News


18/04/2017


Flagstone Bank Credit Update 18 April 2017

Monthly Headlines:
  • Political tensions have risen to the fore this month while economic factors have taken a back seat due mainly to the actions of President Trump and the imminent French presidential elections.
  • From an economic viewpoint things are more encouraging with the latest batch of economic indicators for both the UK and the European Union showing signs that growth in general is improving.
  • UK consumer price inflation (CPI) held steady in March at 2.3% partly due to the later timing of this year’s Easter holidays which pushed down airfares and also due to a dip in global oil prices.
  • The Markit/CIPS Eurozone PMI Composite Output Index rose in March to a near-six year high of 56.4, up from 56.0 in February, with manufacturing and services outputs growing at their fastest rate since 2011.
  • The independent rating agencies have either upgraded or improved their outlook predictions for some major European banks to reflect significant increases to their capital buffers through senior debt issuance.
  • The UK’s biggest banks have been instructed to prepare for a wide range of challenges as part of the latest stress tests from the Bank of England.
  • The Bank of England has also warned that European Union-based banks operating in the UK may have to be vetted by the bank if the system of passporting were to break down after Brexit.
  • Jes Staley, Chief Executive, Barclays plc, is to lose his annual bonus after UK regulators announced that they have opened an investigation into his conduct during a whistleblowing case.
  • The FTSE 350 Bank Index has fallen by 5.0% over the month to 4,101 as markets react adversely to the political uncertainty from President Trump’s activities and the upcoming French presidential elections.
  • The ITRAXX Europe Senior Financials 5-year CDS Index reacted adversely, up by 7.8% over the month to 94bps, due to uncertainty about the outcome of the upcoming French presidential elections and despite the enhanced capital adequacy ratios of many European banks.
Monthly Commentary:

Political tensions have risen to the fore this month while economic factors have taken a back seat. The actions of President Trump in bombing Syria in reaction to the alleged chemical attack by President Assad on his own people, dropping the ‘mother of all bombs’ on the Islamic State mountain stronghold in Afghanistan and ratcheting up his hostile rhetoric with North Korea (as well as the deployment of a naval task force off the Korean peninsula) has created severe market uncertainty. This has been compounded by the realisation that the French presidential elections (that start later this month) are too close to call and could result in a Eurosceptic president being elected which could cause major problems for the European Union.

However from an economic viewpoint things are more encouraging with the latest batch of economic indicators for both the UK and the European Union showing signs that growth in general is improving. In particular the latest Markit/CIPS purchasing managers’ index (PMI) for UK services 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.

The Office for National Statistics (ONS) has reported that UK consumer price inflation (CPI) held steady in March at 2.3%, partly due to the later timing of this year’s Easter holidays which pushed down airfares and also due to a dip in global oil prices. However analysts warn that the squeeze on UK consumers is likely to resume soon. Inflation has accelerated in recent months pushed up by a weakening of the pound since last year’s decision by voters to leave the European Union and by the rise in oil prices.

Meanwhile the Markit/CIPS Eurozone PMI Composite Output Index rose in March to a near-six year high of 56.4, up from 56.0 in February, with manufacturing output growing at its fastest rate since April 2011 and services sector output growing at its fastest rate since May 2011. Analysts believe 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 then Germany.

During the month, the independent rating agencies either upgraded or improved their outlook predictions for some major European banks to reflect significant increases to their  additional loss-absorbing capacity (ALAC) buffers through senior debt issuance – particularly qualifying Tier 2 capital – after the implementation of their respective country’s resolution and recovery regimes (i.e. “bail-in” regulations).

Meanwhile the UK’s biggest banks have been instructed to prepare for a wide range of challenges as part of the latest stress tests from the Bank of England (BoE). The seven major lenders taking part are Barclays, HSBC, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide. Among other things, the banks will need to prove that they can manage any sudden slowdown in foreign interest in UK assets and a potential increase in funding costs for borrowers as the BoE recognises that the UK’s large current account deficit is vulnerable to a reduction in foreign investor appetite for UK assets.

The BoE has also warned that European Union-based banks operating in the UK may have to be vetted by the bank if the system of passporting were to break down after Brexit and if there was no commitment to minimum common standards. If passporting rights were not to apply after Brexit then 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.

Markets have reacted negatively to reports that Jes Staley, Chief Executive, Barclays plc, is to lose his annual bonus after the UK Financial Conduct Authority (FCA) and the PRA announced that they have opened an investigation into his conduct during a whistleblowing case where he sought to discover the identity of the whistleblower. The share price has fallen by 8.2% while the 5-year CDS spread price has risen by 17.4% over the month in reaction to the news.

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: 17th April 2017
5-Year CDS Spreads (bps) Equity Share Prices
14-Apr-17 10-Mar-17 Chg 14-Apr-17 10-Mar-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 21.98 23.77 -7.5%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.28 2.23 +2.2%
Irish Sovereign
Allied Irish Banks 55 62 -11.3% 5.05 5.10 -1.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.90 14.50 +2.8%
Aust and NZ Banking Group Ltd 57 56 +1.8% 31.90 31.95 -0.2%
Banco Bilbao Vizcaya Argentaria S.A. 114 115 -0.9% 6.86 6.89 -0.4%
Parent: Barclays plc
Barclays Bank plc 81 69 +17.4% 2.13 2.32 -8.2%
BNP Paribas S.A. 96 87 +10.3% 58.30 61.86 -5.8%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.16 15.36 +5.2%
Credit Agricole S.A. 93 77 +20.8% 11.91 12.65 -5.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 106 108 -1.9% 14.40 15.58 -7.6%
Deutsche Bank AG 130 127 +2.4% 15.13 18.26 -17.1%
Parent: HSBC Holdings plc
HSBC Bank plc 66 59 +11.9% 6.44 6.67 -3.4%
Parent: ING Groep N.V.
ING Bank N.V. 63 64 -1.6% 13.81 14.62 -5.5%
Intesa Sanpaolo S.p.A. 154 141 +9.2% 2.44 2.43 +0.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.50 5.95 -7.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 69 59 +16.9% 0.63 0.69 -8.7%
Metro Bank plc n/a n/a n/a 33.75 34.52 -2.2%
Nordea Bank AB 43 46 -6.5% 101 109 -7.3%
Parent: RBS Group plc
Royal Bank of Scotland plc 98 86 +14.0% 2.28 2.45 -6.9%
Ult. Parent: Banco Santander S.A.
Santander UK plc 78 77 +1.3% 5.49 5.49 0.0%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 3.37 3.10 +8.7%
Societe Generale 97 86 +12.8% 43.51 47.75 -8.9%
Parent: Standard Chartered plc
Standard Chartered Bank 81 80 +1.3% 7.10 7.41 -4.2%
Svenska Handelsbanken AB 43 43 0.0% 121 127 -4.7%
Unicredit  S.p.A. 176 169 +4.1% 12.89 14.30 -9.9%
FTSE 350 BANK INDEX n/a n/a n/a 4101 4319 -5.0%
SNR FIN ITRAX CDS 5-YEARS 94 87 +7.8% n/a n/a n/a

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