News


17/01/2017


Flagstone Bank Credit Update 17 January 2017

Headlines:
  • The Prime Minister has today announced that the UK is seeking a ‘clean’ Brexit that sees the UK leaving the single market but has promised to create a strong new partnership with the European Union (EU).
  • On Friday Donald Trump will be inaugurated as U.S. President and while there is concern about whether this event could be damaging to the global economy, analysts believe it could prove positive for the UK economy by putting the UK at the front of the queue for a trade deal.
  • The latest PMI survey data points to a strong economic growth pattern for the UK economy which many analysts believe indicates possible GDP growth of 0.5% for the final quarter of 2016.
  • The IMF has raised its forecast for the UK’s economic growth this year and now expects the UK to grow by 1.5% this year compared with the 1.1% it was previously forecasting.
  • Many analysts believe that trying to preserve the ‘passporting’ status quo for financial products is unrealistic and the UK should try for an attainable arrangement with the EU – known as ‘equivalence’.
  • The Basel Committee has postponed a meeting to agree the global framework for banks’ risk-weighted capital ratios as European banks claim the new rules would unfairly penalise them.
  • Barclays and RBS have together agreed to pay in principle $1.0bn in fines to the U.S. Department of Justice for foreign currency manipulation.
  • Moody’s has upgraded the ‘Bank Rating’ of Barclays to reflect the fact that depositors face a much lower loss-given failure as a result of the parent’s issuance to date of loss-absorbing capital.
  • The FTSE 350 Bank Index is up slightly by 2.1% over the month to 4,309 with most European banking shares ‘marking time’ ahead of the imminent Trump presidency and its potential trade implications.
  • The ITRAXX Europe Senior Financials 5-year CDS Index improved by 7.2% over the month to 90bps as markets reacted positively to the lower than expected Deutsche Bank fine for mortgage mis-selling.
Monthly Commentary:

Looks like an interesting period ahead as the UK Prime Minister, Theresa May, has today announced in a keynote speech that the UK is seeking a ‘clean’ Brexit that will see the country leave the single market (and the European economic area) but has promised to create a ‘strong new partnership’ with the European Union (EU). The Prime Minister has made it clear that the UK intends to pull out of the single market (and seek to replace the European customs union with reciprocal arrangements in certain sectors) in order to regain full control of immigration and end the jurisdiction of the European Court of Justice. The announcement was widely predicted and a further fall in the foreign exchange value of sterling appears to have been averted – for now at least – by the promise of a vote on the final deal in both Houses of Parliament. Now that the decision has been taken the Prime Minister has called for the two sides of the Brexit debate to be reconciled and the country to come together.

On Friday Donald Trump will be inaugurated as U.S. President and while there is understandable concerns about whether this event could damage the global economy, analysts believe that it could prove positive for the UK economy since President-elect Trump appears to have put the UK at the front of the queue for a trade deal which could help offset any trade downturn as we leave the EU.

Meanwhile the latest forward-looking Purchasing Managers’ Index (PMI) survey data continues to indicate a strong economic growth pattern for the UK economy with the consensus among analysts that collectively the surveys point to gross domestic product (GDP) growth of 0.5% for the final quarter of 2016 (i.e. 2.0% annualised).

This optimism has been echoed by the International Monetary Fund (IMF) which has raised its forecast for the UK’s economic growth this year following a better than expected economic performance since the Brexit vote. The IMF says it now expects the UK to grow by 1.5% this year compared with the 1.1% it was previously forecasting. It also predicted that the global economy will grow by 3.4% in 2017 and by 3.6% in 2018 which is unchanged from its previous forecast. However the IMF has cautioned that the possibility of more trade barriers could undermine the forecasts.

Ever since the Brexit decision was taken, UK-based financial firms have been concerned that they would lose their ‘passporting’ rights that allows them to sell their products across Europe. Many analysts now appear to be of the view that trying to preserve the status quo is probably unrealistic and so it would be much better to try for a sensible and attainable arrangement with the EU – known as ‘equivalence’. This is an EU legal concept that grants non-member countries with similar regulatory standards access to European financial markets. Although not ideal – as it would mean that the EU could change its financial rules any time and force the UK to change its regulations or face exclusion from the market – analysts believe that securing a deal based on ‘equivalence’ would probably be enough for London to retain its status as a global financial centre.

The Basel Committee on Banking Supervision (BCBS) has postponed a meeting where senior figures were due to agree the global framework for banks’ risk-weighted capital ratios. Reports suggest that a further 2 months could now elapse while further debate takes place over the new rules which European banks claim would unfairly penalise them and which has sparked a lobbying battle with their U.S. peers. Completion of the Basel III capital adequacy regime has been held up by a dispute between bankers and regulators over how lenders calculate the riskiness of assets and the amount of capital they are required to hold. Many European banks use internal risk models which U.S. regulators argue have allowed them to underestimate capital needs. In response European banks claim that reducing their ability to use their own risk models would force them to raise more capital which would contravene an international commitment that bank capital requirements would not increase significantly.

During the month, both Barclays Bank plc and the Royal Bank of Scotland plc agreed to pay more than $1.0bn in fines to the U.S. Department of Justice (DoJ) for currency manipulation after a U.S. judge rubber-stamped the deal. Barclays Bank will pay $650m and the Royal bank of Scotland $395m as part of a $2.5bn agreement with the DoJ which includes a $925m contribution from Citigroup Inc and $550m contribution from JP Morgan Chase & Co.

In addition, Moody’s has upgraded the ‘Bank Rating’ of Barclays Bank plc by one notch to reflect the fact that customer depositors face a much lower loss-given failure as a result of the parent’s issuance to date of loss-absorbing capital and on expectations of future issuance in the near term. Also, Standard & Poor’s has upgraded both Bank of America N.A. and Citibank N.A. by one notch to reflect their robust trading performance, strong balance sheets and the general improvement in the U.S. economy.

See below for 5-year CDS spread and share price movements for the last month.
5-YEAR CDS SPREADS AND SHARE PRICES
Monthly Movements
Date: 17th January 2017
5-Year CDS Spreads (bps) Equity Share Prices
Financial Institutions 13-Jan-17 09-Dec-16 Chg 13-Jan-17 09-Dec-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 22.55 21.64 +4.2%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.18 2.26 -3.5%
Irish Sovereign
Allied Irish Banks 63 66 -4.5% 5.20 5.06 +2.8%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.50 14.35 +1.0%
Aust and NZ Banking Group Ltd 67 71 -5.6% 30.67 29.92 +2.5%
Banco Bilbao Vizcaya Argentaria S.A. 127 127 0.0% 6.24 6.41 -2.7%
Parent: Barclays plc
Barclays Bank plc 80 82 -2.4% 2.35 2.34 +0.4%
BNP Paribas SA 87 87 0.0% 62.16 60.23 +3.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.50 14.00 +3.6%
Credit Agricole SA 77 77 0.0% 12.59 11.52 +9.3%
Parent: Credit Suisse Group AG
Credit Suisse AG 119 133 -10.5% 16.12 15.60 +3.3%
Deutsche Bank AG 165 202 -18.3% 18.15 17.47 +3.9%
Parent: HSBC Holdings plc
HSBC Bank plc 71 70 +1.4% 6.78 6.75 +0.4%
Parent: ING Groep N.V.
ING Bank N.V. 67 65 +3.1% 13.78 13.64 +1.0%
Intesa Sanpaolo S.p.A. 134 140 -4.3% 2.47 2.37 +4.2%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.67 5.34 +6.2%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 72 71 +1.4% 0.66 0.62 +6.5%
Metro Bank plc n/a n/a n/a 31.27 32.74 -4.5%
Nationwide Building Society 80 85 -5.9% n/a n/a n/a
Nordea Bank AB 65 67 -3.0% 101 102 -1.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 118 118 0.0% 2.21 2.18 +1.4%
Ult. Parent: Banco Santander S.A.
Santander UK plc 81 82 -1.2% 5.15 4.88 +5.5%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 2.55 2.55 0.0%
Societe Generale 87 87 0.0% 47.48 46.57 +2.0%
Parent: Standard Chartered plc
Standard Chartered Bank 117 119 -1.7% 7.19 6.59 +9.1%
Svenska Handelsbanken AB 56 58 -3.4% 126 134 -6.0%
Unicredit  S.p.A. 175 191 -8.4% 2.67 2.49 +7.2%
FTSE 350 BANK INDEX n/a n/a n/a 4309 4219 +2.1%
SNR FIN ITRAX CDS 5-YEARS 90 97 -7.2% n/a n/a n/a

 

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