The UK referendum on Thursday, 23rd June is almost upon us with the expected ramping up of claims and counter-claims in full swing. However, much of the rhetoric from both sides is opinions rather than hard facts which appear to be in short supply. Analysts caution that there will continue to be significant volatility in global financial markets and in the value of sterling against foreign currencies both in the run-up to the referendum – and afterwards, if the “Leave” camp were to win – due to financial markets hating uncertainty.
For most of the past month this uncertainty has not been reflected in the credit default swap (CDS) market with the ITRAXX Europe Senior Financials 5-year CDS Index hovering around the 97bps mark. However, during the last week the index has surged by 18.6% as a raft of opinion polls appear to indicate that momentum has swung to the Brexit camp.
Although a Brexit result in itself is unlikely to result in the collapse of any major bank, since there is a minimum 2-year grace period between the vote and actually leaving the EU, nevertheless a Brexit decision is expected to modestly depress the country’s GDP growth while a new relationship between the UK, the EU and other trading partners evolves. This may result in the credit rating agencies downgrading the UK sovereign rating which in turn may further increase wholesale funding costs for UK banks resulting in a reduction in lending volumes, the squeezing of interest margins/profits and the implementation of further cost-saving measures.
Evidence that the U.S. neutral rate of interest remains stalled near zero has caused the Federal Reserve (Fed) to slow its expected pace of interest rate hikes as policymakers signalled their hands may be tied until a rebound in global demand or other forces raise that key measure of the economy’s underlying strength. Following the Fed’s latest meeting, Chair Janet Yellen said the central bank was still coming to grips with the likelihood that the neutral rate – the point at which monetary policy is neither spurring nor restraining economic growth – is stuck at a historic low and could limit the central banks room to manoeuvre until such times as the global economy improves. The Fed has been thwarted more than once in its interest rate hike plans by the weak state of the global economy and the uncertainty surrounding the UK’s upcoming vote on whether or not to leave the European Union.
The European Central Bank’s pledge to buy bonds of vulnerable countries faces a legal challenge this week, with Germany’s top court set to rule on the legality of its bond-buying plans. A negative verdict could send shock waves through already jittery markets, given the powerful influence exerted on investors by the ECB’s unprecedented efforts to shore up Europe’s economy. Although the scheme was never used, it was widely credited with soothing the region’s financial crisis. EU judges have already approved the plan, but that ruling was challenged in Germany, where the ECB’s plans are highly controversial. Most analysts expect the German court to give the scheme the green light but a surprise could have far-reaching consequences, potentially complicating Germany’s participation in the ECB’s current €80bn-a-month bond-buying plan.
During the month, Moody’s upgraded the credit ratings for both ABN AMRO Bank and Svenska Handelsbanken to reflect their improved financial performance and downgraded the credit rating for Deutsche Bank to reflect the heightened challenges associated with the delivery of its 5-year strategic plan. Moody’s also reduced the outlook for both Coventry Building Society and Yorkshire Building Society to “Stable” to reflect the increased competition in the sector and “buy-to-let” regulatory action. Fitch upgraded the credit rating for KBC Bank to reflect its improved financial strength and downgraded the credit rating for Credit Suisse to reflect trading losses and ongoing material conduct & litigation risks. Fitch also upgraded the credit rating for Skipton Building Society to reflect its improvement in overall risk quality.
A Brexit result could scupper the expected sell-off of the UK government’s remaining 9% stake in Lloyds Banking Group shares to the general public as the widely predicted disruption to financial markets would probably cause investors to sell UK assets. It is understood that the UK government intends to sell #2bn worth of shares as early as August, provided Britain remains in the EU.
The Irish Government is planning to return Allied Irish Banks plc to market seven years after it was bailed out during Ireland’s economic collapse. It is understood that the Irish Government intend to offload a stake of about 25% in AIB in a stock market offering early next year in a deal that will value the lender at about £7.9 million.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||20th June 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.91||1.87||+2.1%|
|Allied Irish Banks||73||65||+12.3%||6.30||7.60||-17.1%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.97||14.61||+9.3%|
|Aust and NZ Banking Group Ltd||86||107||-19.6%||23.23||24.11||-3.6%|
|Banco Bilbao Vizcaya Argentaria S.A.||164||127||+29.1%||5.40||5.51||-2.0%|
|Parent: Barclays plc|
|Barclays Bank plc||131||125||+4.8%||1.66||1.65||+0.6%|
|BNP Paribas SA||96||80||+20.0%||43.45||44.02||-1.3%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.41||11.76||+5.5%|
|Credit Agricole SA||93||80||+16.3%||8.05||8.65||-6.9%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||154||133||+15.8%||20.55||19.90||+3.3%|
|Deutsche Bank AG||209||176||+18.8%||13.68||14.68||-6.8%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||106||101||+5.0%||4.31||4.30||+0.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||87||72||+20.8%||9.98||10.43||-4.3%|
|Intesa Sanpaolo S.p.A.||161||127||+26.8%||2.04||2.22||-8.1%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.49||4.82||-6.8%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||109||103||+5.8%||0.65||0.66||-1.5%|
|Metro Bank plc||n/a||n/a||n/a||20.60||21.00||-1.9%|
|Nationwide Building Society||78||76||+2.6%||n/a||n/a||n/a|
|Nordea Bank AB||70||65||+7.7%||76||76||0.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||142||134||+6.0%||2.22||2.11||+5.2%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||80||76||+5.3%||3.81||4.06||-6.2%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||2.40||2.56||-6.3%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||169||144||+17.4%||5.26||5.07||+3.7%|
|Svenska Handelsbanken AB||70||63||+11.1%||100||101||-1.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3145||3140||+0.2%|
|SNR FIN ITRAX CDS 5-YEARS||115||97||+18.6%||n/a||n/a||n/a|