News


20/03/2017


Flagstone Bank Credit Update 20 March 2017

Weekly Headlines:
  • A split over interest rate policy has emerged at the Bank of England for the first time in over a year as one MPC member voted for an immediate rise which analysts believe could signal an earlier rise than expected.
  • Markets have been expecting the first bank rate rise to take place halfway through 2018 at the earliest with many economists forecasting policy to remain unchanged until 2019.
  • Market focus on future interest rate movements has shifted to the BoE after the U.S. Federal Reserve raised the Fed Rate last week for the third time since the financial crisis began.
  • PricewaterhouseCoopers predicts that UK consumers are likely to curb spending over the next two years as households adjust to the Brexit fallout with growth easing from 3.0% in 2016 to 2.0% this year.
  • The latest UK unemployment data for the three months to January showed a further fall in the unemployment rate but also indicated a sharp slowdown in wage growth to 2.3% from 2.6%.
  • The Royal Bank of Scotland is engaged in talks to try to avert a High Court showdown in less than two months’ time and end the £1.2bn lawsuit brought by investors over the bank’s £12.0bn rights issue in 2008.
  • The FTSE 350 Bank Index fell slightly by 0.7% over the week to 4,287 on profit-taking after recent rises in European bank shares on encouraging annual banks results for 2016.
  • The ITRAXX Europe Senior Financials 5-year CDS Index improved by 2.3% over the week to 85bps to reflect the general strengthening of bank balance sheets while shrugging off future regulatory challenges.
General Commentary:

A split over interest rate policy has emerged at the Bank of England (BoE) for the first time in more than a year which analysts believe could signal an earlier rise than expected. Ms. Kristin Forbes, an external member of the monetary policy committee (MPC), voted this month for an immediate quarter-point increase in the bank rate to 0.5%. It was the first split vote since July last year.

Markets have been expecting the first bank rate rise to take place halfway through 2018 at the earliest with many economists forecasting policy to remain unchanged until 2019. Minutes of the MPC meeting show that Ms. Forbes believes that domestic factors are beginning to generate inflation and the expected post-referendum slowdown in the economy has not materialised. The minutes also show that the MPC also raised its forecast for growth in the first three months of the year from 0.5% to 0.6%.

Market focus on future interest rate movements has shifted to the BoE after the U.S. Federal Reserve raised the Fed Rate last week for the third time since the financial crisis began which suggests that the low interest rate era is possibly drawing to a close. Analysts predict two further rate rises in the U.S. this year.

In contract with the optimistic MPC growth forecast, a report from PricewaterhouseCoopers (PWC) predicts that UK consumers are likely to curb spending over the next two years as households adjust to the Brexit fallout. The report expects consumer spending growth to ease from 3.0% in 2016 to 2.0% this year and to 1.7% in 2018 after being responsible for powering the UK economy and for helping to defy forecasts of a marked slowdown after last June’s EU referendum decision. The report suggests that consumer spending was the single most important driver of economic growth and had expanded on average by 2.4% faster than inflation over the past four years. PWC believes that this was due to a number of factors including the robust housing market, rising employment levels, rock-bottom interest rates and higher borrowing.

This more pessimistic view is supported by the latest UK unemployment data for the three months to January. Although it showed a further fall in the unemployment rate it also indicated a sharp slowdown in wage growth.  The Office for National Statistics (ONS) reported that the unemployment rate fell to 4.7% which is the lowest level since the summer of 1975. However, wage growth slowed to 2.3% (excluding bonuses) from 2.6% in the previous three-month period. Although wages are still rising above the rate of inflation (currently 1.8%) the gap has narrowed considerably. Following the March UK budget, the Institute for Fiscal Studies (IFS) has warned that wages are unlikely to be higher in the next five years. The latest data showed that wages are growing at the slowest rate since April of last year. Analysts advise that the weakness is broad-based with wage growth moderating in the financial and business services, distribution, construction and public sectors.

The Royal Bank of Scotland (RBS) is engaged in talks to try to avert a High Court showdown in less than two months that would involve shareholders accusing the taxpayer-backed lender of holding back key financial information in the run-up to its near collapse at the height of the global financial crisis. Lawyers for both parties are understood to have entered negotiations to end the £1.2bn lawsuit brought by 27,000 private investors and more than 100 institutional fund managers over the bank’s £12.0bn rights issue in 2008. RBS has settled four of the five shareholder claims against it and if it were able to reach a deal on the fifth it would end the embarrassing prospect of several of the lender’s former senior managers, including Fred Goodwin its disgraced former chief executive, being forced to give evidence in court. The trial is scheduled to begin in May and analysts believe that the talks have only a 50-50 chance of reaching a deal after the claimants rejected a share of an earlier £800 million settlement.

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 March 2017
5-Year CDS Spreads (bps) Equity Share Prices
17-Mar-17 10-Mar-17 Chg 17-Mar-17 10-Mar-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 23.52 23.77 -1.1%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.26 2.23 +1.3%
Irish Sovereign
Allied Irish Banks 59 62 -4.8% 5.15 5.10 +1.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.00 14.50 -3.4%
Aust and NZ Banking Group Ltd 54 56 -3.6% 31.58 31.95 -1.2%
Banco Bilbao Vizcaya Argentaria S.A. 115 115 0.0% 7.08 6.89 +2.8%
Parent: Barclays plc
Barclays Bank plc 70 69 +1.4% 2.30 2.32 -0.9%
BNP Paribas S.A. 83 87 -4.6% 60.28 61.86 -2.6%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 15.80 15.36 +2.9%
Credit Agricole S.A. 74 77 -3.9% 12.31 12.65 -2.7%
Parent: Credit Suisse Group AG
Credit Suisse AG 106 108 -1.9% 15.48 15.58 -0.6%
Deutsche Bank AG 123 127 -3.1% 17.86 18.26 -2.2%
Parent: HSBC Holdings plc
HSBC Bank plc 58 59 -1.7% 6.59 6.67 -1.2%
Parent: ING Groep N.V.
ING Bank N.V. 60 64 -6.3% 14.38 14.62 -1.6%
Intesa Sanpaolo S.p.A. 137 141 -2.8% 2.48 2.43 +2.1%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.99 5.95 +0.7%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 59 59 0.0% 0.69 0.69 0.0%
Metro Bank plc n/a n/a n/a 33.03 34.52 -4.3%
Nordea Bank AB 46 46 0.0% 102 109 -6.4%
Parent: RBS Group plc
Royal Bank of Scotland plc 84 86 -2.3% 2.44 2.45 -0.4%
Ult. Parent: Banco Santander S.A.
Santander UK plc 77 77 0.0% 5.65 5.49 +2.9%
Shawbrook Group plc n/a n/a n/a 2.99 3.10 -3.5%
Societe Generale 84 86 -2.3% 47.11 47.75 -1.3%
Parent: Standard Chartered plc
Standard Chartered Bank 77 80 -3.8% 7.30 7.41 -1.5%
Svenska Handelsbanken AB 41 43 -4.7% 125 127 -1.6%
Unicredit  S.p.A. 164 169 -3.0% 14.60 14.30 +2.1%
FTSE 350 BANK INDEX n/a n/a n/a 4287 4319 -0.7%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 85 87 -2.3% n/a n/a n/a

 

Sign up to receive rate alerts