News


31/10/2016


Flagstone Bank Credit Update 31 October 2016

Weekly Headlines:
  • UK economy confounds the fears of many analysts that it would be dragged into an immediate post Brexit recession with growth of 0.5% for Q3-2016 which was higher than the 0.3% expected.
  • Analysts believe that the prospect of an interest rate rise in the U.S. have increased after figures showed that the U.S. economy had grown at its fastest pace in two years of 2.9% (annualised).
  • Government borrowing costs across the world are trending higher on the prospect of a U.S interest rate rise that economists believe will make the end of ultra-loose monetary policies by central banks.
  • Economists are eagerly awaiting the release this week of the Bank of Englands’s latest Quarterly Inflation Outlook Report to see if there are any clues as to the future direction of UK interest rates.
  • Economists expect the Bank of England to start raising concerns about medium term inflationary pressures caused by weak productivity prompted by the better than expected Q3-2016 GDP figures.
  • Analysts have interpreted comments by the governor of the Bank of England, when appearing before the House of Lords, as hints that UK interest rates may rise earlier than had been expected.
  • S&P has reaffirmed the UK’s sovereign “AA” long-term credit rating with a “negative” outlook citing ongoing uncertainty about the country’s future outside the European Union.
  • Clydesdale Bank Plc has announced that it has made a non.-binding offer to take over Royal Bank Scotland’s Williams & Glyn business after Spain’s Banco Santander SA called off discussions last month.
  • The ITRAXX Europe Senior Financials 5-year CDS index is a little changed up 1.6% at 96bps, while markets digest the financial performance of major banks as the third quarter reporting season gets underway.
  • The FTSE 350 Bank Index rose slightly over the week by 1.5% as investors were heartened by the better than expected third quarter performance of Deutsche Bank which reported a pre-tax profit.
General Commentary:

The UK economy continues to confound the fears of many analysts that it would be dragged into an immediate recession following the EU referendum decision. The first official estimate of growth for the third quarter showed that gross domestic product (GDP) rose by 0.5% between July and September 2016 which was higher than the 0.3% expected. However it was the Services sector that provided all the expansion, posting growth of 0.8% while manufacturing and construction both shrank with economists warning that the UK economy remains unbalanced.

Analysts believe that the prospect of an interest rate rise in the U.S. has increased after figures showed that the U.S. economy had grown at its fastest pace in two years due to strong exports. The first estimate of GDP reported growth of 2.9% (annualised) for the third quarter which was comfortably ahead of economists’ expectations of a 2.5% rise and significantly more than the 1.4% recorded in the second quarter. The Federal Open Market Committee (FOMC) meets this week and could raise interest rates, although economists believe that a rise in December is more likely as the figures indicate that consumer spending remains subdued. Government borrowing costs across the world are trending higher on the prospect of a U.S. interest rate rise that economists believe will mark the end of an era of ultra-loose monetary policies by central banks in general.

Against this background, most economists are eagerly awaiting the release of the Bank of England’s latest Quarterly Inflation Outlook Report this week to see if there are any clues as to the future direction of UK interest rates. The general consensus view among economists is that they expect the Bank to start raising concerns about medium term inflationary pressures caused by weak productivity – rather than just the temporary inflation imported by the collapse in sterling – prompted by the better than expected UK GDP figures for the third quarter. The BoE is expected to adjudge that the spare capacity gap between economic demand and supply has been squeezed to about 1.0% from 2.5% estimated in August.  

Speculation about a possible earlier rise in UK interest rates than expected was prompted by comments made by Mark Carney, the Governor of the Bank of England, when appearing before the House of Lords last week that “monetary policy cannot do it all” and “there are scenarios of this post-referendum world where monetary policy is not uniformly as accommodative”. Analysts interpreted his comments as hints that UK interest rates may rise earlier than expected. Since then, ten-year government borrowing costs have risen by 0.175% with ten-year gilts reaching 1.31% which is the highest level seen since the Brexit vote as investors discounted the prospect of another rate cut.

Standard & Poor’s (S&P) has reaffirmed the UK’s sovereign “AA” long-term credit rating with a “negative” outlook as the credit rating agency believes there is a risk of a further rating downgrade because of ongoing uncertainty about the country’s future outside the European Union. S&P remains of the view that Brexit presents a significant risk to the UK’s track record of strong economic performance and to its large financial sector in particular as the referendum outcome had created a less predictable and less stable policy framework. Factors cited by S&P that could trigger a further downgrade include weaker than expected growth, or a decision by foreign central banks to sell some of their holdings of sterling, or a new referendum on Scottish independence. However UK government debt remains comfortably within investment-grade territory and financial markets have reacted little to past downgrades of major sovereign borrowers.

Clydesdale Bank Plc has announced that it has made a non-binding offer to take over Royal Bank of Scotland’s Williams & Glyn business after Spain’s Banco Santander SA called off discussions last month. This development could end a costly seven-year process by RBS to offload Williams & Glyn after it was ordered to do so by the European Union as a condition of its taxpayer-funded rescue at the peak of the global financial crisis. However RBS has repeated that it will miss the deadline of December 2017 to dispose of its Williams & Glyn business that could lead to the EU imposing draconian penalties on the taxpayer-backed lender over its failure to offload the unit. While RBS is involved in talks with the UK Treasury, it has yet to meet European Commission officials to agree a solution over the sale. RBS has so far spent £1.5 billion preparing Williams & Glyn for a sale and early this year pulled an initial public offering mainly because of IT problems.

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: 31st October 2016
5-Year CDS Spreads (bps) Equity Share Prices 
  28-Oct-16 21 0ct 16 Chg 28-Oct-16 21 0ct 16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 20.99 19.82 +5.9%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.71 1.74 -1.7%
Irish Sovereign
Allied Irish Banks 61 61 0.0% 5.29 5.60 -5.5%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.35 14.00 +2.5%
Aust and NZ Banking Group Ltd 68 68 0.0% 27.62 28.25 -2.2%
Banco Bilbao Vizcaya Argentaria S.A. 117 124 -5.6% 6.59 6.17 +6.8%
Parent: Barclays plc
Barclays Bank plc 99 102 -2.9% 1.91 1.83 +4.4%
BNP Paribas S.A. 73 71 +2.8% 53.97 51.64 +4.5%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.32 13.40 -0.6%
Credit Agricole S.A. 67 67 0.0% 9.94 9.54 +4.2%
Parent: Credit Suisse Group AG
Credit Suisse AG 132 132 0.0% 21.05 21.66 -2.8%
Deutsche Bank AG 216 212 +1.9% 13.33 13.12 +1.6%
Parent: HSBC Holdings plc
HSBC Bank plc 71 76 -6.6% 6.25 6.26 -0.2%
Parent: ING Groep N.V.
ING Bank N.V. 66 65 +1.5% 13.13 11.79 +11.4%
Intesa Sanpaolo S.p.A. 133 132 +0.8% 2.16 2.11 +2.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.98 4.90 +1.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 81 87 -6.9% 0.58 0.55 +5.5%
 
Metro Bank plc n/a n/a n/a 27.96 27.16 +2.9%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 72 72 0.0% 95 93 +2.2%
Parent: RBS Group plc
Royal Bank of Scotland plc 127 131 -3.1% 1.94 1.90 +2.1%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 83 -1.2% 4.52 4.33 +4.4%
Shawbrook Group plc n/a n/a n/a 2.25 2.47 -8.9%
Societe Generale 69 69 0.0% 36.10 34.70 +4.0%
Parent: Standard Chartered plc
Standard Chartered Bank 108 108 0.0% 7.03 7.06 -0.4%
Svenska Handelsbanken AB 63 64 -1.6% 126 125 +0.8%
Unicredit  S.p.A. 173 168 +3.0% 2.35 2.28 +3.1%
 
FTSE 350 BANK INDEX n/a n/a n/a 3877 3830 +1.2%
 
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 96 94 +1.6% n/a n/a n/a

 

Sign up to receive rate alerts