News


06/02/2017


Flagstone Bank Credit Update 6 February 2017

Weekly Headlines:
  • The Bank of England has increased its growth forecast for this year and now expects the economy to grow by 2.0% in 2017, up from a forecast of 1.4% in November 2016.
  • The Bank of England has made a striking forecast about the savings rate which it expects to fall to 4.0% in 2017 which is the lowest rate since the early 1960s.
  • It appears that UK economists are performing a collective U-turn on the impact of Brexit with the latest survey from Consensus Economics predicting that the average forecast for 2017 growth is now above 1.4%.
  • Growth in the UK services sector slowed in January for the first time in four months with the latest PMI survey dropping from 56.2 in December to 54.5 last month.
  • Deutsche Bank posted a net loss of €1.9bn ($2.1bn) for the final quarter of 2016 as legal costs for past misdemeanours weighed heavily on results.
  • Deutsche Bank has been fined more than £500m by UK and U.S. authorities for anti-money laundering failings that allowed clients to transfer $10bn out of Russia in trades that were suggestive of financial crime.
  • The UK government has reduced its stake in Lloyds Banking Group to 4.998% as it aims to return the bank to full private ownership in the next few months.
  • The Financial Services Compensation Scheme (FSCS) savings limit that protects investors should a bank or building society collapse has been increased to £85,000 from £75,000 with effect from the 30th January.
  • The FTSE 350 Bank Index has reduced only slightly by -0.1% over the week to 4,361 on anticipation of strong final quarter financial results from major banks and despite the Deutsche Bank fourth quarter loss.
  • The ITRAXX Europe Senior Financials 5-year CDS Index also improved slightly by 0.9% over the week to 84bps as markets continue to react positively to encouraging eurozone economic signs.
General Commentary:

The Bank of England (BoE) has made another dramatic rise in its gross domestic product (GDP) growth forecast for this year and now expects the economy to grow by 2.0% in 2017. This is up from a forecast of 1.4% in November which was itself an upgrade from the 0.8% forecast made in August. The raised growth forecast follows much criticism levelled at the BoE for being too gloomy when it drastically cut its growth forecast after the Brexit vote. In its latest Quarterly Inflation Report the BoE said the improved forecast was partly the result of higher spending and investment contained in Chancellor Philip Hammond’s Autumn Statement. It also attributed factors such as stronger growth in the U.S. and Europe as well as rising stock markets and the greater availability of consumer credit. The BoE also made a striking forecast about the savings rate, which it expects to fall to 4.0% in 2017 which is the lowest rate since the early 1960s. As expected the Bank kept interest rates on hold at 0.25%.

It appears that UK economists are performing a collective U-turn on the impact of Brexit echoing the BoE’s sharp revision to its growth forecast. The latest survey from Consensus Economics shows the average forecast for 2017 growth is now above 1.4%, from a low point of 0.6% in August as the resilience of UK consumers continues to confound most analysts. In general economist forecasts are still gloomier than those of the BoE but several large upgrades are now expected after the hefty revision announced by the BoE last week. Both UBS and Credit Suisse have since raised their 2017 predictions to 1.4% and 1.3% respectively. Credit Suisse was one of a number of investment banks to predict a recession and a 1.0% contraction in the aftermath of the Brexit vote.

Growth in the UK services sector slowed for the first time in four months in January as rising inflationary pressure weighed on businesses. Services activity as measured by the Markit/CIPS Purchasing Managers Index (PMI) survey dropped from 56.2 in December to 54.5 last month. This was well below the City’s consensus forecast for January of 55.8 as new business and employment rose at a slower than expected rate. Though still a positive reading, the latest figures mark the slowest rise in output since October. However worries about a wider slowdown may have been calmed by the business expectations survey which recorded its highest level since May 2016. The concern for the City is that the Services sector along with consumer spending has been one of the two main factors propping up UK growth over the last few years and any sign that the sector might be flagging will send out a warning sign.

Deutsche Bank has fallen further behind its Wall Street rivals performance wise despite the strong rebound in bond trading in the last three months of last year. The bank posted a net loss of €1.9bn ($2.1bn) for the final quarter of 2016 as legal costs for past misdemeanours weighed heavily on results. Shares initially fell by more than 5.0% before recovering to finish the week down by 1.8%. Analysts had expected the bank to post a loss of €1.2bn. The bank intends to continue with its rationalisation programme which could include withdrawing from more markets and client groups, although another round of job cuts is not expected. The bank is confident that it will be profitable this year and has started the year well with its debt trading unit seeing revenue rise by 40% year-on-year in January.

Deutsche Bank has also been fined more than £500m by UK and U.S. authorities for anti-money laundering failings that allowed wealthy clients to transfer $10bn out of Russia in trades that were “highly suggestive” of financial crime. Germany’s biggest bank has been hit with a £163m penalty from the Financial Conduct Authority (FCA) and a $425m (£341m) fine from the New York State Department of Financial Services (DFS) after it was found to have carried out a series of “mirror trades” and other suspicious transactions through its Moscow, London and New York offices that shifted money from Russia to offshore bank accounts. The FCA’s penalty was the biggest ever levied by the City watchdog for lax anti-money laundering (AML) controls.

The UK government has reduced its stake in Lloyds Banking Group to 4.998% as it aims to return the bank to full private ownership in the next few months. The government was left with a 43% stake in the bank after a £20.5bn taxpayer-funded bailout during the 2007-09 financial crisis. Even though the government is now selling the shares at below the average price it paid for them, it has so far received about £18.5bn pounds back. UK Financial Investments Limited (UKFI) is selling on average approximately 1.0% of shares every 3 weeks. This means at the current rate the bank should be fully returned to private ownership by around May.

The Financial Services Compensation Scheme (FSCS) savings limit – that protects investors should a bank or building society collapse – has been increased to £85,000 with effect from the 30th January following a £10,000 rise in the protection level. The weakening of the pound against the euro since the Brexit vote led to the change in the threshold. The amount of compensation payable is set at €100,000 across the European Union and so significant currency movements can alter the level for UK savers. The change means the protection limit returns to its pre-July 2015 level.

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: 6th February 2017
5-Year CDS Spreads (bps) Equity Share Prices
03-Feb-17 27-Jan-17 Chg 03-Feb-17 27-Jan-17 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. 75 75 0.0% 22.50 22.00 +2.3%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.19 2.14 +2.3%
Irish Sovereign
Allied Irish Banks 66 64 +3.1% 4.90 4.99 -1.8%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.61 14.90 +4.8%
Aust and NZ Banking Group Ltd 60 61 -1.6% 29.11 29.77 -2.2%
Banco Bilbao Vizcaya Argentaria S.A. 118 109 +8.3% 6.18 6.38 -3.1%
Parent: Barclays plc
Barclays Bank plc 77 76 +1.3% 2.29 2.31 -0.9%
BNP Paribas S.A. 87 77 +13.0% 61.14 61.45 -0.5%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.44 14.41 +0.2%
Credit Agricole S.A. 76 67 +13.4% 12.28 12.48 -1.6%
Parent: Credit Suisse Group AG
Credit Suisse AG 113 108 +4.6% 15.08 15.28 -1.3%
Deutsche Bank AG 159 156 +1.9% 18.84 19.18 -1.8%
Parent: HSBC Holdings plc
HSBC Bank plc 66 63 +4.8% 6.85 6.88 -0.4%
Parent: ING Groep N.V.
ING Bank N.V. 61 59 +3.4% 13.81 13.66 +1.1%
Intesa Sanpaolo S.p.A. 144 128 +12.5% 2.24 2.27 -1.3%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.66 5.75 -1.6%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 67 65 +3.1% 0.66 0.66 0.0%
Metro Bank plc n/a n/a n/a 34.88 32.90 +6.0%
Nationwide Building Society 80 80 0.0% n/a n/a n/a
Nordea Bank AB 46 48 -4.2% 106 106 0.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 101 99 +2.0% 2.29 2.32 -1.3%
Ult. Parent: Banco Santander S.A.
Santander UK plc 81 81 0.0% 5.34 5.36 -0.4%
Shawbrook Group plc n/a n/a n/a 2.47 2.41 +2.5%
Societe Generale 87 76 +14.5% 45.87 47.37 -3.2%
Parent: Standard Chartered plc
Standard Chartered Bank 92 92 0.0% 8.01 7.82 +2.4%
Svenska Handelsbanken AB 43 43 0.0% 136 133 +2.3%
Unicredit  S.p.A. 171 155 +10.3% 26.16 27.71 -5.6%
FTSE 350 BANK INDEX n/a n/a n/a 4361 4364 -0.1%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 84 85 -0.9% n/a n/a n/a

 

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