News


22/05/2017


Flagstone Bank Credit Update 22 May 2017

Monthly Headlines:
  • The UK inflation rate, as measured by the Consumer Prices Index, rose last month to its highest level since September 2013 and now stands at 2.7%.
  • The ONS has reported that the UK unemployment rate has fallen to 4.6% which is the lowest level recorded in 42 years with the number of unemployed falling by 53,000 to 1.54m in the three months to March.
  • The influential EY Item Club cautions that in their view unemployment is set to rise from a low point of 4.6% this year to 5.4% in 2018 and to 5.8% in 2019 amid a predicted slower growth in new jobs.
  • The latest CBI industrial trends report indicates that the UK manufacturing sector has hit a three-year high thanks to the fall in the value of the pound which boosted exports and a wider revival in world trade.
  • The ONS has reported that UK retail sales staged a surprise revival in April as the volume of goods sold (including fuel) rose by 2.3% compared with March which was well above analyst expectations of 1.0%.
  • The UK government has announced that it has sold its remaining shares in Lloyds Banking Group which has been returned to the private sector eight years after the government invested £20.0bn to save it.
  • Despite the imminent shareholders’ court case, the price of RBS shares rose slightly over the week on broker “buy” recommendations based on the strong performance of the core business.
  • The Allied Irish Banks p.l.c. share price rose sharply by 17.3% over the week on growing expectations that the Irish Government will shortly give the go-ahead on the long-awaited flotation of the bank.
  • The FTSE 350 Bank Index rose by 0.3% over the week to 4,319 continuing the upward trend after the outcome of the French presidential elections which resulted in a win by the centralist candidate, Macron.
  • The ITRAXX Europe Senior Financials 5-year CDS Index has given up some of its recent margin improvements, increasing by 5.4% to 71bps over the week as markets put the French presidential election win behind them.
General Commentary:

Official figures from the Office for National Statistics (ONS) showed that the UK inflation rate, as measured by the Consumer Prices Index (CPI), rose last month to its highest level since September 2013. Inflation now stands at 2.7% which is up from 2.3% in March and well above the 2.0% target level set by the Bank of England (BoE). The main reason for the increase was higher air fares which partly rose because of the later date of Easter this year compared with 2016. Rising prices for vehicle excise duty, clothing and electricity also played a part but a fall in the price of petrol and diesel slightly offset this.

The BoE has repeated its prediction that inflation as measured by the Consumer Prices Index (CPI) would peak at just below 3.0% just this year. The BoE also warned that 2017 would be a more challenging time for UK consumers as inflation rises and wage growth lags behind inflation for the first time since mid-2014.

Meanwhile the ONS has reported that the UK unemployment rate has fallen to 4.6% which is the lowest level recorded in 42 years. The number of unemployed people fell by 53,000 to 1.54m in the three months to March while the employment rate has reached 74.8% which is the highest level reached since records began in 1971.

However the influential EY Item Club cautions that in their view unemployment is set to rise from its low point of 4.6% this year to 5.4% in 2018 and to 5.8% in 2019 amid a predicted slower growth in new jobs. The Item Club said that a slowing supply of jobs is behind its forecast as employers adjust to a tightening labour market by greater use of existing staff. The Item Club argues that as the proportion of people in work climbs ever higher firms will find it more difficult to fill vacancies resulting in greater utilisation of the existing workforce and slower jobs growth. However on the positive side the Item Club believes that lower growth in the workforce may deliver a boost to productivity in what has been a long period of insipid productivity growth.

The latest UK industrial trends report from the Confederation of British Industry (CBI) indicates that the manufacturing sector has hit a three-year high thanks to the fall in the value of the pound which boosted exports and thanks to a wider revival in world trade. Output for the three months to May was at its highest since December 2013 underpinned by strong demand in the mechanical engineering and chemicals sectors. Manufacturers are optimistic of another rise in production in the next quarter.

The CBI report is consistent with the findings of this month’s Markit/CIPS purchasing managers’ index (PMI) survey which also showed that activity among UK manufacturers was strong having reached a three-year high amid demand at home and from Europe, Africa, Brazil and North America. Manufacturing accounts for only 10% of the economy but the upturn is welcome news after a sharp slowdown in growth in the first quarter when GDP slipped to 0.3%.

The ONS has reported that UK retail sales staged a surprise revival in April as shoppers appear to have shrugged off growing concerns about rising inflation and a slowing economy. The volume of goods sold (including fuel) rose by 2.3% compared with March which was the fastest monthly rate of growth since January and was well above analyst expectations of 1.0%. Retail sales increased by 4.0% compared with April last year. The surge in retail sales has compensated for a weak first quarter when they recorded their biggest quarterly fall in seven years when down by 1.4%. The ONS has suggested that the warmest April in more than 100 years has helped to boost demand for food, home improvements and gardening equipment. Consumer spending has been a key driver of growth and analysts hope that the strong April figures suggest the economy will regain momentum after the lacklustre GDP growth for the first three months of the year.

The UK government has announced that it has sold at a modest profit its remaining shares in Lloyds Banking Group which has been returned to the private sector eight years after the government invested £20.0bn to save it. The Group has stated that the government will see a return of £21.2bn on its investment and is expected to make a profit for taxpayers of at least £900m from the bailout.

The return of Lloyds Banking Group to the stock market is in stark contrast to the Royal Bank of Scotland (RBS) that is still 73% owned by taxpayers after the Government spent £45.5 billion to bail the bank out at the height of the financial crisis. Despite the imminent court case against the bank brought as a class action by shareholders who lost money in the ill-fated 2008 rights issue, the price of RBS shares rose slightly over the week on broker “buy” recommendations based on the strong performance of the core business including an improving trend in the net interest margin.

The price of the existing small publicly-traded shares of Allied Irish Banks p.l.c. (AIB) rose sharply by 17.3% over the week on growing expectations that the Irish Government will shortly give the go-ahead on the long-awaited flotation of the bank in order to return it to the private sector. Analysts believe that the Irish Government is most likely to give the go-ahead for a stock exchange announcement of the intention to float an initial 25% stake on the stock market before the next leader of Fine Gael is selected on the 2nd June. The sale could raise between €2.5bn and €3.0bn according to analysts.

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: 22nd May 2017
5-Year CDS Spreads (bps) Equity Share Prices
19-May-17 12-May-17 Chg 19-May-17 12-May-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 23.57 24.53 -3.9%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.55 2.52 +1.2%
Irish Sovereign
Allied Irish Banks 44 42 +4.8% 7.20 6.14 +17.3%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.65 14.95 -2.0%
Aust and NZ Banking Group Ltd 60 55 +9.1% 28.50 29.22 -2.5%
Banco Bilbao Vizcaya Argentaria S.A. 87 79 +10.1% 7.41 7.39 +0.3%
Parent: Barclays plc
Barclays Bank plc 62 59 +5.1% 2.14 2.06 +3.9%
BNP Paribas S.A. 58 55 +5.5% 65.67 66.56 -1.3%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.04 16.26 -1.4%
Credit Agricole S.A. 58 55 +5.5% 14.32 14.29 +0.2%
Parent: Credit Suisse Group AG
Credit Suisse AG 79 78 +1.3% 14.05 14.74 -4.7%
Deutsche Bank AG 102 98 +4.1% 17.09 17.19 -0.6%
Parent: HSBC Holdings plc
HSBC Bank plc 52 48 +8.3% 6.66 6.78 -1.8%
Parent: ING Groep N.V.
ING Bank N.V. 48 48 0.0% 15.09 15.32 -1.5%
Intesa Sanpaolo S.p.A. 125 117 +6.8% 2.80 2.83 -1.1%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 6.01 5.88 +2.2%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 55 50 +10.0% 0.72 0.69 +4.3%
Metro Bank plc n/a n/a n/a 37.33 35.13 +6.3%
Nordea Bank AB 39 36 +8.3% 115 113 +1.8%
Parent: RBS Group plc
Royal Bank of Scotland plc 76 72 +5.6% 2.63 2.59 +1.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 73 70 +4.3% 5.83 6.03 -3.3%
Shawbrook Group plc n/a n/a n/a 3.41 3.41 0.0%
Societe Generale 58 55 +5.5% 50.02 49.70 +0.6%
Parent: Standard Chartered plc
Standard Chartered Bank 70 61 +14.8% 7.36 7.46 -1.3%
Svenska Handelsbanken AB 38 36 +5.6% 125 126 -0.8%
Unicredit  S.p.A. 136 136 0.0% 16.80 17.01 -1.2%
FTSE 350 BANK INDEX n/a n/a n/a 4319 4306 +0.3%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 71 67 +5.4% n/a n/a n/a

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