News


06/06/2016


Bank Credit Update 6 June 2016

Weekly Headlines:
  • Mortgage interest rates have fallen to record lows as the Bank of England mulls over the possibility of an interest rate cut.
  • The OECD has slashed its forecast for UK growth to 1.7% from 2.1% as it believes that fears that Britain might leave the EU have already undermined growth.
  • An Ipsos-Mori poll taken last week has revealed that nearly two-thirds of voters believe Brexit would make no difference to their standard of living.
  • Activity in the UK’s dominant service sector picked up last month, according to the latest Markit/CIPS Purchasing Managers’ Index but growth remains subdued.
  • Markit expect the economy to grow by 0.2% in the second quarter of 2016 which would be down from the 0.4% growth recorded in the first three months of the year.
  • The U.S. economy created the fewest number of jobs in May in more than 5-1/2-years which could make it harder for the Federal Reserve to raise interest rates in June.
  • The European index 5-year CDS spreads increased over the week by 5.6% to 95bps as markets remain in limbo awaiting the outcome of the Brexit referendum vote and the Fed rate decision later this month.
  • The FTSE 350 Bank Index continues its downward trend, falling by 2.3% over the week as bank shares continue to suffer from the lower first quarter profits as a result of the global economic slowdown.

 

Major News Stories:

 Mortgage interest rates have fallen to record lows as Bank of England mulls over the possibility of an interest rate cut. Earlier in the year mortgage rates had risen as banks and building societies scrapped some of the best deals on offer because they expected the Bank of England to start raising interest rates. Since then, however, forecasts for an interest rate rise have been pushed back, and some Bank of England officials have even discussed the possibility of a cut to the base rate to below its current 0.5% level. As a result, mortgage rates are once again falling.

The Organisation for Economic Co-operation and Development (OECD) has slashed its forecast for UK growth to 1.7% from 2.1% as it believes that fears that Britain might leave the EU have already undermined growth. The OECD has forecast that UK economic growth would be 3.0% lower than it would be if we remain in the EU – the equivalent of £2,200 less per household. However the report acknowledges that the UK economy is likely to continue to grow if the ‘Leave’ campaign is successful.

However, an Ipsos-Mori poll taken last week has revealed that nearly two-thirds of voters (58%) believe Brexit would make no difference to their standard of living. Just 22% think that it would hit them in the pocket, while 11% think that it would make them better off. A 56% majority expect direct investment from the EU into the UK to fall, and 46% expect UK exports to the EU to drop.

Activity in the UK’s dominant service sector picked up last month, according to the latest Markit/CIPS Purchasing Managers’ Index (PMI) but growth remained subdued. The index rose to 53.5 in May from 52.3 in April. A figure above 50 indicates expansion. More than a third of firms said they had suffered from the uncertainty over the EU referendum. Markit expect the economy to grow by 0.2% in the second quarter of 2016 which would be down from the 0.4% growth recorded in the first three months of the year.

Other PMI surveys released last week indicate that the manufacturing sector edged back into growth during May while activity in the construction sector continues to slow. Markit chief economist, Chris Williamson, said: “growth has collapsed in manufacturing and construction, leaving the economy dependent on the service sector to sustain the upturn, though even here the pace of expansion has remained frustratingly weak so far this year.”

A flurry of data from China in coming weeks is expected to reinforce views that the world’s second-largest economy is slowly steadying but not gaining momentum as investors had hoped just a few months ago, a Reuters’ poll of economists has revealed. Increased government infrastructure spending and a housing recovery are supporting growth even as Beijing appears to be pulling in the reins on a record credit binge amid worries about the dangers of using too much debt to stimulate the economy. Though investors’ fears of a hard landing have ebbed, concerns remain that Beijing has not moved fast enough on key reforms, such as cutting excess capacity, while debt continues to rise and the yuan currency comes under pressure.

The U.S. economy created the fewest number of jobs in May in more than 5-1/2-years as manufacturing and construction employment fell sharply, which could make it harder for the Federal Reserve to raise interest rates in June. Non-farm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010. Underscoring the job creation weakness was the fact that employers hired 59,000 fewer workers in March and April than previously reported. While the unemployment rate fell three-tenths of a percentage point to 4.7% in May, the lowest level since November 2007, this was due to 458,000 Americans giving up the search for work.

See below for 5-year CDS spread and share price movements for the week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Weekly Movements
Date: 6th June 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 3-Jun-16 27-May-16 Chg 3-Jun-16 27-May-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.15 2.20 -2.3%
Irish Sovereign
Allied Irish Banks 62 64 -3.1% 6.80 6.90 -1.4%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.25 15.42 -1.1%
Aust and NZ Banking Group Ltd 90 96 -6.3% 25.09 25.85 -2.9%
Banco Bilbao Vizcaya Argentaria S.A. 129 119 +8.4% 5.71 6.06 -5.8%
Parent: Barclays plc
Barclays Bank plc 109 101 +7.9% 1.80 1.86 -3.2%
BNP Paribas S.A. 84 78 +7.7% 46.32 49.77 -6.9%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.08 13.58 -3.7%
Credit Agricole S.A. 80 75 +6.7% 8.65 9.09 -4.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 129 125 +3.2% 20.88 20.13 +3.7%
Deutsche Bank AG 169 162 +4.3% 15.00 16.29 -7.9%
Parent: HSBC Holdings plc
HSBC Bank plc 94 86 +9.3% 4.45 4.48 -0.7%
Parent: ING Groep N.V.
ING Bank N.V. 72 67 +7.5% 10.84 11.38 -4.7%
Intesa Sanpaolo S.p.A. 124 115 +7.8% 2.21 2.36 -6.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.55 4.87 -6.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 90 84 +7.1% 0.70 0.72 -2.8%
 
Metro Bank plc n/a n/a n/a 22.19 22.19 0.0%
 
Nationwide Building Society 78 76 +2.6% n/a n/a n/a
Nordea Bank AB 63 58 +8.6% 80 82 -2.4%
Parent: RBS Group plc
Royal Bank of Scotland plc 120 109 +10.1% 2.37 2.51 -5.6%
Ult. Parent: Banco Santander S.A.
Santander UK plc 78 75 +4.0% 4.05 4.40 -8.0%
Shawbrook Group plc n/a n/a n/a 2.88 2.95 -2.4%
Societe Generale 80 75 +6.7% 35.61 36.95 -3.6%
Parent: Standard Chartered plc
Standard Chartered Bank 150 141 +6.4% 5.27 5.42 -2.8%
Svenska Handelsbanken AB 63 58 +8.6% 103 108 -4.6%
Unicredit  S.p.A. 166 154 +7.8% 2.64 2.99 -11.7%
 
FTSE 350 BANK INDEX n/a n/a n/a 3302 3380 -2.3%
 
SNR FIN ITRAX CDS 5-YEARS 95 90 +5.6% n/a n/a n/a
 

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