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.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||13th February 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|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%|
|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%|
|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%|
|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|