News


08/05/2017


Flagstone Bank Credit Update 8 May 2017

Weekly Headlines:
  • Some analysts believe that the Bank of England is set to lower its growth forecasts after the UK economy faltered in the first quarter with financial markets pricing in a rise in Bank Rate to 0.5% in early 2019.
  • Activity in the UK’s services sector for April at 55.8 grew at its fastest monthly pace this year according to the latest Markit/CIPS UK Services Purchasing Managers’ Index.
  • Activity in the UK’s manufacturing sector grew at its fastest pace in April for three years according to the latest Markit/CIPS UK Manufacturing Purchasing Managers’ Index, rising to 57.3 from 54.2 in March.
  • Activity in the UK’s construction sector picked up in April according to the latest Markit/CIPS UK Construction Purchasing Managers’ Index (PMI), rising to 53.1 from 52.2 in March.
  • Analysts believe that a fall in U.S. unemployment last week to its lowest level in a decade and a sharp rebound in hiring have strengthened the case for the Federal Reserve to raise interest rates in May.
  • The U.S. President is considering breaking up big Wall Street banks by splitting their consumer business from their investment operations via the introduction of new-Glass-Steagall-style bank rules.
  • The share price of Barclays plc fell by 2.8% over the week to a five-month low of 206p after Goldman Sachs became the third broker in a month to cut its target price on higher cross-border regulatory hurdle fears.
  • The independent directors of Shawbrook Group plc have again advised shareholders against the takeover deal and are asking them to take no action after the bidders went hostile at the end of March.
  • The FTSE 350 Bank Index rose by 1.6% over the week to 4,247 due to ongoing relief that the outcome of the French presidential elections is likely to lead to a win by the centralist candidate, Macon.
  • TheITRAXX Europe Senior Financials 5-year CDS Index was up by 6.6% over the week to 70bps on the likelihood of a conservative UK general election win and a centralist French presidential election win.
General Commentary:

Many analysts believe that the Bank of England (BoE) is set to lower its growth forecasts this coming week after the UK economy faltered in the first quarter with financial markets pricing in a rise in Bank Rate to 0.5% in the first quarter of 2019 at the earliest. Although inflation is already above the BoE’s 2.0% target and is expected to rise further, most economists now predict that the slowdown leaves a pre-Brexit interest rate rise increasingly unlikely. The economy grew by just 0.3% in the first quarter (1.2% annualised), against the BoE’s expectations of a 0.5% rise as the weaker pound pushed up prices which resulted in consumers cutting their spending. Along with the weak first quarter growth figures there appears to be little sign that wage growth is picking up which suggests inflation is a consequence of the weaker exchange rate.

There was some encouraging economic news during the week with April activity in the UK’s services sector (which accounts for 75% of the economy) growing at its fastest monthly pace this year according to the latest Markit/CIPS UK Services Purchasing Managers’ Index (PMI). The index rose to 55.8 and has now been above the 50 level that marks the divide between growth and contraction for 9-months in a row. However Markit said that prices charged by service sector firms rose at their fastest rate since July 2008. Markit said the strong performance from the dominant services sector, together with similarly upbeat surveys for construction and manufacturing, suggests that the economy is currently growing at twice the pace than that seen in the first quarter of the year. Markit believes that the three surveys collectively point to a UK GDP growth rate of 0.6% (2.4% annualised) at the start of the second quarter but warns that rising inflation is likely to eventually curb UK growth.

In addition April activity in the UK’s manufacturing sector (which accounts for 10% of the economy) grew at its fastest pace for three years according to the latest Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) which rose to 57.3 from 54.2 in March. This was well above economist expectations. Markit reported that the sector enjoyed a solid improvement over the last month with new orders being received at the fastest rate since January 2014. The survey found the main source of new work came from the domestic market but there was also a solid increase in new export business due to a combination of better global economic conditions and the weakening of the pound against other major currencies. While a fall in the value of the pound since the Brexit vote last June has made UK goods cheaper for foreign buyers, it has also pushed up the cost of imports for UK companies.

Meanwhile activity in the UK’s construction sector picked up in April according to the latest Markit/CIPS UK Construction which rose to 53.1 from 52.2 in March. This represents the sharpest rise in total construction output so far in 2017 with civil engineering expands at its fastest pace for 13 months. The April data also pointed to the strongest upturn in incoming new work so far this year which survey respondents attributed to the resilient economic backdrop and a sustained improvement in client demand. However robust demand for construction materials and upward pressure on costs from sterling depreciation resulted in another steep increase in input prices during April.

Analysts believe that a surprise fall in U.S. unemployment to its lowest level in a decade and a sharp rebound in hiring have strengthened the case for the Federal Reserve (Fed) to raise interest rates. Non-farm jobs increased by 211,000 in April which was greater than economist forecasts and a big turnaround from the 79,000 gain reported for March while unemployment dipped to 4.4%. The strength of the figures will give a boost to President Trump who has promised to create 25 million jobs in the next decade but the hiring rate will need to climb much higher for him to achieve that goal. Last week the Fed held interest rates at current levels. Economists said that the latest job numbers mean that interest rates are almost certain to go up next month and are likely to rise again in September.

The U.S. President, Donald Trump, has announced that he is considering breaking up big Wall Street banks by splitting their consumer business from their investment operations via the introduction of new-Glass-Steagall-style bank rules. US banks were permitted to own both main street banks and investment banking operations from 1999 after the Glass-Steagall Act was repealed. Many analysts believe that the repeal set the groundwork for the 2008 global financial crisis.

The share price of Barclays plc fell by 2.8% over the week to a five-month low of 206p after Goldman Sachs (Goldman) became the third broker in a month to cut its target price from 250p to 180p. The U.S. bank stated that in its view the capital gap between Barclays and its rivals in Europe has widened meaningfully during the first quarter while revenues from its investment business were weaker than expected. Although Goldman believes that an external capital raising initiative is low on the list of options, alternative capital measures could prove to be financially costly. While the bank’s management team has made forward steps in repositioning the bank, Goldman cautions that regulatory hurdles have adversely moved against cross-border banks in general. As Barclays has a corporate and investment bank presence on both sides of the Atlantic, Goldman believes that this could mean the group will be adversely impacted by significant changes in the regulatory environment – more so than its peers.

The independent directors of Shawbrook Group plc have again advised shareholders against the takeover deal and are asking them to take no action after the bidders went hostile at the end of March and took their offer directly to investors. To bolster its defence, the specialist lender also issued a trading update statement last week in which it confirmed it continues to trade in line with management expectations and wrote £495 million of new customer loans during the first quarter of this year which was up by 4.0% on the same period in 2016. The challenger bank has warned that a hostile £842 million bid made by private equity suitors Pollen Street Capital and BC Partners could cost it more than £12 million if the buy-out firms are ultimately successful in their pursuit of the business. Pollen Street, which founded Shawbrook, still owns 38.8% of the bank and now wants to buy it back 2-years after floating it on the stock exchange. The pair will take Shawbrook private if they secure acceptances from over 75% of Shawbrook voting rights. Alternatively if they receive more than 50% but less than 75% they will keep the bank listed. The Bank’s directors argue that the bid of 330p undervalues the business pointing to the fact that the shares are currently trading above the bid price at 342p.

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: 8th May 2017
5-Year CDS Spreads (bps) Equity Share Prices 
05-May-17 28-Apr-17 Chg 05-May-17 28-Apr-17 Chg
ABN AMRO Groep N.V. n/a n/a n/a 25.69 24.10 +6.6%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.53 2.53 0.0%
Irish Sovereign
Allied Irish Banks 45 49 -8.2% 5.54 5.24 +5.7%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 15.24 15.15 +0.6%
Aust and NZ Banking Group Ltd 54 55 -1.8% 30.65 32.76 -6.4%
Banco Bilbao Vizcaya Argentaria S.A. 82 91 -9.9% 7.80 7.35 +6.1%
Parent: Barclays plc
Barclays Bank plc 61 67 -9.0% 2.06 2.12 -2.8%
BNP Paribas S.A. 59 64 -7.8% 67.88 64.78 +4.8%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 16.60 16.92 -1.9%
Credit Agricole S.A. 57 62 -8.1% 14.48 13.65 +6.1%
Parent: Credit Suisse Group AG
Credit Suisse AG 82 91 -9.9% 15.55 15.13 +2.8%
Deutsche Bank AG 102 110 -7.3% 17.42 16.53 +5.4%
Parent: HSBC Holdings plc
HSBC Bank plc 49 53 -7.5% 6.59 6.37 +3.5%
Parent: ING Groep N.V.
ING Bank N.V. 48 52 -7.7% 15.76 14.94 +5.5%
Intesa Sanpaolo S.p.A. 120 134 -10.4% 2.84 2.67 +6.4%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.75 5.72 +0.5%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 51 56 -8.9% 0.70 0.69 +1.4%
Metro Bank plc n/a n/a n/a 34.70 35.29 -1.7%
Nordea Bank AB 36 36 0.0% 113 109 +3.7%
Parent: RBS Group plc
Royal Bank of Scotland plc 73 79 -7.6% 2.69 2.65 +1.5%
Ult. Parent: Banco Santander S.A.
Santander UK plc 75 75 0.0% 6.30 5.99 +5.2%
Shawbrook Group plc n/a n/a n/a 3.42 3.42 0.0%
Societe Generale 59 64 -7.8% 51.88 50.21 +3.3%
Parent: Standard Chartered plc
Standard Chartered Bank 62 68 -8.8% 7.18 7.21 -0.4%
Svenska Handelsbanken AB 36 36 0.0% 127 126 +0.8%
Unicredit  S.p.A. 139 153 -9.2% 16.22 14.94 +8.6%
FTSE 350 BANK INDEX n/a n/a n/a 4247 4180 +1.6%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 70 75 -6.6% n/a n/a n/a

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