News


09/01/2017


Flagstone Bank Credit Update 9 January 2017

Headlines:
  • A slew of encouraging Markit/CIPS services purchasing managers’ index (PMI) survey results covering the December period indicate possible GDP growth of 0.5% for the final quarter of 2016.
  • The latest PMI index figures for December have continued to defy fears of a Brexit slowdown, indicating that the UK services sector and the UK construction sector are growing at a faster pace than pre-Brexit.
  • Analysts caution that the current resilience of the economy, sitting alongside elevated levels of uncertainty, could mean that the next UK interest rate move could be either up or down.
  • A BDO survey indicates that the UK’s retail sector has experienced its fourth poor December in a row with negative like-for-like sales growth of -0.1% on the high street amid volatile consumer sentiment.
  • Consumers and businesses in the Eurozone appear to have shrugged off political uncertainty to start 2017 with confidence at its highest level in more than five years.
  • The Basel Committee has postponed a meeting to agree the global framework for banks’ risk-weighted capital ratios as European banks claim the new rules would unfairly penalise them.
  • Barclays and RBS will together pay more than $1.0bn in fines to the U.S. Department of Justice for foreign currency manipulation to draw a line under this long-running saga.
  • The ITRAXX Europe Senior Financials 5-year CDS index improved by 8.2% to 87bps over the week as the markets are optimistic of improving credit conditions for European banks in the New Year.
  • The FTSE 350 Bank Index was up 3.3% over the week as the markets put Italian bank solvency concerns and the financial impact of U.S. Department of Justice fines behind them.
General Commentary:

A slew of encouraging Markit/CIPS services purchasing managers’ index (PMI) survey results, covering the December period, indicate a strong economic growth pattern for the UK economy. Analysts believe that collectively the surveys point to gross domestic product (GDP) growth of 0.5% for the final quarter of 2016 (2.0% annualised).

The latest Markit/CIPS purchasing managers’ index (PMI) figures indicate that the UK services sector has continued to defy fears of a Brexit slowdown, growing at its fastest pace for 17 months in December. The index rose to 56.2 last month, from 55.2 in November – its highest level since July 2015. However economists caution that inflationary pressures continue to build in the sector with prices rising at the fastest rate since April 2011. Services, which include areas such as retailing and banking, make up more than three-quarters of the UK economy.

The Markit/CIPS purchasing managers’ index (PMI) for the UK construction sector also indicated that construction ended 2016 well by expanding at its fastest pace for 9 months in December. The index rose to 54.2 in December, up from 52.8 for the month before. However, the sector continues to experience intense cost pressures with the increase in costs last month being the biggest since April 2011. This came about as suppliers passed on the higher costs of imported raw materials due to the weak pound.

Although at face value these survey results suggest that the next move by the Bank of England is more likely to be a rate hike than a cut, economists believe that the Monetary Policy Committee (MPC) members remain concerned about the extent to which Brexit-related uncertainty could slow growth this year. As a consequence analysts caution that the current resilience of the economy, sitting alongside elevated levels of uncertainty, could mean that the next UK interest rate move could be either up or down.

The UK’s retail sector experienced its fourth poor December in a row with negative like-for-like sales growth on the high street amid volatile consumer sentiment. The latest figures from BDO indicate that comparable sales growth dipped by 0.1% last month after the high street failed to rally at the end of a disappointing year of trading. The downbeat figures and the weaker-than-expected update from Next will raise further fears that the UK’s retailers have had a tough festive period. This week a host of retailers will update the market on their festive period performance and markets are bracing themselves for a mixed bag of results.

Consumers and businesses in the Eurozone appear to have shrugged off political uncertainty to start 2017 with confidence at its highest level in more than five years. The European Commission’s monthly survey of economic sentiment in the 19 countries that share the euro rose in December for the fourth consecutive month to 107.8, boosted by rising optimism in France, Germany and the Netherlands. This was up from 106.6 in November and well above the 106.8 reading expected by economists polled by Reuters, as well as its long-term average of 100. It would appear that the Italian referendum and subsequent concerns about the Italian banking sector has not significantly impacted confidence in the Eurozone and caused a mere stagnation in sentiment in Italy itself. Analysts point to improving order books, strong employment expectations and strengthening assessments of production in recent months that outweigh political volatility for the moment.

The Basel Committee on Banking Supervision (BCBS) has postponed a meeting where senior figures were due to agree the global framework for banks’ risk-weighted capital ratios. Reports suggest that a further 2 months could now elapse while further debate takes place over the new rules which European banks claim would unfairly penalise them and which has sparked a lobbying battle with their U.S. peers. Completion of the Basel III capital adequacy regime has been held up by a dispute between bankers and regulators over how lenders calculate the riskiness of assets and the amount of capital they are required to hold. Many European banks use internal risk models which U.S. regulators argue have allowed them to underestimate capital needs. In response European banks claim that reducing their ability to use their own risk models would force them to raise more capital which would contravene an international commitment that bank capital requirements would not increase significantly.

Barclays Bank plc (Barclays) and the Royal Bank of Scotland plc (RBS) will together pay more than $1.0bn in fines to the U.S. Department of Justice (DoJ) for currency manipulation to finally draw a line under this long-running saga after a U.S. judge rubber-stamped the deal. Barclays will pay $650m and RBS will pay $395m as part of a $2.5bn agreement with the DoJ which includes a $925m contribution from Citigroup and $550m from JP Morgan. The banks had agreed to pay the fines in May 2015 after pleading guilty to rigging foreign exchange markets.

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: 9th January 2017
5-Year CDS Spreads (bps) Equity Share Prices
06-Jan-17 30-Dec-16 Chg 06-Jan-17 30-Dec-16 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. n/a n/a n/a 22.23 21.05 +5.6%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.36 2.37 -0.4%
Irish Sovereign
Allied Irish Banks 63 65 -3.1% 5.15 5.00 +3.0%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.46 14.15 +2.2%
Aust and NZ Banking Group Ltd 67 68 -1.5% 31.38 30.42 +3.2%
Banco Bilbao Vizcaya Argentaria S.A. 117 124 -5.6% 6.57 6.41 +2.5%
Parent: Barclays plc
Barclays Bank plc 77 82 -6.1% 2.35 2.23 +5.4%
BNP Paribas S.A. 81 85 -4.7% 62.49 60.55 +3.2%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 14.59 14.45 +1.0%
Credit Agricole S.A. 71 75 -5.3% 12.34 11.78 +4.8%
Parent: Credit Suisse Group AG
Credit Suisse AG 115 119 -3.4% 15.89 14.31 +11.0%
Deutsche Bank AG 159 169 -5.9% 18.32 17.25 +6.2%
Parent: HSBC Holdings plc
HSBC Bank plc 66 69 -4.3% 6.69 6.57 +1.8%
Parent: ING Groep N.V.
ING Bank N.V. 62 65 -4.6% 13.90 13.37 +4.0%
Intesa Sanpaolo S.p.A. 128 139 -7.9% 2.54 2.43 +4.5%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.40 5.36 +0.7%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 66 69 -4.3% 0.66 0.63 +5.6%
Metro Bank plc n/a n/a n/a 31.16 29.25 +6.5%
Nationwide Building Society 83 85 -2.4% n/a n/a n/a
Nordea Bank AB 65 68 -4.4% 103 101 +2.0%
Parent: RBS Group plc
Royal Bank of Scotland plc 111 113 -1.8% 2.32 2.25 +3.1%
Ult. Parent: Banco Santander S.A.
Santander UK plc 81 81 0.0% 4.42 4.96 -10.9%
Shawbrook Group plc n/a n/a n/a 2.71 2.72 -0.4%
Societe Generale 81 85 -4.7% 47.34 46.75 +1.3%
Parent: Standard Chartered plc
Standard Chartered Bank 113 116 -2.6% 6.91 6.64 +4.1%
Svenska Handelsbanken AB 56 57 -1.8% 125 127 -1.6%
Unicredit  S.p.A. 161 175 -8.0% 2.82 2.73 +3.3%
FTSE 350 BANK INDEX n/a n/a n/a 4274 4138 +3.3%
SNR FIN ITRAX CDS 5-YEARS    (ESTIMATED) 87 95 -8.2% n/a n/a n/a

Sign up to receive rate alerts