News


15/05/2017


Flagstone Bank Credit Update 15 May 2017

Monthly Headlines:
  • The surprise UK general election called by the Conservatives and the French presidential elections have overshadowed the increased tension between President Trump and the North Korea leader.
  • UK official gross domestic product (GDP) figures indicate that the UK economy grew by just 0.3% in the first quarter of 2017 which is the slowest rate of growth since the first three months of last year.
  • Economists believe that the slowdown in UK GDP growth in the first quarter has effectively killed off the likelihood that the Bank of England will raise interest rates in the foreseeable future.
  • The Bank of England has released its latest forecasts for the UK economy predicting lower GDP growth for this year, down from 2.0% to 1.9%, due to weaker first quarter growth than expected.
  • The Bank of England has released details of the Minimum Requirements for Eligible Liabilities (or MREL) that UK banks will be required to hold to prevent taxpayers from bailing out UK banks in the future.
  • Deutsche Bank AG has announced that Chinese conglomerate, HNA, has overtaken Blackrock to become Deutsche Bank’s biggest shareholder after increasing its stake in the bank to 9.92%.
  • Moody’s has downgraded the long-term ratings for six Canadian banks by one notch as part of a general rating action, citing a more challenging operating environment for banks in Canada for 2017 and beyond.
  • The U.S. President, Donald Trump, has announced that he is considering breaking up big Wall Street banks by splitting their consumer business from their investment operations.
  • The FTSE 350 Bank Index has recovered all of the previous month’s losses, rising by 5.0% to 4,306 as markets react positively to the election of the centralist candidate, Macon, as the new French president.
  • The ITRAXX Europe Senior Financials 5-year CDS Index reacted positively over the month with the price premium reducing by 28.3% to 67bps, as the market breathed a sigh of relief about the outcome of the French presidential election.
General Commentary:

A month is certainly a long time in politics with the surprise UK general election called by the Conservatives overshadowing the increased tension between President Trump and the North Korea leader while the French presidential elections produced an unexpected result for the centralist candidate, Macron, with the established parties having been knocked-out in the first round of voting. Both of these factors were seen as positive by the markets and resulted in a 28.3% improvement in the ITRAXX Europe Senior Financials 5-year CDS Index over the month while the FTSE 350 Bank Share Index rose by 5.0%.

However there was conflicting news on the UK economic front with official gross domestic product (GDP) figures from the Office for National Statistics (ONS) indicating that the UK economy grew by just 0.3% in the first quarter of 2017 which is the slowest rate of growth since the first three months of last year. The ONS stated that the slower pace of GDP growth in the quarter was mainly due to a fall of 0.3% in service sector growth against a figure of 0.8% at the end of 2016. Economists believe that the slowdown in UK GDP growth in the first quarter has effectively killed off the likelihood that the Bank of England (BoE) will raise interest rates in the foreseeable future – pencilling in early 2019 as a possibility for the first rise. On the other hand, the latest Markit/CIPS UK Services sector PMI survey indicated that activity in the sector grew at its fastest monthly pace this year in April at 55.8, up from 55.0 over the month.

The Bank of England (BoE) has released its latest forecasts for the UK economy as part of its quarterly Inflation Report update which shows the economy growing robustly for the next three years. However the Governor, Mark Carney, cautioned that the benign outlook will depend on a series of assumptions not least that the government manages to secure a smooth Brexit agreement with a transition arrangement. However the BoE did lower its GDP growth forecast for this year from 2.0% to 1.9% due to a weaker first quarter than expected but raised the growth prospect for next year from 1.6% to 1.7% and in 2019 from 1.7% to 1.8%. Inflation is expected to peak earlier than expected at 2.8% this year which is the same level as previously forecast for 2018.

As part of the resolution strategy for UK banks, the BoE has released details of the Minimum Requirements for Eligible Liabilities (known as MREL) that UK banks will be required to hold to prevent taxpayers from having to pay for bank bailouts in the future. MREL comprises a combination of ‘going-concern’ capital (mainly equity and retained earnings that enable a bank to continue operations) and ‘gone-concern’ capital (made up of special MREL bonds that absorb losses in the event of insolvency) which means banks should have enough resources to draw on in a crisis without going cap in hand to taxpayers. Special MREL bonds will convert into equity capital once a bank’s main capital reserves are reduced to nil. The MREL requirements are part of European Union law and form the final leg of reforms introduced since the 2007-09 financial crisis. Further details are available on the Bank of England website:

http://www.bankofengland.co.uk/financialstability/Pages/role/risk_reduction/srr/mrel.aspx but we have extracted some of the illustrative information into the following table to assist understanding and for ease of reference purposes.
Firm
Going Concern Gone Concern = Interim   MREL 2020 Loss Absorbing
(MREL + Buffers)
Barclays 12.0% 8.0% 20.0% 24.5%
HSBC 11.8% 8.0% 19.8% 22.9%
Lloyds 12.5% 8.0% 20.5% 23.9%
RBS 11.8% 8.0% 19.8% 24.0%
Santander UK 12.9% 8.0% 20.9% 24.4%
St Chartered 10.8% 8.0% 18.8% 22.4%
Other Firms 11.7% 6.3% 18.0% 21.5%

 

Nationwide Building Society will be assessed on their Leverage Ratio rather than their capital adequacy ratios. In addition to the global and domestic systemically important UK banks, there are eight other UK banks and building societies (i.e. Other Firms) that currently have a resolution plan that involves the use of resolution tools by the Bank (rather than reliance on the insolvency regime). These are: Clydesdale Bank plc, Co-operative Bank plc, Coventry Building Society, Metro Bank plc, Skipton Building Society, Tesco Bank, Virgin Money and Yorkshire Building Society. For the remaining UK banks and building societies the insolvency regime will apply.

As part of its capital raising initiative, Deutsche Bank AG has announced that Chinese conglomerate, HNA, has overtaken Blackrock to become Deutsche Bank’s biggest shareholder after increasing its stake in the firm to 9.92%. HNA, which is privately run by billionaire Chen Feng owns stakes in a range of companies including Hainan airlines, hotel operator Hilton Worldwide and Singapore-listed logistics firm CWT.

Moody’s has downgraded the long-term ratings for six Canadian banks by one notch as part of a general rating action on concerns that a more challenging operating environment for banks in Canada for 2017 and beyond could lead to a deterioration in asset quality. Moody’s point to weakening credit conditions in Canada including an increase in private-sector debt to 185% of Canada’s gross domestic product for last year. Banks affected by the rating action are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank.

The U.S. President, Donald Trump, has announced that he is considering breaking up big Wall Street banks by splitting their consumer business from their investment operations. Many analysts believe that the repeal of the Glass-Steagall Act in 1999 set the groundwork for the 2008 global financial crisis.

 

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Monthly Movements
Date: 15th May 2017
5-Year CDS Spreads (bps) Equity Share Prices 
Financial Institutions 12-May-17 14-Apr-17 Chg 12-May-17 14-Apr-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 24.53 21.98 +11.6%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.52 2.28 +10.5%
Irish Sovereign
Allied Irish Banks 42 55 -23.6% 6.14 5.05 +21.6%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.95 14.90 +0.3%
Aust and NZ Banking Group Ltd 55 57 -3.5% 29.22 31.90 -8.4%
Banco Bilbao Vizcaya Argentaria S.A. 79 114 -30.7% 7.39 6.86 +7.7%
Parent: Barclays plc
Barclays Bank plc 59 81 -27.2% 2.06 2.13 -3.3%
BNP Paribas S.A. 55 96 -42.7% 66.56 58.30 +14.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.26 16.16 +0.6%
Credit Agricole S.A. 55 93 -40.9% 14.29 11.91 +20.0%
Parent: Credit Suisse Group AG
Credit Suisse AG 78 106 -26.4% 14.74 14.40 +2.4%
Deutsche Bank AG 98 130 -24.6% 17.19 15.13 +13.6%
Parent: HSBC Holdings plc
HSBC Bank plc 48 66 -27.3% 6.78 6.44 +5.3%
Parent: ING Groep N.V.
ING Bank N.V. 45 63 -28.6% 15.32 13.81 +10.9%
Intesa Sanpaolo S.p.A. 117 154 -24.0% 2.83 2.44 +16.0%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.88 5.50 +6.9%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 50 69 -27.5% 0.69 0.63 +9.5%
Metro Bank plc n/a n/a n/a 35.13 33.75 +4.1%
Nordea Bank AB 36 43 -16.3% 113 101 +11.9%
Parent: RBS Group plc
Royal Bank of Scotland plc 72 98 -26.5% 2.59 2.28 +13.6%
Ult. Parent: Banco Santander S.A.
Santander UK plc 70 78 -10.3% 6.03 5.49 +9.8%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 3.41 3.37 +1.2%
Societe Generale 55 97 -43.3% 49.70 43.51 +14.2%
Parent: Standard Chartered plc
Standard Chartered Bank 61 81 -24.7% 7.46 7.10 +5.1%
Svenska Handelsbanken AB 36 43 -16.3% 126 121 +4.1%
Unicredit  S.p.A. 136 176 -22.7% 17.01 12.89 +32.0%
FTSE 350 BANK INDEX n/a n/a n/a 4306 4101 +5.0%
SNR FIN ITRAX CDS 5-YEARS 67 94 -28.3% n/a n/a n/a

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