News


14/11/2016


Flagstone Bank Credit Update 14 November 2016

Monthly Headlines:
  • The unexpected election of Donald Trump as the next U.S. president is likely to usher in a period of change on a number of fronts.
  • President-elect Trump comes from a business background and is seeking to cancel – or more likely to renegotiate – a number of free trade deals that put “America first”.
  • The “Trumponomics” approach is likely to have adverse implications for the European Union and wider global economy but could propel the UK to the front of the queue for a free trade deal.
  • The High Court judgement that MP’s must be given a say on triggering Article 50 has encouraged the view that this will temper the possibility of a “Hard Brexit”.
  • The U.S. presidential result has galvanised Wall Street into believing that the Dodds-Frank Act will be repealed by the new Administration.
  • The FTSE 350 Bank Index is up by 4.9% over the month to 3,882 from 3,701 while the ITRAXX Europe Senior Financials 5-year CDS Index has improved by 4.2% over the month to 97bps from 101bps.
  • Both S&P and Fitch have reduced their outlooks for Wells Fargo Bank N.A. to “Negative” to reflect the potential damage to the bank’s earnings and reputation following recent regulatory actions.
  • Fitch improved the outlook for Standard Chartered Bank to “Stable” to reflect the presence of a significant junior debt buffer that would protect senior obligations from default in case of failure.
Monthly Commentary:

Undoubtedly the major event of the month has been the unexpected election of Donald Trump as the next U.S. president which has resulted in a period of media-led hysteria with comments ranging from Armageddon to a global economic collapse. However leaving these more incredulous comments to one side, the presidential result is likely to usher in a period of change on a number of fronts.

Bearing in mind that President-elect Trump comes from a business background, it is no real surprise that he is seeking to cancel – or more likely to renegotiate – a number of free trade deals that put “America first”. These include among others the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP) and the Transatlantic Trade & Investment Partnership (TTIP) with the European Union. While we may be heading for a degree of American isolation, many analysts believe that it is more likely to result in a more pragmatic approach (“Trumponomics”) being adopted where the beneficiaries of any U.S. support will be required to pay their way (e.g. mainland Europe NATO members).

While the “Trumponomics” approach is likely to have adverse implications for the European Union and wider global economy, it could prove timely for the UK, post-Brexit, as the UK could be propelled to the front of the queue for a free trade deal since our economy largely complements that of the U.S. and is unlikely to pose a threat to U.S. jobs. This optimism, along with the recent High Court judgement that Members of Parliament (MP’s) must be given a say on triggering Article 50, has encouraged the view that this will temper the possibility of a “Hard Brexit”. This has resulted in a slight recovery in the value of sterling on the foreign exchanges and the likelihood that UK interest rates will remain at current levels for now.

The U.S. presidential result has galvanised Wall Street into believing that the Dodds-Frank Act will be repealed by the new Administration. The Act is intended to make sure that abuses that led to the financial crisis never happen again. Although seen by many as cumbersome and costly, it does appear to be working with most of the work on probing the recent sham accounts scandal at Wells Fargo being carried out by an agency created under the Act. Its possible removal could not only prove dangerous but is also viewed with trepidation by the City since a light-touch regulation may give a competitive advantage to New York.

Despite the potential negative impact for European banks and the ongoing difficulties at Deutsche Bank AG – who are in negotiation with the U.S. Department of Justice (DoJ) to try to substantially reduce the initial claim of $14.0 billion (£11.5 billion) for mis-selling toxic products linked to U.S. sub-prime mortgages – the FTSE 350 Bank Index is up by 4.9% over the month to 3,882 from 3,701 while the ITRAXX Europe Senior Financials 5-year CDS Index showed spreads retracing some of their recent rises, improving by 4.2% over the month to 97bps from 101bps.

During the month, both S&P and Fitch reduced their outlooks for Wells Fargo Bank N.A. to “Negative” to reflect the potential damage to the bank’s earnings and reputation following recent regulatory actions after it was discovered that Bank staff opened as many as 2 million sham accounts in customers’ names without authorisation.

Moody’s upgraded Danske Bank A/S with a “Positive” outlook on the basis of the continued improvement in earnings, capitalisation and credit quality in all key areas of its business while S&P improved the outlook for KBC Bank N.V. to “Stable” to reflect their view that the Bank will continue to strengthen its core capital position and increase its buffer of bail-in-able instruments from resilient earnings that will help offset pressure from the low-interest-rate environment.

Despite disappointing profits, Fitch improved the outlook for Standard Chartered Bank to “Stable” to reflect the presence of a significant junior debt buffer that would protect senior obligations from default in case of failure. Moody’s has also applied a “Positive” outlook to Skipton Building Society to reflect strong capital and funding levels and a track record of stable profitability.

See below for 5-year CDS spread and share price movements for the last month.
5-YEAR CDS SPREADS AND SHARE PRICES 
Monthly Movements
Date: 14th November 2016
5-Year CDS Spreads (bps) Equity Share Prices 
Financial Institutions 11-Nov-16 14-Oct-16 Chg 11-Nov-16 14-Oct-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 21.40 19.35 +10.6%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.98 1.66 +19.3%
Irish Sovereign
Allied Irish Banks 64 60 +6.7% 5.00 5.00 0.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.30 16.24 -12.0%
Aust and NZ Banking Group Ltd 70 68 +2.9% 28.30 27.53 +2.8%
Banco Bilbao Vizcaya Argentaria S.A. 130 127 +2.4% 5.91 5.70 +3.7%
Parent: Barclays plc
Barclays Bank plc 86 107 -19.6% 2.01 1.70 +18.2%
BNP Paribas SA 73 75 -2.7% 54.75 48.2 +13.6%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 13.32 13.32 0.0%
Credit Agricole SA 66 72 -8.3% 10.69 9.21 +16.0%
Parent: Credit Suisse Group AG
Credit Suisse AG 140 140 0.0% 20.64 21.25 -2.9%
Deutsche Bank AG 213 226 -5.8% 14.75 12.24 +20.5%
Parent: HSBC Holdings plc
HSBC Bank plc 64 82 -22.0% 6.20 6.20 0.0%
Parent: ING Groep N.V.
ING Bank N.V. 61 68 -10.3% 12.85 11.28 +13.9%
Intesa Sanpaolo S.p.A. 146 139 +5.0% 2.23 1.98 +12.6%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 4.85 4.74 +2.3%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 72 95 -24.2% 0.60 0.52 +14.4%
 
Metro Bank plc n/a n/a n/a 29.43 26.63 +10.5%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 73 72 +1.4% 96 89 +8.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 115 139 -17.3% 2.02 1.73 +16.8%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 83 -1.2% 4.25 4.05 +4.9%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 2.87 2.40 +19.8%
Societe Generale 69 72 -4.2% 39.79 32.85 +21.1%
Parent: Standard Chartered plc
Standard Chartered Bank 101 119 -15.1% 6.17 6.52 -5.3%
Svenska Handelsbanken AB 60 67 -10.4% 125 121 +3.3%
Unicredit  S.p.A. 197 180 +9.4% 2.29 2.11 +8.5%
 
FTSE 350 BANK INDEX n/a n/a n/a 3882 3701 +4.9%
 
SNR FIN ITRAX CDS 5-YEARS 97 101 -4.2% n/a n/a n/a

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