News


21/11/2016


Flagstone Bank Credit Update 21 November 2016

Weekly Headlines:
  • Market attention will be firmly focussed this week on the Chancellor’s Autumn Statement for signs as to the future direction of travel for UK economic policy.
  • The Chancellor is expected to announce some modest infrastructure spending and housing stimulus measures amid expectations of a marked easing-off on deficit reduction.
  • Analysts expect the UK government to rely on fiscal policy to stimulate the economy as the BoE is unlikely to cut interest rates or increase the size of its asset purchase programme any time soon.
  • The future direction of UK interest rates appears to have been thrown into confusion after the latest CPI inflation figure of 0.9% was announced which was well below market expectations for a rise of 1.2%.
  • Eurozone economic growth is expected to continue at a modest pace over the coming year with analysts citing political uncertainty as the main factor holding back progress on eurozone growth.
  • Nationwide Building Society has announced that it is pulling out of commercial property lending in order to focus on its business with consumers amid tough economic conditions.
  • The private equity firm, WL Ross, has sold its 12% shareholding in the Virgin Money group although the share price is still below the level at which the shares were trading before the Brexit vote.
  • The ITRAXX Europe Senior Financials 5-year CDS index has risen sharply by 9.0% to 107bps on a number of concerns in addition to those associated with the election of Donald Trump as the next U.S. president.
  • The FTSE 350 Bank Index rose by 2.2% over the week as the election of Donald Trump is seen by markets as positive for the banking sector and despite some major banks experiencing falls for other reasons
General Commentary:

Market attention will be firmly focussed this week on the Chancellor’s Autumn Statement for signs as to the future direction of travel for UK economic policy. The Chancellor, Philip Hammond, is expected to announce some modest infrastructure spending and housing stimulus measures, according to a Reuter’s poll of economists that found widespread expectations of a marked easing-off on deficit reduction. Analyst forecasts range from £10.0bn to £40.0bn as to how much the borrowing projection for fiscal 2017/18 will rise.

The Reuters poll also concluded that the UK is increasingly likely to rely on fiscal policy in the future to stimulate the economy as the Bank of England (BoE) is unlikely to cut interest rates or increase the size of its asset purchase programme again any time soon. The consensus of UK growth forecasts has not changed much in the past month with modest growth of 0.2% expected for the current quarter and for the first quarter of next year. Growth of 1.1% is predicted for 2017 as a whole which is weaker than the BoE’s November forecast level of 1.4%.

Since the vote to leave the European Union, there has been a marked shift in tone about UK economic policy amid political concerns expressed about the limitations of near-zero interest rates. The change in outlook was underscored by the BoE’s recent decision to dramatically revise up its near-term growth forecast while also making clear that a weak sterling exchange rate and expected higher inflation may prevent it from doing much more. The change also fits with a global trend that has seen a run on major sovereign bond markets since Republican Donald Trump was elected the next U.S. president on fears that U.S. interest rates will rise sooner and quicker than previously expected.

The future direction of UK interest rates appears to have been thrown into confusion after the latest CPI inflation figure of 0.9% was announced last week which was well below market expectations for a rise of 1.2%. After the August interest rate move to 0.25%, analysts believe that the intention of the Monetary Policy Committee (MPC) was for interest rates to remain below 0.50% for a sustained period and would probably fall even further to 0.10% by year-end. But the post-Brexit economy appears to be showing enough resilience to dispel those thoughts. While markets are a long way from predicting an imminent UK interest rate rise, the yield on UK ten-year gilts would appear to indicate that one may be edging closer.

Eurozone economic growth is expected to continue at a modest pace over the coming year according to economists in the latest Reuters poll. These views have hardly changed in the five months since the UK voted to exit the European Union (EU) nor since the U.S. election result – with analysts citing political uncertainty as the main factor that is holding back the eurozone from making any more progress on growth. Italy holds a referendum on constitutional reforms less than a week before the next monthly ECB policy meeting and there is a packed calendar next year with national elections scheduled in Germany, France and the Netherlands.

Minutes from last month’s ECB meeting showed that policymakers believe that December could be a key month for setting future monetary policy direction. There was also evidence of concerns expressed by policymakers about weaker wage growth suggesting that further quantitative easing (QE) is possible and which would be a contrary course of action to the strong likelihood of a U.S. interest rate rise next month.

Nationwide Building Society has announced that it is pulling out of commercial property lending in order to focus on its consumer business amid tough economic conditions. When commenting on the latest interim financial results Joe Garner, Chief Executive Officer, stated that the society intends to concentrate on its core purpose of helping society and that commercial real estate does not fit with that vision. The commercial division accounts for only about 1.0% of its assets and has fallen in recent years. The society continues to grow market share while protecting savers from the fall in interest rates at the expense of boosting profits and protecting its margins. Profits fell from £802 million to £696 million in the six months to 30 September 2016. Net mortgage lending was £6.0bn, compared with £4.0bn while Nationwide’s share of the market rose to 34%, up from 21% at its financial year-end.

The private equity firm, WL Ross, has sold its 12% shareholding in the Virgin Money group at 320p each. The firm bought into Virgin Money in 2010 for £100m and then pumped in a further £250m a year later to help the bank buy the nationalised remains of Northern Rock from the Government which transformed Virgin Money into a contender in high street banking. The firm initially planned to offload only half of its shares but decided to sell them all after the disposal met with strong demand from investors. It follows a volatile time for the bank, with Virgin Money shares plunged following the Brexit vote in June, amid concerns that the economic fallout from the EU referendum result would harm the business although these worries have so far proved unfounded. However, the shares are yet to fully recover and are still priced below the level at which they traded before the vote.

The ITRAXX Europe Senior Financials 5-year CDS index rose by 9% over the week as markets factored in  potential increased credit risks for banks – of which not all are directly associated with the election of Donald Trump as the next U.S. president. Standard Chartered Bank saw its spread rise by 22.8% on fears that the combined factors of the imminent U.S. interest rate rise and the stronger U.S. dollar will have adverse consequences for emerging market economies. In addition the spreads of Italian banks were also higher due to the uncertain outcome of the Italian referendum on constitutional reforms and the potential knock-on impact on the potential recovery plans for certain of its banks.  

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: 21st November 2016
5-Year CDS Spreads (bps) Equity Share Prices 
  18-Nov-16 11-Nov-16 Chg 18-Nov-16 11-Nov-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 20.30 21.40 -5.1%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.06 1.98 +4.0%
Irish Sovereign
Allied Irish Banks 69 64 +7.8% 5.06 5.00 +1.2%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.27 14.30 -0.2%
Aust and NZ Banking Group Ltd 73 70 +4.3% 27.98 28.30 -1.1%
Banco Bilbao Vizcaya Argentaria S.A. 139 130 +6.9% 5.86 5.91 -0.8%
Parent: Barclays plc
Barclays Bank plc 91 86 +5.8% 2.12 2.01 +5.5%
BNP Paribas S.A. 83 73 +13.7% 54.39 54.75 -0.7%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.97 13.32 +4.9%
Credit Agricole S.A. 74 66 +12.1% 10.81 10.69 +1.1%
Parent: Credit Suisse Group AG
Credit Suisse AG 146 140 +4.3% 20.93 20.64 +1.4%
Deutsche Bank AG 221 213 +3.8% 14.96 14.75 +1.4%
Parent: HSBC Holdings plc
HSBC Bank plc 76 64 +18.8% 6.34 6.20 +2.3%
Parent: ING Groep N.V.
ING Bank N.V. 65 61 +6.6% 12.78 12.85 -0.5%
Intesa Sanpaolo S.p.A. 162 146 +11.0% 2.04 2.23 -8.5%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.07 4.85 +4.5%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 77 72 +6.9% 0.59 0.60 -1.7%
 
Metro Bank plc n/a n/a n/a 31.92 29.43 +8.5%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 70 73 -4.1% 97 96 +1.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 127 115 +10.4% 2.05 2.02 +1.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 82 0.0% 4.27 4.25 +0.5%
Shawbrook Group plc n/a n/a n/a 2.50 2.87 -12.9%
Societe Generale 83 69 +20.3% 40.22 39.79 +1.1%
Parent: Standard Chartered plc
Standard Chartered Bank 124 101 +22.8% 6.25 6.17 +1.3%
Svenska Handelsbanken AB 61 60 +1.7% 127 125 +1.6%
Unicredit  S.p.A. 217 197 +10.2% 1.98 2.29 -13.5%
 
FTSE 350 BANK INDEX n/a n/a n/a 3968 3882 +2.2%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 106 97 +9.0% n/a n/a n/a

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