· After the implied “Hard-Brexit” message from the Prime Minister, Theresa May, at the Conservative Party Conference UK politics has taken centre-stage over the last two weeks.
·While to date economic data – both forward and backward looking – has been better than expected, analysts warn that next year will most likely be a much more challenging one for the UK economy.
·Both the OECD and the IMF have revised upwards their growth forecasts for this year to 1.8% while reducing further their forecasts for 2017 to 1.0% and 1.1% respectively.
·The UK’s services industry appears to have performed above expectations in September according to the latest Markit/CIPS PMI survey and has effectively maintained services output at pre-Brexit levels.
·The ITRAXX Europe Senior Financials 5-year CDS Index showed spreads rising by 5.2% over the month mainly due to negative sentiment resulting from Deutsche Bank and the U.S. DoJ $14.0bn claim.
·The outcome of the DoJ claim is likely to have a direct bearing on the level of claim that will be levied against a number of other major banks including Barclays Bank plc and the Royal Bank of Scotland plc.
·European regulators will soon require the EU’s top 32 banks to issue loss-absorbing debt so they can better absorb a downturn and it remains to be seen how successful these issues will be.
·Moody’s downgraded Norddeutsche Landesbank after the Bank reporting a half-year loss due to shipping loan provisions and the shelving of a 7-year bond issue due to lack of investor demand.
After the implied “Hard-Brexit” message from the Prime Minister, Theresa May – and the resultant sharp drop in the value of sterling on adverse domestic growth prospect fears – UK politics has taken centre-stage over the last two weeks. Four months on from the historic referendum decision to leave the European Union (EU), there is little to reveal the likely outcome of negotiations with the EU that can only start once Article 50 has been activated early next year and so any predictions whether good or bad require to be taken with a “pinch of salt” While to date economic data – both forward and backward looking – has been by and large better than expected, analysts warn that next year will most likely be a much more challenging one for the UK economy.
Both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) have revised upwards their growth forecasts for this year to 1.8% while reducing further their forecasts for 2017 to 1.0% and 1.1% respectively.
The UK’s services industry appears to have performed above expectations in September according to the latest Markit/CIPS purchasing managers’ index (PMI). Although the index fell slightly to 52.6 in September from 52.9 in August (with a score above 50 indicates growth), it effectively maintains services output at pre-Brexit levels. Consumer confidence remains buoyant although it remains to be seen whether the expected jump in inflation next year will have a major adverse impact.
Partly due to the encouraging economic data, the FTSE 350 Bank Index rose by 4.7% over the month while on the other hand the ITRAXX Europe Senior Financials 5-year CDS Index showed spreads rising by 5.2% over the month to 101bps from 96bps following on from the previous month’s sharp rise. The sustained deterioration in the latter index was mainly caused by the ongoing difficulties at Deutsche Bank AG who are in negotiation with the U.S. Department of Justice (DoJ) to try to substantially reduce the initial claim of $14.0 billion (£11.5 billion) for mis-selling toxic products linked to U.S. sub-prime mortgages to around $6.0 billion (£4.9 billion).
Analysts expect Deutsche Bank to have to raise at least €5.0 billion (£4.1 billion) in fresh capital as a result of the imminent fines as it does not appear to have the capacity to replenish its capital base from retained profits. The outcome of the DoJ claim is likely to have a direct bearing on the level of claim that will be levied against a number of other major banks including the Royal Bank of Scotland plc who are alleged to be involved to a similar extent and Barclays Bank plc who had less of an involvement.
The difficulties at Deutsche Bank have exposed the weaknesses at the heart of the European financial sector. Negative interest rates have slashed the margins European banks can earn by lending money to customers and regulatory reforms designed to strengthen the banking system have vastly reduced earnings potential on bond, share and currency trading activities.
In a few weeks, European regulators will require the EU’s top 32 banks to issue loss-absorbing debt so they can better absorb a downturn. Estimates of the amount of debt to be sold vary between €376 billion (£327 billion) and €3.0 trillion (£2.6 trillion) and it remains to be seen how successful these issues will be for a sector that is not in the best of health.
During the month, Fitch reduced the outlook for Virgin Money plc from “Positive” to “Stable” to reflect their concern that pressure on the bank’s planned growth and diversification strategy has increased due to the Brexit decision to leave the EU; while Moody’s upgraded the “Bank Deposit” rating for Bank of Ireland to reflect the ongoing Irish economic improvement as well as favourable developments in the bank’s credit fundamentals. On the downside, Moody’s downgraded Norddeutsche Landesbank after the Bank reporting a half-year loss due to shipping loan provisions and was also forced to shelve a 7-year bond issue due to a lack of investor demand.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||17th October 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||19.35||18.20||+6.3%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.66||1.70||-2.4%|
|Allied Irish Banks||60||56||+7.1%||5.00||6.05||-17.4%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||16.24||15.50||+4.8%|
|Aust and NZ Banking Group Ltd||68||65||+4.6%||27.53||26.36||+4.4%|
|Banco Bilbao Vizcaya Argentaria S.A.||127||117||+8.5%||5.70||5.23||+9.0%|
|Parent: Barclays plc|
|Barclays Bank plc||107||87||+23.0%||1.70||1.65||+3.0%|
|BNP Paribas SA||75||70||+7.1%||48.20||44.64||+8.0%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.32||13.96||-4.6%|
|Credit Agricole SA||72||68||+5.9%||9.21||8.64||+6.6%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||140||121||+15.7%||21.25||20.45||+3.9%|
|Deutsche Bank AG||226||195||+15.9%||12.24||11.99||+2.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||82||65||+26.2%||6.20||5.67||+9.3%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||68||58||+17.2%||11.28||10.68||+5.6%|
|Intesa Sanpaolo S.p.A.||139||133||+4.5%||1.98||2.01||-1.5%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.74||4.60||+3.0%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||95||77||+23.4%||0.52||0.57||-8.8%|
|Metro Bank plc||n/a||n/a||n/a||26.63||27.32||-2.5%|
|Nationwide Building Society||85||80||+6.3%||n/a||n/a||n/a|
|Nordea Bank AB||72||62||+16.1%||89||84||+6.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||139||104||+33.7%||1.73||1.86||-7.0%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||83||80||+3.8%||4.05||3.88||+4.4%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||2.40||2.43||-1.2%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||119||103||+15.5%||6.52||6.07||+7.4%|
|Svenska Handelsbanken AB||67||56||+19.6%||121||114||+6.1%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3701||3535||+4.7%|
|SNR FIN ITRAX CDS 5-YEARS||101||96||+5.2%||n/a||n/a||n/a|