News


23/01/2017


Flagstone Bank Credit Update 23 January 2017

Headlines:
  • The UK economy grew by 0.6% in the third quarter, according to the ONS on the third estimate which was a faster growth rate than the 0.50% reported for previous estimates.
  • Analysts predict that the UK GDP growth rate in the final quarter of the year is likely to be positive at 0.5% (2.0% annualised).
  • UK retail sales fell in December at the fastest rate in nearly five years according to ONS official figures dropping by 1.9% from November which was the biggest monthly drop reported since April 2012.
  • The annual rate of consumer price inflation rose to 1.6% in December which was the highest level reported since July 2014 and up from 1.2% in November.
  • UK unemployment fell by 52,000 to 1.6 million in the three months to November – the lowest level for more than a decade – while the jobless rate was steady at an 11-year low of 4.8%.
  • HSBC and UBS have announced that they are likely to each move about 1,000 jobs out of London as they prepare for the expected disruption caused by Britain’s exit from the EU.
  • Barclays has decided to contest the claim by the U.S. Department of Justice that it misrepresented the quality of $31bn (£25bn) of mortgage securities in the run-up to the 2008 financial crisis.
  • Although the FTSE 350 Bank Index reduced only slightly by 0.4% over the week to 4,292, most major European banking shares fell by up to 3.5% on fears of U.S. isolationist trading policies.
  • The ITRAXX Europe Senior Financials 5-year CDS Index improved by 4.2% over the month to 86bps as markets reacted positively to the encouraging eurozone economic signs.
General Commentary:

The official third estimate of Q3-2016 GDP growth from the Office for National Statistics (ONS) indicates that the UK economy grew by 0.6% in the third quarter which was a faster growth rate than for previous estimates for 2016. Growth for the July-to-September period had originally been estimated at 0.5%. The latest data suggested that the business and financial sectors were more active than previously estimated. The ONS also said that growth in the third quarter of the year was helped by robust consumer demand. However, the ONS trimmed its estimates of growth in the first and second quarter of the year. It now estimates that the economy grew by 0.3% in the first quarter, compared with an earlier figure of 0.4%, and has cut its estimate for second-quarter growth to 0.6% from 0.7%. Analysts predict that the UK GDP growth rate in the final quarter of the year is likely to be positive at 0.5% (2.0% annualised).

Retail sales fell in December at the fastest rate in nearly five years according to ONS official figures. Higher prices and Black Friday deals in November appear to have caused consumers to buy less of everything from household goods to food and clothing. Volumes dropped by 1.9% from November which was the biggest monthly drop since April 2012 and greater than the 0.1% decline expected by economists. Compared with a year ago, sales were up by 4.3% but below forecast growth of 7.2%.

Economists warn that steeper inflation is likely to be the theme for the rest of the year as higher prices reduce disposable income and hurt consumer spending power. The annual rate of consumer price inflation (CPI) rose to 1.6% in December which was the highest level reported since July 2014 and up from 1.2% in November. The consensus view of analysts was for an annual inflation increase of 1.4%. The ONS said that higher prices were likely to have had an impact on spending, as shop prices rose at the fastest rate in three years in December, increasing on an annual basis by 0.9%. Excluding petrol and diesel, prices increased by 0.1% which was the first gain since 2014.

Official figures from the ONS indicated that UK unemployment fell by 52,000 to 1.6 million in the three months to November – the lowest level for more than a decade – while the jobless rate was steady at an 11-year low of 4.8%. The employment rate was steady at a record 74.5% although wage growth picked up pace. Average weekly earnings (excluding bonuses) increased by 2.7% compared with a year earlier. Growth in pay including bonuses rose 0.2 percentage points to 2.8% for the year to November. However, the number of people in work slipped by 9,000 to just over 31.8 million.

Official data indicates that the Chinese economy grew by 6.7% in 2016, which compares with 6.9% for the previous year, its slowest annual growth since 1990. However the figure was in line with the country’s official growth target of between 6.5% and 7.0%. China is a key driver of the global economy and any growth slowdown is a major concern for investors around the world. Some analysts are encouraged by data that indicates an annual growth rate of 6.8% in the last three months of 2016 – a slightly faster pace than the rest of the year. However some observers caution that the country’s growth was actually much weaker than the official data would suggest.

Two of Europe’s biggest banks – HSBC and UBS – have announced that they are likely to each move about 1,000 jobs out of London as they prepare for the expected disruption caused by the UK’s exit from the European Union (EU). There are also strong rumours that Goldman Sachs is considering halving its London workforce to 3,000 and moving key operations to New York and continental Europe, particularly Frankfurt, where it too could move up to 1,000 staff. Other banks are expected to announce more concrete plans for how they will adapt to Brexit in the coming months after Prime Minister Theresa May confirmed in a speech last week that the UK would leave the European single market.

Barclays has decided to contest the claim by the U.S. Department of Justice (DoJ) over its role in the selling of toxic mortgage securities in the run-up to the 2008 financial crisis. A lawsuit filed last month by the DoJ accuses the bank of misrepresenting the quality of $31bn (£25bn) of home loans between 2005 and 2007. Lawyers acting for the bank will submit a motion to dismiss the lawsuit in New York in the next 90 days. Barclays is the only bank that so far has contesting the allegation that it deceived investors. U.S. regulators have collected over $60bn in fines from lenders including Bank of America, Goldman Sachs and Citigroup. Last month Deutsche Bank agreed to pay $7.2bn after protracted negotiations with authorities while many analysts expect the Royal Bank of Scotland plc to be the subject of a similar settlement claim in the near future.

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: 23rd January 2017
5-Year CDS Spreads (bps) Equity Share Prices
20-Jan-17 13-Jan-17 Chg 20-Jan-17 13-Jan-17 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. 61 74 -17.6% 22.38 22.55 -0.8%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.19 2.18 +0.5%
Irish Sovereign
Allied Irish Banks 64 63 +1.6% 4.92 5.20 -5.4%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.83 14.50 +2.3%
Aust and NZ Banking Group Ltd 65 67 -3.0% 29.40 30.67 -4.1%
Banco Bilbao Vizcaya Argentaria S.A. 122 127 -3.9% 6.12 6.24 -1.9%
Parent: Barclays plc
Barclays Bank plc 82 80 +2.5% 2.27 2.35 -3.4%
BNP Paribas S.A. 83 87 -4.6% 60.06 62.16 -3.4%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.46 14.50 -0.3%
Credit Agricole S.A. 72 77 -6.5% 12.39 12.59 -1.6%
Parent: Credit Suisse Group AG
Credit Suisse AG 116 119 -2.5% 15.55 16.12 -3.5%
Deutsche Bank AG 156 165 -5.5% 18.06 18.15 -0.5%
Parent: HSBC Holdings plc
HSBC Bank plc 69 71 -2.8% 6.78 6.78 0.0%
Parent: ING Groep N.V.
ING Bank N.V. 62 67 -7.5% 13.36 13.78 -3.0%
Intesa Sanpaolo S.p.A. 127 134 -5.2% 2.47 2.47 0.0%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.66 5.67 -0.2%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 70 72 -2.8% 0.65 0.66 -1.5%
Metro Bank plc n/a n/a n/a 31.70 31.27 +1.4%
Nationwide Building Society 80 80 0.0% n/a n/a n/a
Nordea Bank AB 65 65 0.0% 104 101 +3.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 113 118 -4.2% 2.21 2.21 0.0%
Ult. Parent: Banco Santander S.A.
Santander UK plc 81 81 0.0% 5.13 5.15 -0.4%
Shawbrook Group plc n/a n/a n/a 2.42 2.55 -5.1%
Societe Generale 82 87 -5.7% 45.84 47.48 -3.5%
Parent: Standard Chartered plc
Standard Chartered Bank 107 117 -8.5% 7.53 7.19 +4.7%
Svenska Handelsbanken AB 55 56 -1.8% 129 126 +2.4%
Unicredit  S.p.A. 164 175 -6.3% 2.69 2.67 +0.7%
FTSE 350 BANK INDEX n/a n/a n/a 4292 4309 -0.4%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 86 90 -4.2% n/a n/a n/a

 

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