News


20/06/2016


Bank Credit Update 20 June 2016

Monthly Headlines:
  • Analysts caution that there will continue to be significant volatility in global financial markets both in the run-up to the referendum – and afterwards, if the “Leave” camp were to win.
  • During the last week the ITRAXX Europe Senior Financials 5-year CDS index has surged by 18.6% as a raft of opinion polls appear to indicate that momentum has swung to the Brexit camp.
  • The Fed has slowed its expected pace of interest rate hikes as policymakers anticipate that their hands may be tied until there is a rebound in global demand with the UK referendum result a key factor.
  • 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.
  • Moody’s has downgraded Deutsche Bank’s long-term credit rating to reflect the heightened challenges associated with the delivery of its 5-year strategic plan.
  • A Brexit result could scupper the sell-off of the UK government’s remaining 9% stake in Lloyds Banking Group to the general public with £2bn worth of shares expected to be offered as early as August.
  • The Irish Government is planning to return Allied Irish Banks plc to market next year, seven years after it was bailed out during Ireland’s economic collapse.
General Commentary:

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.

See below for 5-year CDS spread and share price movements for the last month.
5-YEAR CDS SPREADS AND SHARE PRICES 
Monthly Movements
Date: 20th June 2016
5-Year CDS Spreads (bps) Equity Share Prices (LCL)
Financial Institutions 17-Jun-16 13-May-16 Chg 17-Jun-16 13-May-16 Chg
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 1.91 1.87 +2.1%
Irish Sovereign
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%
Societe Generale 95 80 +18.8% 32.87 33.40 -1.6%
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%
Unicredit  S.p.A. 197 180 +9.4% 2.41 2.91 -17.2%
 
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

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