News


20/02/2017


Flagstone Bank Credit Update 20 February 2017

Weekly Headlines:
  • Annual inflation, as measured by the Consumer Prices Index (CPI), reached 1.8% in January which was up from a rate of 1.6% in December, its highest rate for two-and-a-half years.
  • UK wages grew by 2.6% in the three months to December 2016 which was faster than the rate of inflation; while the jobless rate held steady at an 11-year low of 4.8%.
  • UK retail sales slipped back unexpectedly in January, dropping by 0.3% compared with the previous month, which was well below the 0.9% rise expected.
  • The European Commission expects the UK economy to slow down sharply over the next couple of years, predicting that the economy will grow by just 1.5% this year and by 1.2% in 2018.
  • A pro-Brexit group of economists are confident that the UK could record a 4.0% bounce in gross domestic product if the UK stripped away tariffs on imports after leaving the European Union.
  • The Co-operative Bank plc which was rescued from the brink of collapse by a group of hedge funds in 2013 has put itself up for sale after struggling to meet regulatory capital requirements.
  • The UK Treasury has reached a new deal with the European Commission whereby the Bank will no longer sell its Williams & Glyn business but instead will set up a number of competitor-friendly schemes.
  • Fitch has upgraded Nationwide Building Society long-term credit rating by one notch to “A+” while it has also revised down its rating outlook for Santander UK plc to “Stable”.
  • The FTSE 350 Bank Index rose by 2.4% over the week to 4,468 on anticipation of imminent strong final quarter financial results from major European banks.
  • The ITRAXX Europe Senior Financials 5-year CDS Index was unchanged over the week at 92bps as markets reacted positively to encouraging eurozone economic signs.
 
General Commentary:

Official figures from the Office for National Statistics (ONS) indicates that UK consumer price inflation has reached its highest rate for two-and-a-half years mainly as a result of the rising price of fuel. Annual inflation, as measured by the Consumer Prices Index (CPI), reached 1.8% in January which was up from a rate of 1.6% in December. It is the fourth consecutive month that the rate has risen and takes inflation to its highest level since June 2014. As well as fuel, the ONS said food prices also contributed to the rise in inflation due to prices remaining unchanged between December and January, having fallen in the same period a year ago. Partly offsetting these factors were falls in the price of clothing and footwear.

UK wages grew faster than the rate of inflation at the end of 2016 according to official figures from the ONS. In the three months to December, wages grew by 2.6% on an annualised basis. However this rise was slower than the previous period leading many analysts to suggest that consumers could face a squeeze on spending later this year. The ONS also said that the jobless rate held steady at an 11-year low of 4.8%.  Although the unemployment rate is now at its lowest level in over a decade, wage growth remains subdued by historical standards having slowed from the 2.8% rate seen in the three months to November 2016.

UK retail sales slipped back unexpectedly in January following on from December’s dip. Official figures from the Office for National Statistics (ONS) showed retail sales volumes dropped by 0.3% compared with the previous month which was well below the 0.9% rise expected. The ONS said the data indicates the first signs of a fall in the underlying trend since December 2013. It said evidence suggested higher fuel and food prices were key factors. Not only did the fall come on top of a decline in December but the hefty contraction for that month has been revised to -2.1% from -1.9%. Compared with January 2016, sales were up by 1.5% which was the weakest performance since November 2013.

This downbeat view is consistent with the latest forecast for the UK economy from the European Commission which expects the UK economy to slow down sharply over the next couple of years.  In Its latest forecast the Commission predicts that UK gross domestic product (GDP) will grow by just 1.5% this year and by 1.2% in 2018 which compares with a growth rate of 2.0% for last year. The Commission says the slowdown is prompted by uncertainty following last year’s Brexit vote. By contrast the Commission expects growth in the eurozone to grow faster than that of the UK, by 1.6% this year and by 1.8% in the next. However the latest forecasts by the Commission – for both the UK and the eurozone – do represent an improvement on its previous forecasts made last November, which suggested that the UK would grow by just 1.0% this year.

In contrast, a pro-Brexit group of economists are confident that the UK could record a 4.0% bounce in GDP if it stripped away tariffs on imports after leaving the European Union (EU). In a paper published last week the group which was called ‘Economists for Brexit’ and which has been renamed ‘Economists for Free Trade’ said that abolishing all trade barriers would strengthen the UK economy and make it more competitive. They believe that trading as a full member of the World Trade Organisation (WTO) outside of the single market can offer the UK considerable economic benefits. The group added that clearing away all import tariffs would not hurt manufacturing, a position with which many economists disagree. In contrast, the group believes that there could be a 4.0% hit to the UK economy if it chose the opposite direction and put up tariffs on goods in the event that it did not reach a trade deal with the EU. The damage would come from higher prices and slower growth.

The Co-operative Bank plc which was rescued from the brink of collapse by a group of hedge funds in 2013 has put itself up for sale after struggling to meet regulatory capital requirements. The bank reported that while it had made considerable progress implementing a turnaround plan – which included cutting its cost base by a fifth since 2014 – it still expects to make a significant loss for last year. The bank has not made a profit since 2011 and building up capital has proved difficult due to the sustained low interest rates environment. The bank’s privately owned shares are rarely traded making valuation difficult but the Co-operative which owns a fifth of the bank wrote down the value of its stake in the bank in September last year from £185m to £140m, implying a total value for the lender of £700m. The Bank of England’s Prudential Regulation Authority (PRA) which regulates the Bank has said it welcomes the potential sale. It is rumoured that Sabadell, the Spanish owner of TSB Bank, may be interested in acquiring the bank.

The UK Treasury has announced a new deal with the European Commission over the £46.0bn bailout received by the Royal Bank of Scotland (RBS) in 2008. Analysts believe that the Treasury had taken the initiative on fears that RBS’s problems could complicate the Brexit negotiations. Over the last nine years the bank has been unable to divest a network of more than 300 Williams & Glyn branches that it was ordered to sell by the Commission as a punishment for receiving state aid. Under the new proposals it is understood that RBS will no longer have to sell the branches but instead RBS will set up a number of schemes to make it easier for challenger banks to attract its customers. Under one proposal smaller lenders will be given access to its branch network for cash and cheque handling while RBS will set up an independent fund to promote financial technology. The new measures are expected to cost RBS £750m.

Fitch has upgraded Nationwide Building Society long-term credit rating by one notch to “A+” with a “Stable” outlook to reflect Fitch’s view that the Society’s qualifying junior debt buffers are now sufficiently large to provide protection for senior unsecured creditors in case of the Society’s failure.

In addition Fitch has revised down its long-term credit rating outlook for Santander UK Group Holdings plc, Santander UK plc and Abbey National Treasury Services plc to “Stable” from “Positive” to reflect Fitch’s view that the weaker prospects for the banking sector after the UK’s decision to leave the European Union may make it more difficult for the group’s earnings to benefit from its diversified business mix.

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: 20th February 2017
5-Year CDS Spreads (bps) Equity Share Prices
17-Feb-17 10-Feb-17 Chg 17-Feb-17 10-Feb-17 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. 61 61 0.0% 21.88 21.60 +1.3%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.34 2.28 +2.6%
Irish Sovereign
Allied Irish Banks 70 69 +1.4% 5.10 5.30 -3.8%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.50 14.56 -0.4%
Aust and NZ Banking Group Ltd 59 60 -1.7% 30.77 29.49 +4.3%
Banco Bilbao Vizcaya Argentaria S.A. 116 118 -1.7% 6.24 5.97 +4.5%
Parent: Barclays plc
Barclays Bank plc 76 78 -2.6% 2.37 2.29 +3.5%
BNP Paribas S.A. 90 90 0.0% 55.75 55.70 +0.1%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.88 15.13 -1.7%
Credit Agricole S.A. 82 80 +2.5% 11.82 11.40 +3.7%
Parent: Credit Suisse Group AG
Credit Suisse AG 115 115 0.0% 15.31 14.60 +4.9%
Deutsche Bank AG 149 157 -5.1% 18.20 17.80 +2.2%
Parent: HSBC Holdings plc
HSBC Bank plc 65 67 -3.0% 7.07 6.87 +2.9%
Parent: ING Groep N.V.
ING Bank N.V. 66 63 +4.8% 13.46 13.42 +0.3%
Intesa Sanpaolo S.p.A. 139 148 -6.1% 2.17 2.13 +1.9%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.90 5.72 +3.1%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 66 68 -2.9% 0.67 0.66 +1.5%
Metro Bank plc n/a n/a n/a 35.66 36.01 -1.0%
Nationwide Building Society 80 80 0.0% n/a n/a n/a
Nordea Bank AB 46 46 0.0% 109 108 +0.9%
Parent: RBS Group plc
Royal Bank of Scotland plc 101 104 -2.9% 2.42 2.29 +5.7%
Ult. Parent: Banco Santander S.A.
Santander UK plc 79 79 0.0% 5.14 5.04 +2.0%
Shawbrook Group plc n/a n/a n/a 2.70 2.64 +2.3%
Societe Generale 91 89 +2.2% 42.40 42.39 +0.0%
Parent: Standard Chartered plc
Standard Chartered Bank 92 92 0.0% 7.73 7.95 -2.8%
Svenska Handelsbanken AB 41 41 0.0% 131 131 0.0%
Unicredit  S.p.A. 166 176 -5.7% 12.90 12.64 +2.1%
FTSE 350 BANK INDEX n/a n/a n/a 4468 4364 +2.4%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 92 92 0.0% n/a n/a n/a

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