News


03/10/2016


Flagstone Bank Credit Update 3 October 2016

Weekly Headlines:

• The prospect of another interest rate cut in the near-term appears to be receding amid signs that the economy has so far weathering the fallout from the vote to leave the European Union.

• Investors are predicting that there is a one-in-three chance of an interest rate cut next month having previously regarded such a step as a near certainty.

• Official figures indicate that the UK’s services sector has defied gloomy expectations after the Brexit vote with services output rising by 0.4% in July which was an improvement on growth of 0.3% in June.

• The ONS revised upwards its estimates for GDP growth in the second quarter to 0.7% from 0.6% previously. However this remains below growth of 0.8% in the first quarter.

• The latest CBI growth survey indicates that UK companies are anticipating a surge in output in the final quarter of the year despite a predicted slowdown in the three months to September.

• Concerns over the size of its capital buffers sent Deutsche Bank shares to a 33-year low last week before partly recovering on rumours that the DoJ fine may be substantially less than the initial $14.0bn claim.

• Deutsche Bank may have to raise at least €5 billion in fresh capital as a result of the imminent fines as it doesn’t appear to have the capacity to replenish its capital base from retained profits.

• Negative interest rates have slashed European banks’ lending margins and regulatory reforms designed to strengthen the banking system have vastly reduced earnings potential on trading activities.

• The ITRAXX Europe Senior Financials 5-year CDS index rose by 5.2% to 102bps from 97bps, as the spreads of major banks rose by up to 13% as the fallout continues from the DoJ shock settlement claim.

• Despite the Deutsche Bank situation, the FTSE 350 Bank Index fell only slightly over the week by 0.5% as investors pin their hopes on rumours that the final claim will be substantially lower.

General Commentary:

The prospect of another interest rate cut in the near-term appears to be receding amid signs that the economy has so far weathering the fallout from the vote to leave the European Union (EU). A plethora of data over the past two months has shown that the economy is faring better than many economists had predicted. Investors are now predicting that there is a one-in-three chance of an interest rate cut next month having previously regarded such a step as a near certainty. November is seen as the most likely time for further stimulus measures, as it coincides with fresh quarterly growth and inflation forecasts from the Bank of England (BoE).

Official figures from the Office of National Statistics (ONS) indicate that the UK’s important services sector has defied gloomy expectations to continue growing after the Brexit vote with services output rising by 0.4% in July which was an improvement on growth of 0.3% in June. Despite some very weak indicators appearing in the immediate aftermath of the referendum, the figures suggest that the services sector (which accounts for three-quarters of the UK economy) did in fact grow strongly in July. The ONS also revised up its estimates for Gross Domestic Product (GDP) growth in the second quarter to 0.7% from 0.6% previously. However this remains below growth of 0.8% in the first quarter.

This more optimistic view is supported by the latest growth survey from the Confederation of British Industry (CBI). The survey also indicates that the UK economy appears to have largely defied expectations of an immediate slump after the Brexit vote with UK companies anticipating a surge in output in the final quarter of the year despite a predicted slowdown in the three months to September. However the CBI again warns that uncertainty over the UK’s future relationship with the EU is likely to continue to depress optimism and investment plans which would undercut productivity gains and economic growth in the longer term.

The troubles at Deutsche Bank continue to mount with concerns over the size of its capital buffers sending its shares to a 33-year low last week before partly recovering on rumours that the Department of Justice (DoJ) fine may be substantially less than the initial claim for $14 billion (£10.8 billion) for mis-selling toxic products linked to US sub-prime mortgages.

Analysts expect Deutsche Bank to have to raise at least €5 billion in fresh capital as a result of the imminent fines as it does not appear to have the capacity to replenish its capital base from retained profits. Some analysts caution that shareholders may be unwilling to provide further support in these difficult times and that the German government may be forced to reluctantly step in to fill the void. It is generally accepted that Deutsche Bank (which operates in more than 70 countries and has a loan book of €1.8 trillion) is too integral to the European and German economies to be allowed to fail.

The difficulties at Deutsche Bank have exposed the glaring weaknesses at the heart of the European financial sector. Negative interest rates have slashed the margins European banks can earn by lending money to customers and regulatory reforms designed to strengthen the banking system have vastly reduced earnings potential on bond, share and currency trading activities. In a few weeks, European regulators will require the EU’s top 32 banks to issue loss-absorbing debt so they can better absorb a downturn. Estimates of the amount of debt to be sold vary between €376 billion (£327 billion) and €3 trillion (£2.6 trillion) – so it’s too early to tell just how high a mountain the regulators are creating for a sector that is not in the best of health to climb.

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: 3rd October 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 30-Sep-16 23-Sep-16 Chg 30-Sep-16 23-Sep-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 18.42 18.60 -1.0%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.68 1.75 -4.0%
Irish Sovereign
Allied Irish Banks 60 59 +1.7% 6.00 6.00 0.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.00 15.10 -0.7%
Aust and NZ Banking Group Ltd 67 68 -1.5% 27.63 27.59 +0.1%
Banco Bilbao Vizcaya Argentaria S.A. 130 120 +8.3% 5.38 5.49 -2.0%
Parent: Barclays plc
Barclays Bank plc 101 94 +7.4% 1.68 1.71 -1.8%
BNP Paribas S.A. 77 71 +8.5% 45.77 46.96 -2.5%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.57 14.29 -5.0%
Credit Agricole S.A. 75 70 +7.1% 8.78 8.88 -1.1%
Parent: Credit Suisse Group AG
Credit Suisse AG 138 131 +5.3% 21.62 21.28 +1.6%
Deutsche Bank AG 226 221 +2.3% 11.57 11.41 +1.4%
Parent: HSBC Holdings plc
HSBC Bank plc 75 68 +10.3% 5.79 5.74 +0.9%
Parent: ING Groep N.V.
ING Bank N.V. 65 62 +4.8% 10.99 11.06 -0.6%
Intesa Sanpaolo S.p.A. 149 143 +4.2% 1.97 2.00 -1.5%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.66 4.75 -1.9%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 88 81 +8.6% 0.55 0.56 -1.8%
 
Metro Bank plc n/a n/a n/a 27.47 27.83 -1.3%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 70 68 +2.9% 85 85 0.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 131 116 +12.9% 1.79 1.83 -2.2%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 82 0.0% 3.95 3.96 -0.3%
Shawbrook Group plc n/a n/a n/a 2.33 2.49 -6.4%
Societe Generale 75 70 +7.1% 30.78 31.89 -3.5%
Parent: Standard Chartered plc
Standard Chartered Bank 118 110 +7.3% 6.28 6.39 -1.7%
Svenska Handelsbanken AB 65 61 +6.6% 118 118 0.0%
Unicredit  S.p.A. 186 190 -2.1% 2.07 2.15 -3.7%
 
FTSE 350 BANK INDEX n/a n/a n/a 3572 3591 -0.5%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 102 97 +5.2% n/a n/a n/a

Sign up to receive rate alerts