Financials Unshackled Issue 17: Banking Update (UK / Irish / Global Developments)
Latest updates in a UK, Irish, and Global Banking developments context
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
FOREWORD
Good morning and welcome to the latest edition of ‘Financials Unshackled’. The main focus of today’s note is on: i) OSB Group’s (OSB) 3Q24 trading update; ii) further deep reflections on AIB Group’s 3Q24 trading update following my detailed note yesterday; iii) a rough assessment of what the market is pricing in for what the ultimate hit to CBG will be emerging from the motor finance debacle (and associated prospective contagion); and iv) further press updates on the motor finance saga more broadly. Much more covered beyond these developments too.
ESSENTIAL UPDATES
3Q24 trading update from OSB Group is slightly disappointing
Key Synopsis & Take
OSB Group (OSB) published a trading statement for 3Q24 (for the period from 1st July to date) this morning - which is slightly more detailed than usual. In overall terms it’s not the dampest of updates but it does slightly err on the disappointing side - though, with that said, sentiment has been very negative of late anyway. Given the cautionary tone on prospective EIR adjustments, it seems likely that stakeholders will remain somewhat concerned in this respect. Even the fact that more detail than normal is provided (of an, arguably, negative tilt) makes me feel a bit nervous about management’s confidence in the FY24 outcome (beyond the marginal u/l net loans growth guidance dowwngrade issued today). FY24 underlying (u/l) net loans growth guidance has been very marginally downgraded from +c.3% y/y to “growth of slightly under 3%” and a note of caution has been reiterated in terms of customer behaviour in reversionary periods (EIR context) though it is noted that the potential future impact of Precise BTL customers spending less time on reversion will reduce significantly over the next two years - and FY24 NIM guidance has been preserved. The CEO flags “a gradual return of confidence in our core markets” and that OSB is “seeing increased applications in our more cyclical businesses” which is somewhat positive, though nothing to be excited about just yet - and, not unexpectedly, some caution is raised in terms of the future plans of professional landlords due to the stamp duty increase on second properties in the Budget.
In More Detail
Organic originations of £0.9bn in 3Q24 (3Q23: £1.3bn) with demand in core lending sub-segments remaining in line with expectations. U/L net loans +2% YTD to £26.3bn at end-3Q. Renewed focus on Commercial Mortgages, Bridging Finance and Asset Finance is progressing, with an increase in applications in each of these sub-segments in 3Q but FY24 u/l net loan growth guidance downgraded to slightly below 3% from c.3%, which is somewhat disappointing (though not a major surprise or change - albeit it’s unfavourable momentum).
U/L FY24 NIM guidance preserved at 230-240bps as higher yielding mortgages in the back book roll off to current prevailing spreads and as the market observes slightly elevated fixed term retail deposit pricing. Indeed, it feels like one should continue to be cautious in the context of the risk of end-year EIR adjustments given the following comment: “The Group continues to evaluate customer behaviour in the reversion period throughout the fourth quarter and will assess this as part of the usual year-end process” (a broadly similar cautionary tone was struck within the 1H24 update and the fact that OSB hasn’t been able to say something more positive today means that management is still quite concerned here in my view) and while the statement goes on to note that “The potential future impact of Precise Buy-to-Let customers spending less time on reversion will reduce significantly over the next two years as these mortgages reach maturity” it feels like that comment has just been included to deflect against the risk of an adverse reaction to the continued cautionary EIR guidance (as it should be known anyway that these mortgages will be approaching maturity over the next two years). My gut is that OSB management is warming up the market for a likely (though not definite) adverse EIR adjustment at end-FY24 but is seeking to soften that forthcoming possible bad news with the fact that there is line of sight on an end to the potential issues in this vein.
Expected u/l Cost/Income guidance of c.36% for FY24 is unchanged - while OSB notes that it continues to invest in the digitalisation of its core platform and customer-facing propositions, it marries that commentary up with a “focus on cost control with proactive actions to make its business-as-usual cost base more efficient”. It feels unlikely that stakeholders will revise cost expectations materially on the back of this update.
3M+ arrears +10bps q/q to 1.7%, which is still very contained and is “in line with management expectations”. Also helpful - at the margin - to learn that the secured loan book benefited from a small impairment release in 3Q.
Estimated impacts of Basel 3.1 reforms package of slightly less than a 2pps hit to the CET1 capital ratio remains unchanged.
OSB notes that it had repurchased £32.1m of shares (as of market close on 5th November) under the £50m buyback programme that was announced in August.
CEO outlook commentary in terms of lending already flagged above and strikes a somewhat cautionary tone on balance I would say.
Super-strong AIB Group share price performance post-3Q update
The market liked what it heard from AIB Group (AIBG) - once again - yesterday with the stock price up >6% on the day. Great to see loan growth guidance bumped up but the key highlight for me was once again the current financial year net interest income (NII) upgrade - though I would add that AIBG is performing strongly across all key metrics which would have been reassuring too. But, in all fairness, anyone following interest revenue-biased banks knows that NII is still the ‘key talking point’ and the upgrade here was, I suspect, instrumental to the share price boom on the day (though it’s impossible to accurately disaggregate the factors underlying a share price reaction with that said). Arguably, the CFO was bounced into issuing a FY24 NII upgrade on the earnings call (to >€4.0bn from c.€4.0bn per the trading statement itself - admitting on the call that the c.€4.0bn official guidance is “marginally conservative”). Given the 3Q trading statement reiterated guidance for c.€4.0bn of NII for FY24 (consistent with the guidance issued at the stage of the 1H24 results, which marked an upgrade at that point as the pre-existing guidance had been for FY24 NII of >€3.65bn), and in light of the 9M24 NII experience, it raised the question as to what that meant in terms of implied sequential q/q decline in NII in 4Q - so, we got another upgrade ‘thick and fast’ which served to reassure the market that there are ‘no clouds on the horizon’ in terms of 4Q NII delivery.
It’s also worth recapping on a question on the earnings call on what the market is missing in the context of the FY26 15% RoTE target - with the analyst who fielded the question observing that consensus estimates are more bearish than what management seems comfortable with, but noting that consensus is still getting to a >15% FY26 RoTE (as an aside, and for what it’s worth, my own ‘back of the envelope’ indicates it should be considerably higher than 15% despite a much lower official rate backdrop). The response was predictable. The CEO confidently asserted that management is not in the business of updating medium-term targets on a high frequency basis.
Sure, that’s fair. No one wants a management team to be reactively dishing out changed medium-term guidance every quarter based on latest trends / outlook - and, while my own perspective is that there is a very strong probability that this medium-term target will indeed be well beaten, who on this planet knows with informed confidence what will happen on a two-year view so it’s understandable to play the game conservatively (indeed, by the same token (albeit in the other direction), the UK banks like BARC and LLOY (though not NWG) are seen by the market to be over-optimistic in terms of their own medium-term return targets - and only time will tell). However, looking at this question through another lens, the degree of precision with which analysts typically hold the large cap UK banks to account in terms of their returns targets, means that it is a very fair question. Most management teams, understandably, tend to give themselves some ‘room’ (when things are going well at least - with increased inclination for over-optimism when things are going badly to put it simplistically) though it all boils down to the degree of severity of that ‘room’ with the analysts’ job being to dissect in that context.
But let’s step back to have a look at the track record of AIBG NII delivery versus AIBG NII guidance over the years because context is everything. At the stage of the publication of its FY22 results in March 2023 AIBG guided that NII for FY23 was expected to be >€3.0bn with NIM of >240bps (based on an especially high deposit beta assumption which would have entailed enormous structural change in the deposit market in a very short space of time - with analysts understandably adopting the guidance in their models, but noting their ‘extreme conservatism’ in cases…). As it turned out (and following a series of sequential quarterly upgrades to NII through FY23*) actual FY23 NII came in at €3.84bn. The analyst questions are sensible - I follow the UK banks closely and I understand the rationale for trying to backsolve guidance (that’s the analysts’ job effectively at one level). But I think it should be clear by now to interested observers that there has been an obvious trend here (on the way up at least), so, people need to be commercial rather than overly scientific in terms of how they approach the analysis in my view.
It will be interesting to see if government places more stock soon given the strong share price. Indeed, the government’s shareholding in AIBG reduced considerably through the ‘2023/24 guidance upgrade cycle’ from c.55% at 6th March 2023 to c.21% on 26th September 2024. However, who knows what the effect of what now looks extremely likely to be a Trump win in the US Presidential election (indeed, he has, at the time of writing, already declared victory) will be - given his soundbites on corporation tax et al., which could have significant implications for the Irish economy), though, in fairness the market has been largely 50:50 between the two candidates so it’s hardly going to be a major shock if he does win.
With all of that said, in light of clear colour on the structural hedge maturity profile and much changed deposit beta guidance this year one senses that we’re at - or at least towards - the tail end of the ‘guidance upgrade cycle’ from an income perspective but, in thinking about all-important ‘stabilisation / inflection point considerations’ in overall terms (momentum, as well as context, is everything!), I would draw your attention to one particular remark in my note yesterday, as follows: “I would reiterate my view that AIBG is exceptionally well provisioned in overall terms and I see a significant prospect of ECL writebacks over time”. Indeed, it was also noteworthy that the CFO sent a very clear message on cost containment on the call yesterday in his reference to headcount focus (which makes a lot of sense and could also serve a dual-purpose as a veiled threat to unions - that could become firmer in the coming months if necessary - in the context of upcoming negotiations I would argue) as well as his comment to the effect that the impending SRT is expected to be just the first of a multi-year programme (with a likelihood of bigger ambitions in terms of both structuring and sizing in the context of future such SRT transactions). SO, there’s ‘room in the tank’ for more upside potentially in a non-NII context and management has been as clear as can be on that in my reading.
One final point I want to make is that I made the remark in my Sunday note (and previously) that I thought AIBG might allude to the downside rate sensitivities being conservative. They didn’t. Indeed, fleshing out the details further, a point I want to make is that I do think they are conservative when looking forward, i.e., accounting for ‘moving parts’. However, the latest published downside rate sensitivities (which are disclosures, not guidance) are based on the prevailing Balance Sheet at 30th June, i.e., concrete point-in-time estimates. They are not intended to look forward and they do not reflect the changing maturity profile of the swaps within the structural hedge arrangement, for example - which is a massive NII resilience factor as I have been writing in recent weeks (this should have been pretty clear to close observers anyway following the structural hedge swap maturity profile details conveyed on the 1H24 earnings call, which were just reiterated yesterday). While I still believe the downside sensitivities are likely to be somewhat conservative (in keeping with the broader conservatism underpinning guidance - even though, to re-emphasise, they are just disclosures, not guidance), the far bigger point in a NII outlook context is the ‘moving parts’.
* FY23 NII guidance was lifted to >€3.3bn on 4th May 2023, a c.10% upgrade just over 8 weeks after the FY23 NII guidance of >€3.0bn was issued (on 8th March 2023, close to the end of 1Q23). Then, on 28th July 2023, FY23 NII guidance was lifted to >€3.6bn. Then, on 1st November 2023, FY23 NII guidance was lifted to >€3.75bn.
Close Brothers - some basic math to (very roughly) estimate the hit that the market appears to be pricing in:
CityA.M. reported yesterday that, according to a stock analyst, Close Brothers Group (CBG) could face a financial hit of as much as £640m if the recent Court of Appeal decision in the “Hopcraft” case presents contagion for its premium finance business (I called out premium finance as an area of concern in my detailed note on motor finance yesterday - click here for my note). The analyst’s base case expectation, according to the article, is that CBG will face a hit of £420m, including £100m within its premium finance business. As I wrote in my note on CBG of 25th September last (click here for the piece), the company had flagged c.£420m of capital strengthening actions pre-emptively in the context of the ongoing FCA review prior to the landmark Court of Appeal judgment. Notably, CBG’s market capitalisation now sits at c.£331m, meaning that the reduction in the lenders’ market capitalisation since the FCA first announced its intention to undertake work in the motor finance market on 11th January 2024 (click here for the FCA Statement in this context) amounts to c.£850m. While there are many other moving parts in the context of its YTD stock price performance which I am not going to attempt to disaggregate here (and which would be impossible to do anyway), CBG’s market capitalisation fell by c.£550m between 11th January and 24th October (the day prior to its announcement pertaining to the “Hopcraft” judgment). So, despite these ‘many other moving parts’ from a stock price perspective (and, notably, most UK peer banks have actually seen very strong growth in their equity market valuations in the YTD), it is fair to conclude that the market has had great concerns in relation to the overall financial hit to CBG emanating from the FCA review (with some concerns in relation to unfavourable court hearing outcomes likely baked into the price ahead of the “Hopcraft” judgment) - which has now intensified since the “Hopcraft” judgment (with a further c.£300m wiped off CBG’s market capitalisation since 24th October). So, the analyst’s downside scenario estimates may sound stark, but, mathematically (which is not to express a view on valuation of any description), the market appears to be pricing in a much bigger hit than £640m - a hit of (potentially materially) >£1bn on a reasonable estimate it would appear (i.e., with £850m wiped off the value of the equity since 11th January and a reasonable argument to suggest that, in the absence of any redress / other cost concerns in a motor finance context this year, CBG’s equity market valuation might have actually risen materially YTD, it mathematically means that the equity value erosion attributable to motor finance (and now contagion) concerns is likely to be - potentially materially - north of £1bn). I appreciate it’s obviously more nuanced given that the market is likely thinking very differently about the prospective growth profile of the business et al. (given potentially structurally reduced propensity to engage in consumer lending) but the overall ‘back of the envelope’ exercise still serves to highlight, in high-level terms, how the market is thinking about it all. So, another useful reminder that it’s always important to try to differentiate between the consensus analyst view and the actual market view. Note that this is not to poke a hole in the argument presented by the analyst in question (or any other analysts’ views for that matter) - I haven’t seen the note and the £640m downside scenario hit that is referenced could be incremental to the announced >£400m of capital-strengthening measures for all I know - indeed, every analyst on the street appears to be making an estimate in relation to the potential hit, but, reading the article prompted me to try to ‘have a stab’ at ascertaining what the market is telling us. Click here for the CityA.M. article.
Motor finance in focus:
The FT reports this morning that Britain’s motor finance industry is “in disarray”, recapping on: i) measures taken by CBG to stop lending; ii) Lloyds’ (LLOY) decision to suspend commission payments for new motor finance loans; and iii) BMW and Honda’s finance divisions briefly suspending new car loans last week. The article also notes that the industry has held emergency talks with Treasury and the FCA to arrive at a solution (see my note from yesterday on this point) and that some lending has resumed as loan contracts have been recalibrated to disclose the amount of commission paid by the finance providers and how it was computed. The article flags contagion risk and cites comments made by Jamie Patton, MD at Johnson Law Group, who notes that the overall financial impact for the banking industry could be as bad as if not worse than the PPI scandal (based on his reported average claim value estimates of £1,200-1,500 per relevant loan contract on DCAs and £400 on fixed fee commissions). While Nikhil Rathi, FCA CEO, reportedly remarked last week that the regulatory body is awaiting the outcome of a Supreme Court hearing before taking further action, that could be a long time coming (12 months plus I hear) and one suspects that the Treasury and the FCA will have something to say well before then. All eyes on when we might see some intervention from these bodies. What a mess. Click here for the article.
SECTOR NEWS - UK
Landlord profitability hits its highest point since 2022: Amidst all the kerfuffle about the plight of landlords (with The Telegraph, in particular, consistently clamping down hard on the incumbent government in this respect), it is notable that a survey of over 700 landlords conducted by Pegasus Insight on behalf of Paragon Bank (PAG) has found that 87% of those surveyed reported making a profit in 3Q24, the highest percentage since 1Q22. Click here for more details regarding the survey findings. As I have recently reported, the professional landlord segment has coped well in the face of the rising interest rate environment - which is why we see continued low impairment charge prints from the professional BTL lenders, OSB Group (OSB) and Paragon Banking Group (PAG).
COMPANY NEWS - UK
Sky News reports on NatWest Group’s pension buy-in transaction: NatWest Group (NWG) noted in its 3Q24 results document that “In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third party insurer for some of the liabilities of the Main section. Around a third of the Main section is now covered by insurance policies that give protection against demographic and investment risks, improving security of the member benefits.” (see p.30). Sky News reported yesterday that the third party in question was Rothesay. Click here for the article. Separately, NWG has reportedly partnered with Mastercard to launch a new mobile virtual card payment solution for business - click here for the article in The Fintech Times.
Jamba Europe advertised a secondary offer to Revolut employees: Marcel van Oost’s latest FinTech newsletter flags that Jamba Europe, controlled by NY-based HOF Capital, advertised a secondary offer to almost 3,500 Revolut shareholders earlier this month through the Republic trading platform. The FCA reportedly halted the offer due to concerns it could be seen as a "financial promotion”, which would require regulatory approval. Click here for the referenced newsletter.
Snippets:
Bloomberg reported yesterday that HSBC (HSBA) executives are concerned that its new City of London HQ (which it is due to move to in 2026) will not be of a sufficient size to accommodate staff needs and are considering taking up more space before relocating. Click here for the article.
The Telegraph Questor column is neutral on Standard Chartered (STAN) and negative on Close Brothers Group (CBG). Click here for the article.
Investec (INVP) yesterday announced an early redemption of the residual £108.1m of outstanding AT1 securities (of the £250m issue). Click here for the RNS.
Shawbrook effects changes to its commercial investment loan terms: Specialist Lending Solutions reported yesterday that Shawbrook has increased the maximum LTVs available on certain commercial investment asset classes and will now lend to first-time landlords for semi-commercial properties. Click here for the article.
SECTOR NEWS - IRELAND
Wise CTO interview in The Currency: The Currency published an interview with Wise (WISE) CTO Harsh Sinha yesterday following the firm’s publication of its second annual State of Irish Banking report. He strikes a somewhat critical tone in terms of the level of competition in the Irish market and the legacy cost base of incumbent banks. It is important to point out that Monzo (which is in the process of establishing a European hub in Dublin) uses WISE’s platform to help facilitate quick low-cost international money transfers - but Sinha also notes that WISE is very open to working with the pillar banks too, stating that the company “talks to everybody who will pick up the phone”. Getting back to his observations on the Irish banking market, he makes the following noteworthy points: i) Ireland has a much bigger problem from a competitiveness standpoint than consolidated banking markets in other jurisdictions - validly noting that Irish banks have not been passing on the gains made from higher base rates to consumers (aka depositors); ii) “…it’s great…” that Monzo “…are launching in Ireland. I think it’s a market that needs more competition.”; and iii) he is sympathetic to the challenge that traditional banks face from their younger rivals: “I wouldn’t like to be in an incumbent bank right now, given how much legacy a lot of banks are running”. While one could cynically argue that his comments are somewhat self-serving in the context of the partnership with Monzo he clearly makes valid points. Click here for the article.
Snippets:
Interesting interview in The Currency yesterday with Gerard Casey, CEO of Cantor Fitzgerald Ireland in which he notes that AUM have now risen to €9bn (€8.2bn at end-FY23, which were +24% y/y) and that Cantor is targeting revenues of >€60m for FY24 (from €51.4m in FY23, which was +23% y/y). Click here for the article.
COMPANY NEWS - IRELAND
Business Post article on AIB Group employee costs: Following the AIB Group (AIBG) CFO’s comments on yesterday’s 3Q24 earnings to the effect that a clinical focus on headcount will be key to costs containment, the Business Post ran an article yesterday on the topic. The article lifts a quote from a S&P report from July on the Irish banks more broadly, as follows: “Despite Irish banks' strong focus on efficiency, expense in absolute terms grew significantly over the past two years, owing to staff increases required to onboard a large number of clients transferring from exiting banks, the introduction of health and other benefits as well as variable pay to employees, and ongoing investments in IT systems and automation aimed at improving cost efficiency…Enhancing cost efficiencies through optimisation of operating structures is critical for Irish banks to sustain robust profitability, especially as interest rates return to normal levels”. Indeed, it does appear that much of the increase in AIBG headcount associated with the onboarding of new customers has not yet been reversed (though I could stand corrected on this as it is not possible to disaggregate specific employee cohort movements based on public data), it does suggest that there is some room for natural staff cost reductions in the months and year ahead. The message that I took from the AIBG CFO’s comments were that headcount optimisation will be a key focus for FY25 - though clearly the pace of lending growth does exert some demand in the opposite direction. I would add that employee costs are likely to be under the microscope at Bank of Ireland (BIRG) as well - with its 3Q24 IMS noting that “The Group continues to maintain tight control over its cost base while absorbing inflation and continuing to invest in strategic growth and simplification opportunities”. On PTSB, its recent 3Q24 trading update noted that “management remain committed to reducing costs in absolute terms over the coming years”, which will be critical if the bank is to trend towards an adequate level of returns over time. Click here for the article.
Snippets:
The Irish Independent reported yesterday that Pepper Advantage is hiking variable mortgage rates on hundreds of loans despite the declining official rate backdrop. It is, in my view, disappointing that there is still no coherent government policy to resolve the plight of these ‘mortgage prisoners’ more broadly. Click here for the article. Separately, it is noteworthy that J.C. Flowers has agreed to acquire Pepper Advantage, Pepper Global’s credit management business (click here for an article in Mortgage Strategy on the agreed deal).
The Irish Times reported yesterday afternoon that Davy (BIRG) has agreed the sale of its property investment management business to the unit’s CEO (David Goddard) for an undisclosed sum along with its €1.6bn asset portfolio. Click here for the article.
EUROPEAN / GLOBAL UPDATES
ECB finds that the credit quality of European banks’ CRE portfoliios is visibly deteriorating: The ECB yesterday published a system-wide analysis of commercial real estate (CRE) exposures and risks, which analyses the complex linkages between CRE markets and the financial system (click here for the publication). The main highlights for me were: i) credit quality is visibly deteriorating, with the NPL ratio doubling since the start of the most recent monetary tightening cycle - with both Probability of Defaults (PDs) and Loss Given Defaults (LGDs) both on the rise on account of the market downturn; ii) approximately one-third of banks’ lending exposures to non-financial corporates (NFCs) is collateralised by some form of CRE assets - and eurozone (EZ) banks have c.€1.3 trillion in outstanding loans to CRE investors; iii) despite the aforementioned big numbers, CRE loan portfolios account for just 6% of EZ bank assets and credit quality deterioration in CRE portfolios is therefore unlikely to threaten the solvency of the banking system - especially considering EZ banks’ healthy capital positions; iv) with that said, exposures are not evenly spread across banks and a tail of smaller specialised banks with larger exposures (>10% of total assets), accounting for c.13% of EZ bank assets may experience stress; v) non-banks are also exposed - insurers have total exposure of c.€48bn to EZ CRE companies and private credit may also play a role in lending to CRE markets; and vi) c.€490bn of CRE-related debt instruments have been issued by EZ sectors. Bloomberg also picked up on this publication yesterday (click here for the article) as did S&P Global Market Intelligence (click here for the article). Separately, Scope Ratings hosted a webinar on European CRE funding yesterday which you can watch back by clicking here.
Detailed interview with Claudia Buch, Chair of the Supervisory Board of the ECB: The ECB yesterday published the transcript of an extensive interview with Claudia Buch, Chair of the Supervisory Board of the ECB, with four newspapers. A few key highlights: i) higher bank profitability may not be sustainable and “Banks should thus use the opportunity of higher profits to improve their financial and operational resilience, invest into IT infrastructure and cyber resilience”; ii) the banking sector has sufficient capital headroom to cope with the increased capital requirements (of c.8-9% on average across the eurozone (EZ) banking sector) related to the Basel 3.1 final reforms package - maintaining the line that there will be no relaxation of the ECB’s position following recent moves to curtail the impact in both the US and the UK (to hammer this point home, Buch also notes that “On average, US capital requirements are higher, in particular for globally systemically important banks and because of the less frequent use of internal models in the United States”); iii) she notes that, while cross-border mergers are one way for banks to respond to increased competitive pressures, the ECB is neutral in an in-market consolidation versus a cross-border transaction context: “We stick to the clear criteria to assess mergers, while recognising the potential benefits and risks of cross-border diversification”; iv) Buch notes that she hopes that “….the banking union can advance under the existing proposals without any specific event needing to happen first. We already have common supervision, and non-performing loans have declined – these are two key preconditions for a European deposit insurance scheme (EDIS)”; v) there is still a need to address some gaps in the context of the bank-sovereign nexus “…such as the ratification of the European Stability Mechanism (ESM) and a framework for the provision of liquidity in resolution…In addition, EDIS would further weaken the bank-sovereign nexus by diversifying the resources of the deposit insurance fund, thus reducing potential reliance on national sovereigns. Diversification and less dependency on national funds would provide a clear advantage.”; vi) on credit quality: “We observe vulnerabilities in areas particularly affected by higher interest rates, such as commercial real estate. It’s not just about the flexible rates and bullet loans, but also the shift in demand due to remote work. This risk has been known for some time, prompting us to focus intensely on commercial real estate. We have been working closely with highly exposed banks to understand and mitigate these risks. Recent data show a decline, on aggregate, in non-performing loans, with slight upticks in recent quarters, particularly in commercial real estate and lending to small and medium-sized enterprises.”; and vii) she notes that one long-standing deficiency at many banks is risk data aggregation (this comment was in answer to a question on deficiencies in climate risk assessment - with Frank Elderson, notably, speaking on this topic recently). Click here for the transcript.
Snippets:
Bloomberg covers the Commerzbank and Unicredit earnings updates this morning - with both banks increasing guidance. Click here for the Commerzbank article and click here for the Unicredit article.
Bloomberg reported more details of the impending (reportedly “advanced stage”) Commerzbank SRT trade yesterday afternoon (which I flagged in yesterday’s note) which is reported to be linked to a c.€2bn corporate loan portfolio - and the SRT is reported to be c.€150m in size. Click here for the article.
Reuters reported yesterday that the Bank of Spain has noted that the impact of lower official rates on Spanish banks’ profitability should be limited and at least partly offset by rising loan volumes. Click here for the article.
Reuters also reported yesterday that the Intesa Sanpaolo CEO argues that the bank’s strong market capitalisation (on a relative basis versus other eurozone (EZ) lenders) is a reflection of investors’ comfort with its strategy of holding off on “bold” M&A moves. Click here for the article.
SELECT ECONOMICS / PROPERTY / POLITICS UPDATES
Martin Wolf on why the UK needs a strategy for growth that addresses its weaknesses: I love reading Martin Wolf and his piece in the FT yesterday, as usual, doesn’t disappoint (click here to read). He makes a strong argument as to why the UK needs a growth strategy that addresses its “low investment, desperately low savings, insufficient mobilisation of capital for innovative businesses, poor infrastructure, inadequate housing, a long tail of weak companies, inadequate creation of skills, and huge and persistent regional inequalities”. I would add that productivity is a key issue for the UK (which we have been talking about for >10 years though it doesn’t feature as prominently in the media nowadays - and is clearly interrelated with some of the above themes) - indeed, last Friday’s FT Political Fix podcast (click here to listen), which was an excellent round-up post-Budget, picks up on the productivity theme particularly (around half-way through). Separately, Matthew Brooker also writes in Bloomberg today about how the £100bn of capital investment spend contemplated in the Budget is a necessary corrective action in the context of decades of underinvestment in infrastructure - click here for the article.
Savills forecasts growth in UK house prices of 23.4% between 2025 and 2029: Today’s edition of The Times picks up on Savills research that forecasts UK house price growth of 23.4% over the five-year period from 2025 through 2029 (i.e., just under 4.5% growth p.a. on average) owing to cheaper mortgage rates, above inflation wage growth, and a continued undersupply of homes - with the northwest of England expected to turn in the strongest growth (+29.4% over the five-year period). Click here for the article.
Irish fiscal tax revenues keep on growing: The Department of Finance (DoF) reported yesterday that tax receipts of €8.2bn were collected in October, +€3.1bn y/y owing to the ruling of the CJEU on 10th September last in relation to Apple (tax receipts were broadly flat y/y when the c.€3bn related to the one-off Apple tax receipts are stripped out of the calculation). Overall tax revenues in the 10 months to end-October were €76.3bn, +14.9% y/y (+c.10% y/y if the one-off Apple tax receipts are stripped out). Corporation tax represented 28% of the overall tax take in the YTD (or c.25% if the one-off Apple receipts are stripped out). An Exchequer surplus of €1.3bn was recorded in the 10 months to the end of October. The bottom line here is that Irish fiscal finances are in rude health but all eyes lie on what the change in the US Presidency will bring - with changes impending in a US Tax Cuts and Jobs Act (TCJA) irrespective of who wins. Click here for the press release.
The Irish Times Editorial argues that a change in housing policy is needed: The Irish Times Editorial (published on the website last evening - click here) argues that the publication of new official housing targets averaging 50,500 units p.a. up to 2030 does not represent a bold new approach on the part of the incumbent government - noting that “The Government has chosen to largely ignore the calls from the Housing Commission for a fundamental reset in policy, which would recognise what is in effect a housing emergency”. Separately, The Irish Times has published a useful ‘Explainer’ this morning in relation to how government arrived at this 50,500 annual housing units target - click here for the piece.
Latest MSCI/SCSI Ireland Quarterly Property Index report shows a turnaround in retail values: The Irish Independent reports this morning on the latest MSCI/SCSI Ireland Quarterly Property Index for 3Q24, which reportedly shows a slight improvement in provincial retail property values though office values are still on the decline (particularly office stock built between 1970 and 2009). Click here for the article.
Irish Finance Bill passed: The Irish Finance Bill passed all stages in the Dail (Houses of Parliament) last night meaning that the date of the General Election is likely to be set imminently. Click here for an Irish Independent article on this.
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