As a result of the Brexit referendum decision, Standard & Poor’s and Fitch have downgraded the UK’s sovereign credit rating, adjudging that the vote to leave the European Union would hurt the UK economy. Standard & Poor’s stripped the UK of its last remaining top-notch credit rating, dropping it by two grades from “AAA” to “AA”. It was the first time S&P had chopped an AAA-rated sovereign credit rating by two notches in one move. Fitch also downgraded the UK’s creditworthiness by one notch while Moody’s applied a ‘negative’ outlook. All three rating agencies indicated that more cuts could follow. The revised ratings can be summarised as follows:
|Credit Rating Agencies||Long-Term Credit Ratings||Outlooks|
|Standard & Poor’s||AA||Negative|
In addition, Moody’s has cut its outlook on the UK banking system to ‘negative’ from ‘stable’ as well as the outlooks on the ratings of 12 UK banks and building societies, citing reduced profitability after the referendum vote. Moody’s expect lower economic growth and heightened uncertainty over the UK’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions for UK financial institutions. However, while the credit rating agency also said that it expected the wholesale debt funding market to become more volatile for UK lenders (resulting in higher funding costs and squeezing their profits), they also predict that the overall impact should be limited.
The 12 banks and building societies affected are: Barclays, HSBC Bank, Santander UK, Coventry Building Society, Leeds Building Society, Lloyds Bank, Nationwide Building Society, Nottingham Building Society, Principality Building Society and TSB Bank as well as Bradford & Bingley and NRAM (No1) Ltd. The ratings of four other UK banks and building societies were maintained namely: Royal Bank of Scotland Group plc, Skipton Building Society, West Bromwich Building Society and Yorkshire Building Society) as Moody’s believes that the potential impact of the referendum result on these institutions is outweighed by more firm-specific credit considerations.
The announcement last week by Mark Carney, Governor, Bank of England (BoE) that interest rates are likely to be cut to tackle the economic fallout from Brexit is regarded by analysts as a significant challenge for many banks and building societies as a low interest rate environment will make it harder for banks to generate a profit on the difference between the rates that are paid on savings and the rates that can be charged on loans. Analysts are predicting that the UK economy will slow and unemployment will rise which could push up bad debts – all of which could make for an uncomfortable environment for high-street banks.
The BoE is preparing to unleash another round of monetary stimulus as it battles to contain the economic fallout of The UK’s decision to leave the EU. In a market update, Governor Mark Carney said a downturn was on its way and Britain was already suffering from “economic post-traumatic stress disorder”. He said the central bank would take whatever action is needed to support growth which probably includes some quantitative easing in the next few months in an attempt to reassure the markets and the general public.
Shawbrook Group surprised the markets by announcing that it expects to book an additional impairment charge in the second quarter due to some irregularities in its asset finance business and that Chief Financial Officer Tom Wood had resigned. The charge of about £9.0 million relates to a number of loans being underwritten in its asset finance business that did not match its lending criteria. Although the share price initially fell by by 27% from its post-Brexit Monday level, it has since recovered from this second phase fall. Provided that all irregularities have been identified and the weakness in their governance procedures have been rectified, analysts are confident that this should not cause lasting damage to their reputation.
While the FTSE 100 index is up since the referendum, the UK banking sector remains well below it pre-Brexit vote level with Royal Bank of Scotland’s shares down 25% while rival bailed-out bank Lloyds is off 20% and Barclays Bank down 16%. The “challenger” banks aiming to take on the established players on the high street have also had a testing time over the last two weeks with Aldermore Group down by 39% (significant exposure to small and medium size businesses), Shawbrook Group down by 28% and Metro Bank down by 16%. Global banks have fared better with HSBC up 5% and Standard Chartered up by 4% since the historic vote.
Investors will start to look beyond the Brexit-dominated headlines in the coming week to gauge the outlook for the global economy and what impact an expected rebound in U.S. job creation may have on central banks that are considering adopting a looser monetary policy. The main data in the coming week is therefore likely to be U.S. non-farm payrolls numbers due on Friday, which a preliminary Reuters poll predicts will show that the world’s largest economy added 180,000 jobs in June after May’s surprisingly weak reading of just 38,000. The Fed is likely to continue to follow a cautious stance on monetary policy having held its last meeting prior to the Brexit vote. Another rate rise from the Fed was already looking in doubt and after the referendum analysts believe that major global central banks may now need to increase their quantitative easing programmes to help revive inflation.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||04th July 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.22||1.40||-12.9%|
|Allied Irish Banks||75||86||-12.8%||5.51||5.71||-3.5%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.03||14.80||-5.2%|
|Aust and NZ Banking Group Ltd||83||87||-4.6%||23.95||23.44||+2.2%|
|Banco Bilbao Vizcaya Argentaria S.A.||158||173||-8.7%||5.12||4.84||+5.8%|
|Parent: Barclays plc|
|Barclays Bank plc||135||124||+8.9%||1.40||1.54||-9.1%|
|BNP Paribas S.A.||89||104||-14.4%||39.91||39.40||+1.3%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||11.37||12.19||-6.7%|
|Credit Agricole S.A.||88||100||-12.0%||7.65||7.65||0.0%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||159||170||-6.5%||21.19||20.72||+2.3%|
|Deutsche Bank AG||206||222||-7.2%||12.56||13.37||-6.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||94||126||-25.4%||4.70||4.48||+4.9%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||82||95||-13.7%||9.16||9.34||-1.9%|
|Intesa Sanpaolo S.p.A.||153||181||-15.5%||1.68||1.74||-3.4%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.66||4.56||+2.2%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||114||129||-11.6%||0.54||0.57||-5.3%|
|Metro Bank plc||n/a||n/a||n/a||17.53||19.37||-9.5%|
|Nationwide Building Society||95||76||+25.0%||n/a||n/a||n/a|
|Nordea Bank AB||70||82||-14.6%||71||74||-4.1%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||140||140||0.0%||1.70||2.05||-17.1%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||86||75||+14.7%||3.50||3.38||+3.6%|
|Shawbrook Group plc||n/a||n/a||n/a||1.74||2.34||-25.6%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||141||165||-14.5%||5.82||5.63||+3.4%|
|Svenska Handelsbanken AB||72||85||-15.3%||101||107||-5.6%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3065||3087||-0.7%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||112||120||-6.7%||n/a||n/a||n/a|