News


12/12/2016


Flagstone Bank Credit Update 12 December 2016

Monthly Headlines:
  • After the surprising ‘positive’ turmoil resulting from the unexpected election of Donald Trump as the next U.S. president, a period of relative calm has returned to the financial markets.
  • The financial markets have taken comfort from increasing signs that the UK Government may be prepared to negotiate a “softer” Brexit linked to ongoing EU payments.
  • The eurozone is bracing itself for a period of political uncertainty and economic instability after Prime Minister, Matteo Renzi, suffering a crushing defeat in the referendum on constitutional reform.
  • Attention continues to focus on Monte dei Paschi di Siena as it urgently needs to raise 5.0 billion (£4.2 billion) in order to remain solvent and analysts believe that investors may now decline to assist.
  • The BoE’s Financial Policy Committee announced the results of the annual stress test for the main UK lenders, with only Barclays, RBS and Standard Chartered Bank below their required MDA levels.
  • 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.
  • Several European banks have reported their Supervisory Review and Evaluation Process (SREP) capital requirements for 2017 as agreed with the ECB and in general these are lower than previously expected.
  • S&P reduced the outlook for Standard Chartered Bank from “Positive” to “Stable” to reflect the challenging market conditions for the Emerging Market countries in Africa in which the Bank operates.
  • The FTSE 350 Bank Index is up by 8.7% over the month to 4,219 with most of the rise over the last couple of days after the ECB announced an extension to QE which was welcomed by the stock markets.
  • The ITRAXX Europe Senior Financials 5-year CDS index was unchanged over the month with credit spreads improving by 9.9% over the last week as there was no immediate fallout from the Italian referendum results.
Monthly Commentary:

After the surprising ‘positive’ turmoil resulting from the unexpected election of Donald Trump as the next U.S. president, a period of relative calm has returned to financial markets. Volatility in the UK financial markets is expected to be low until next year while market participants await the outcome in January of the current appeal by the UK Government to the Supreme Court against the High Court ruling that Members of Parliament must be given a say on triggering Article 50 to exit the European Union (EU). The financial markets have also taken comfort from increasing signs that the UK Government may be prepared to negotiate a “softer” Brexit linked to ongoing EU payments as well as robust UK forward-looking data that supports the view that the economy is likely to grow by 0.5% in the final quarter (2.0% annualised).

Meanwhile the eurozone is bracing itself for a period of political uncertainty and economic 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 eurozone membership. European share prices have fallen with markets worried that the referendum decision in the EU’s third largest economy could cause a financial crisis for Italy’s fragile banking sector. In particular attention continues to focus on Monte dei Paschi di Siena as it urgently needs to raise €5.0 billion (£4.2 billion) in order to remain solvent and many analysts believe that investors may decline to assist. The bank is the worst affected of a group of Italian banks that are saddled with €360 billion in toxic non-performing loans.

During the month the BoE’s Financial Policy Committee (FPC) announced the results of the annual stress test for the main UK lenders (see table below). 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 where the stress test results were below their respective Maximum Distributable Amount (‘MDA’). However only RBS was required to improve its capital plan as it failed multiple hurdles of the test.

Bank Q3-16 CET Stress Test Result 2016 MDA Gap to MDA
Barclays 11.56% 6.9% 7.8% -0.9%
HSBC 13.92% 9.1% 7.4% 1.7%
Lloyds 13.44% 10.3% 7.7% 2.6%
Nationwide 23.29% 15.6% 8.8% 6.8%
RBS 14.95% 5.9% 8.2% -2.3%
Santander UK 11.10% 9.9% 7.3% 2.6%
Standard Chartered 13.00% 6.7% 7.0% -0.3%

 

RBS issued a statement after the stress test results were published indicating that it plans to 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.

of up to $14.0 billion by the U.S. Department of Justice for its part in the sub-prime mortgage mis-selling scandal.Several European banks have reported their Supervisory Review and Evaluation Process (SREP) capital requirements for 2017 as agreed with the ECB and in general these are lower than previously expected by analysts. Earlier this year the ECB split the Pillar 2 requirements into P2R (Recommended) and P2G (Guidance) with only the former included in the calculation of the bank’s maximum distribution amount (MDA) threshold rate. As a consequence, the minimum Common Equity Tier 1 amount required to sit below the MDA threshold levels for 2017 include: 4.5% Pillar 1 requirement (unchanged), a lower Pillar 2 requirement (i.e. P2R only), a lower Capital Conservation Buffer and a Systemic Risk buffer (unchanged).

During the month Standard & Poor’s reduced the outlook for Standard Chartered Bank from “Positive” to “Stable” to reflect the challenging market conditions for the Emerging Market countries in Africa in which the Bank operates due to the imminent Fed interest rate rise and stronger U.S. Dollar. Fitch applied a “Negative” outlook to the Standard Bank of South Africa for the same reasons. Meanwhile Moody’s reduced the outlook for Coöperatieve Rabobank U.A. to “Negative” to reflect the execution risks inherent in the restructuring which has resulted in a wide-ranging overhaul of the Bank’s governance structure.

See below for 5-year CDS spread and share price movements for the last week.
5-YEAR CDS SPREADS AND SHARE PRICES 
Monthly Movements
Date: 12th December 2016
5-Year CDS Spreads (bps) Equity Share Prices 
Financial Institutions 9-Dec-16 11-Nov-16 Chg 9-Dec-16 11-Nov-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 21.64 21.40 +1.1%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.26 1.98 +14.1%
Irish Sovereign
Allied Irish Banks 66 64 +3.1% 5.06 5.00 +1.2%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.35 14.30 +0.4%
Aust and NZ Banking Group Ltd 71 70 +1.4% 29.92 28.30 +5.7%
Banco Bilbao Vizcaya Argentaria S.A. 127 130 -2.3% 6.41 5.91 +8.5%
Parent: Barclays plc
Barclays Bank plc 82 86 -4.7% 2.34 2.01 +16.4%
BNP Paribas SA 87 73 +19.2% 60.23 54.75 +10.0%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.00 13.32 +5.1%
Credit Agricole SA 77 66 +16.7% 11.52 10.69 +7.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 133 140 -5.0% 15.60 13.63 +14.5%
Deutsche Bank AG 202 213 -5.2% 17.47 14.75 +18.4%
Parent: HSBC Holdings plc
HSBC Bank plc 70 64 +9.4% 6.75 6.20 +8.9%
Parent: ING Groep N.V.
ING Bank N.V. 65 61 +6.6% 13.64 12.85 +6.1%
Intesa Sanpaolo S.p.A. 140 146 -4.1% 2.37 2.23 +6.3%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.34 4.85 +10.1%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 71 72 -1.4% 0.62 0.60 +4.2%
 
Metro Bank plc n/a n/a n/a 32.74 29.43 +11.2%
 
Nationwide Building Society 85 85 0.0% n/a n/a n/a
Nordea Bank AB 67 73 -8.2% 102 96 +6.1%
Parent: RBS Group plc
Royal Bank of Scotland plc 118 115 +2.6% 2.18 2.02 +7.9%
Ult. Parent: Banco Santander S.A.
Santander UK plc 82 82 0.0% 4.88 4.25 +14.8%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 2.55 2.87 -11.3%
Societe Generale 87 69 +26.1% 46.57 39.79 +17.0%
Parent: Standard Chartered plc
Standard Chartered Bank 119 101 +17.8% 6.59 6.17 +6.8%
Svenska Handelsbanken AB 58 60 -3.3% 134 125 +7.2%
Unicredit  S.p.A. 191 197 -3.0% 2.49 2.29 +8.7%
 
FTSE 350 BANK INDEX n/a n/a n/a 4219 3882 +8.7%
 
SNR FIN ITRAX CDS 5-YEARS 97 97 0.0% n/a n/a n/a

Sign up to receive rate alerts