +7.6%
Parent: HSBC Holdings plc
HSBC Bank plc 86 97 -11.3% 4.48 4.29 +4.4%
Parent: ING Groep N.V.
ING Bank N.V. 67 72 -6.9% 11.38 10.49 +8.5%
Intesa Sanpaolo S.p.A. 115 133 -13.5% 2.36 2.31 +2.2%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.87 4.81 +1.2%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 84 95 -11.6% 0.72 0.70 +2.9%
 
Metro Bank plc n/a n/a n/a 22.19 22.12 +0.3%
 
Nationwide Building Society 76 76 0.0% n/a n/a n/a
Nordea Bank AB 58 65 -10.8% 82 78 +5.1%
Parent: RBS Group plc
Royal Bank of Scotland plc 109 126 -13.5% 2.51 2.31 +8.7%
Ult. Parent: Banco Santander S.A.
Santander UK plc 75 76 -1.3% 4.40 4.15 +6.0%
Shawbrook Group plc n/a n/a n/a 2.95 2.80 +5.4%
Societe Generale 75 84 -10.7% 36.95 34.67 +6.6%
Parent: Standard Chartered plc
Standard Chartered Bank 141 154 -8.4% 5.42 5.26 +3.0%
Svenska Handelsbanken AB 58 65 -10.8% 108 104 +3.8%
Unicredit  S.p.A. 154 177 -13.0% 2.99 3.00 -0.3%
 
FTSE 350 BANK INDEX n/a n/a n/a 3380 3236 +4.4%
 
SNR FIN ITRAX CDS 5-YEARS 90 100 -10.0% n/a n/a n/a
 

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