Financials Unshackled Issue 16: 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
The main focus of today’s note is on: i) AIB Group’s (AIBG) 3Q24 trading update and earnings call; ii) the risk of credit rating downgrades for large UK banks owing to the motor finance fallout; iii) Bank of Ireland’s (BIRG) agreed sale of c.€800m of UK consumer loans, according to press reports; and iv) ECB reflections on bank supervision. These are covered in the Essential Updates section below and the following sections cover additional key newsflow since my note on Sunday: 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 to the section(s) that are of interest, with all sections clearly segregated. I aim to capture most key newsflow in a UK & Ireland banking context since my last note. 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 and a useful reference source for you.
ESSENTIAL UPDATES
AIB Group reports a stellar 3Q; FY24 loan growth guidance upgraded
AIB Group (AIBG) issued its 3Q24 trading update for the three months to 30th September 2024 this morning. In overall terms the statement struck an upbeat tone with continued positive financial performance trends seen in 3Q, an upgrade to FY24 net loan growth guidance to +5-6% y/y (from +4% y/y) with all other FY24 guidance reaffirmed, and continued strong capital and liquidity levels. Indeed, the FY24 NII guidance was effectively upgraded then on the earnings call with the CFO noting it is expected to be >€4.0bn rather than c.€4.0bn (which ought to put paid to any concerns around the shape of 4Q NII). Medium-term targets are also reaffirmed with the CEO Colin Hunt remarking that “We are implementing our strategy at pace and remain on course to deliver sustainable returns to our shareholders guided by our medium-term target of a RoTE of 15%”. I remarked in my Sunday note that these medium-term targets are easily within AIBG’s reach in my view - indeed, management was challenged on the call about what consensus could be missing given consensus estimates are for a higher FY26 RoTE despite modelling income numbers that appear to sit a little below implied guidance. The CEO made it clear in response to this question that management is not in the business of refreshing medium-term targets on a high frequency basis.
So, all in all, a very positive update and it appears to me that there is upside to FY25/26 consensus estimates in a NII, a OOI, and an opex context though it will take time for higher NII estimates to materialise (and clearly this is somewhat dependent on how official rate expectations evolve - with the CFO noting on the call that AIBG expects the Deposit facility rate to fall to c.2% by end-FY25). Indeed, it will be interesting to see if government elects to place more stock in the coming days / weeks -notably, the last placing in late June was struck at a price of 492.4c per share.
I joined the earnings call at 08:00 BST and would flag the following key highlights (from both the trading statement and the call) for those who want to go through the detail:
Strong income performance: Total income +7% y/y in 9M24, with net interest income (NII) +12% y/y. 9M24 net interest margin (NIM) of 3.22% (3.24% for 1H24) was strong, with a 3Q exit NIM of 3.19%. AIBG has maintained FY24 NII guidance for c.€4.0bn (though see below for CFO comments on the call). On my calculations it looks like the bank printed NII of c.€3.1bn for 9M24, which indicates, based on run rate trends and taking account of an expected further official rate reduction, AIBG should come in marginally ahead of €4.0bn for the full year which would imply a better NII outturn in 4Q than implied by the c.€4.0bn guidance (but it is very difficult to be overly precise here, especially given swap maturity profiles in the structural hedging programme). It is important to note that AIBG’s reiteration of FY24 NII guidance is now predicated on a December 2024 ECB Deposit Facility rate of 3.00% (down from 3.25%) - so it’s a ‘quasi upgrade’ to FY24 NII guidance in a sense. Also, AIBG reiterates that its NII guidance assumes a deposit beta of <15% - and observes that 9M24 deposit beta was c.12% (the CFO reminded us on the call that there have been no changes to deposit pricing since the ECB started to cut rates). Furthermore, the bank notes that the flow of funds to term accounts slowed in 3Q24 (to c.€300-400m per month) - which is constructive in a NII resilience context. To add on this, the CFO noted on the call that NII is expected to be >€4.0bn for FY24 (consistent with the expectation I set out in my note on Sunday) and reaffirmed his comfort with consensus FY25 & FY26 NII estimates, strongly underpinned by the structural hedging programme (and noted that downside rate sensitivities disclosed at the stage of the 1H24 update would be broadly unchanged). Just on the structural hedging programme, I have written previously about AIBG’s particular strategies in this respect - and the CFO provided helpful commentary on the call around the impending slowdown in annual swap contract maturities to a run rate of c.€5-6bn for FY25/26 from c.€10bn in FY23/24 (following AIBG’s strategy to extend duration in the context of the expected official rate trajectory). Consistent with my recent views, the statement notes that “The outlook for NII remains resilient in a lower rate environment due to our stable and granular deposit base, growth in our loan book and management of our structural hedge programme to reduce NII sensitivity”.
Other operating income (OOI) was -15% y/y in 9M24, which is not unexpected given the lower income from forward contracts with the completion of the onboarding of Ulster Bank loans. It was positive to see that “There were strong performances across fee-based lines primarily reflecting higher volumes from a larger customer base and we continue to enhance our wealth management proposition”. OOI guidance was reaffirmed for >€700m in FY24. The CFO also noted on the call that Goodbody AUM has increased to c.€12.5bn.
Costs tracking in line with expectations: Opex +6% y/y in 9M24 due to increased staff numbers; FY24 opex expected to be +6-7% plus the c.€25m one-off spend for customer and operational efficiency initiatives including investment in the branch network, as previously guided. The question in relation to costs evolution cropped up on the call, rather unsurprisingly - the CFO noted that continued investment in technology will continue to be a feature (though he noted that he wouldn’t anticipate a material change in the depreciation charge going forward) and made it very clear that a clinical focus on headcount will be key to costs containment.
Asset quality remains robust: AIBG reiterates FY24 cost of risk (CoR) guidance for the lower end of the 20-30bps range as it maintains its “conservative, forward-looking and comprehensive ECL approach”. The CFO noted on the call that there has been a significant repricing of CRE assets - notably, retail (with values not recovering since the pandemic) and office (secondary stock in particular), with values across these particular asset classes within CRE down by 30-40% over time but he went on to note that all of that had been anticipated by management in its provisioning. He further noted that refinancing discussions have been going very well and that the flow into default has actually been less than expected (and the CEO also noted that there has been no deterioration in early warning indicators). 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.
Loan growth across the board; FY24 guidance upgrade: Very encouraging numbers from a (broad-based) lending expansion perspective (particularly important for AIBG in a declining rate backdrop given its low loans to deposits (LTD) ratio of 64% - albeit the deposit base continues to expand as well, with customer deposits +€1.0bn in 3Q to €108.0bn) with gross loans of €70.4bn at end-3Q (+5% y/y), with new lending of €10.0bn in the YTD (+17.6% y/y). AIBG notes that, for 9M24, new mortgage lending in Ireland was +10% y/y (share of mortgage market drawdowns of 36% in 9M24 and the CEO noted on the call that the pipeline is strong, giving management much confidence in the outlook for mortgage lending growth in FY25), personal lending in Ireland was +9% y/y, new lending to SMEs in Ireland was +4% y/y, new lending in Capital Markets was +11% y/y, UK new lending was +4% y/y, and new lending of €1.3bn in Climate Capital (a comparative figure for 9M23 is not available). The growth trends have driven an upgrade to FY24 loan growth guidance from +4% y/y to +5-6% y/y. Notably, NPEs accounted for 3.1% of gross loans at end-3Q (3.2% at end-1H24).
On the call the CFO noted that loan growth is expected to run at approximately 5% p.a. going forward, which is supportive in a NII trajectory context. The CEO also noted that there is expected to be a gradual shift in the composition of the loan book over time as the Climate Capital unit (predominantly renewables-focused lending into the US, UK and Europe) grows at a faster clip than the remainder of the book though I would note that this will have the effect of gradually nudging up RWA density, ceteris paribus, given the very high risk weights on that lending.
Strong capital and liquidity positions; capitalisation supportive in the context of further buybacks: AIBG reported a CET1 capital ratio of 15.8% at end-3Q24 (which accounts for a dividend accrual in line with the Group’s policy - i.e., a 60% payout is accrued for, being the top end of the 40-60% policy range as required under CRR) and notes: i) it continues to expect a positive c.50bps impact from the Basel 3.1 reforms package; and ii) its inaugural SRT is nearing completion with an estimated c.20bps benefit. AIBG continues to target a dividend policy at the upper end of its 40-60% ordinary policy range and reiterates its commitment to excess capital distributions “as we move towards our medium-term target of CET1 >14%”. On liquidity, AIBG reported a LCR of 204% and a NSFR of 162% at end-3Q, both well in excess of minimum regulatory requirements.
On the call, the CFO noted that the impending SRT trade relates to a portfolio of c.€1bn of corporate loans - and is expected to deliver RWA reduction of c.€800m and an annual associated hit of just c.€6-7m in terms of income foregone. He went on to note that he sees this upcoming inaugural transaction as part of a multi-year SRT programme and that AIBG is likely to be more ambitious in terms of structure and size going forward - and that other loan assets like mortgages will be considered for SRT transactions as well.
Fitch warns that large UK banks could face credit rating downgrades
Fitch, the credit rating agency, reported yesterday morning that some large UK banks could face the risk of a credit rating downgrade on account of potential redress costs related to the motor finance debacle, noting that: “The ruling materially increases the likelihood of a redress scheme to compensate customers, which could have large financial implications” (click here for the Fitch note and click here for an article that featured in The Telegraph yesterday afternoon on the development and here for an article in The Times today on the same topic). Fitch placed the ratings of Close Brothers Group (CBG) on Rating Watch Negative on Friday last (click here for that Fitch note) due to CBG’s relatively high exposure to motor finance and its relatively lower level of loss-absorption capacity in absolute terms. Fitch namechecks the following other lenders who have been significantly involved in motor finance lending but whose ratings are not immediately affected: Bank of Ireland UK (BIRG), Barclays (BARC), Investec (INVP), Lloyds (LLOY), Paragon Bank (PAG), Santander UK, and FirstRand Bank due to its ownership of MotoNovo - and notes that LLOY, Santander UK, and BARC have the strongest loss absorption capacity of the pack (referencing profitability and capitalisation metrics). Fitch also stated that it does not expect that potential compensation costs will be as large as for PPI misselling and goes on to note that the ruling is “…likely to prompt stricter regulatory scrutiny and necessitate changes in business practices to ensure compliance with disclosure requirements”. Fitch wraps up by remarking that it is unclear as of yet as to whether the Court of Appeal ruling will affect other consumer finance segments and that “A lengthy look-back period across multiple lending segments could raise the risk of more material redress processes”.
The industry is clearly in a bit of a tailspin since the Court of Appeal judgment and it is unclear at this point what the potential redress bill could look like - or whether the decision could be reversed upon appeal to the Supreme Court (with any such appeal unlikely to be heard for c.12 months from what I gather). Lenders have undoubtedly been recalibrating loan agreements in recent days in the wake of the judgment which might see lending activities recommence in the relative near-term - but, with that said, some lenders are likely to be re-evaluating whether they want to continue to play in this space given the seemingly changed risk profile. There also appears to be contagion risk for other consumer lending activities (e.g., premium finance) - although I would note that the FCA’s Mortgage Conduct of Business Rules ought to mean a very low risk of contagion in a mortgage lending context given the very clear disclosure requirements applicable to mortgage credit intermediaries set out in the rulebook (click here for latest version of MCOB and I would direct you to digest the contents of MCOB 4 and MCOB 4A if interested in learning more on this). Indeed, while the judgment is concerned with the duty of care owed to “consumers” (click here for the judgment) it does beg the question as to whether exposures in certain intermediated non-consumer lending sectors (e.g., small business finance) could also emerge as a result of the decision. It will be very interesting to see what the FCA and/or Treasury has to say on the debacle and what actions either or both party may take - and I would expect that we will learn more in this respect in short order.
Bank of Ireland reported to have agreed a sale of c.€800m of UK consumer loans
Bloomberg reported yesterday afternoon that Bank of Ireland (BIRG) has agreed to dispose of a portfolio of c.€800m of UK consumer loans, according to sources. Citigroup is understood to be arranging the financing for the deal through a securitisation arrangement, using the loans as collateral. The loans will be split into several tranches, according to the press report - with GoldenTree Asset Management said to be intending to acquire the junior tranche(s). Click here for the article.
This press report does not come as a great surprise given that the BIRG CFO noted on the 1H24 earnings call that it expected to exit personal lending in 2H24. Indeed, BIRG announced, on 5th December 2023, that it had extended its partnership with the UK Post Office for a further five years to a minimum end date of 2031 but that the partnership would no longer focus on providing Post Office branded mortgages or personal loans - and went on to note that it had also agreed with the AA to conclude its partnership with that business in recognition of “the strategic objectives” of BIRG (click here for that RNS). BIRG further noted, within that RNS, that it has historically originated the vast majority of its UK unsecured loans through these two partnerships - so, it could be argued that the writing has been on the wall for some time in terms of its UK personal lending portfolio.
ECB reflections on bank supervision
The ECB yesterday published a written overview for the exchange of views of the Chair of the ECB Supervisory Board of the ECB with the Eurogroup on 4th November - to mark the 10-year anniversary of European banking supervision (click here for the document). Indeed, Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, also spoke yesterday at a conference in Frankfurt to mark the SSM’s 10-year anniversary (click here for the transcript of the speech).
Firstly, on the written overview document, the following points are noteworthy in my view: i) the first few pages are a lookback at how European banks’ resilience has strengthened over the last decade (higher capitalisation, improved profitability, significantly reduced NPLs, etc.); ii) the document then recaps on the supervisory priorities of the SSM for 2024-26, which were published in December 2023 (click here for the document) as well as reminding us of the enhanced package of supervisory reforms agreed in May 2024; and iii) it wraps up on the familiar topics of banking union and a capital markets union (CMU). In this latter context, the document observes that: i) the fact that banking union remains incomplete weakens Europe’s ability to respond to future shocks; ii) closing gaps in the resolution framework - specifically calling out an effective crisis management and deposit insurance framework (CMDI) - supports supervision and financial stability; iii) the credibility of resolution would be further enhanced by setting up a framework for liquidity in resolution; and iv) making progress on the CMU project would be supportive in the context of improved integration of banking markets across Europe.
On Elderson’s speech, he notes that the risk landscape is highly complex, volatile and challenging - flagging geopolitical risks; operational headwinds including cyberattacks and technology disruptions; and climate risks. Elderson reminds us that the Supervisory Review and Evaluation Process (SREP) has been reformed - with these risks in mind - to make it more targeted and risk-based, which is supportive in a risk identification context. In terms of risk remediation, Elderson notes that the ECB sets out a time-bound remediation path - and, to the extent that a bank is not remedying a deficiency at the necessary speed, the ECB will step in and deploy more intrusive measures from its supervisory toolkit. He goes on to note that deregulation and more lenient supervision would compromise the sector’s resilience and wraps up on the topics of banking union and CMU - and calls for member states “…to resume discussions on setting-up a European-level public backstop to provide temporary liquidity funding to banks following resolution”.
So, no relaxation of regulation or the scale of supervisory activities is on the agenda it would seem (which won’t surprise) and the regulators continue to make noise around moving forward to complete the banking union.
SECTOR NEWS - UK
Mortgage pricing continuing to push up: Unsurprising to see that mortgage lenders are continuing to nudge up pricing in the wake of higher swap rates post-Budget. Mortgage Introducer reported yesterday that David Hollingworth, Director at L&C Mortgages, has noted further fixed rate price increases from Skipton Building Society (yesterday) and Coventry Building Society (taking effect today). Click here for the article. Indeed, a separate Mortgage Introducer article yesterday covers HSBC UK’s (HSBA) latest rate changes (upward mostly) across its mortgage range - click here for that article. Finally, in a mortgages context, there was an interesting article in The Telegraph yesterday on how mortgage borrowers are shunning longer-term (10Y) fixed rate mortgages in favour of shorter duration product - however, I wouldn’t read this as the death knell for long-term product; it’s just that there has been a general expectation that rates will decline so borrowers are understandably opting for shorter fixes or variable products in the hope that they can refinance onto / benefit from a lower rate in the relative near-term as official rates come down further (though expectations have now evolved somewhat since the Budget it must be said). Click here for the article.
Savings offers picking up: The Telegraph reported yesterday that several large lenders have launched attractive savings offers recently - with some significant current account switching incentives in the mix (most notably, from Lloyds (LLOY), NatWest (NWG), First Direct (HSBA), and Nationwide Building Society). Click here for the article. Indeed, This Is Money also reported yesterday on Santander UK’s relaunch of its current account switching £150 cash bonus, with the offer open to new and existing customers - click here for the article.
Interesting Bloomberg opinion piece on how the economic incentives regarding both pensions and property were completely reversed in the Budget: Marcus Ashworth and Stuart Trow penned an excellent opinion piece on Bloomberg yesterday on how the economic incentives regarding both pensions and property were completely reversed in the Budget. Notably, the authors flag, in a BTL property context, that “The practical effect for property investors is to significantly reduce the incentive for amateur landlordism and the luxury of buying holiday homes. Engineering an exit of small landlords adds to the pressure for the government to deliver on social housing where promises are easier to make than deliver. Yet by not hiking regular CGT on property, she [Reeves] also avoided the classic tax problem of preventing savings being reallocated more productively. Had property CGT rates risen to levels close to inheritance tax, many discouraged small landlords would have reluctantly concluded that struggling on was preferable to paying high levels to exit their investments.”. Click here for the article.
This Is Money piece on structural hedging: This Is Money published an article on structural hedging - how the hedges work and how they are providing strong net interest income (NII) tailwinds for select UK banks yesterday. If interested in reading more on structural hedging, I recommend consulting: i) a presentation from RBS Treasury dated 13th June 2018 (click here for it); and ii) the presentation (click here) and the associated management walkthrough document (click here) from Barclays’ Structural Hedge Teach-In session held on 28th November 2023.
Bank Referral Scheme labelled a “total failure”: The Times reported yesterday that the Bank Referral Scheme, which is a Treasury scheme designed to improve access to finance to small businesses has been labelled a “total failure” by James Robson, CEO of FundOnion, a loan comparison site - in the wake of a Post Implementation Review that was published alongside the Budget on 30th October (click here for the Post Implementation Review), which found that “…only 5% of businesses that are initially rejected for finance end up securing finance through the scheme”. The referral scheme requires nine major banks to refer small companies whose loan applications are rejected to independent platforms which link them up with alternative sources of finance. Notably, the Treasury last week concluded that the scheme “…has made a positive contribution to competition in business lending, and improved some SMEs’ ability to access finance since its launch”. While it is without question that there is a debt funding gap for SMEs, the relative unwillingness of alternative lenders (outside of the nine major banks) to procure funding to most rejected applicants is also likely reflective of the risks carried by some of these small enterprises, for whom debt funding might not be suitable.
New FCA rules in relation to borrowers either in or at risk of financial difficulty: Useful reminder piece on the Your Money website yesterday on the fact that new FCA rules in relation to borrowers either in or at risk of financial difficulty came into force yesterday - these rules mean that lenders must provide better support to customers, including more options to postpone a payment. Click here for the article.
COMPANY NEWS - UK
Peel Hunt upgrades target price for NatWest Group: Various press reports picked up on Peel Hunt lifting its price target for NatWest Group (NWG) from 410p to 450p yesterday - with the brokerage reportedly citing earnings upgrades and liberation from State intervention and legal issues as the underpins for its target price move. NWG’s share price rose by c.3% yesterday - it has been a great start for the relatively new CEO, Paul Thwaite. Click here for a CityA.M. article on the upgrade. Separately, The Wall Street Journal reported yesterday that KBW has moved NWG to its top pick, replacing Lloyds (LLOY) - noting that, while the lender is more geared to falling rates than LLOY (though, notably, company disclosures - which represent just internal estimates - indicate that LLOY is much more sensitive in Year 1), it isn’t exposed to the motor finance debacle (notably, in overall terms, it is reported that KBW remains positive on domestic UK retail banks)
Goldman Sachs downgrades Standard Chartered: The Wall Street Journal reported yesterday that Goldman Sachs (GS) has downgraded its rating on Standard Chartered (STAN) to Neutral (from Buy), arguing that potential worse-than-expected market movements pose a risk to its NII trajectory (and observing that its structural hedging is relatively low), volatility is expected in reported earnings as the group embarks on a restructuring , and the delivery of cost savings could “weigh”.
Standard Chartered strikes financing deal with British International Investment: Bloomberg reported yesterday afternoon that Standard Chartered (STAN) has struck a $350m financing deal with British International Investment to support small businesses who face working capital challenges to boost trade - and to support the flow of trade between Africa, South Asia and South East Asia. Click here for the article. Separately, Bloomberg also reports this morning that STAN has partnered with Wise (WISE) to leverage WISE’s payments platform to offer multi-currency money transfers in Asia and the Middle East - click here for the article.
The Times Tempus on S&U: The Times Tempus column today focuses on the investment case for S&U (SUS). Click here for the piece.
Progressive Equity Research issues research report on Secure Trust Bank (STB) following the 3Q24 trading update: To access the report you can fill out the form here.
BNPL firm Affirm launches in UK: The FT has reported that the US buy now pay later (BNPL) company, Affirm, has launched in the UK. Max Levchin, Affirm’s Founder & CEO, noted to the newspaper that Affirm’s differentiated approach denotes a competitive advantage in the UK market - commenting that Affirm underwrites every individual transaction before making a credit decision and “only approves consumers following an assessment that evidences their ability to repay”. Nor does it charge any late fees. Affirm’s entry comes despite the UK government’s much-awaited consultation last month to bring BNPL lenders under the scrutiny of the FCA and the Consumer Credit Act. Interestingly, the FT article picks up on Worldpay data, which show that spending on BNPL purchases grew by 18% y/y in 2023 to $316bn - accounting for 7% of all UK ecommerce transactions. Click here for the article - and click here for a Bloomberg article on the topic.
Excellent interview with Richard Davies, CEO of Allica Bank: Well worth watching a video interview from yesterday with Allica Bank CEO Richard Davies, hosted by The Bank Tellers - click here to watch. Davies walks through Allica’s journey and how its focus on lending to underserved mid-sized businesses (5-250 employees) in the UK is supporting significant growth - notably, Davies informs us that Allica Bank is the fastest-growing company across all sectors of the economy over the last four years. Notably, Allica reported PBT of £16.1m in FY23 - its first full year of profit.
Recognise Bank announces £25m investment: Recognise Bank yesterday announced that it has secured £25m in fresh capital from its majority shareholder Parasol V27, which will support the delivery of a 5-year plan. This takes the total amount raised by the bank to >£120m. The capital injection will support Recognise Bank’s continued focus on business lending across multiple product sectors. Recognise Bank also announced that Phil Jenks has stepped down as Chairman with effect from 31st October and will continue to serve as a INED until no later than the end of 2024. Furthermore, Jean Murphy (CEO) will step down from her position by the end of 2024. Recognise Bank has appointed Steve Pateman as Chair and Simon Bateman as CEO, both subject to regulatory approval. Click here for the press release.
SECTOR NEWS - IRELAND
BPFI reports soaring personal loan drawdowns: Banking & Payments Federation Ireland (BPFI) reported yesterday that personal loan drawdowns were +18.8% y/y in 2Q24 to €641m (an increase of >50% since 2Q22), the highest quarterly level of lending by value (and volume) since the series began in 1Q20. The y/y growth in values was strong across all three categories: i) car finance +18.9% y/y to €224m; ii) home improvements lending +17.5% y/y to €202m; and iii) other lending +20.1% y/y to €214m. Click here for the press release and here for the report. These are positive trends in terms of listed lenders’ loan growth - at strong yields and RoRWAs.
COMPANY NEWS - IRELAND
PTSB working to resolve an issue causing outages for some customers: Darragh Nolan at the Irish Independent reported yesterday evening that PTSB has said it is working to resolve an issue causing ‘intermittent’ outages for some customers. The article notes that customers have been logging complaints with support staff on social media with some saying that they cannot log in to the PTSB app or website and others saying they cannot make any online payments. A PTSB spokesperson reportedly noted: “We are currently experiencing a technical issue which is intermittently impacting our mobile app and desktop services…We understand the issue and are working hard to resolve it as quickly as possible. We apologise to our customers for any inconvenience caused”. While it appears to be just a glitch that affect all banks from time to time, this news does come a day after the Business Post reported on RBC’s recent 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 (which I picked up on in ‘Financials Unshackled Issue 15’ on Sunday - click here for the note). Click here for the Irish Independent article and here for a later article in The Irish Times on the news.
EUROPEAN / GLOBAL UPDATES
Commerzbank seeks to convince investors of the merits of its standalone strategy: Reuters reported yesterday on Commerzbank’s receipt of regulatory approval to buy back up to €600m of stock as it tries to convince investors of its standalone strategy in the wake of Unicredit’s unorthodox clever stakebuilding efforts. CEO Bettina Orlopp said in a statement that “Our shareholders can rely on us”. It will be interesting to hear what more Commerzbank has to say when it publishes its 3Q24 earnings update tomorrow. Click here for the article. Bloomberg also reported on the development - also noting that Orlopp’s new plan contemplates a substantial increase in SRTs to bolster distributable capital - click here for the article.
KBW research note on European banks: The Wall Street Journal reported yesterday on a KBW research note which argues that a Trump win would be beneficial for banks that have capital markets exposure and that benefit from a strong USD with less exposure to tariffs. The analysts note that a Harris win would arguably be more surprising and a relief for the tariff-threatened economies.
Speech on the benefits of tokenisation: Leong Sing Chiong, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore spoke yesterday on the benefits of tokenisation, highlighting its value in a FX, a funds, and a CBDC settlements context - concluding that “asset tokenisation can deliver significant efficiency gains to be reaped in the financial services industry, particularly in wholesale financial markets”. Click here for the speech. Indeed, the FCA yesterday also issued a statement welcoming Project Guardian’s first industry report on tokenisation (Project Guardian is an international collaboration of industry and regulators, led by the Monetary Authority of Singapore, that explores the use of fund and asset tokenisation). Click here for the FCA Statement and here for the Project Guardian report. Fascinating stuff.
Good article in The Financial Brand on whether nonbank players could accelerate instant payments adoption: Interesting piece yesterday in The Financial Brand on whether nonbank players could give instant payments a strong nudge forward in a US context. There are mixed views on this with Uzayr Jeenah, Partner at McKinsey, noting that many banks aren’t hurrying to adopt instant payments because they don’t perceive demand from their merchant bases - going on to note that “Customer behavior in the U.S. will take a very long time to change, and you’re not going to see the rapid adoption of instant payments that we have seen in other geographies”, concluding that loyalty to credit cards and credit card rewards will be a feature of the market for some time yet. Click here for the article.
SELECT ECONOMICS / PROPERTY / POLITICS UPDATES
BoE expected to cut the base rate to 4.75% on Thursday: The FT reported yesterday that economists polled by Reuters are forecasting a 25bps reduction in the bank base rate (BBR) to 4.75% on Thursday. This is consistent with implied market expectations. However, the burning question now is, what is the likely neutral rate in the wake of a Budget that will drive a significant increase in government debt. Click here for the article. Good piece from Bloomberg yesterday here too. Also, Karen Ward (Chief Market Strategist for EMEA at JPM) writes in The Times today that the UK MPC should resist the temptation to follow the US and Europe in terms of pushing through steep rate cuts - click here for the article.
UK retail sales growth slows: The British Retail Consortium (BRC) reports this morning that total UK retail sales were +0.6% y/y in October (versus a +2.6% y/y growth rate observed in October 2023). Helen Dickinson, CEO of the BRC noted: “…October’s sales growth was disappointing. This was part driven by half term falling a week later this year, depressing the October figures, and November sales will likely see more of a boost. Uncertainty during the run-up to the Budget, coupled with rising energy bills, also spooked some consumers…”. Click here for the data.
To what extent is the high savings ratio acting as a brake on economic growth?: I enjoyed reading Hermione Taylor’s piece in Investors Chronicle yesterday in which she raises the question about the extent to which the structural uplift in the UK savings ratio (which now sits at 11% (up from c.6% in the years preceding the pandemic)) is holding back consumer spending and, therefore, economic activity. It is interesting to note that the OBR now expects that the savings ratio will remain above 10% until 2027, then falling more gradually towards its historical average as real wage growth returns (click here for OBR Economic and Fiscal Outlook of 30th October - and see p.43). A more profligate consumer is helpful for banks in a debt servicing capability context all the same - which is borne out in recent BoE Financial Stability Reports, which have picked up on improved household debt to income ratios. Click here for Taylor’s article.
US Presidential Election and Irish Corporation Tax (CT): Following various press reports from Sunday on what a Trump presidency could ultimately mean for Irish CT (which depends on whether the Republicans gain control of none, one or both houses), Thomas Hubert at The Currency penned a detailed piece on the topic yesterday, which walks through the detail of the Tax Cuts and Jobs Act (TJCA) passed by the Trump administration seven years ago and how they are set to change, potentially eating into “Ireland’s advantage”. Click here for the article.
Colm Lauder reports on the Irish government’s final nail in the coffin for the listed REITs: Interesting opinion piece in the Business Post yesterday penned by my former colleague Colm Lauder, who makes the point that the Department of Finance’s (DoF) recently published funds review adopts a cautious approach to REIT reform despite accepting that there are “large and growing” funding requirements for Irish property. Lauder remarks that “The reluctance to recommend substantive amendments to the Reit regime is perplexing, particularly considering Ireland’s significant, and rapidly growing need for private investment capital. Indeed, policy makers have reiterated that there is indeed a role institutional capital can play, but they continue to fail to provide an efficient platform for it to do so.”. Click here for the article.
BNP Paribas Real Estate 3Q24 Dublin Office Market Report: BNP Paribas Real Estate Ireland published its 3Q24 Dublin Office Market Report yesterday and it was notable that the positive momentum observed in 2Q has carried through to 3Q - with 47.9k sqm of purpose-built office space taken up in Dublin (+66% y/y - and marginally above the long-term average for 3Q) in the quarter. Almost 32k sqm of new space was completed in 3Q though the vacancy rate rose to 15.7%. Prime headline rents were stable at €673 per sqm though net effective rents remain under pressure. It was also notable that the Information and Communications Technology (ICT) sector accounted for just 7.1% of office take-up in 3Q - the lowest since records began (having accounted for 51% of Dublin office take-up between 2017 and 2021) - which was the focus of the mainstream media yesterday. Click here for the report and here for an article on it in The Irish Times yesterday.
Irish housing updates: Interesting piece in The Irish Times yesterday penned by Lorcan Sirr, Senior Lecturer in Housing at Technological University Dublin, in which he runs through history to highlight that housing issues have been a constant feature of the Irish economy for 100 years - noting that “it should perhaps be called a permacrisis”. Click here for the article. Also interesting to note a news report in The Irish Times yesterday evening which states that the Coalition government is set to agree new housing targets averaging 50,500 new homes p.a. during the lifetime of the next government as the Minister for Housing reportedly brought a revised draft of the National Planning Framework (NPF) to political leaders on Monday evening - click here for the piece.
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