News


02/05/2017


Flagstone Bank Credit Update 2 May 2017

Weekly Headlines:
  • Official figures from the Office for National Statistics indicate that the UK economy grew by just 0.3% (1.2% annualised) in the first quarter of 2017, the slowest rate of growth since the first three months 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 will raise interest rates in the foreseeable future.
  • Market research firm GfK reports that UK consumer sentiment continues to be relatively buoyant as the country enters the two-year window of Brexit negotiations.
  • Inflation in the eurozone has returned to the European Central Bank’s target level with official figures indicating that inflation in the bloc reached 1.9% in April which was up from 1.5% in March.
  • The U.S growth rate of 0.7% (annualised) for the first quarter of 2017 indicates that the US economy slowed dramatically in the first three months of the year to its lowest level reported for three years.
  • The Royal Bank of Scotland reported a £300 million profit in the first three months of the year compared with a loss of almost £1.0bn for the same period last year
  • Pre-tax profits for Barclays Bank reached £1.7bn in the first three months of the year, which was a rise of 112%, underpinned by a £600 million fall in losses from its legacy debts recovery division.
  • The FTSE 350 Bank Index rose by 3.6% over the week to 4,180 on market relief that the outcome of the French presidential elections is likely to lead to a win by the centralist candidate, Macon.
  • The ITRAXX Europe Senior Financials 5-year CDS Index improved by a massive 17.5% over the week to 75bps on the likelihood of a conservative UK general election victory and the likely centralist outcome of the French presidential elections.
General Commentary:

Official figures from the Office for National Statistics (ONS) for gross domestic product (GDP) growth indicates 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 2016. In the last quarter of 2016 GDP growth increased by 0.7%. Economists had been expecting GDP growth to slow as UK consumers reined back spending in the face of rising inflation but had pencilled in a higher figure of 0.4%. 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. The main drag on the services sector (which accounts for about 78% of the UK economy) came from the hotels, restaurants and the distributions sector which fell by 0.5% as increasing prices from rising inflation has applied the brakes to retail trade. Output in the construction sector was also lower after expanding by 0.2% in the first three months of the year following 1.0% growth in the fourth quarter of 2016 while industrial production expanded by 0.3% over the period.

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. The BoE currently maintains a neutral stance on interest rate movements having done so since around three months after cutting interest rates from 0.50% to 0.25% last year as a means of protecting the UK from any economic shock of Brexit. However in recent statements the BoE had hinted that a rate hike back to 0.50% could be on the horizon as the economy had been outperformed expectations since the Brexit referendum while inflation has recently surged and is widely expected to pass 3.0% by the end of 2017.

However UK consumer sentiment continues to be relatively buoyant as the country enters the two-year window of Brexit negotiations with the European Union (EU). Market research firm GfK’s measure of UK consumer confidence slipped to -7 in April from -6 in March which was in line with the median forecast of economists. Although this means that UK consumer confidence is at its lowest level in four months, as consumers weigh up the outlook for the economy and their finances ahead of Brexit and June’s general election, the survey did show that consumer confidence remains robust by historical standards. This is likely to help reassure policymakers who are watching to see how a recent rise in inflation is affecting household spending which is the main driver of the economy.

Inflation in the eurozone has returned to the European Central Bank (ECB)’s target level. Official figures indicate that inflation in the bloc reached 1.9% in April which was up from 1.5% in March but just below February’s four-year high of 2.0%. ECB head, Mario Draghi, commented that while the Eurozone’s economic recovery was increasingly solid, inflation was not yet high enough to justify lifting interest rates. Following its latest meeting last week the ECB has kept its main interest rate on hold at zero and left its bond-buying stimulus scheme unchanged. The bond-buying programme has already been trimmed to €60.0bn (£51.0bn) a month from €80.0bn. The main factor behind April’s pick-up in inflation was rising energy prices. Core inflation – a measure that is watched closely by the ECB and which strips out energy and unprocessed food prices – rose to 1.2% in April from 0.8% in March. The core figure was higher than expected and is at its highest level since September 2013. However analysts believe that the ECB is very unlikely to read too much into April’s data as it was positively impacted by Easter timing distortions.

Meanwhile the U.S growth rate for the first quarter of 2017 indicates that the US economy slowed dramatically in the first three months of the year to its lowest level reported for three years. According to official data GDP expanded at an annual rate of 0.7% in the first quarter. This was disappointing news for the Trump administration who have pledged to raise growth to 4.0%. In a bid to fulfil that promise, the White House has announced plans to slash the rate of corporation tax from 35% to 15%. The plans also propose to offer an incentive for companies to bring back money held overseas and a cut in the tax rate for individuals. The Trump administration may be reassured by the trend in recent years for growth figures to be depressed in the first quarter but then experience a strong pick-up later in the year.

The Royal Bank of Scotland (RBS) reported a £300 million profit in the first three months of the year as its core lending business continued to recover and as cost-cutting boosted performance. The profit compared with a loss of almost £1.0bn in the same period last year and has raised analyst expectations that the bank is set for a profit in 2018. As a consequence the share price closed the week up 10.4%. However there remains substantial clouds on the horizon including the need to settle the bank’s multibillion-pound litigation in the U.S. over its sale of sub-prime mortgage bonds. In January RBS set aside £3.1bn towards the cost of the penalty but has reiterated a warning that the final sum could be substantially more. RBS also needs to resolve the fate of Williams & Glyn and is awaiting a judgment by the European Commission about whether a UK Treasury proposal for the bank to spend at least £750 million helping challenger lenders and small businesses will be deemed a sufficient final penalty for its £45.5bn of state aid. The bank will also go to court in four weeks’ time to defend itself against claims by shareholders that it misled them about its dire financial state at the time of its £12.0bn rights issue in 2008.

Barclays Bank plc has reported that pre-tax profits reached £1.7bn in the first three months of the year which was a rise of 112%. This was partly due to a £600 million fall in losses from the division responsible for cleaning up its legacy debts. Pre-tax profits of £1.36bn from its international and investment banking business were up by 32%. However analysts caution that the investment bank’s performance lagged its peers on Wall Street and its return on shareholder equity was slightly lower than forecast. The Bank also announced that it will go against the tide of job-cutting by big banks to recruit 1,000 extra staff. The jobs will be created in areas including Cheshire, Northampton and Glasgow this year and Barclays said that it would be hiring the same number again by 2020 as profits rise further. The expansion includes 750 technology posts and 250 customer service jobs to support Barclays’ Premier and Business Banking customers.

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Movements over the Last Week
Date: 2nd May 2017
5-Year CDS Spreads (bps) Equity Share Prices 
28-Apr-17 21-Apr-17 Chg 28-Apr-17 21-Apr-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 24.10 22.58 +6.7%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.53 2.35 +7.7%
Irish Sovereign
Allied Irish Banks 49 55 -10.9% 5.24 5.00 +4.8%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.15 14.78 +2.5%
Aust and NZ Banking Group Ltd 55 58 -5.2% 32.76 31.81 +3.0%
Banco Bilbao Vizcaya Argentaria S.A. 91 114 -20.2% 7.35 7.10 +3.5%
Parent: Barclays plc
Barclays Bank plc 67 78 -14.1% 2.12 2.08 +1.9%
BNP Paribas S.A. 64 89 -28.1% 64.78 62.00 +4.5%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.92 16.49 +2.6%
Credit Agricole S.A. 62 86 -27.9% 13.65 12.43 +9.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 91 105 -13.3% 15.13 14.43 +4.9%
Deutsche Bank AG 110 127 -13.4% 16.53 15.57 +6.2%
Parent: HSBC Holdings plc
HSBC Bank plc 53 63 -15.9% 6.37 6.24 +2.1%
Parent: ING Groep N.V.
ING Bank N.V. 52 63 -17.5% 14.94 13.81 +8.2%
Intesa Sanpaolo S.p.A. 134 155 -13.5% 2.67 2.51 +6.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.72 5.64 +1.4%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 56 68 -17.6% 0.69 0.64 +8.1%
Metro Bank plc n/a n/a n/a 35.29 34.55 +2.1%
Nordea Bank AB 36 43 -16.3% 109 103 +5.8%
Parent: RBS Group plc
Royal Bank of Scotland plc 79 96 -17.7% 2.65 2.40 +10.4%
Ult. Parent: Banco Santander S.A.
Santander UK plc 75 76 -1.3% 5.99 5.67 +5.6%
Shawbrook Group plc n/a n/a n/a 3.42 3.39 +0.9%
Societe Generale 64 90 -28.9% 50.21 46.29 +8.5%
Parent: Standard Chartered plc
Standard Chartered Bank 68 79 -13.9% 7.21 6.86 +5.1%
Svenska Handelsbanken AB 36 43 -16.3% 126 121 +4.1%
Unicredit  S.p.A. 153 175 -12.6% 14.94 13.64 +9.5%
FTSE 350 BANK INDEX n/a n/a n/a 4180 4036 +3.6%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 75 91 -17.5% n/a n/a n/a

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