News


10/04/2017


Flagstone Bank Credit Update 10 April 2017

Weekly Headlines:
  • The latest batch of forward-looking indicators show signs that UK economic growth is losing momentum as the trade deficit widens and activity in the industrial and construction sectors falters.
  • Some analysts are predicting growth of only 0.4% for the first quarter of this year especially as the steep depreciation of the pound is still not delivering the expected strong stimulus to the balance of trade.
  • The influential EY Item Club expects UK growth to slow down over the next few years and predicts GDP to rise to 1.8% this year, 1.2% next year and 1.5% in 2019.
  • The Governor of the Bank of England has warned that European Union-based banks operating in London may have to be vetted by the BoE after Brexit if there is no commitment to minimum common standards.
  • Bondholders of the Co-operative Bank plc are bracing themselves for significant losses as the bank has disclosed that all potential bidders for the Co-op Bank envisage that the bondholders take a haircut.
  • Shawbrook Group plc has rejected for a second time a hostile takeover bid by a private equity consortium led by Pollen Street Capital and BC Partners.
  • The FTSE 350 Bank Index fell slightly by 1.3% over the week to 4,168 underpinned by encouraging signs in relation to economic support for Greece and respectable annual banks results for 2016.
  • The ITRAXX Europe Senior Financials 5-year CDS Index gave up its recent gains, rising by 4.4% over the week to 89bps on further political posturing after the triggering of Article 50 by the UK.
General Commentary:

Analysts caution that the latest batch of forward-looking indicators are showing signs that UK economic growth is losing momentum as the trade deficit widens and activity in the industrial and construction sectors falters with many expecting a reduction in gross domestic product (GDP) growth from 0.7% for the final quarter of last year. As a consequence some analysts are predicting growth of only 0.4% for the first quarter especially as the Office for National Statistics (ONS) believes that the steep depreciation of the pound is still not delivering the expected strong stimulus to the balance of trade by making exporters more competitive.

The ONS assertion appears to be supported by the latest headline UK trade deficit figures for goods and services which widened to £3.7bn in February from £3.0bn in January. However it would appear that erratic commodity imports (such as in gold, oil and gas) were the main drivers of the widening gap between imports and exports. Excluding them the deficit shrunk from £3.0bn in January to £2.5bn in February and so the sterling exchange rate advantage would appear to be having some effect.

This more optimistic view is reflected in the latest Markit/CIPS purchasing managers’ index (PMI) for services which indicated that activity in the UK’s dominant services sector rose at a faster-than-expected pace in March. The index rose to 55.0, compared with the February figure of 53.3. Respondents were also optimistic about the year ahead with signs that the fall in the value of sterling since the Brexit vote had led to new sales inquiries from abroad and demand from overseas clients. However on the downside cost pressures have led to the fastest rise in prices since late 2008.

However the latest Markit/CIPS Purchasing Managers’ Index (PMI) for UK manufacturing showed that the manufacturing sector has lost some of its momentum in March as export orders grew more slowly and demand for consumer goods faltered against a backdrop of rising inflation pressures. The Index slipped to 54.2 from a downwardly revised 54.5 in February which was below the average forecast of 54.6 by economists. While the index is well above its long-running average of 51.6, this is the third month in a row that it has reduced since it reached an 18-month high in December and many economists believe that this trend will continue.

The latest Markit/CIPS Purchasing Managers’ Index (PMI) for construction also showed that growth in the construction sector had slowed slightly in March which appears to support the view that the UK economy has lost some of its strong momentum of late last year. The index dropped back to 52.2 from 52.5 in February which was the joint slowest rate of growth since a recent pick-up for the sector began in September. The survey showed growth in housebuilding slowed to a seven-month low which more than offset the best growth month so far this year for civil engineering firms who were helped by infrastructure spending while commercial construction also picked up.

The influential EY Item Club predicts that the current Eurozone recovery should help the UK offset any short-term Brexit-related economic slowdown through increased exports. Unlike the ONS, the Item Club believes that exporters have been able to take advantage of a weaker pound thanks to resurgent demand from across the Channel with exporters having unfettered access to the single market for the next two years at least. The latest business surveys by IHS/Markit indicate that the Eurozone is poised to enjoy its strongest quarter of economic growth in nearly six years despite the uncertainty created by the upcoming political elections in France and Germany.

Despite this positive view, the EY Item Club does expect UK growth to slow down over the next few years. Its latest predictions are for GDP to rise to 1.8% this year, to 1.2% next year and to 1.5% in 2019. The Item Club believes that as growth slows the Bank of England (BoE) is likely to hold interest rates at the current record low of 0.25% until at least autumn 2018. The BoE is widely expected to keep interest rates unchanged at its policy announcement this week despite a second month of above-target inflation. Economists are forecasting inflation of 2.3% for March, the same level as for February, with many expecting the annual rate to exceed 3.0% by the year-end. Members of the monetary policy committee (MPC) have indicated that they are prepared to overlook a period of inflation in excess of their 2.0% target provided there are no signs of broader inflationary pressures such as sharply rising wages.

Mark Carney, the Governor of the Bank of England (BoE) has warned that European Union-based banks operating in London may have to be vetted by the BoE and could be banned from some activities if the system of passporting broke down after Brexit and if there was no commitment to minimum common standards. The Governor has urged regulators not to succumb to protectionism but has cautioned that the Bank may not be able to rely on the judgment of other home-country regulators if it was felt that their respective regulations did not pass an ‘equivalence’ test. If passporting rights do not continue to apply after Brexit many firms that are either physically based in the UK, or providing services within the single market, would come directly under Prudential Regulation Authority (PRA) supervision for the first time. This would give the PRA the right to determine whether the business operates as a branch or a subsidiary which has huge capital implications for regulated firms.

Bondholders of the Co-operative Bank plc (Co-op Bank) are bracing themselves for significant losses as the bank has disclosed that all potential bidders for the bank envisage the bondholders taking a haircut. The Co-op Bank has received several non-binding proposals and has compiled a shortlist of candidates who will be provided with more extensive financial information. Virgin Money and CYGB, owner of Clydesdale Bank, are regarded as potential buyers. Each of the proposals received includes some form of liability management exercise (LME) which would mean that bondholders would not be repaid in full and are likely to have to swap their bonds for equities. In parallel with the sale the bank is also investigating a recapitalisation exercise with potential investors while the Co-operative Group has written down its remaining 20% stake in the bank to zero.

Shawbrook Group plc (Shawbrook) has rejected for a second time the hostile takeover bid by a private equity consortium led by Pollen Street Capital and BC Partners. Although the terms had been tweaked the headline price of 332p was unchanged. Anticipation of a third offer from the consortium resulted in the share price closing up 2.7% at 340p last week. A number of Shawbrook’s largest investors have taken the opportunity to sell all or part of their holdings to hedge fund, Sand Grove Capital, which is now the third-largest investor in the bank. These include Fidelity International, Old Mutual Global Investors and Investec Asset Management. However James Benamor, the founder of Amigo Loans, who was a silent partner in the private equity consortium has sold his 2% stake in Shawbrook which has trimming the consortium’s holding from 46% to 44%.

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Movements over the Last Week
Date: 10th April 2017
5-Year CDS Spreads (bps) Equity Share Prices 
07-Apr-17 31-Mar-17 Chg 07-Apr-17 31-Mar-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 22.32 22.75 -1.9%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.32 2.22 +4.5%
Irish Sovereign
Allied Irish Banks 55 53 +3.8% 5.05 5.05 0.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.70 14.20 +3.5%
Aust and NZ Banking Group Ltd 56 57 -1.8% 31.41 31.82 -1.3%
Banco Bilbao Vizcaya Argentaria S.A. 112 116 -3.4% 7.12 7.27 -2.1%
Parent: Barclays plc
Barclays Bank plc 79 77 +2.6% 2.15 2.25 -4.4%
BNP Paribas S.A. 91 88 +3.4% 60.90 62.43 -2.5%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 15.71 15.34 +2.4%
Credit Agricole S.A. 85 80 +6.3% 12.57 12.70 -1.0%
Parent: Credit Suisse Group AG
Credit Suisse AG 103 102 +1.0% 14.52 14.90 -2.6%
Deutsche Bank AG 126 127 -0.8% 15.53 16.15 -3.8%
Parent: HSBC Holdings plc
HSBC Bank plc 65 63 +3.2% 6.54 6.51 +0.5%
Parent: ING Groep N.V.
ING Bank N.V. 60 61 -1.6% 14.07 14.17 -0.7%
Intesa Sanpaolo S.p.A. 148 143 +3.5% 2.54 2.55 -0.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.44 5.44 0.0%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 67 65 +3.1% 0.63 0.66 -4.5%
Metro Bank plc n/a n/a n/a 33.71 32.53 +3.6%
Nordea Bank AB 41 41 0.0% 102 102 0.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 94 92 +2.2% 2.38 2.42 -1.7%
Ult. Parent: Banco Santander S.A.
Santander UK plc 78 79 -1.3% 5.78 5.75 +0.5%
Shawbrook Group plc n/a n/a n/a 3.40 3.31 +2.7%
Societe Generale 92 88 +4.5% 46.52 47.55 -2.2%
Parent: Standard Chartered plc
Standard Chartered Bank 79 80 -1.3% 7.42 7.63 -2.8%
Svenska Handelsbanken AB 41 41 0.0% 120 123 -2.4%
Unicredit  S.p.A. 167 162 +3.1% 14.11 14.45 -2.4%
FTSE 350 BANK INDEX n/a n/a n/a 4168 4225 -1.3%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 89 85 +4.4% n/a n/a n/a

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