News


24/04/2017


Flagstone Bank Credit Update 24 April 2017

Weekly Headlines:
  • ONS official figures this week are expected to show that growth in the UK economy has slowed in the first quarter with economists forecasting GDP growth of just 0.4%, the slowest rate of growth in a year.
  • The latest ONS UK retail sales figures unexpectedly fell by -1.8% in March compared with February and by -1.4% year-on-year on a quarterly basis, while economists’ consensus was for a monthly fall of -0.2%.
  • The IMF has raised its forecast for global growth in 2017 to 3.5% from 3.4% but has left its estimate for 2018 growth unchanged at 3.6% while warning of possible “disruptive factors”.
  • The IMF has revised up its UK growth forecast for this year for the second time in three months to 2.0% after admitting that the post-Brexit performance of the UK economy has been stronger than expected.
  • Michael Saunders, an external member of the MPC, has hinted that UK interest rates may need to rise soon as he anticipates that economic growth and inflation are set to exceed expectations
  • The chancellor has announced that the UK government has recovered all of the £20.3bn injected into Lloyds Banking Group to rescue the stricken lender in 2008 with the remaining 1.9% of shares to be sold off soon.
  • The UK Ministry of Justice is seeking to join the shareholder lawsuit against RBS over its £12.0bn rights issue in the latest escalation of the legal fight between the bank and embittered investors.
  • The FTSE 350 Bank Index fell slightly by 1.6% over the week to 4,036 on concerns about the outcome of the French presidential elections although bizarrely French bank shares rose after recent losses.
  • The ITRAXX Europe Senior Financials 5-year CDS Index improved by 3.1% over the week to 91bps on hope that a strong Conservative majority outcome to the UK general election would be positive for Brexit talks.
General Commentary:

Official figures this week from the Office for National Statistics (ONS) are expected to show that growth in the UK economy has slowed in the first quarter as rising prices are expected to bring the post-referendum consumer boom to an end. Economists have forecast GDP growth of just 0.4% for the first three months of the year which is down from 0.7% in the final quarter of 2016 and the slowest rate of growth in a year. If the prediction proves to be accurate then analysts believe the figures will confirm that cracks are beginning to appear in the economy which has been far more resilient than feared after the EU referendum last June.

This more pessimistic view is supported by the latest ONS UK retail sales figures which unexpectedly fell by -1.8% in March compared with February and by -1.4% year-on-year on a quarterly basis. Economists’ consensus was for a monthly fall of -0.2%. This is the biggest quarterly fall since 2010 as the prices of every day goods continue to climb. The ONS reported that demand for all types of goods had fallen except for textiles, clothing and footwear. The biggest falls were seen in sales of household goods and petrol. The ONS said average store prices had increased by 3.3% on the year which is the highest price growth reported since March 2012. The largest contribution came from petrol where prices were up by some 16.4% on the year.

Meanwhile the International Monetary Fund (IMF) has raised its forecast for global growth in 2017 to 3.5% from 3.4% but has left its estimate for 2018 growth unchanged at 3.6% while warning of possible “disruptive factors” such as protectionism in the U.S. and maybe in France. Despite the above concerns about the UK economy, the IMF has also revised up its UK growth forecast for this year for the second time in three months after admitting that the performance of the UK economy since the Brexit vote last year has been stronger than expected. In its half-yearly World Economic Outlook the IMF stated that it now envisaged the UK economy expanding by 2.0% in 2017 – up from 1.5% three months ago – which would make the UK the second fastest-growing advanced economy after the U.S.

Michael Saunders, an external member of the Monetary Policy Committee (MPC), has hinted that UK interest rates may need to rise soon as he anticipates that economic growth and inflation are set to exceed expectations. Speaking to the Federation of Small Businesses, Mr. Saunders said that any interest rate rises would need to be limited and gradual but added that in his view such a move would not cause damage to the outlook for the UK economy. With the fall in the pound since the Brexit vote still passing through to inflation (which remained at a three-year high of 2.3% in March), Mr. Saunders believes that consumer prices were likely to increase faster than the Bank of England’s estimate of 2.75% and that CPI inflation could reach 3.0% later this year or early in the next. However he added that the sudden sharp rise in consumer prices does not mean that a post-Brexit UK will face persistently high inflation. If Mr. Saunders votes for an interest rate rise at next month’s MPC meeting he would join Kristin Forbes in looking to increase rates from their record low of 0.25% but financial markets do not expect a rise until the end of 2018.

At the International Monetary Fund (IMF) meeting in Washington, the UK Chancellor announced that the government has recovered all of the £20.3bn injected into Lloyds Banking Group to rescue the stricken lender in 2008. A full return to private ownership of the remaining 1.9% holding is expected within the next few months. However the government still owns 72% of Royal Bank of Scotland and the share sale plan has been put on hold amid warnings that the stake may have to be sold at a loss. Another £22.0bn remains held in the nationalised assets of Northern Rock and Bradford & Bingley.

The UK Ministry of Justice is seeking to join the shareholder lawsuit against Royal Bank of Scotland (RBS) over its £12.0bn rights issue in the latest escalation of the legal fight between the bank and embittered investors. The Accountant General of the Senior Court has applied to join the action before the trial next month. The ministry is said to want to represent people including children and the estates of people who have died intestate and who may not be able to pursue claims. However the application may be unsuccessful because claimants must usually launch a case within six years of when they could reasonably have found out about the offence. The RBS lawsuit began in 2008, brought by investors who had bought shares in a cash-call in that year and had lost most of their money when the bank collapsed a few months later. The investors are suing for compensation alleging that RBS did not give a proper picture of its finances. The bank has settled with four of five groups that originally sued.

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: 24th April 2017
5-Year CDS Spreads (bps) Equity Share Prices 
21-Apr-17 14-Apr-17 Chg 21-Apr-17 14-Apr-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 22.58 21.98 +2.7%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.35 2.28 +3.1%
Irish Sovereign
Allied Irish Banks 55 55 0.0% 5.00 5.05 -1.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.78 14.90 -0.8%
Aust and NZ Banking Group Ltd 58 57 +1.8% 31.81 31.90 -0.3%
Banco Bilbao Vizcaya Argentaria S.A. 114 114 0.0% 7.10 6.86 +3.5%
Parent: Barclays plc
Barclays Bank plc 78 81 -3.7% 2.08 2.13 -2.3%
BNP Paribas S.A. 89 96 -7.3% 62.00 58.30 +6.3%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.49 16.16 +2.0%
Credit Agricole S.A. 86 93 -7.5% 12.43 11.91 +4.4%
Parent: Credit Suisse Group AG
Credit Suisse AG 105 106 -0.9% 14.43 14.40 +0.2%
Deutsche Bank AG 127 130 -2.3% 15.57 15.13 +2.9%
Parent: HSBC Holdings plc
HSBC Bank plc 63 66 -4.5% 6.24 6.44 -3.1%
Parent: ING Groep N.V.
ING Bank N.V. 63 63 0.0% 13.81 13.81 0.0%
Intesa Sanpaolo S.p.A. 155 154 +0.6% 2.51 2.44 +2.9%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.64 5.50 +2.5%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 68 69 -1.4% 0.64 0.63 +1.6%
Metro Bank plc n/a n/a n/a 34.55 33.75 +2.4%
Nordea Bank AB 43 43 0.0% 103 101 +2.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 96 98 -2.0% 2.40 2.28 +5.3%
Ult. Parent: Banco Santander S.A.
Santander UK plc 76 78 -2.6% 5.67 5.49 +3.3%
Shawbrook Group plc n/a n/a n/a 3.39 3.37 +0.6%
Societe Generale 90 97 -7.2% 46.29 43.51 +6.4%
Parent: Standard Chartered plc
Standard Chartered Bank 79 81 -2.5% 6.86 7.10 -3.4%
Svenska Handelsbanken AB 43 43 0.0% 121 121 0.0%
Unicredit  S.p.A. 175 176 -0.6% 13.64 12.89 +5.8%
FTSE 350 BANK INDEX n/a n/a n/a 4036 4101 -1.6%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 91 94 -3.1% n/a n/a n/a

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