News


12/09/2016


Flagstone Bank Credit Update 12 September 2016

Weekly Headlines:

• The MPC holds its latest monthly meeting this Thursday against a backdrop of pending hard economic numbers that cover the post-Brexit period.

• Economists have forecast that consumer prices will be 0.7% higher in August, compared with a year ago, edging up from 0.6% in July which was the biggest annual rise since the end of 2014.

• The consensus view of economists is that the MPC will wait until its November meeting before cutting 15 basis points from Bank Rate which is expected to stay at 0.10% until at least the end of 2018.

• The BCC has reduced its growth forecasts and expects the UK to grow by 1.8% this year compared with its original forecast in March of 2.2% and by 1.0% in 2017 compared with its original forecast of 2.3%.

• BDO’s index of business optimism – which looks at growth six months ahead – rose to 98.7 from 97.9, indicating that optimism is improving after falling to a three-year low last month.

• Critics of the EBA stress tests have expressed concerns that the July results were inconclusive and subjective as there were no passes or failures but instead the results were presented as a league table.

• Some analysts believe that the ECB’s monetary policy is squeezing the margins of European banks, making their shares unattractive to investors and distorting market prices.

• The FTSE 350 Bank Index reduced slightly over the week by 0.8% as most European financial market traders returned from their summer holiday period.

• There was a strong improvement of 7.3% in the ITRAXX Europe Senior Financials 5-year CDS index to 83bps from 90bps – with Deutsche Bank improving to 193bps from 214bps.

General Commentary:

The Monetary Policy Committee (MPC) holds its latest policy meeting this Thursday against a backdrop of pending hard economic numbers that cover the post-Brexit period. Official figures which include inflation on Tuesday, unemployment on Wednesday and retail sales on Thursday should give a clearer picture of how companies and consumers are responding to the Brexit vote after the recent purchasing manager surveys showed activity bouncing back last month.

Economists polled by Reuters forecast consumer prices will be 0.7% higher in August, compared with a year ago, edging up from 0.6% in July which was the biggest annual rise since the end of 2014. The unemployment rate for the three months to July is forecast to stay at 4.9% (an 11-year low) while the number of people claiming jobless benefits in August is seen rising after a surprise fall in July. Monthly retail sales are predicted to have fallen in August after a jump in July when consumers showed no immediate alarm after the Brexit vote. Data and surveys in the coming week will also give a steer on price and industry trends in the eurozone after the European Central Bank (ECB) recently disappointed market expectations that it would announce an extension of its asset purchase programme.

The consensus view of economists from the latest Reuters poll indicates that the MPC will wait until its November meeting before cutting 15 basis points from Bank Rate in an effort to further cushion the adverse economic impact of the Brexit decision. Most economists believe that the economy has already started to tip into a mild recession although recent purchasing manager surveys have been more upbeat. All but 2 of the 59 economists that participated in the poll said Bank Rate would be left unchanged this month. However just over half of the poll respondents expect Bank Rate to fall to 0.10% in November and then stay there until at least the end of 2018. Economists believe that any further policy easing after the next rate cut would likely take the form of a further expansion of the Bank’s asset purchases.

The British Chambers of Commerce (BCC) has reduced its economic growth forecast for the UK in the light of the Brexit vote. It now expects the UK economy to grow by 1.8% this year compared with its original forecast in March of 2.2% and by 1.0% in 2017 compared with its original forecast of 2.3%. BCC expects uncertainty surrounding the UK’s negotiations over its European Union (EU) exit to dampen growth prospects while it expects consumer spending to weaken. The BCC further predicts that while the UK may skirt with recession it should be able to avoid it. The BCC downgrade implies that the UK economy will be £43.8bn smaller by the end of 2018 than was expected before the Brexit decision although the slide in the value of sterling since the vote should improve the UK’s net trade position.

However, a separate report on business conditions from accountancy and services group BDO indicates that optimism is improving after falling to a three-year low last month. BDO’s index of business optimism, which looks at growth six months ahead, rose to 98.7 from 97.9. This was well above the 95.0 level which would indicate the start of recessionary conditions. Ongoing uncertainty and the likely longer-term damage if we exit the single market are concerns which BDO believes continue to justify government support for growth. In particular, BDO urges the government to take advantage of current cheap borrowing costs to invest in infrastructure and protect UK economic growth as we move closer to exit negotiations.

The creditworthiness of some major European banks continues to be questioned by many analysts despite the July announcement of the results of the European Banking Authority (EBA) recent stress tests on 51 major banks within the EU. Critics have expressed concerns that the results were inconclusive and open to subjective interpretation as there were no passes or failures but instead the results were presented as a league table based on estimated Tier One capital and a series of economic shocks.

Some analysts believe that the ECB’s monetary policy is squeezing the margins of European banks, making their shares unattractive to investors and distorting market prices. Critics argue that it is unacceptable that financial regulators on one hand demand that banks increase their capital ratios while on the other hand they impose punitive interest rates on the additional reserves that this policy creates.

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Weekly Movements
Date: 12th September 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 9-Sep-16 2-Sep-16 Chg 9-Sep-16 2-Sep-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 18.90 18.89 +0.1%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.76 1.68 +4.8%
Irish Sovereign
Allied Irish Banks 56 57 -1.8% 6.00 6.00 0.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.77 15.83 -0.4%
Aust and NZ Banking Group Ltd 63 65 -3.1% 26.76 26.84 -0.3%
Banco Bilbao Vizcaya Argentaria S.A. 108 115 -6.1% 5.70 5.69 +0.2%
Parent: Barclays plc
Barclays Bank plc 82 89 -7.9% 1.75 1.74 +0.6%
BNP Paribas S.A. 67 70 -4.3% 47.93 47.82 +0.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.97 14.06 -0.6%
Credit Agricole S.A. 66 68 -2.9% 8.79 8.69 +1.2%
Parent: Credit Suisse Group AG
Credit Suisse AG 116 123 -5.7% 21.19 21.39 -0.9%
Deutsche Bank AG 193 214 -9.8% 13.65 13.32 +2.5%
Parent: HSBC Holdings plc
HSBC Bank plc 62 68 -8.8% 5.78 5.81 -0.5%
Parent: ING Groep N.V.
ING Bank N.V. 56 59 -5.1% 11.32 11.45 -1.1%
Intesa Sanpaolo S.p.A. 125 128 -2.3% 2.17 2.19 -0.9%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.70 4.58 +2.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 72 79 -8.9% 0.59 0.61 -3.3%
 
Metro Bank plc n/a n/a n/a 26.82 24.63 +8.9%
 
Nationwide Building Society 75 82 -8.5% n/a n/a n/a
Nordea Bank AB 60 64 -6.3% 85 86 -1.2%
Parent: RBS Group plc
Royal Bank of Scotland plc 99 104 -4.8% 2.07 2.04 +1.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 78 80 -2.5% 4.20 4.10 +2.4%
Shawbrook Group plc n/a n/a n/a 2.45 2.33 +5.2%
Societe Generale 67 70 -4.3% 33.34 33.16 +0.5%
Parent: Standard Chartered plc
Standard Chartered Bank 99 104 -4.8% 6.40 6.61 -3.2%
Svenska Handelsbanken AB 56 61 -8.2% 116 115 +0.9%
Unicredit  S.p.A. 165 174 -5.2% 2.34 2.35 -0.4%
 
FTSE 350 BANK INDEX n/a n/a n/a 3664 3695 -0.8%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 83 90 -7.3% n/a n/a n/a

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