News


30/08/2016


Flagstone Bank Credit Update 30 August 2016

Weekly Headlines:
  • Expectations are beginning to grow that the Chancellor’s autumn reset of UK economic policy will include a sizeable fiscal stimulus in the form of additional infrastructure spending, or tax cuts, or both.
  • The latest UK Treasury compilation of independent economist monthly forecasts predicts average growth of 0.7% for 2017 which is down from 0.8% last month and down from 2.1% in June.
  • Slower GDP growth is expected to feed through to higher borrowing and so more debt with revised forecasts predicting government borrowing of £66.9bn for the current fiscal year.
  • UK retailers have reported their strongest sales in August for six months adding to signs that consumers are taking the country’s vote to leave the European Union in their stride, at least for now.
  • Markets continue to doubt whether the Fed will hike the Fed rate in September after Fed Chair, Janet Yellen, stated that the case for an increase had strengthened but provided little clarity as to when.
  • Analysts believe that the corporate advisers to the Co-operative Bank plc could recommend winding down the troubled lender as it embarks on a review of its future.
  • The share prices of those “challenger” banks that have a significant exposure to SME’s have risen strongly with Aldermore Bank plc up by +23.5% and Shawbrook Group plc up by +23.4%.
  • There was a slight deterioration in the ITRAXX Europe Senior Financials 5-year CDS index to 91bps from 89bps with Deutsche Bank and Italian banks the highest movers.
  • The FTSE 350 Bank rose slightly over the week as many financial markets remain in a quiet period over the summer holidays.
General Commentary:

Expectations are beginning to grow that the Chancellor’s autumn reset of UK economic policy will include a sizeable fiscal stimulus in the form of additional infrastructure spending, or tax cuts, or both despite many economists predicting the likelihood of bigger budget deficits and higher government debt even if he chose to do nothing.

The latest UK Treasury compilation of independent economist monthly forecasts predicts average growth of 0.7% for 2017 which is down from 0.8% last month and down from 2.1% in June. Analysts have consistently warned that next year is expected to be the year of greatest economic weakness with business investment and employment likely to be subdued and consumers likely to suffer from an income squeeze as a result of a rise in inflation resulting from the fall in the foreign exchange value of sterling.

Slower gross domestic product (GDP) growth is expected to feed through to higher borrowing and so more debt. In June, economist forecasts predicted government borrowing for this fiscal year of £61.7bn, falling to £46.7bn for fiscal year 2017-18. However the latest revised forecasts predict government borrowing of £66.9bn and £59.8bn respectively.

UK retailers have reported their strongest sales in August for six months adding to signs that consumers are taking the country’s vote to leave the European Union in their stride, at least for now. The monthly sales volume index figure released by the Confederation of British Industry (CBI) rose to +9 in August which was its highest level since February and compares with an initial slump vote to -14 in July after the Brexit decision. Sales in September are expected to moderate with a sales volume index forecast figure of +3 for the month. The release was in keeping with recent data showing consumers appear to have shrugged off the shock Brexit vote with retail sales boosted by warm weather and by overseas buyers attracted by a cheaper pound. However many analysts warn that while the fall in sterling has boosted visitor numbers to the UK it is likely to push up the price of imported goods over time which will mean households will be more likely to rein back spending on non-essential items.

Financial market continue to doubt whether the Federal Reserve (Fed) will hike interest rates in September after Fed Chair Janet Yellen stated that the case for an interest rate increase was strengthening but provided little clarity on when it would next move. Fed Vice-Chair, Stanley Fischer, has been more forthcoming suggested a hike was possible as soon as September. While the initial market reaction was to push up the probability of a September hike to 44%, investors quickly had second thoughts and the implied chance has since reverted to 36%. Analysts caution that the August payrolls report due this coming Friday might miss expectations and make it that much harder for policymakers to contemplate a September tightening.

Analysts believe that Bank of America Merrill Lynch (BAML) – corporate advisers to the Co-operative Bank plc – could recommend winding down the troubled lender as it embarks on a review of its future. BAML have been tasked with helping the Co-operative Bank management to get the business into shape for a potential sale, a merger, or even an eventual shutdown, as its hedge fund backers who own 80% of the shares look for an exit three years after rescuing the bank. However potential buyers may be put off by the bank’s continuing losses, IT problems and the possibility that more bad debts could emerge post-Brexit from the commercial property book that it acquired by buying the Britannia building society in 2009. Analysts also question whether the Bank of England will continue to tolerate the Bank’s current capital position which is considered insufficient to cope with any major stress situations to the UK economy.

During last week the share prices of those “challenger” banks that have a significant exposure to small and medium sized enterprises (SMEs) have risen strongly with Aldermore Bank plc up by +23.5% and Shawbrook Group plc up by +23.4%. The share prices of these banks were particularly adversely impacted by the initial reaction to the Brexit decision but it appears that investor confidence has been mostly restored on the back of some recent encouraging economic data and strong interim results from these banks.

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: 29th August 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 26-Aug-16 19-Aug-16 Chg 26-Aug-16 19-Aug-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.63 1.32 +23.5%
Irish Sovereign
Allied Irish Banks 59 59 0.0% 6.25 6.40 -2.3%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 16.00 16.18 -1.1%
Aust and NZ Banking Group Ltd 67 68 -1.5% 26.67 26.68 -0.0%
Banco Bilbao Vizcaya Argentaria S.A. 119 114 +4.4% 5.43 5.09 +6.7%
Parent: Barclays plc
Barclays Bank plc 92 91 +1.1% 1.66 1.60 +3.7%
BNP Paribas S.A. 73 71 +2.8% 44.83 42.58 +5.3%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.73 13.43 +2.2%
Credit Agricole S.A. 71 70 +1.4% 8.20 7.92 +3.5%
Parent: Credit Suisse Group AG
Credit Suisse AG 126 126 0.0% 21.26 21.86 -2.7%
Deutsche Bank AG 216 202 +6.9% 12.60 11.95 +5.4%
Parent: HSBC Holdings plc
HSBC Bank plc 70 70 0.0% 5.47 5.43 +0.7%
Parent: ING Groep N.V.
ING Bank N.V. 61 61 0.0% 10.88 10.44 +4.2%
Intesa Sanpaolo S.p.A. 133 119 +11.8% 2.01 1.83 +9.8%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.66 4.95 -5.9%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 83 81 +2.5% 0.58 0.55 +5.5%
 
Metro Bank plc n/a n/a n/a 24.01 23.90 +0.5%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 65 65 0.0% 79 77 +2.6%
Parent: RBS Group plc
Royal Bank of Scotland plc 110 109 +0.9% 1.97 1.88 +4.8%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 82 0.0% 3.89 3.64 +6.9%
Shawbrook Group plc n/a n/a n/a 2.32 1.88 +23.4%
Societe Generale 72 71 +1.4% 31.92 30.06 +6.2%
Parent: Standard Chartered plc
Standard Chartered Bank 108 110 -1.8% 6.23 6.25 -0.3%
Svenska Handelsbanken AB 61 61 0.0% 108 105 +2.9%
Unicredit  S.p.A. 181 169 +7.1% 2.19 1.93 +13.5%
 
FTSE 350 BANK INDEX n/a n/a n/a 3499 3429 +2.0%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 91 89 +2.2% n/a n/a n/a
 

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