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|
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.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||12th 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||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%|
|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%|
|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%|
|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|