News


13/02/2017


Monthly Bank Credit Update 13 February 2017

Monthly Headlines:
  • The UK economy continues to enjoy a post-Brexit boost with stronger-than-expected industrial and manufacturing output in December while the country’s trade balance narrowed.
  • Many economists thought the Bank of England was overly optimistic when it came out with a 2.0% forecast for this year but many suspect that it may have actually called it right.
  • Banks and businesses are believed to have borrowed far more than expected via the Bank of England’s most recent Quantitative Easing scheme which was launched towards the end of last year.
  • Deutsche Bank AG has posted a net loss of €1.9bn ($2.1bn) for the final quarter of 2016 as legal costs for past misdemeanours weighed heavily on results.
  • The Cooperative Bank plc has warned investors that it is set to fall short of its capital targets and analysts warn that the Prudential Regulation Authority may soon require the lender to cease trading.
  • The Royal Bank of Scotland intends to apply a £3.1bn provision to its fourth quarter financial accounts as it prepares to settle significant claims in the U.S. that it mis-sold toxic mortgage-backed securities.
  • During the month Moody’s improved the outlook for Bank of America N.A. to “Positive” while Standard & Poor’s upgraded the outlook for Bank of Ireland to “Stable”.
  • Although the FTSE 350 Bank Index is up slightly by 1.3% over the month to 4,364, some major European banking shares have fallen by around 10% on adverse impact fears of revised Basel 3 RWA rules.
  • The ITRAXX Europe Senior Financials 5-year CDS Index became more expensive over the month, up by 2.2% to 92bps, with sharply higher French and Italian bank spreads offset by positive moves elsewhere.
Monthly Commentary:

The UK economy continues to enjoy a post-Brexit boost as the latest official data from the Office of National Statistics (ONS) showed stronger-than-expected industrial and manufacturing output in December while the country’s trade balance narrowed. Industrial production rose by 1.1% month-on-month in December which was close to double the rate expected while manufacturing was up by 2.1% giving an annual growth rate of 4.4%. The UK’s trade deficit also narrowed sharply in the final three months of the year to £8.6bn having hit a record high in the previous quarter as the fall in the pound helped the country’s exporters. The construction sector also recorded a strong up-swing in the final month of last year with growth of 1.8% month-on-month which was the largest monthly increase since last April as new house building rose by 2.9% in December.

Economists have greeted the positive data as a further sign that the UK’s growth has become more balanced and believe that it points to a strong outlook for 2017. However despite the strong manufacturing and construction growth there were few expectations in the City of a marked revision in fourth quarter GDP since together the two sectors only account for just over a fifth of economic output. The most optimistic forecast is for a revision up to 0.7% quarter-on-quarter. Many economists thought the Bank of England (BoE) was overly optimistic when it came out with a 2.0% forecast for this year but many suspect that it may have actually called it right.

Banks and businesses are believed to have borrowed far more than expected via the BoE’s most recent Quantitative Easing (QE) scheme which was launched towards the end of last year. The BoE has bought £4.9bn of corporate bonds in just three months, having originally announced that it would buy a total of £10.0bn over an 18-month period. At the same time, the Term Funding Scheme has lent £20.7bn to companies and banks. The aim of both policies, alongside a plan to buy £60bn of Government bonds, is to keep interest rates low. Analysts point to corporate investment being a source of economic growth and the fact that borrowing costs came down can be seen as a positive factor because it boosts the probability of firms investing more.

Despite the strong rebound in bond trading in the last three months of last year, Deutsche Bank AG has posted a net loss of €1.9bn ($2.1bn) for the final quarter of 2016 as legal costs for past misdemeanours weighed heavily on results. Analysts had expected the bank to post a loss of €1.2bn. The Bank has also been fined more than £500m by UK and U.S. authorities for anti-money laundering failings that allowed wealthy clients to transfer $10bn out of Russia in trades that were “highly suggestive” of financial crime.

The Cooperative Bank plc warned investors in a brief statement that it is set to fall short of the capital targets it had agreed with the BoE’s Prudential Regulation Authority (‘PRA’). Analysts predict that rather than let the bank struggle to find new capital, the regulator may require the lender to cease trading. A wind-down of the lender would mark the first test case for the BoE’s new rescue powers which were introduced in the aftermath of the financial crisis. Under the so-called ‘bail-in’ rules, bondholders – and those not covered by the Financial Services Compensation Scheme (‘FSCS’) up to a limit of £85,000 – must take a financial ‘hair-cut’ before a taxpayer-backed rescue is permitted. Nationwide Building Society, the ‘white-knight’ of the sector, has publicly declared that it is unlikely to take-over the bank. This is consistent with its refusal to take over Manchester Building Society a few months ago despite being asked to do so by the PRA. As of this morning, the Cooperative Bank announced that it was putting itself up for sale and is inviting offers to buy all of its shares. The BBC commented that determining the right price will be difficult as the amount of capital any buyer needs to sink into the bank is very far from clear.

The Royal Bank of Scotland (‘RBS’) has announced that it intends to apply a £3.1bn provision to its fourth quarter financial accounts as it prepares to settle significant claims in the U.S. that it mis-sold toxic mortgage-backed securities in the run up to the 2008 financial crisis. The provision means that RBS is unlikely to make a profit in 2016 for the ninth straight year. RBS is preparing to start negotiations with the U.S. Department of Justice (‘DoJ’) over a settlement of the mis-selling claims which could be as high as £9bn. Barclays Bank plc has decided to contest the claim by the DoJ over its role in the selling of toxic mortgages in the run-up to the 2008 financial crisis.

During the month Moody’s improved the outlook for Bank of America N.A. to “Positive” to reflect an increased likelihood that the bank’s profitability will strengthen on a sustainable basis over the next 12-18 months while the bank continues to adhere to its conservative risk profile which should lower its earnings volatility. Standard & Poor’s upgraded the long-term credit rating of Bank of Ireland by one notch with a “Stable” outlook to reflect its dominant Irish market share, international diversity and better relative asset quality performance than its Irish peers as well as a stable deposit base with a relatively low proportion of corporate deposits.

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: 13th February 2017
5-Year CDS Spreads (bps) Equity Share Prices
Financial Institutions 10-Feb-17 13-Jan-17 Chg 10-Feb-17 13-Jan-17 Chg
ABN Amro Bank N.V.
ABN AMRO Groep N.V. 61 75 -18.7% 21.60 22.55 -4.2%
Parent: Aldermore Group plc
Aldermore Bank plc n/a n/a n/a 2.28 2.18 +4.6%
Irish Sovereign
Allied Irish Banks 69 63 +9.5% 5.30 5.20 +1.9%
Parent: Arbuthnot Banking Group plc
Arbuthnot Latham & Co. n/a n/a n/a 14.56 14.50 +0.4%
Aust and NZ Banking Group Ltd 60 67 -10.4% 29.49 30.67 -3.8%
Banco Bilbao Vizcaya Argentaria S.A. 118 127 -7.1% 5.97 6.24 -4.3%
Parent: Barclays plc
Barclays Bank plc 78 80 -2.5% 2.29 2.35 -2.6%
BNP Paribas SA 90 87 +3.4% 55.70 62.16 -10.4%
Parent: Close Brothers Group plc
Close Brothers Limited n/a n/a n/a 15.13 14.50 +4.3%
Credit Agricole SA 80 77 +3.9% 11.40 12.59 -9.5%
Parent: Credit Suisse Group AG
Credit Suisse AG 115 119 -3.4% 14.60 16.12 -9.4%
Deutsche Bank AG 157 165 -4.8% 17.80 18.15 -1.9%
Parent: HSBC Holdings plc
HSBC Bank plc 67 71 -5.6% 6.87 6.78 +1.3%
Parent: ING Groep N.V.
ING Bank N.V. 63 67 -6.0% 13.42 13.78 -2.6%
Intesa Sanpaolo S.p.A. 148 134 +10.4% 2.13 2.47 -13.8%
Parent: Investec plc
Investec Bank plc n/a n/a n/a 5.72 5.67 +0.9%
Parent: Lloyds Banking Group plc
Lloyds Bank plc 68 72 -5.6% 0.66 0.66 0.0%
Metro Bank plc n/a n/a n/a 36.01 31.27 +15.2%
Nationwide Building Society 80 80 0.0% n/a n/a n/a
Nordea Bank AB 46 65 -29.2% 108 101 +6.9%
Parent: RBS Group plc
Royal Bank of Scotland plc 104 118 -11.9% 2.29 2.21 +3.6%
Ult. Parent: Banco Santander S.A.
Santander UK plc 79 81 -2.5% 5.04 5.15 -2.1%
Shawbrook Group plc
Shawbrook Bank Limited n/a n/a n/a 2.64 2.55 +3.5%
Societe Generale 89 87 +2.3% 42.39 47.48 -10.7%
Parent: Standard Chartered plc
Standard Chartered Bank 92 117 -21.4% 7.95 7.19 +10.6%
Svenska Handelsbanken AB 41 56 -26.8% 131 126 +4.0%
Unicredit  S.p.A. 176 175 +0.6% 12.64 13.38 -5.5%
FTSE 350 BANK INDEX n/a n/a n/a 4364 4309 +1.3%
SNR FIN ITRAX CDS 5-YEARS 92 90 +2.2% n/a n/a n/a

 

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