News


26/09/2016


Flagstone Bank Credit Update 26 September 2016

Weekly Headlines:

• The OECD has backtracked on its warning that Brexit would damage the economy – upgrading its growth forecast for this year to 1.8% from 1.7% in June – but did cut the outlook for 2017 by half to only 1.0%.

• The UK Chancellor acknowledged the OECD outlook for 2017 and the likelihood of some difficult times ahead but remains confident that the UK has the tools necessary to support the economy.

• MPC member, Kristin Forbes, has broken ranks by stating that in her view the BoE does not have to cut interest rates further to tackle the negative effects of the Brexit vote.

• Confidence among UK consumers appears set to continue to rebound from its post-Brexit downturn with the GfK monthly consumer confidence indicator improving to -4 this month, from -7 last month.

• With inflation and unemployment low there is little sign of any imminent consumer belt-tightening but the BoE believes that companies across the UK are scaling back expansion plans.

• Economists forecast that the UK’s current account deficit will have narrowed slightly in the second quarter to £30.4bn but remains a key risk if overseas investors were to stop buying UK assets.

• The FTSE 350 Bank Index improved slightly over the week by 1.6% underpinned by the Fed decision not to increase U.S. interest rates.

• Although the ITRAXX Europe Senior Financials 5-year CDS index rose only slightly to 97bps from 96bps, the spreads of major banks rose between 5% and 13% on contagion fears after the DoJ shock settlement claim for $14.0bn against Deutsche Bank for their role in the mis-selling of mortgage-backed securities.

General Commentary:

Last week the Organisation for Economic Co-operation and Development (OECD) backtracked on its warning that a Brexit vote would damage the UK economy by upgrading its growth forecast for this year and stating that swift action by the Bank of England (BoE) had helped to bolster activity. The OECD estimated the UK economy would suffer less than initially feared as a result of the vote in June to leave the European Union (EU). It has forecast UK growth of 1.8%, up from 1.7% in June. However it did cut the outlook for 2017 by half to only 1.0% citing the ongoing uncertainty about the UK’s trading relationship with the EU as the main reason.

The Chancellor, Philip Hammond, acknowledged the uncertainty reflected in the OECD outlook and the likelihood of some difficult times ahead but is confident that the UK has the tools necessary to support the UK economy as we adjust to a new relationship with the EU which will be outlined in the UK government’s first budget plans on the 23rd November.

Kristin Forbes, a member of the Monetary Policy Committee (MPC), has broken ranks by stating that in her view the BoE does not have to cut interest rates further to tackle the negative effects of the Brexit decision. She added that the current interest rate of 0.25% was low enough to prevent the economy from slipping into a recession. Ms Forbes had backed the vote to cut interest rates from 0.50% to 0.25% in August but now believes that the UK economy has not faltered to the levels that were predicted earlier and that she was confident it would recover without the need to cut rates to nearer 0%. These views appear to be at odds with a new Brexit warning last week from the BoE that the UK economy faces a challenging period that could undermine financial stability in the short term.

Confidence among UK consumers appears set to continue to rebound from its post-Brexit downturn in the latest sign that the economy is shrugging off the initial effects of the Brexit decision. The expected bounce when consumer confidence figures for September are released on Thursday is expected to show that sentiment has recovered close to its level before the referendum. Economists are forecasting a rise in GfK’s monthly consumer confidence indicator to -4 this month, from -7 last month. The closely watched gauge fell to -12 in July.

With inflation and unemployment low, there is little sign that a bout of consumer belt-tightening is in the offing but many economists still expect a gradual slowdown in growth as the ongoing uncertainty over Brexit is likely to make businesses reluctant to invest or to take on new staff. According to a report from the Bank of England’s regional agents last week, companies across the UK are scaling back their expansion plans.

Official figures this week are set to show the extent of the UK’s large trade gap with the rest of the world going into the referendum. Economists forecast that the UK’s current account deficit will have narrowed slightly to £30.4bn in the second quarter but which remains very high. The fall in the value of sterling since the referendum should help cut the deficit but the Bank of England (BoE) warned last week that the trade gap remains a key risk if overseas investors were to stop buying UK assets.

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: 26th September 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 23-Sep-16 16-Sep-16 Chg 23-Sep-16 16-Sep-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 18.60 18.20 +2.2%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.75 1.70 +2.9%
Irish Sovereign
Allied Irish Banks 59 56 +5.4% 6.00 6.05 -0.8%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.10 15.50 -2.6%
Aust and NZ Banking Group Ltd 68 65 +4.6% 27.59 26.36 +4.7%
Banco Bilbao Vizcaya Argentaria S.A. 120 117 +2.6% 5.49 5.23 +5.0%
Parent: Barclays plc
Barclays Bank plc 94 87 +8.0% 1.71 1.65 +3.6%
BNP Paribas S.A. 71 70 +1.4% 46.96 44.64 +5.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.29 13.96 +2.4%
Credit Agricole S.A. 70 68 +2.9% 8.88 8.64 +2.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 131 121 +8.3% 21.28 20.45 +4.1%
Deutsche Bank AG 221 195 +13.3% 11.41 11.99 -4.8%
Parent: HSBC Holdings plc
HSBC Bank plc 68 65 +4.6% 5.74 5.67 +1.2%
Parent: ING Groep N.V.
ING Bank N.V. 62 58 +6.9% 11.06 10.68 +3.6%
Intesa Sanpaolo S.p.A. 143 133 +7.5% 2.00 2.01 -0.5%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.75 4.60 +3.3%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 81 77 +5.2% 0.56 0.57 -0.9%
 
Metro Bank plc n/a n/a n/a 27.83 27.32 +1.9%
 
Nationwide Building Society 85 80 +6.3% n/a n/a n/a
Nordea Bank AB 68 62 +9.7% 85 84 +1.2%
Parent: RBS Group plc
Royal Bank of Scotland plc 116 104 +11.5% 1.83 1.86 -1.6%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 80 +2.5% 3.96 3.88 +2.1%
Shawbrook Group plc n/a n/a n/a 2.49 2.43 +2.5%
Societe Generale 70 70 0.0% 31.89 31.13 +2.4%
Parent: Standard Chartered plc
Standard Chartered Bank 110 103 +6.8% 6.39 6.07 +5.3%
Svenska Handelsbanken AB 61 56 +8.9% 118 114 +3.5%
Unicredit  S.p.A. 190 176 +8.0% 2.15 1.97 +9.1%
 
FTSE 350 BANK INDEX n/a n/a n/a 3591 3535 +1.6%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 97 96 +1.0% n/a n/a n/a

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