The UK building industry sector has continued its recovery after the vote to leave the European Union (EU). The sector beat expectations last month with the IHS Markit/CIPS construction purchasing managers’ index edging up from 52.6 to 52.8. Growth in housebuilding, commercial and civil engineering activity helped to boost the figure to an eight-month high, exceeding the consensus forecast of 52.2. Readings above 50 demonstrate growth. It was the third consecutive month that building activity had risen although the rate of growth was well below the levels of earlier this year and the levels of the past two years.
The U.S. faces the prospect of at least two interest rate rises next year after a key employment report showed solid jobs growth and falling unemployment in the world’s biggest economy. Analysts had already put the chance of a rate increase later this month at nearly 95%. Non-farm employment rose by 178,000 in November, slightly ahead of economists’ forecasts, while unemployment fell unexpectedly from 4.9% to 4.6%, its lowest level since August 2007. All signs now point to a rise in the Fed rate when the Federal Open Market Committee (FOMC) meets on the 13th and 14th December.
The BoE’s Financial Policy Committee (FPC) has announced the results of the annual stress test for the main UK lenders. The FPC found that the UK banking system was robust enough to avoid any macro-prudential action and announced that the UK countercyclical buffer is to be maintained at zero until at least June 2017 (unless there was a material change in the outlook between now and then). The stress test components were severe with the adverse scenario including: a 1.9% reduction in the global economy (including a sharp economic decline in China); a 31% decline in UK house prices over the 5-year test period; and a 42% decline in UK commercial real estate. In most cases the results confirmed the resilience of the UK banks following years of building up capital defences in the balance sheet, with 3 exceptions, namely Barclays Bank, Royal Bank of Scotland (RBS) and Standard Chartered Bank. However only RBS was required to improve its capital plan as it failed multiple hurdles of the test.
State-backed RBS has agreed a cost-cutting plan with the Prudential Regulation Authority and intends to sell assets to boost its capital after failing its Bank of England stress tests, with the Bank of England (BoE) warning of a “challenging” outlook for the UK’s financial system. RBS issued a statement after the stress test results were published to say it would take a range of actions to make up the capital shortfall which amounts to about £2.0 billion. It is understood that the stress test for RBS included the adverse impact of significant one-off fines and litigation costs – including a potential claim of up to $14.0 billion by the U.S. Department of Justice for its part in the sub-prime mortgage mis-selling scandal.
RBS has also confirmed that it has reached agreement on a full and final settlement with three out of the five shareholder groups (that represents over three-quarters of claims by value) to pay about 40p a share to settle claims over its ill-fated rights issue in 2008. The proposed compensation figure would amount to a total settlement of around £800 million which has surprised many analysts who were expecting RBS to have to pay more. However it has yet to reach settlement with two other shareholder groups – representing the likes of Société Générale, Abbey Life, Aberdeen Asset Management and Axa as well as local authorities, retail investors and RBS staff – have not yet agreed to the deal. It is thought that these groups are questioning how much some big investors may have known about the state of the bank’s finances when they backed the rights issue.
The PRA has been trying to find ways in recent weeks to save the Manchester Building Society. Problems arose four years ago when interest-rate swaps that had been used to offset risk incurred in its fixed-rate mortgage lending turned out to have been incorrectly reported in its accounts. The society was forced to restate its reserves which significantly reduced its retained earnings and led to losses for 2011 and 2012. The society staved off collapse at the time by organising an £18.0 million capital raising exercise from five larger societies. The PRA had hoped that the society would be able to claw its way back to health and start lending again. However, the Manchester warned earlier this year of “material uncertainty” as its capital strength fell short of regulatory standards. It added at the time that it was considering a number of options to enable it to continue to meet capital requirements and improve the quality of its regulatory capital.
Italy is bracing itself for political and financial instability after Prime Minister, Matteo Renzi, and the Italian government suffering a crushing defeat in the referendum on constitutional reform which was widely seen as a referendum on EU membership. European share prices have fallen with markets worried that instability in the EU’s third largest economy could re-ignite a dormant financial crisis and deal a hammer blow to Italy’s fragile banking sector. In particular, attention will focus on Monte dei Paschi di Siena that urgently needs to raise €5.0 billion (£4.2 billion), an initiative that may fail if investors walk away. The bank is the worst affected of a group of Italian banks that are saddled with €360 billion in toxic, non-performing loans.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||5th December 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||20.10||20.06||+0.2%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.16||2.07||+4.3%|
|Allied Irish Banks||69||70||-1.4%||5.65||5.35||+5.6%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.04||14.19||-1.1%|
|Aust and NZ Banking Group Ltd||73||73||0.0%||28.46||28.28||+0.6%|
|Banco Bilbao Vizcaya Argentaria S.A.||143||143||0.0%||5.79||5.77||+0.3%|
|Parent: Barclays plc|
|Barclays Bank plc||90||92||-2.2%||2.13||2.16||-1.2%|
|BNP Paribas S.A.||89||87||+2.3%||54.59||54.94||-0.6%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.62||13.61||+0.1%|
|Credit Agricole S.A.||81||78||+3.8%||10.60||10.84||-2.2%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||146||145||+0.7%||13.64||13.44||+1.5%|
|Deutsche Bank AG||220||218||+0.9%||14.84||14.85||-0.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||78||77||+1.3%||6.27||6.41||-2.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||68||67||+1.5%||12.61||12.75||-1.1%|
|Intesa Sanpaolo S.p.A.||164||164||0.0%||2.13||2.02||+5.4%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.07||5.21||-2.7%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||77||77||0.0%||0.58||0.59||-1.7%|
|Metro Bank plc||n/a||n/a||n/a||32.20||33.58||-4.1%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||70||70||0.0%||96||97||-1.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||128||127||+0.8%||1.93||2.02||-4.2%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||4.29||4.28||+0.2%|
|Shawbrook Group plc||n/a||n/a||n/a||2.49||2.52||-1.2%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||125||124||+0.8%||6.45||6.35||+1.7%|
|Svenska Handelsbanken AB||59||61||-3.3%||127||128||-0.8%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3928||3997||-1.7%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||108||109||-1.0%||n/a||n/a||n/a|