News


27/06/2016


Bank Credit Update 27 June 2016

Weekly Headlines:

• The Bank of England (BoE) is likely to slash interest rates and even restart its money-printing programme to stimulate a slowing economy after the vote for Brexit.
• The BoE may be pushed into more radical action such as reviving its quantitative easing (QE) programme to revive the economy.
• The BoE stands ready to provide more than £250 billion, plus “substantial” access to foreign currencies, to ease any squeeze in financial markets.
• The CBI and the IoD have appealed for a period of calm and have warned politicians not to rush into decisions that will affect generations to come.
• Ratings agency Moody’s has assigned a negative outlook to its ‘Aa1’ long-term rating for UK government debt while Standard & Poor’s are expected to downgrade the UK’s sovereign top-notch AAA rating.
• HSBC has forecast that inflation may increase to 4% within 18 months should there be a sustained fall in sterling which would put the BoE under pressure to raise interest rates.
• Share prices of many major banks fell by 7% – 10% over the week after the Brexit announcement.
• The ITRAXX Europe Senior Financials 5-year CDS index was not published at close of business on Friday due to the market turmoil and so we have provided an estimate for completeness.

General Commentary:

Analysts believe that the Bank of England (BoE) is likely to slash interest rates and even restart its money-printing programme to stimulate a slowing economy after the vote result in favour of Brexit. A cut in Base Rate is now viewed as a near-certainty with a reduction to zero expected in the coming months. Base Rate has been at a record low of 0.5% since 2009. Many economists now expect the economy to stagnate as the prospect of years of uncertainty over Britain’s trading relationships deters investment.

With interest rate already at a record low, the ability of the BoE to revive the economy is limited. Experts believe the BoE may be pushed into more radical action such as reviving its quantitative easing (QE) programme. This would see the BoE create tens of billions of pounds more of new money to buy government bonds and drive down borrowing costs.

The BoE stands ready to provide more than £250 billion, plus “substantial” access to foreign currencies, to ease any squeeze in markets, and Governor Mark Carney has said it would consider more measures if needed.

As predicted by many analysts, once the Brexit result was confirmed, many business groups that had campaigned for a Remain vote and warned of grave consequences appear to have ‘changed their minds’ and now believe that the UK economy was flexible enough to adapt to the Brexit vote and resilient enough to stave off economic shocks.  The Confederation of British Industry (CBI) and the Institute of Directors (IoD) have appealed for a period of calm and have warned politicians not to rush into decisions that will affect generations to come. Fears over international isolationism were also short-lived as President Obama said the special relationship between the US and the UK was still intact while Donald Tusk, the President of the European Council, said negotiations with Britain would be conducted in an orderly way to avoid prolonged uncertainty.

Ratings agency Moody’s has assigned a negative outlook to its ‘Aa1’ long-term rating for UK government debt citing concerns that the UK’s creditworthiness is now at greater risk after voting to leave the European Union (EU), as they believe that the country would face substantial challenges to successfully negotiate its exit from the bloc. During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth.

Rival credit ratings agency Standard & Poor’s – the only major body to still assign the UK a top-notch AAA grade – are expected to downgrade the UK sovereign rating as they had said before Thursday’s referendum that the UK was likely face a downgrade if it voted to leave; while Fitch Ratings has said that the Brexit vote result would be moderately negative.

In light of the Brexit decision, HSBC has forecast that inflation may increase to 4% within 18 months should there be a sustained fall in sterling which would put the BoE under pressure to raise interest rates. HSBC believes that higher inflation would squeeze wages and depress growth, delivering the economic slowdown that the Treasury, the International Monetary Fund (IMF) and many others had previously warned would follow a Brexit decision. Living standards would drop as prices rise faster than wages, just as they did in the five years from 2009.

A rule of thumb used by economists is that a 10% fall in the trade-weighted value of sterling translates into a 1% rise in inflation. Sterling fell by 6% against the currency basket on the day after the Brexit decision. However other analysts believe that a modest fall in sterling could help inflation rise to the BoE target level of 2% while the partial recovery in the oil price is expected to unwind over the coming months as the uncertainty caused by Brexit is likely to reduce demand in the short-term.

Jaime Caruana, the head of the Bank for International Settlements (BIS) has issued a statement confirming that major central banks will limit market turbulence as much as possible in the aftermath of the UK voting to leave the EU. The statement also revealed that some of the world’s biggest central banks have offered financial backstops to soothe plunging markets after the EU referendum result and some have already intervened in currency markets on concerns that volatility could hit growth. Mr Caruana pointed out that stronger capital and liquidity buffers put in place by banks had made markets more resilient in the face of disturbances, and central banks were ready to ensure markets keep working in an orderly manner.

The Brexit result is expected to put on hold the expected sell-off of the UK government’s remaining 9% stake in Lloyds Banking Group shares to the general public due to the anticipated high level of volatility in financial markets that  would probably cause investors to sell UK assets.

Germany’s constitutional Court rejected on Tuesday a challenge of the European Central Bank’s emergency bond-buying scheme, clearing a never-used crisis fighting tool. Conceived at the height of Europe’s debt crisis, the Outright Monetary Transactions (OMT) programme was launched as part of ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, giving the bank broad powers to buy the debt of financially strained members. The European Court of Justice has already cleared OMT but German politicians and academics had asked the German court to dismantle it, arguing that it constituted illegal monetary financing, violating German law.

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: 27th June 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 24-Jun-16 17-Jun-16 Chg 24-Jun-16 17-Jun-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.40 1.91 -26.7%
Irish Sovereign
Allied Irish Banks 86 73 +17.8% 5.71 6.30 -9.4%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.80 15.97 -7.3%
Aust and NZ Banking Group Ltd 87 86 +1.2% 23.44 23.23 +0.9%
Banco Bilbao Vizcaya Argentaria S.A. 173 164 +5.5% 4.84 5.40 -10.4%
Parent: Barclays plc
Barclays Bank plc  (ESTIMATED 23 June + 20bps) 124 131 -5.3% 1.54 1.66 -7.2%
BNP Paribas S.A. 104 96 +8.3% 39.40 43.45 -9.3%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 12.19 12.41 -1.8%
Credit Agricole S.A. 100 93 +7.5% 7.65 8.05 -5.0%
Parent: Credit Suisse Group AG
Credit Suisse AG 170 154 +10.4% 20.72 20.55 +0.8%
Deutsche Bank AG 222 209 +6.2% 13.37 13.68 -2.3%
Parent: HSBC Holdings plc
HSBC Bank plc    (ESTIMATED 23 June + 20bps) 126 106 +18.9% 4.48 4.31 +3.9%
Parent: ING Groep N.V.
ING Bank N.V. 95 87 +9.2% 9.34 9.98 -6.4%
Intesa Sanpaolo S.p.A.  (ESTIMATED 23 June + 20bps) 181 161 +12.4% 1.74 2.04 -14.7%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.56 4.49 +1.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc   (ESTIMATED 23 June + 20bps) 129 109 +18.3% 0.57 0.67 -14.9%
 
Metro Bank plc n/a n/a n/a 19.37 20.60 -6.0%
 
Nationwide Building Society 76 78 -2.6% n/a n/a n/a
Nordea Bank AB 82 70 +17.1% 74 76 -2.6%
Parent: RBS Group plc
Royal Bank of Scotland plc 140 142 -1.4% 2.05 2.22 -7.7%
Ult. Parent: Banco Santander S.A.
Santander UK plc 75 80 -6.3% 3.38 3.81 -11.3%
Shawbrook Group plc n/a n/a n/a 2.34 2.40 -2.5%
Societe Generale   (ESTIMATED 23 June + 20bps) 115 95 +21.1% 28.80 32.87 -12.4%
Parent: Standard Chartered plc
Standard Chartered Bank 165 169 -2.4% 5.63 5.26 +7.0%
Svenska Handelsbanken AB 85 70 +21.4% 107 100 +7.0%
Unicredit  S.p.A. 217 197 +10.2% 2.08 2.41 -13.7%
 
FTSE 350 BANK INDEX n/a n/a n/a 3087 3145 -1.8%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 120 115 +4.3% n/a n/a n/a
 

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