News


03/04/2017


Flagstone Bank Credit Update 3 April 2017

Weekly Headlines:
  • The UK current account deficit has improved by the largest amount on record with the deficit dropped to £12.0bn in Q4-2016 which is less than half the £25.7bn reported in the previous quarter.
  • The ONS has confirmed that UK gross domestic product (GDP) grew by 0.7% in Q4-2016 which was unchanged from the previous estimate with the annual growth rate for 2016 unchanged at 1.8%.
  • Strong consumer spending growth continues for now despite a decline in real disposable incomes which has pushed the household savings ratio in Q4-2016 down to its lowest level since records began in 1963.
  • The UK’s biggest banks have been told by the Bank of England to prepare for a wide range of challenges as part of the latest stress tests including any sudden slowdown in foreign interest in UK assets.
  • The private equity bidders seeking to take control of Shawbrook Group have gone over the heads of the board and put their £827 million offer for the mortgage bank directly to its shareholders.
  • Virgin Money is poised to table a takeover bid for the ailing Co-operative Bank plc and is expected to compete with private equity giants Cerberus and JC Flowers in the first round of bidding this week.
  • The FTSE 350 Bank Index was relatively unchanged over the week at 4,225 despite the triggering of Article 50 by the UK underpinned by recent encouraging annual banks results for 2016.
  • The ITRAXX Europe Senior Financials 5-year CDS Index fell by 5.69% over the week to 85bps despite Brexit uncertainties and subsequent political posturing after the triggering of Article 50 by the UK.
General Commentary:

Official figures from the Office for National Statistics (ONS) indicate that the UK current account deficit has improved by the largest amount on record. The deficit dropped to £12.0bn in the final three months of 2016 which was less than half the £25.7bn reported in the previous quarter. This in turn has narrowed the current account deficit from 5.3% to 2.4% of gross domestic product which is the smallest percentage since 2012 and the biggest quarterly decline since records began in 1955. The ONS comments that the improvement was mainly caused by a narrowing of the trade deficit as the sharp fall in the value of the pound since the Brexit vote had made exports more competitive and imports pricier. At the same time foreign direct investment in the UK rose sharply in the final quarter to £110.0bn which is the highest level since 2014.

The ONS has confirmed that the UK’s gross domestic product (GDP) grew by 0.7% in the fourth quarter of 2016 which was unchanged from the previous estimate and in line with analyst expectations. Although the third quarter GDP was revised down from 0.6% to 0.5%, the estimated annual GDP growth rate for 2016 remained unchanged at 1.8%. However some analysts are concerned that fourth quarter growth was driven primarily by a 0.7% increase in consumer spending while business investment fell by 0.9%. This relatively strong consumer spending growth has occurred despite a decline in real disposable incomes which has pushed the household savings ratio in Q4-2016 down to its lowest level since comparable records began in 1963. This reinforces the view of many analysts that the UK economy will see a gradual slowdown this year as consumers reduce their spending despite some offset from stronger net exports.

As predicted last week, the UK’s biggest banks have been told to prepare for a wide range of challenges as part of the latest stress tests from the Bank of England (BoE). The banks will have to show they have sufficient resources in place to cope with any shocks. The seven major lenders taking part are Barclays, HSBC, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide. Last year, RBS had to bolster its finances by about £2.0bn after failing the last stress test. One key test will be to prove they can manage any sudden slowdown in foreign interest in UK assets as the UK’s large current account deficit is vulnerable to a reduction in foreign investor appetite for UK assets and potential increases in funding costs for borrowers. Under the BoE’s annual cyclical scenario, banks must show they can cope with a recession in the global economy while in the UK they must cope with interest rates peaking at 4.0% and house prices falling by a third. The lenders have also been set a biennial exploratory scenario which assumes severe and synchronised stress to the UK and global economy. This second scenario assumes weak global trade, UK interest rates cut to 0%, and increasing competition for major UK lenders from challenger banks.

The private equity bidders seeking to take control of Shawbrook Group have gone over the heads of the board and put their £827 million offer for the mortgage bank direct to its shareholders. Pollen Street Capital and BC Partners have launched a 330p-a-share offer for the 61% of the group that they do not already own. The price was unchanged from an offer made and rejected earlier in the month. As expected it has triggered a fresh rejection from Shawbrook. However the bid has been structured as a conventional takeover offer instead of the scheme of arrangement planned originally. This would allow them to take control of the business with only 51% of investor acceptances instead of the previous 75% hurdle. In addition the bidders have said that they are prepared to see Shawbrook maintain a listing if it receives less than 75% of the shares instead of taking the group private. Shares in Shawbrook closed on Friday up by 5.1% over the week to 331p.

Meanwhile it is understood that Virgin Money is poised to table a takeover bid for the ailing Co-operative Bank plc (Co-op Bank) and is expected to compete with private equity giants Cerberus and JC Flowers in the first round of bidding for the bank which closes this week. Both Clydesdale Bank and Virgin Money were reported to have requested information from the advisers to the Co-op Bank. However sources close to the situation do not expect the Clydesdale bank to submit a bid. If the Co-op Bank is unable to find a buyer by this week’s deadline it will be forced to either raise £750 million in fresh capital or be wound down. Bankers believe that the Co-op Bank will be unable to access the bond market and so it is unlikely to be able to raise cash at an economic interest rate. The Co-operative Group – which owns a 20% stake in the Co-op Bank – is tipped to write-off the value of its shareholding this weeks. City sources believe there is still a strong possibility that the sales process will still fail.

See below for the 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: 3rd April 2017
5-Year CDS Spreads (bps) Equity Share Prices
31-Mar-17 24-Mar-17 Chg 31-Mar-17 24-Mar-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 22.75 22.90 -0.7%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.22 2.23 -0.4%
Irish Sovereign
Allied Irish Banks 53 52 +1.9% 5.05 5.10 -1.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.20 14.40 -1.4%
Aust and NZ Banking Group Ltd 57 59 -3.4% 31.82 31.36 +1.5%
Banco Bilbao Vizcaya Argentaria S.A. 116 121 -4.1% 7.27 7.19 +1.1%
Parent: Barclays plc
Barclays Bank plc 77 74 +4.1% 2.25 2.27 -0.9%
BNP Paribas S.A. 88 92 -4.3% 62.43 60.46 +3.3%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 15.34 15.41 -0.5%
Credit Agricole S.A. 80 82 -2.4% 12.70 12.28 +3.4%
Parent: Credit Suisse Group AG
Credit Suisse AG 102 104 -1.9% 14.90 14.60 +2.1%
Deutsche Bank AG 127 129 -1.6% 16.15 15.54 +3.9%
Parent: HSBC Holdings plc
HSBC Bank plc 63 63 0.0% 6.51 6.48 +0.5%
Parent: ING Groep N.V.
ING Bank N.V. 61 63 -3.2% 14.17 13.76 +3.0%
Intesa Sanpaolo S.p.A. 143 143 0.0% 2.55 2.54 +0.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.44 5.97 -8.9%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 65 63 +3.2% 0.66 0.68 -2.9%
Metro Bank plc n/a n/a n/a 32.53 33.33 -2.4%
Nordea Bank AB 41 49 -16.3% 102 100 +2.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 92 89 +3.4% 2.42 2.39 +1.3%
Ult. Parent: Banco Santander S.A.
Santander UK plc 79 79 0.0% 5.75 5.72 +0.5%
Shawbrook Group plc n/a n/a n/a 3.31 3.15 +5.1%
Societe Generale 88 91 -3.3% 47.55 47.32 +0.5%
Parent: Standard Chartered plc
Standard Chartered Bank 80 79 +1.3% 7.63 7.27 +5.0%
Svenska Handelsbanken AB 41 43 -4.7% 123 125 -1.6%
Unicredit  S.p.A. 162 166 -2.4% 14.45 14.39 +0.4%
FTSE 350 BANK INDEX n/a n/a n/a 4225 4222 +0.1%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 85 90 -5.6% n/a n/a n/a

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