The second estimate from the Office for National Statistics (ONS) indicates that the UK economy grew by more than previously reported in the final three months of 2016. Gross domestic product (GDP) increased by 0.7% in the quarter, up from 0.6%, with the upward revision mainly due to manufacturing industry having done better than thought.
However the ONS did cut its estimate for growth in 2016 as a whole to 1.8%, down from the 2.0% that it had forecast last month. This downward revision has pushed the UK slightly below Germany with an estimate of 1.9%, in the G7 growth league – though analysts point out that the difference is well within the recognised margin of error. The downward revision appears to have been prompted by weaker North Sea oil and gas production during the first six months of 2016, and does not reflect the underlying strength of the UK economy. The third revision of the figures will be released on the 31st March after the Budget on the 8th March.
UK Retail sales fell in December by 1.9% from the previous month, according to official ONS figures. Sales across all main retail sectors declined with the heaviest falls coming at non-food stores. This was the biggest monthly fall for more than four and a half years. A consensus of analysts had predicted a much smaller 0.1% monthly fall. Analysts caution that this is likely to be the theme for the rest of the year as higher prices will reduce disposable income and hurt consumer spending growth.
UK government finances recorded a £9.4bn surplus in January which was £300.0m higher than the same month last year. January is typically a strong month for government finances being boosted by self-assessment tax receipts. For the financial year-to-date, borrowing stands at £49.3bn which is the lowest since the comparable period of 2008. Economists say strong tax receipts mean the government could undershoot the Office For Budget Responsibility (OBR) forecast deficit of £68.0bn for the current financial year that was included in November’s Autumn Statement.
The minutes from the latest Federal Reserve committee (Fed) meeting indicates that the Fed may need to raise interest rates sooner than expected if the economy stays strong. The first meeting of the Fed since Donald Trump became president discussed the possibility of a rate rise as early as March while most economists have been forecasting a rise in June. However Fed officials appear to be divided on the timing of a rise amid uncertainty over the impact of President Trump’s policies. Several Fed officials expressed fears that unemployment could fall substantially below the Fed’s 4.8% target which could trigger inflationary pressures and force the Fed to boost rates at a faster pace than financial markets are expecting. Unemployment in December was 4.7%, although it was back at 4.8% in January.
The Bank of England (BoE) has announced that it plans to take steps to help smaller banks to compete against their larger high street rivals as the BoE seeks to reduce the disparity in capital rules that makes it more expensive for smaller banks to lend. In a statement, the Prudential Regulation Authority said that it would be refining its capital rules that give big banks far more leeway to decide how much of a loss-buffer they need to have against any given loan. By contrast with smaller lenders that must use a ‘standardised’ approach whereby risk weightings are pre-set for everything from mortgages to corporate loans, large banks are able to use their internal models to determine an appropriate capital requirement for their lending. In effect, this means that smaller banks have to assign a higher risk weighting against exactly the same quality of loan compared with a bigger rival. The most striking example over the last few years is Scottish Widows Bank plc who reported a tier 1 capital ratio of 6.5% in their 2014 Financial Statements but which was restated as 33.3% in the 2015 Financial Statements – without any change in the underlying figures – when it was permitted to use the Lloyds Bank plc internal risk model.
The Royal Bank of Scotland plc (RBS) reported an annual pre-tax loss of £7.0bn for the 2016 financial year which brought its total losses since the financial crisis to £58.0bn. This marked the ninth consecutive year of loss and compared with a £2.0bn loss in 2015. RBS last made a profit on the eve of the financial crisis in 2007. The bank was again dragged down by legacy problems with £10.0bn of one-off payments which included £6.0bn of conduct costs. RBS also took a £750.0m provision to cover the costs of promoting competition in small business banking as an alternative to having to spin off a 300-branch separate bank (Williams & Glyn). However RBS pointed to good results in its core bank which made an operating profit of £4.0bn while stating that the drive to improve performance will require further cost cutting. The bank aims to reduce costs by £2.0bn by 2020 which includes savings of £750.0m this year.
Barclays plc has reported a trebling of its annual pre-tax profit to £3.2bn for the 2016 financial year compared with £1.1bn a year earlier. However this was below the average analyst forecast of 4.0bn. The bank also reported a surprise boost to its capital reserves from rising trading profit amid volatile markets and the faster than expected disposal of unwanted assets in 2016 which included its Asian private bank, its Southern European cards business and its Italian retail business. Capital has been a concern for investors since the Bank of England said last November that the bank had fallen short of one of its targets in a stress test scenario but stopped short of requiring the bank to submit a new plan to boost reserves. The bank still faces challenges including significant litigation costs in the U.S. rising provisions for late credit card repayments and completing the sale of its African division.
HSBC Holdings plc has reported a fall of 62% in its annual pre-tax profit to £7.1bn for the 2016 financial year compared with£18.9bn a year earlier. The group attributed the fall to a string of one-off charges, including the sale of its operations in Brazil. HSBC said its core performance had been broadly satisfactory given the volatile financial conditions but warned that a rise in global protectionism was a concern. The bank also announced a smaller-than-expected share buyback programme which also helped to undermine the share price that finished the week down by 8.1%. Although analysts consider the group to still be in transition after the financial crisis, they are cautiously optimistic that this is the last set of results that include big one-off charges for reorganising the business and for writing-down the value of assets.
Lloyds Banking Group plc has reported a 7% fall in annual pre-tax profit to £1.6bn for the 2016 financial year compared with £1.8bn a year earlier. The group increased provisions for payment protection insurance (PPI) compensation in the year to £4.0bn taking the overall total that the bank has set aside to pay compensation to £16.0bn. The group, which restarted dividend payments to shareholders last year after a six year break, also announced it would pay shareholders a special dividend of 0.5p giving a total pay-out to shareholders of £2.0bn. Analysts now regard the group as an increasingly safe regular bank with little or no likelihood of balance sheet growth but a strong outlook for further dividend growth.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Movements over the Last Week|
|Date:||27th February 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||61||61||0.0%||21.45||21.88||-2.0%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.32||2.34||-0.9%|
|Allied Irish Banks||69||70||-1.4%||5.10||5.10||0.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||13.84||14.50||-4.6%|
|Aust and NZ Banking Group Ltd||57||59||-3.4%||30.96||30.77||+0.6%|
|Banco Bilbao Vizcaya Argentaria S.A.||118||116||+1.7%||6.07||6.24||-2.7%|
|Parent: Barclays plc|
|Barclays Bank plc||76||76||0.0%||2.26||2.37||-4.6%|
|BNP Paribas S.A.||98||90||+8.9%||54.68||55.75||-1.9%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||14.77||14.88||-0.7%|
|Credit Agricole S.A.||87||82||+6.1%||11.22||11.82||-5.1%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||117||115||+1.7%||15.03||15.31||-1.8%|
|Deutsche Bank AG||149||149||0.0%||18.14||18.20||-0.3%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||65||65||0.0%||6.50||7.07||-8.1%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||68||66||+3.0%||13.03||13.46||-3.2%|
|Intesa Sanpaolo S.p.A.||148||139||+6.5%||2.08||2.17||-4.1%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.75||5.90||-2.5%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||67||66||+1.5%||0.69||0.67||+3.0%|
|Metro Bank plc||n/a||n/a||n/a||35.64||35.66||-0.1%|
|Nordea Bank AB||46||46||0.0%||107||109||-2.3%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||101||101||0.0%||2.38||2.42||-1.7%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||79||79||0.0%||5.05||5.14||-1.8%|
|Shawbrook Group plc||n/a||n/a||n/a||2.60||2.70||-3.7%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||91||92||-1.1%||7.31||7.73||-5.4%|
|Svenska Handelsbanken AB||41||41||0.0%||127||131||-3.1%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4242||4468||-5.1%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||94||92||+2.2%||n/a||n/a||n/a|