Financials Unshackled Issue 15: Banking Update (UK / Irish / Global Developments)
Perspectives & Snippets on UK / Irish / Global Banking Developments
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
Good evening. As my wife and son enjoy the glorious climes of South Australia I remain firmly chained to the desk committing to keep you updated on all things banking - although I did enjoy a rare night out on Friday it must be said!
Without further ado this issue covers perspectives (and snippets) on select developments from Friday and the weekend - subsequent to ‘Financials Unshackled Issue 14’, which was published on the evening of Thursday 31st October.
This note is divided into: i) Essential Updates (some detailed updates / perspectives on key developments); ii) Sector News - UK; iii) Company News - UK; iv) Sector News - Ireland; v) Company News - Ireland; vi) European / Global Updates; and vii) Select Economics / Property / Political Updates. While it is not possible to provide hyperlinks you can quickly scroll down to the section(s) that are of interest, with all sections clearly segregated. I also provide links to all articles, reports, etc., that I refer to (where possible) which I hope is helpful for accessing source materials easily.
ESSENTIAL UPDATES
UK: Motor finance remains in the spotlight
The fallout from the Court of Appeal judgment in respect of the “Hopcraft” case on Friday 25th October continues to rumble on. To recap, the Court ruled that motor dealers acting as credit brokers owe a fiduciary duty to their customers - and that lenders will be liable for dealers’ non-disclosures. This is a considerably ‘higher bar’ than that imposed by prevailing regulatory requirements, thereby potentially putting lenders ‘on the hook’ for substantial liabilities. Indeed, this development has come amidst an ongoing FCA review into whether motor finance customers have been overcharged because of the past use of discretionary commission arrangements (DCAs) - for which analyst estimates in relation to total associated industry costs ranged from £6-16bn (before the unexpected “Hopcraft” case judgment).
In terms of latest developments since my last note, the following are noteworthy:
Patrick Hosking penned a lengthy piece in The Times on Friday evening, picking up on: i) Gary Greenwood at Shore Capital’s comments to the effect that the court judgment is expected to expand the consensus total expected costs of £6-16bn accruing from the FCA review for lenders; ii) Stephen Haddrill’s (Director-General of the Finance & Leasing Association (FLA)) concerns in relation to how the (arguably opportunist in some cases) claims management companies (CMCs) might act now, noting that “Uncertainty in regulation will always be exploited by claims management firms as an opportunity for speculative claims. They push forward their business at the expense of UK investment and the economy”; and iii) Coby Benson’s (from Bott & Co, a consumer law firm) comments in relation to the wider implications of the ruling for other lending segments: “The judgment also applies equally to non-motor finance lenders, such as those who have secretly paid commission to brokers of personal loans or insurance”. The article also picks up on Metro Bank’s (MTRO) decision on to temporarily pause asset finance lending while it reviews its systems, processes and legal documentation. Click here for the article.
Michael Bow at The Telegraph also wrote an interesting piece on the debacle on Friday, which flags that the effect of this will likely be higher prices for motor finance lending given the ensuing dearth of loan supply in the wake of the Court judgment. The article also notes that Nikhil Rathi, FCA CEO, has said he is working “at pace” to find a solution and could provide further guidance soon - and Bow notes that one option is for the FCA to suspend any possible legal claims against lenders for a period of time (which would presumably require government intervention to empower the regulatory body to do so) - especially considering that the Supreme Court looks likely to have the final say here. Click here for the article.
Matthew Lynn of The Telegraph set out his perspectives on the matter on Saturday, with yet another headline highlighting the alleged travails of the Labour government: “Britain’s car finance fiasco risks crashing the economy”. Lynn notes that the market for motor vehicles cannot function without lending (a valid assertion I would argue) and opines that: i) government will need to pass emergency legislation over the coming days, limiting compensation claims; and ii) the BoE will need to underwrite the lenders, setting up a fund to acquire ‘bad loans’. Click here for the article.
In a Bank of Ireland Group (BIRG) context, Joe Brennan at The Irish Times reported on Friday that the lender’s UK motor finance business, Northridge Finance, has also temporarily paused offering motor finance facilities. Click here for the article. BIRG reported, in its 3Q24 IMS of 30th October, that its UK motor finance loan book was c.€3bn in size at 30th September. Indeed, Brennan also reported on the topic on Saturday - I was pleased to contribute to the piece, noting that “The emerging view is that pre-existing analyst estimates for motor finance provisioning are much too low”, which is a comment related to all lenders with potential exposures here. However, any protective measures for the sector that the BoE / FCA might extend in the coming days would undoubtedly be helpful - and are necessary in my view given the potential scale of the problem (ahead of a Supreme Court decision) to stabilise the situation for the lenders in the near-term. Click here for Brennan’s Saturday article. Indeed, Sean Pollock at the Sunday Independent also wrote on the topic today and reported that the Central Bank of Ireland (CBI) has no plans to conduct a similar lookback probe. Click here for Pollock’s piece.
Ireland & UK: Looking ahead to AIBG, OSB and VANQ 3Q trading updates
Next week we are due to receive 3Q24 trading updates (for the three months to 30th September) from: i) AIB Group (AIBG) - Tuesday 5th November; ii) OSB Group (OSB) - Wednesday 6th November; and iii) Vanquis Banking Group (VANQ) - Thursday 7th November.
Briefly, taking AIBG first, I expect that the messages will be broadly similar to those conveyed within its 1H24 update, i.e., continued very strong profitability, further expansion in the loan book owing to favourable domestic market lending conditions, stability in customer deposits with no marked change in trends in migration to term product, and continued capital strength reflecting organic capital generation. I would expect reaffirmation of FY24 guidance - with a reasonable probability of a further FY24 NII upgrade (despite the fact that guidance has been procured assuming an end-year ECB Deposit Facility rate of 3.25%) with its structural hedging strategies and continued contained deposit funding costs a key underpin for near-term NII resilience, although I suspect any such upgrade would be just a tweak to the existing guidance for NII of c.€4.0bn to >€4.0bn. Clearly the dialogue is already focused on the NII trajectory in outer years in the wake of changed official rate expectations but I strongly expect that AIBG will reassure in the context of its FY26 medium-term targets - which still look to be easily within its reach despite lower expected base rates now and some possible incremental cost pressures in the years ahead. AIBG hosts an earnings call every quarter which helps stakeholders obtain more colour in respect of certain issues - I expect a particular focus on downside NII sensitivities (which appear to me to be quite conservative) as well as on how plans for the intended SRT transaction in 2H24 are progressing.
On OSB, the 3Q updates tend to be short and we will likely just get a few key data points. OSB reset expectations for FY24 at the stage of the 1H24 results - in particular, downgrading: i) NIM guidance from c.250bps to c.230-240bps mainly owing to increased mortgage market competition; ii) Cost/Income from c.33% to c.36%; and iii) underlying net loan book growth guidance from +c.5% y/y to +c.3% y/y. One suspects management has given itself enough room to meet the revised targets in the wake of relatively challenging market conditions and I do not expect any change to FY24 underlying net loan growth guidance next week. While it appears that refreshed FY24 NIM guidance is somewhat conservative, I would be a bit nervous on the possibility of a further adverse change to EIR assumptions given potential persistence in the increased speed at which maturing fixed term mortgages redeem or switch onto lower prevailing spreads that was observed through 1H24 - however, it appears to me that revised FY24 NIM guidance was conservatively calibrated with this also in mind so, on balance, my sense is that FY24 NIM (and Cost/Income) guidance will be reaffirmed.
VANQ will likely set out a reasonably detailed quarterly update and key focus points are likely to include: i) outlook for motor finance lending volumes / complaints trends and how this could impact on FY24 guidance and on guidance for a low single-digit RoTE in FY25 / mid-teens RoTE for FY26 (it is important to note that VANQ has never entered into discretionary broker commission arrangements, according to FY23 Annual Report p.37); ii) NIM evolution; iii) whether upsized cost reduction expectations are on track; and iv) whether underlying credit performance remains stable.
SECTOR NEWS - UK
UK Budget and the housing market: There was a useful piece in The Times on Friday on the likely implications of the Budget in a housing market context. Some highlights: i) risk of higher mortgage rates (given higher expected gilt and therefore swap rates - and given the OBR’s assessment, which I covered in my 31st October note) with latest Moneyfacts data (as of Friday morning) showing that average 2Y/5Y fixed mortgage rates now stand at 5.39%/5.09% - broadly flat versus the rates prevailing on 1st October (and down 90bps/77bps y/y); ii) reduced appetite to acquire properties on the part of amateur landlords (see further note below on this topic) in response to the 2pps increase in the stamp duty surcharge on second homes to 5%; and iii) the piece reminds us that the OBR forecasts net additional homes of 1.3mn in England over the next five years, which falls short of the government’s 1.5mn target - though the OBR, having been too optimistic in the past, does not factor in the major planning reforms that have been announced. Click here for the article. I also recommend listening to the FT Political Fix podcast for a useful run-through the Budget - click here to listen.
Limited companies dominate buy-to-let (BTL) purchases: Much has been written about the travails of landlords in recent months (and years) but it was interesting to read a piece in the FT on Friday, flagging Hamptons data which show that limited company purchases of properties in England and Wales reached 85,000 in the year to September (indeed, Hamptons also recently reported that the number of BTL incorporations was +28% y/y to 5,312 in September 2024 - and that 70% of new BTL purchases are now effected through a company structure - click here for the Hamptons piece). While landlords purchased just 10% of all homes sold in Great Britain this year (down from 16% in 2015), an increasing share is going to limited companies, i.e., the fall-off in purchases relates to the amateur BTL segment (though, with that said, it’s not a mutually exclusive point as there has been an ongoing trend for larger amateur buyers to incorporate). The mainstream UK listed lenders who are heavily focused on BTL lending, OSB Group (OSB) and Paragon Banking Group (PAG), almost exclusively procure their lending to professional limited company landlords. Click here for article. Also worth having a read of a detailed piece in The Sunday Times today (click here for the article) on how the stamp duty rise will hit the BTL market.
Snippets:
George Nixon writes in The Times on Saturday explaining why mortgage rates will be higher and what are the options for borrowers now given it typically takes a few weeks for higher swap rates (which are particularly volatile at the moment I might add) to be transmitted to mortgage pricing. Click here for the article.
Mortgage Strategy set out a useful summary on Friday of fixed rate mortgage reductions effected in the past week - with Santander UK trimming rates by up to 36bps, Barclays UK (BUK) trimming by up to 30bps, and Lloyds Bank (LLOY) and Halifax (LLOY) effecting both upward and downward rate changes. It will be interesting to see what the coming weeks will bring in terms of swap rates and ensuing mortgage rate changes as the market (hopefully) settles post-Budget. Click here for the article.
This Is Money reported on Friday that, given NS&I has only raised £3.3bn in the 2024/25 fiscal year thus far (which is below its annual fundraising target of £5-13bn, set in the Spring Budget in March), speculation has emerged that it may enhance its Premium Bonds prize fund rate (which was cut to 4.15% from 4.40% last month). While I have set out my views to the effect that NS&I is unlikely to price in a way that drags the market significantly up, this does seem a reasonable prospect for now at least given: i) the upward movement in swap rates of late; and ii) the fact that UK banks were not levied with any incremental tax charges in the Budget last week. Click here for the article. Indeed, This Is Money further reported this morning on recent savings rate changes (some up, some down) in recent days (click here for the article). Furthermore, The Telegraph ran a piece on Friday on Reeves’ “£975m stealth tax raid” for savers in the context of her decision to freeze ISA allowances until 2030 (click here for the article).
The BoE Prudential Regulation Authority (PRA) and the FCA published a joint Policy Statement on Friday: PS18/24 - Supervisory Statement - Prudential assessment of acquisitions and increases in control (click here for PS18/24). Most notably for me was the following change: “The PRA and FCA have clarified what constitutes ‘significant influence’ to make it clearer that, when determining if there is significant influence, it is not just a case of being on the board of an authorised firm or its parent, but the ability to direct or influence decisions made by the authorised firm’s board. That direction or influence could be through a shareholder board appointment (to the UK authorised person or its parent) or other arrangement.”. FCA release here.
The BoE published its latest monthly Regulatory Digest for October on Friday. A useful resource to catch up on latest regulatory developments in case you missed anything. Click here to access the Digest.
COMPANY NEWS - UK
BARC completes acquisition of Tesco Bank: Barclays (BARC) announced on Friday morning that it has now completed the acquisition of Tesco’s retail banking business and has commenced a long-term strategic partnership with the supermarket group. The acquired business includes credit cards, unsecured personal loans, deposits and the operating infrastructure. In conjunction with completion of the acquisition, Barclays UK (BUK) has entered into a long-term, exclusive strategic partnership with Tesco for an initial period of 10 years to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, as well as explore other opportunities to offer financial services to Tesco customers through Tesco's distribution channels and on the open market (this is the way in which supermarket groups should have sought to gain a slice of the banking pie from Day One in my view). The transaction involves the acquisition of c.£8.4bn of gross loans (£4.2bn credit cards, £4.2bn unsecured personal loans) and c.£6.8bn of customer deposits. The consideration payable by BUK at completion was £0.6bn (consistent with expectations set out in the 9th February RNS, announcing the agreement to acquire this business) and the deal is expected to result in the recognition of c.£0.3bn of PBT in 4Q24 (being the net impact of a gain on acquisition of c.£0.5bn and a Day 1 impairment charge of c.£0.2bn), generating a c.50bps expected RoTE benefit for FY24. The transaction results in the addition of c.£7bn of risk-weighted assets (RWAs) and is estimated to reduce BARC’s CET1 capital ratio (based on the end-3Q24 position) by c.20bps (BARC’s initial estimate, according to the RNS issued on 9th February 2024 announcing the agreement to acquire this business, was that the CET1 capital ratio depletion would be in the order of c.30bps (based on BARC’s end-3Q23 CET1 capital ratio)). BARC further notes that it will integrate the acquired business over time and the deal is expected to be accretive to Group RoTE post-integration. This, in my view, is a strategically sensible acquisition for BARC in the context of: i) its ambitions to reduce the proportionality of RWAs attributable to the Investment Bank (by growing other segments rather than de-emphasising IB) given consistency of RoRWA capability considerations; and ii) its appetite to ‘bulk up’ in the UK and move up the risk curve for better risk-adjusted returns (which is an underpin for its FY26 target RoTE of >12%). It is a marginal positive to see that the level of CET1 capital ratio depletion (including the Day 1 ECL charge) will be marginally less than initially estimated. Click here for the RNS.
BARC, HSBA & STAN vying for US commercial lending growth: Reuters published an interesting article on Friday afternoon picking up on the theme of large UK banks’ appetite for US commercial banking growth, noting that Barclays (BARC), HSBC (HSBA), and Standard Chartered (STAN) are pursuing ambitions in this respect. The article cites previously unreported BCG data which show that the US commercial banking revenue pool grew from $310bn in 2019 to $429bn in 2023. Click here for the article.
STB issues unscheduled trading update, noting u/l FY24 PBT is expected to fall materially short of consensus estimates: Secure Trust Bank (STB) issued an unscheduled trading update on Friday morning covering the FY24 outlook and the 3Q24 (three months to 30th September) experience (notably, STB had been scheduled to publish its 3Q24 trading update on 13th November - with the bank also set to host a Capital Markets Event on that date). On 3Q, net loans were +0.5% q/q / +7.1% y/y to £3.44bn while deposits were +3.2% q/q / +15.6% y/y to £3.14bn. The update also notes that STB “…remains on track to deliver £5m of Project Fusion savings by the end of the year and a further £3m of cost savings in 2025, bringing total annualised cost savings to £8m by the end of next year…”. However, these positive factors were overshadowed by the news that the activities to progress value recovery from the excess level of defaulted balances (relating to the suspension of collections activity following the FCA's Borrowers in Financial Difficulty ('BIFD') review that led to a higher volume of Vehicle Finance loans reaching default status) are taking longer than expected, meaning some value recovery is now likely to extend into FY25. This underpins a material downgrade to expected underlying FY24 PBT of £10-15m in size, which was not well received by the market with the share price falling by c.16% on Friday. Click here for the RNS.
Snippets:
RLAM’s shareholding in Close Brothers Group (CBG) has reduced to 4.88% (previously disclosed shareholding: 5.31%) following a transaction on 30/10/24.
Rachel Lawrence, CFO of Secure Trust Bank (STB) acquired 4,094 shares in STB on Friday at an average price of 486p per share - for a total outlay of £19.9k.
Bloomberg reports this afternoon on Santander UK, effectively floating the question as to whether its Spanish parent’s commitment to the geography is set for further decline. Click here for the article.
Skipton Building Society has appointed Hasintha Gunawickrema to its Board as a NED, subject to regulatory approval. Click here for the press release.
SECTOR NEWS - IRELAND
Prospective personnel cost pressures at Irish banks: The Business Post reported yesterday that results of surveys of thousands of bank employees conducted by the Financial Services Union (FSU) indicate that a large majority of staff at AIB Group (AIBG), Bank of Ireland (BIRG) and PTSB believe they should be given significant pay increases next year. It is not surprising that surveys of this kind elicit such a response on the part of staff. However, given the strong profitability enjoyed by AIBG and BIRG in particular, it looks like Spring 2025 will prove a testy period in their negotiations with the FSU - with the banks likely to emphasise strongly the adverse expected impact of lower official rates on profitability (as well as emerging competition) in the years ahead in these discussions to put paid to any arguments for large pay increases - and, notably, the banks handled their negotiations with unions adeptly in recent years in my view. I have recently argued strongly in favour of a repeal of the supertax of 89% on variable pay in excess of €20k to allow the banks manage their staff cost bases more flexibly (click here for my detailed piece). It is also notable that Banking & Payments Federation Ireland (BPFI) has warned that the transition to instant payments required under the EU’s Single European Payments Areas (SEPA) requirements will prove costly for the banks. Click here for the article.
Mortgage rate changes expected imminently: Jon Ihle at The Sunday Times writes today that mortgage brokers are predicting that Bank of Ireland (BIRG) and PTSB will effect downward “tweaks” to their mortgage rates following recent moves by AIB Group (AIBG) and Avant Money (Bankinter) - citing views expressed by Trevor Grant, Chairman of the Association of Irish Mortgage Advisors (AIMA). Grant thinks that will be it in terms of downward rate moves until 2025. For what it’s worth, I agree with Grant’s views - which appear to suggest limited reductions for the remainder of the year but it is sensible to expect downward rate moves on the part of the listed lenders following ECB rate cuts and with an impending General Election in train (and we may see AIBG tweak again too). On Avant, I noted on Thursday that it is cutting mortgage rates by up to 40bps following the ECB’s recent cuts to official rates and will introduce a new 1% cashback incentive on all mortgages drawn from January 2025 - while I expect Avant to continue to be competitive I don’t expect that they will drive the market down massively in a mortgage spreads context - and the indications from its CEO & CFO on the recent Bankinter 3Q24 results call were that its ambitions in Ireland will be pursued at a measured pace; indeed its share of mortgage drawdowns has been pretty steady in recent quarters. In overall terms I remain strongly of the view that the listed lenders will focus intensively on recouping some spread on this product as official rates decline - and I think that will suit Avant as well. Click here for the article.
Snippets:
Donal MacNamee at the Business Post wrote on Friday about how Irish banks are more sensitive to lower official rates than peer UK and eurozone (EZ) banks. MacNamee flagged RBC’s recent initiation of coverage report on Irish banks which assigned an underperform rating to both AIBG and BIRG. The sensitivity of the Irish banks to lower official rates is well understood by the market and is a function of higher dependence on interest revenues owing to: i) a lower proportion of fee-earning businesses in their suite of activities (especially given required non-core divestments post-GFC); ii) different climate for bank product fees relative to other jurisdictions; and iii) lower passthrough of higher rates to deposit customers as rates went up (though somewhat mitigated by reduced mortgage spreads). Click here for the article.
Ian Guider at the Business Post writes today about the competitive threat that Avant Money (Bankinter) could pose to the listed lenders. I think that is certainly possible on a medium-term view but, as noted above, I expect that Avant will pursue its ambitions gradually and I don’t anticipate any ‘race to the bottom’ in pricing terms in a bid to pursue faster growth. Click here for the article.
Donal MacNamee at the Business Post also reports today on RBC’s findings to the effect that Irish banks rank “very poorly” on digital propositions relative to their UK peers and have a “lot of work to do” to improve customers’ online experiences - who reportedly cited average score and ranking data sourced from Apple’s App Store and Google Play to inform their views (with the table helpfully reproduced in the article - and which paints quite a grim picture in fact). The findings are not greatly surprising and one concern is that, in the short to medium-term, the impetus to invest sufficiently can suffer as the banks book substantial profits in what is a highly concentrated market - for now. Click here for the article.
The Sunday Times reports today that a seven-year long investigation into NAMA’s sale of its Northern Ireland loan portfolio (Project Eagle) has found that the State’s bad bank fetched the best possible price - although the news report notes that the investigation has concluded that NAMA failed to manage conflicts of interest appropriately. So, it appears that NAMA has successfully defended the discount rate that it used to value the loan portfolio - and validly arguing, in my view, in its 14th September 2016 response to the C&AG Special Report on the sale of Project Eagle that: “It would have been commercially naïve of NAMA to maintain that a portfolio valuation derived from a discount rate of 5.5% could have been realised in the face of overwhelming actual expert evidence that the market’s valuation was lower”. Click here for the article.
The Central Bank of Ireland (CBI) published its Monthly Card Payment Statistics for September 2024 on Friday, which show that monthly card payments were +13.4% y/y in the month to €8.56bn (-2.9% m/m) and cash withdrawals were €1.12bn in the month (-2.6% y/y; -4.4% m/m) - illustrating that, in considering y/y changes, the Irish economy is becoming increasingly cashless. Click here for the release.
COMPANY NEWS - IRELAND
Snippets:
Wellington’s shareholding in AIB Group (AIBG) has increased to 3.01% (previously disclosed shareholding: 2.92%) following a transaction on 30/10/24.
EUROPEAN / GLOBAL UPDATES
Eurozone banks net covered bonds supply set to decline in 2025: The Wall Street Journal picked up on a Barclays analyst note on Friday noting that the net supply of covered bonds issued by eurozone (EZ) banks is set to decline in 2025 due to reduced funding needs - as deposits and lending flows continue to procure net liquidity surpluses.
Swiss Finance Minister interview with Bloomberg: Interesting Bloomberg article yesterday containing an excerpt of an interview with Switzerland’s Finance Minister, Karin Keller-Sutter on Thursday, in which she articulated her view that Credit Suisse’s subsidiaries in the UK and US were insufficiently capitalised which meant it was very difficult to sell them in a timely manner when Credit Suisse was struck by crisis (though she wouldn’t be drawn on whether the Swiss regulator will increase the level of capital that banks are required to hold against their foreign subsidiaries from the 60% level, a key question now for UBS). It is widely expected that UBS may need to set aside an additional $15-25bn of capital to meet likely higher minimum requirements over time. Keller-Sutter also notes that future banking crises cannot be fully ruled out as “you always have moral hazard” and “people making mistakes” - going on to highlight geopolitical risks and high sovereign debt levels as key risk factors. Click here for the article.
GS makes big leveraged finance hire: Bloomberg reported on Friday that Goldman Sachs (GS) has recruited Kartik Subramanian-Nair from Barclays (BARC) as a MD in a push to drive further growth in leveraged finance. Click here for the article.
Growth of cards relative to consumption growth in the US has slowed considerably in recent years: Interesting article in The Wall Street Journal on Friday, picking up on the marked slowdown in the USD volume of debit and credit card payments relative to personal consumption expenditure (PCE) growth since the pandemic. Relevant to those playing in the US cards market though, in a Barclays (BARC) context, I would expect we will see the bank forge further partnerships in a bid to drive continued growth. Click here for the article.
Snippets:
Pierre Cipollone, Member of the ECB’s Executive Board, wrote for the ECB Blog on Friday on how a digital euro would blend the simplicity of cash with digital convenience. Click here for the article.
Click here for an excellent piece from Martin Sandbu in the FT earlier today exploring whether the West should worry about whether alternative financial cross-border connections could be achieved in the wake of Russian banks being kicked out of Swift, etc.
Matthew Lynn at The Telegraph writes today on how the world is about to witness an epic clash between governments and investors - with a new financial crisis potentially in store. Click here for the article.
Alternative Credit Investor reported on Friday on comments made by Gijs de Reuver, MD in Houlihan Lokey’s financial restructuring group, to the effect that the smaller size of European leveraged loan markets likely means a lesser propensity for ‘creditor-on-creditor violence’ cases, which have been on the increase in the US. Click here for the article.
Bloomberg reported on Friday afternoon that Randy Schwimmer, Vice Chairman at Churchill Asset Management, expects US rates to remain higher for longer which will be a boon for private credit yields. Click here for article.
Marc Rubinstein’s latest Substack post explores the demise of Credit Suisse (part 2). Marc is always an interesting read. Click here for the article. Rupak Ghose has also written extensively on this topic on Substack of late - check out his top-notch material here.
SELECT ECONOMICS / PROPERTY / POLITICS UPDATES
BoE widely expected to cut base rate to 4.75% on Thursday: We will learn of the BoE Monetary Policy Committee’s (MPC) interest rate decision at 12:00 BST on Thursday 7th November. Market expectations are for a further 25bps reduction in the base rate to 4.75%, with a 8:1 majority expected to be in favour of such a move. However, market expectations in relation to the scale of further base rate reductions beyond next week’s decision have reduced materially in the wake of the Budget (as discussed in my note of 31st October). Click here for a useful piece on this in The Times on Friday.
Investors warning of a lingering risk premium in gilt yields: Interesting article in the FT on Friday on how investors have been cautioning that there is now an additional risk premium embedded in UK government bond pricing on account of the high borrowing implied by last week’s Budget. Still, nothing like the reaction to the Truss / Kwarteng ‘Mini-Budget’ in 2022 and 10Y gilt yields notably contracted and steadied since the initial reaction to the Budget, settling at 4.46% (having moved as high as 4.53% on Thursday). Click here for the article.
Nationwide HPI shows UK house prices +0.1% m/m / +2.4% y/y in October: Nationwide published its monthly House Price Index (HPI) for October 2024 on Friday which showed that average house price growth slowed considerably in the month to £265.7k (+0.1% m/m / +2.4% y/y - from +0.6% m/m / +3.2% y/y in September). Not entirely surprising to see house price growth slow ahead of the Budget it must be said. Click here for the press release.
Irish housing in focus: Two articles in The Irish Times this weekend on the Irish housing market that are well worth a read. Jack Horgan-Jones wrote on Saturday about the political system’s lack of acceptance of the true underlying demand for housing, noting comments from one government source to the effect that there is now a 0% chance that new housing output targets will be agreed before the General Election, which won’t surprise (but will frustrate) active observers (click here for the article). Notably, the government had set an initial target for 33,450 housing units in 2024 and the CSO recently reported that 21,634 new homes were delivered in the nine months to end-September, all well off structural housing build needs. Eoin Burke-Kennedy writes today on the factors underpinning the global boom in house prices, which are also relevant in an Irish market context (click here for the article). Indeed, it is, in my view, difficult to foresee any improvement in affordability conditions on a medium-term outlook - not unhelpful for the banks in terms of collateral values but not supportive of transaction activity reaching normalised levels (albeit recent mortgage approvals and drawdowns data have been positive for loan growth nonetheless).
Focus on what a Trump Presidency would mean for Ireland: Four interesting articles on what a Donald Trump win in the US election next week could mean for Ireland. Cliff Taylor wrote in The Irish Times yesterday (click here for the article) about the risks to Ireland in the event that Trump were to: i) reduce the US corporation tax (CT) rate to 15% (as he has threatened to do), matching the Irish CT rate applicable to large companies - thereby lessening the attractiveness of Ireland as an investment destination; and ii) impose 10-20% tariffs on imports from countries outside of China (which he has threatened to do), which could prove significantly impactful for firms producing in Ireland for US markets (e.g., pharma, medical devices). However, such outcomes are by no means a fait accompli if Trump does trump Harris next week - indeed, Claire Scott at The Sunday Times touches on these issues in a piece today (click here for the article), noting that Ireland has already begun to step up its diplomatic efforts (and has, notably, been very successful historically in this vein). A separate article to the aforementioned one was also penned by Scott at The Sunday Times on this topic (click here for the article), with comments from Minister for Public Expenditure and Reform Paschal Donohoe as follows: “It’s difficult to predict what the next corporate tax policy of the US will be, but the next US president is going to have big decisions to make, because their current overall tax policy has to be extended or changed early in their next term. So it is possible that we could see a change in corporate tax revenue.”. The Business Post article on the topic today is also well worth a read (click here for the article). The bottom line is that this is a highly sensitive topic in Ireland given that the proportion of fiscal revenues attributable to CT receipts has roughly doubled on a c.10-year lookback (with just 10 companies accounting for c.60% of CT revenues - and just 3 accounting for roughly one-third of CT revenues).
Snippets:
Sunday Independent/Ireland Thinks opinion polls shows Fine Gael (FG) & Fianna Fail (FF) coalition very likely again following impending General Election. The results were: FG 26% (unchanged), FF 20% (+1pp), Sinn Fein 18% (-1pp). Read more here and also see exclusive interview with Tanaiste Micheal Martin in today’s Sunday Independent - who is “hungry” to be Taoiseach (Prime Minister) again here.
Disclaimer
The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.
Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.
Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.