News


24/10/2016


Flagstone Bank Credit Update 24 October 2016

Weekly Headlines:
  • Analysts appear divided between those who believe that the Monetary Policy Committee will hold Bank Rate at 0.25% in November and those who forecast a cut to 0.10% may still happen then.
  • The UK consumer price index rose to 1.0% in the year to September, compared with a 0.6% rise in the year to August, which is the fastest cost of living rise in two years.
  • The Governor of the Bank of England is prepared to let inflation overshoot its official target of 2.0% to keep the economy on an even keel as the UK negotiates the terms of its exit from the EU.
  • GDP growth figures this week are expected to show that so far the UK economy has shrugged-off most of the impact of the Brexit vote with growth forecast to have reached 0.4% in the third quarter.
  • The Chancellor is expected to pump at least £20.0bn a year into UK infrastructure as part of a new industrial strategy to help cushion the likelihood of a UK growth slowdown to around 1.0% in 2017.
  • The Treasury has borrowed £45.5bn in the first six months of the financial year and borrowing is expected to overshoot the OBR’s full-year borrowing forecast by £14.0bn for the full year.
  • Fitch has cut its outlook for Italy to “Negative” while S&P has raised its outlook for France to “Stable”.
  • The Royal Bank of Scotland is braced for the European Commission to take control of a section of its business for failing to meet promises to sell 300 branches as part of its 2008 taxpayer bailout.
  • Although the Arbuthnot Banking Group share price fell by 13.8% last week, this was due to a technical adjustment after the declaration of a 3% special dividend to investors supported by strong financials.
  • The ITRAXX Europe Senior Financials 5-year index improved by 6.8% to 94bps from 101bps as calm returned to the markets as Deutsche Bank continues to negotiate a settlement with the U.S. DoJ.
  • The FTSE 350 Bank Index rose by 3.5% over the week as investors continue to hope that the final Deutsche Bank settlement figure with the DoJ will be substantially lower.
General Commentary:

With the economy looking healthier than expected after the Brexit vote, analysts appear divided between those who believe that the Monetary Policy Committee (MPC) will hold Bank Rate at 0.25% in November and those who forecast a cut to 0.10% may still happen then. Most believe that the MPC will hold-off in November from approving any more Quantitative Easing (QE) or corporate bond purchases. The MPC may also prefer to wait until the content of the Chancellor’s Autumn Statement is known before taking further action. If the Bank of England does leave interest rates unchanged in November, most analysts expect interest rates to go down to 0.10% early in 2017. 

As predicted by most analysts, the UK consumer price index rose to 1.0% in the year to September, compared with a 0.6% rise in the year to August. This is the fastest cost of living rise in two years as everyday goods, fuel and eating out became more expensive. Inflation is expected to rise sharply over the next year due mainly to the fall in the value of sterling and higher energy prices. Many analysts expect the rate to exceed the Bank of England’s target of 2.0% in 2017.

The Bank of England Governor, Mark Carney, has publicly stated that he is prepared to let inflation overshoot its official target rate of 2.0% to keep the economy on an even keel as the UK negotiates the terms of its exit from the European Union (EU). However the Office for National Statistics (ONS) has declared that the sharp rise in September’s inflation figures was not down to the fall in the value of the pound, as was widely expected, but instead was largely due to extremely low prices a year ago.

The latest GDP growth figures from the ONS this week are expected to show that the UK economy has shrugged-off most of the impact of the Brexit vote so far. Growth is forecast to have reached 0.4% in the third quarter, confounding fears that output would tumble in the wake of the referendum result. Although the economy has slowed since growth of 0.7% was reported in the second quarter, it is expected to have grown at the same pace as in the first three months of the year. However economists fear that tougher times lie ahead as business investment appears to have already begun to wane and consumers are likely to rein in their spending as weaker sterling drives up the price of imported goods.

The Chancellor is expected to pump at least £20.0bn a year into UK infrastructure as part of a new industrial strategy to help cushion the likelihood of a UK growth slowdown to an annual rate of around 1.0% in 2017. Ahead of next month’s autumn statement on the 23rd November, the Chancellor is understood to be drawing up a list of small road, rail, and housing projects designed to deliver a swift economic boost as part of his fiscal reset and is thought to have discussed new funding needs for hundreds of ‘shovel-ready’ schemes totalling at least 1% of UK GDP.

However a recent deterioration in the public finances has limited the Chancellor’s room for manoeuvre and underlined the need for smaller ‘value for money’ improvements. Official figures released last week showed the Treasury has borrowed £45.5bn in the first six months of the financial year, and the Institute for Fiscal Studies believes that the Treasury is on course to overshoot the Office for Budget Responsibility’s full-year borrowing forecast by £14.0bn. In order for the forecast to be met, borrowing would have to total only £10.0bn over the next six months. Analysts believe that such an outcome is unlikely, even with the windfall of self-assessment income tax receipts that the government receives in January and February 2017.

Fitch has cut its outlook for Italy to “Negative” citing that weak growth, high debt and the uncertain outcome of a planned referendum are posing risks to the third-largest economy in the Eurozone. Fitch believes that political uncertainty has increased since the last review ahead of the vote on constitutional reform with polls now suggesting its outcome is too close to call. In addition the latest vote-pleasing budget measures which include an upward revision to the deficit target risks breaking Eurozone fiscal rules that requires governments to make progress every year towards balancing their books or achieving a surplus. Analysts believe that Italy’s banking sector and its €200.0bn of bad loans pose another risk to the economy while the outcome of rescue plans for Banca Monte dei Paschi di Siena is also uncertain.

Standard & Poor’s has raised its outlook for France to “Stable” citing the positive effect of labour and tax reforms introduced in the last two years. In the first positive rating action for France since the loss of its triple-A sovereign rating in 2012, the rating agency said the reforms carried out since President Hollande’s pro-business reforms in 2013 should boost job creation, competitiveness and the public finances. In July the French socialist government forced through parliament reforms designed to make France’s protective labour laws more flexible.

The Royal Bank of Scotland (RBS) is bracing itself for the European Commission to take control of a section of its business as punishment for failing to meet promises made as part of its 2008 taxpayer bailout. The Bank has just 10 weeks left to announce a sale of a network of 300 branches in order to meet a deadline agreed with Brussels. The disposal was one of five conditions imposed on RBS when it accepted a £46.0bn rescue from British taxpayers. A planned sale of the Williams & Glyn business to Santander UK plc appears to have hit the buffers leaving the Bank short of time to find an alternative plan. Analysts believe other credible bidders are wary of the complex technology issues involved in the sale. If the Bank fails to agree a sale by year-end, European Commission officials will be entitled to appoint a trustee to seize control of the sale process. The trustee would be legally obliged to find the best way to meet the terms of the agreement with Brussels, even if that proved costly to the bank’s shareholders.

Although the FTSE 350 Bank Index rose by an average of 3.5% over the week, shares in Arbuthnot Banking Group fell by 13.8%. However this was due to a strong performance in the first half of the year which resulted in a first half profit of over £225.0 million. As a result the Group’s board declared the payment of a special dividend of £3.00 per share which equates to approximately £45 million. As this dividend will be paid on 18 November 2016 to shareholders on the register on 21 October 2016, the shares have undergone a technical adjustment to reflect the dilution in value so the movement is not linked to any credit concerns.   

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: 24th October 2016
5-Year CDS Spreads (bps) Equity Share Prices 
  21-Oct-16 14-Oct-16 Chg 21-Oct-16 14-Oct-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 19.82 19.35 +2.4%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.74 1.66 +4.8%
Irish Sovereign
Allied Irish Banks 61 60 +1.7% 5.60 5.00 +12.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.00 16.24 -13.8%
Aust and NZ Banking Group Ltd 68 68 0.0% 28.25 27.53 +2.6%
Banco Bilbao Vizcaya Argentaria S.A. 124 127 -2.4% 6.17 5.70 +8.2%
Parent: Barclays plc
Barclays Bank plc 102 107 -4.7% 1.83 1.70 +7.6%
BNP Paribas S.A. 71 75 -5.3% 51.64 48.20 +7.1%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.40 13.32 +0.6%
Credit Agricole S.A. 67 72 -6.9% 9.54 9.21 +3.6%
Parent: Credit Suisse Group AG
Credit Suisse AG 132 140 -5.7% 21.66 21.25 +1.9%
Deutsche Bank AG 212 226 -6.2% 13.12 12.24 +7.2%
Parent: HSBC Holdings plc
HSBC Bank plc 76 82 -7.3% 6.26 6.20 +1.0%
Parent: ING Groep N.V.
ING Bank N.V. 65 68 -4.4% 11.79 11.28 +4.5%
Intesa Sanpaolo S.p.A. 132 139 -5.0% 2.11 1.98 +6.6%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.90 4.74 +3.4%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 87 95 -8.4% 0.55 0.52 +5.8%
 
Metro Bank plc n/a n/a n/a 27.16 26.63 +2.0%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 72 72 0.0% 93 89 +4.5%
Parent: RBS Group plc
Royal Bank of Scotland plc 131 139 -5.8% 1.90 1.73 +9.8%
Ult. Parent: Banco Santander S.A.
Santander UK plc 83 83 0.0% 4.33 4.05 +6.9%
Shawbrook Group plc n/a n/a n/a 2.47 2.40 +2.9%
Societe Generale 69 72 -4.2% 34.70 32.85 +5.6%
Parent: Standard Chartered plc
Standard Chartered Bank 108 119 -9.2% 7.06 6.52 +8.3%
Svenska Handelsbanken AB 64 67 -4.5% 125 121 +3.3%
Unicredit  S.p.A. 168 180 -6.7% 2.28 2.11 +8.1%
 
FTSE 350 BANK INDEX n/a n/a n/a 3830 3701 +3.5%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 94 101 -6.8% n/a n/a n/a

Sign up to receive rate alerts