News


30/05/2017


Flagstone Bank Credit Update 30 May 2017

Monthly Headlines:
  • Official figures from the ONS indicate that the UK economy grew more slowly than first estimated in the first three months of the year at 0.2% which was down from the original estimate of 0.3%.
  • In contrast the U.S. economy grew at a faster pace than initially thought in the first three months of the year, expanding at an annual pace of 1.2% which was up from the previous estimate of 0.7%.
  • A group of small shareholders have reached a settlement with the Royal Bank of Scotland over claims that they were misled about the bank’s financial state before it asked investors for £12.0bn in 2008.
  • The existing share price of Allied Irish Banks once again rose sharply over the week by 19% on growing expectations that the Irish Government will shortly approve the long-awaited re-flotation of the bank.
  • Moody’s has downgraded the long-term ratings for six Canadian banks as part of a general rating action, citing a more challenging operating environment for banks in Canada for 2017 and beyond.
  • Moody’s cut China’s sovereign debt rating by one notch to A1 from Aa3 in its first downgrade of the country in nearly 30 years as growth slows and debt continues to rise.
  • The FTSE 350 Bank Index rose by 0.5% over the week to 4,341 continuing the upward trend of the last few weeks on positive market sentiment after the French presidential election result.
  • The ITRAXX Europe Senior Financials 5-year CDS Index has resumed its recent margin improvement trend, increasing by 3.6% to 66bps over the week, on positive market sentiment.
General Commentary:

Official figures from the Office for National Statistics (ONS) indicate that the UK economy grew more slowly than first estimated in the first three months of the year as the key services sector appears to have lost momentum. Economic growth for the quarter slowed to 0.2% which was down from the original estimate of 0.3%. The ONS commented that there had been a slowdown in consumer-focused industries, such as retail sales and accommodation, partly due to rising prices. In the last quarter of 2016 the UK economy had expanded by 0.7% but many economists have been expecting it to slow this year as they predict consumers will cut back on spending in the face of accelerating inflation.

In contrast the U.S. economy grew at a faster pace than initially thought in the first three months of the year. The latest official figures indicated that the economy expanded at an annual pace of 1.2% in the quarter which was up from the previous estimate of 0.7%. The change came after upward revisions to business and consumer spending. The initial estimate had been seen as a blow to US President Donald Trump who had pledged in his election campaign to raise growth to 4.0%. However the revised figure still represents a slowdown from the 2.1% annual growth rate recorded in the final quarter of 2016. The report also revised down the previous year’s estimates for wages and salaries which analysts believe could mean U.S. consumers have less of a financial cushion going forward.

A group of small shareholders have reached a settlement with the Royal Bank of Scotland (RBS) over claims that they were misled about the bank’s financial state before it asked investors for £12.0bn in 2008. The 9,000-strong RBS Shareholders Action Group has confirmed that it has accepted an offer of 82p a share which is almost double the original offer made by RBS. Although the amount is lower than investors had hoped it is understood that Trevor Hemmings, the leisure magnate who bankrolled the action, has decided to accept the offer and so is no longer willing to fund the action.

The price of the existing small publicly-traded shares of Allied Irish Banks p.l.c. (AIB) once again rose sharply over the week by 19% on growing expectations that the Irish Government will shortly approve the long-awaited re-flotation of the bank in order to return it to the private sector. This could raise between €2.5bn and €3.0bn according to analysts.

Moody’s has downgraded the long-term credit and bank deposit ratings for six Canadian banks as part of a general rating action, citing a more challenging operating environment for banks in Canada for 2017 and beyond which they believe could lead to a general deterioration in the banks’ asset quality. Moody’s point to weakening credit conditions in the domestic economy including an increase in private-sector debt to a hefty 185% of the country’s gross domestic product (GDP) as well as elevated house prices. In Moody’s view this is likely to leave Canadian banks and consumers more vulnerable to the downside risks facing the Canadian economy than they have been in the past. The banks affected by the rating action are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank who were all downgraded by one notch with “negative” outlooks.

Moody’s has also downgraded its sovereign credit rating on China which has added to worries about the global impact of slowing growth and rising debt in Asia’s economic powerhouse. Moody’s has cut China’s rating by one notch to A1 from Aa3 in its first downgrade of the country in nearly 30 years as it expects the financial strength of the economy to erode in coming years as growth slows and debt continues to rise. China’s massive debt has been at the centre of concerns among economists for some time as they believe that Beijing is walking a fine line as it tries to contain financial risks. China’s finance ministry have commented that the downgrade by Moody’s is unjustified as they believe it is based on inappropriate methodology and exaggerated difficulties facing the economy while underestimating reform efforts. Chinese authorities have stepped up regulatory curbs in recent months to defuse financial risks and have cracked down on risky lending practices with the central bank moving toward tighter policy. But economists regard the steps taken as erring too much on the side of cautious in order to avoid a sharp brake in economic growth.

See below for 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: 30th May 2017
5-Year CDS Spreads (bps) Equity Share Prices 
Financial Institutions 26-May-17 19-May-17 Chg 26-May-17 19-May-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 23.41 23.57 -0.7%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 246 257 -4.0%
Irish Sovereign
Allied Irish Banks 44 44 0.0% 8.60 7.20 +19.4%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.82 14.92 -0.6%
Aust and NZ Banking Group Ltd 65 60 +9.2% 28.22 28.50 -1.0%
Banco Bilbao Vizcaya Argentaria S.A. 91 85 +6.9% 7.45 7.41 +0.5%
Parent: Barclays plc
Barclays Bank plc 59 60 -1.6% 212 214 -1.0%
BNP Paribas S.A. 52 56 -7.9% 66.39 65.67 +1.1%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.12 16.06 +0.4%
Credit Agricole S.A. 52 56 -6.7% 14.50 14.32 +1.3%
Parent: Credit Suisse Group AG
Credit Suisse AG 75 78 -3.2% 13.69 13.56 +1.0%
Deutsche Bank AG 97 99 -1.7% 16.49 17.09 -3.5%
Parent: HSBC Holdings plc
HSBC Bank plc 51 52 -2.8% 675 666 +1.4%
Parent: ING Groep N.V.
ING Bank N.V. 42 46 -9.7% 15.20 15.09 +0.7%
Intesa Sanpaolo S.p.A. 120 121 -0.8% 2.62 2.80 -6.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 623 601 +3.7%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 52 53 -2.8% 72 72 -0.1%
Metro Bank plc n/a n/a n/a 37.20 37.33 -0.3%
Nordea Bank AB 39 39 +0.1% 113 115 -1.6%
Parent: RBS Group plc
Royal Bank of Scotland plc 72 73 -1.3% 262 263 -0.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 68 73 -6.3% 5.87 5.83 +0.6%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 341 341 -0.0%
Societe Generale 51 56 -9.7% 49.35 50.02 -1.3%
Parent: Standard Chartered plc
Standard Chartered Bank 68 67 +1.5% 734 736 -0.3%
Svenska Handelsbanken AB 36 38 -5.2% 123 125 -1.9%
Unicredit  S.p.A. 134 134 -0.0% 16.59 16.80 -1.3%
FTSE 350 BANK INDEX n/a n/a n/a 4341 4319 +0.5%
SNR FIN ITRAX CDS 5-YEARS 66 69 -3.6% n/a n/a n/a

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