Financials Unshackled Issue 27: Weekly 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
Happy new year - and welcome to the latest issue
Good evening, happy new year, and welcome to the latest issue of Financials Unshackled. This note is split into five sections: i) Calendar for the week ahead; ii) Essential Updates; iii) Other UK Highlights (other key UK sectoral and company developments since the last issue); iv) Other Irish Highlights (other key Irish sectoral and company developments since the last issue); and v) Global / European Highlights (select key developments in a Global / European context since the last issue).
Financials Unshackled is evolving in 2025
The Financials Unshackled product will evolve considerably this year. Occasional in-depth notes will start later this month: i) exploring select sector trends / themes in significant depth; and ii) setting out ‘deep dives’ on individual banking & speciality finance names (listed companies, prospective IPO candidates, others) - and the intention is to gradually broaden the coverage beyond just the UK & Ireland in this vein. There will also be more timely coverage of select key developments (e.g., company results) though data releases / newsbites, to the extent that they do not constitute ‘groundbreaking news’, will continue to be covered within the ‘Weekly Banking Update’ notes for the time being at least. The ‘Weekly Banking Update’ will typically (save for exceptional circumstances / public holidays) be circulated at c.17:00 BST on Sundays going forward. I will continue to iterate in due course (as appropriate) but that’s the plan for the coming months. Reader feedback is important - and if you have any suggestions / views on what you would like me to cover within the occasional in-depth notes - or, indeed, any other perspectives - please email me directly at john.cronin@seapointinsights.com
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Calendar for the week ahead
Tue 7th Jan (09:00 BST): ECB Euro Area Bank Interest Rate Statistics - November 2024
Wed 8th Jan (11:00 BST): Central Bank of Ireland (CBI) Money and Banking Statistics - November 2024
Wed 8th Jan (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates - November 2024
Fri 10th Jan (11:00 BST): Central Bank of Ireland (CBI) Monthly Card Payment Statistics - November 2024
Essential Updates
BoE update shows m/m decline in mortgage approvals in November
The Bank of England (BoE) published its monthly Money and Credit Statistics (including Effective Interest Rates) for November 2024 on Friday 3rd January. You can access the Money and Credit Statistics here - and some granular effective interest rate information here. Note that it appears there have been some (relatively minor) revisions to the prior month (October) lending volume data and household deposit volume data since original publication on 29th November last.
Key points from a lending volume perspective: i) net mortgage borrowing was back down again, to £2.5bn in November from £3.4bn in October (and £2.5bn in September) though the annual growth rate rose to +1.3% y/y from +1.1% y/y in October - continuing the upward growth trend observed since April 2024; ii) net mortgage approvals fell by 2,409 m/m to 65,720 in November - this reduction was largely unexpected (with consensus expectations amongst economists for approvals of 68,700 in November, according to Bloomberg) but, with that said, approvals do remain well above their previous 12-month average of 60,400 (notably, remortgaging approvals were also down by 300 m/m to 31,200) and it is important to reflect on the specific circumstances that could have driven the m/m reduction that was observed*; iii) net consumer credit borrowing decreased slightly again m/m to £0.9bn in November (+6.6% y/y) - with the c.£100m m/m reduction attributable to lower credit card borrowing; iv) a very strong m/m uptick was observed in business lending with non-financial businesses borrowing a net £6.0bn in November, up from £3.2bn in October (while the monthly data can ebb and flow a bit the trend is clear, i.e., growth is picking up - and, notably, the annual rate of growth in large business lending rose to +4.0% y/y in November from +2.2% y/y in October though SME net lending remains lower y/y).
* In seeking to understand why mortgage approvals unexpectedly dipped m/m, I note that some economic commentators have called out potential consumer confidence factors. At first glance, this seems a plausible explanation in the wake of the 30th October Budget. Indeed, it is notable that the UK Consumer Confidence Index (CCI) has been on a slightly downward trend since July (see here), and, given the mechanics and timing of household decision-making in relation to whether or not to buy a home, I suspect there could be a slight lag effect at play here. However, I think a much more likely explanation is simply that: i) there was a slight surge in approvals ahead of the 30th October Budget (indeed, the October mortgage approvals print was the strongest since August 2022 and was +c.2,700 m/m) with consequential base effects arising then in November from a m/m comparison perspective; and ii) a ‘pause’ for a relatively brief period in approval-seeking activity as prospective homebuyers / remortgagors sought to evaluate the impact of the Budget on household finances and, probably far more importantly, waited for banks and building societies adjust their rates post-Budget (which doesn’t tend to - and didn’t - happen overnight) after swap rates settled (despite the added impetus to transact soon ahead of stamp duty changes). I suspect weekly data, to the extent it were available, would show a significant bias in approval numbers towards the second half of November. Clearly i) and ii) are interrelated but I see ii) as the more significant point here - especially given the time it took the lenders to adjust pricing post-Budget. So, basically I would not call this the start of a downward trend. Indeed, the individual lenders will have a good read as to why approvals dipped in November from analysing their own data, so, it’s a point worth raising with them in any calls you may have with management / IR teams. Furthermore, the impending stamp duty changes will skew trends in the relative near-term - so, approval rates are likely to remain buoyant on a y/y comparison basis over the next few months (December, January, February data) I suspect but could then dip significantly in the Spring, though a significant element of any such dip may prove temporary rather than structural to the extent that economic conditions do not worsen. But this means it will be harder to get a firm sense of the true underlying trends over the next few months.
Key points from a loan pricing perspective: i) the effective interest rate on new mortgage drawdowns was 4.50% in November, -11bps m/m (the lowest since April 2023 and reflective of swap rate movements); ii) the average interest rate on the outstanding stock of mortgage debt was +2bps m/m to 3.80% in November; iii) the effective interest rate on interest-charging overdrafts was -8bps m/m to 22.86% in November; iv) the effective interest rate on new personal loans was +11bps m/m to 8.96% in November; v) the effective interest rate on interest-bearing credit cards was -20bps m/m to 21.54% in November; and vi) the average cost of new borrowing by UK non-financial businesses was -12bps m/m to 6.56% in November while the effective interest rate on new SME loans was -9bps m/m to 7.17%.
Key points from a deposit volume and pricing perspective: i) household deposits were +£0.2bn in November following substantial growth of +£18.8bn in October; ii) the effective interest rate paid on new time deposits was -14bps m/m to 4.02% in November and the effective rates on the outstanding stock of time and sight deposits were 3.80% and 2.21% in November respectively (-6bps and +10bps m/m respectively); iii) business deposits were -£6.2bn in November (following net outflows of £6.3bn in October); and iv) the effective rate on new time deposits from non-financial businesses was -8bps m/m to 4.22% in the month while the effective rate on stock sight deposits was -9bps m/m to 2.59% in November.
So, what does all of this data tell us?: i) the outstanding stock of household and business credit is continuing to expand, supported by lower interest rate expectations and rising business confidence in future growth prospects - and while the unexpected m/m dip in mortgage approval numbers does raise question marks around waning household confidence I think my own thesis above around households temporarily pausing approval-seeking post-Budget is more likely to explain what was going on in November (so, I don’t think this is the start of a structural downward trend); and ii) pricing trends on new lending and deposit flows appear marginally favourable from a net interest margin (NIM) expansion perspective (however, wider factors at an individual lender level including legacy loan stock roll-off and structural hedge roll are separate influencers from an individual lender NIM perspective).
Shawbrook to finally re-IPO in 2025?
Mark Kleinman at Sky News broke the news on Saturday morning that BC Partners and Pollen Street Capital (which both own a near-50% shareholding in Shawbrook following a take-private transaction in early 2017) are reportedly close to appointing Goldman Sachs (and other bankers, potentially including Barclays) to advise on a potential IPO, which the owners are said to be keen to execute in 1H25 (read the article here) - and which, the article notes, would seek an equity valuation of >£2bn. Sources close to the situation reportedly informed Sky News that no decision to proceed has been taken as of yet and, rather unsurprisingly, that any such decision would depend on market conditions.
This is not the first time that the owners have explored a prospective IPO (see Bloomberg article from 21st January 2022 here) so we will see what comes but the news follows a recent increase in interest amongst international institutional investors in UK names. Shawbrook has churned out decent growth in its specialist lending segments in recent years and has delivered consistently strong financial performance. I covered the bank’s 3Q24 trading update in Financials Unshackled Issue 18 on 8th November last, which you can access here.
To the extent that the owners do proceed with an IPO process, Financials Unshackled will set out an in-depth analysis of the investment case for readers on a timely basis. Note that a >£2bn equity valuation would imply a P/TBV of >1.6x (based on 30th June tangible equity position of £1,235m) and a P/E of >10x (simply annualising 1H24 u/l PAT - although my own view is that a declining official rate backdrop ought to be constructive from a NIM (and, therefore, an earnings) perspective).
On a separate but interrelated note there have been a few well-written articles in recent days on how the UK stock market could be revived that are well worth a read. Sam Chambers at The Sunday Times writes here about how government intervention could help by, for example: i) linking tax relief granted to pension funds with the size of their allocation to domestic companies on a sliding scale (as Simon French at Panmure Gordon has argued); ii) scrapping stamp duty reserve tax (SDRT), the 0.5% levy applied to share transactions; and iii) the phase-out of cash ISAs over a five-year period to be replaced with UK equity (and infrastructure) ISAs (as the former CEO of L&G, Sir Nigel Wilson, has argued) - and Chambers also picks up on a potentially harder-to-fix aspect, i.e., the lack of an ‘equity culture’ in comparison to the US. The Sunday Times editorial also picks up on this topic here and Andrea Rossi, CEO of M&G, also sets out his thoughts in the same newspaper here. This Is Money also ran a piece on Friday on this same topic here.
Notably, The Telegraph also reports this morning that Aspen Insurance, a Lloyd’s of London underwriter, has recently filed paperwork seeking permission to list its shares on the NYSE (read the article here), in a blow to London’s hopes of securing the expected c.£3bn IPO despite the reform measures effected to the Listing Rules in 2024 (when Aspen was previously considering a listing - ahead of the aforementioned reforms - it was reported by the FT (here, in December 2023) that it was minded to go with NY over London). As an aside, it was also interesting to read Nicholas Megaw’s piece in the FT today here on how the US market is set for an IPO comeback in 2025 - a topic that has received a lot of coverage recently.
Dilosk CEO picks up on why the Irish listed banks are so profitable
Dilosk (ICS Mortgages) featured in three articles in the Business Post in recent days.
The first article on Thursday (see here) discusses Dilosk CEO Fergal McGrath’s concerns around the lack of competition in the Irish banking market, in which he makes the observation that the exits of Ulster Bank and KBC Bank Ireland from the market has strengthened the “duopoly” held over the market by AIB Group (AIBG) and Bank of Ireland Group (BIRG). In particular, McGrath highlights his ire at the fact that depressed deposit pricing has served to strengthen the pillar banks’ position: “Yes, we did think it [the minimal passthrough of higher official rates to deposit customers] was unfair. And we had highlighted it at various meetings of … senior meetings of the Central Bank, and at government level as well”. As an aside, Billy Kane over at Finance Ireland has made similarly strong arguments around depositors bailing out mortgage-holders but the reality is that it suits ‘vested interests’. However, it must also be said that large incumbent bank deposit customers have some optionality to migrate to higher-yielding product both within and between those same institutions and anyone who follows the news knows that Raisin and Trade Republic offer options to access higher rate deposit product with other European banks (and Revolut and Bunq also offer far superior rates) but household (and many business) customers just don’t move! Indeed, the depressed deposit pricing is undeniably the chief reason underpinning the substantial returns that the Irish banks are generating as I have written before.
Getting back to Dilosk, McGrath opted to keep his concern concise and contained - (after all, he probably doesn’t want ‘hate mail’!). Who knows what optionality 2025 will bring for the business and it was encouraging to read his upbeat comments on the outlook for the year ahead: “I would be quite positive on the opportunities next year…We had our board meeting last week, and we were setting the business plan. I think the environment is quite favourable, so I’d be cautiously optimistic”.
The third article today (read here) goes into more depth on the same themes but also notes that McGrath reportedly told the newspaper that Dilosk will execute at least one securitisation in 2025 and that it is planning to launch “another variation of an interesting product in the market” too, though he wouldn’t be drawn on specifics.
Briefly, the second article on Friday (read here) notes that Dilosk is cutting rates for new fixed rate home loans by 25bps (to 4.25%) with effect from Friday 10th January. These rates are still above the rates offered by the mainstream banks so I wouldn’t be concerned about any material market share erosion for the listed players as a result of this decision.
Other UK Highlights
Sector Snippets
Rightmove published latest average UK mortgage rates on Saturday 4th January (see here). Average 2Y and 5Y fixed rates now sit at 5.05% and 4.80% respectively (-2bps and -1bp week-on-week respectively; -24bps and -16bps y/y respectively). So, not much movement then over the last week (despite Halifax (LLOY) and Leeds Building Society announcing reductions in recent days - see here) which is not surprising but as the usual ‘annual sale’ gets going in earnest next week I would expect to see rates fall back further in the next update (indeed, Mortgage Introducer reported on Friday that HSBC UK (HSBA) is cutting residential and BTL rates with effect from Monday 6th January - see here).
The latest Nationwide UK House Price Index (for December 2024) was published on Thursday 2nd January and shows that house price growth slowed to +0.7% m/m in December (from +1.2% m/m growth in November), taking the average price to £269.4k. This represents 4.7% y/y growth (up from 3.7% y/y growth in the 12 months to November). On the outlook for 2025, Robert Gardner (Chief Economist at Nationwide) notes: “Upcoming changes to stamp duty are likely to generate volatility, as buyers bring forward their purchases to avoid the additional tax. This will lead to a jump in transactions in the first three months of 2025 (especially in March) and a corresponding period of weakness in the following three to six months, as occurred in the wake of previous stamp duty changes. This will make it more difficult to discern the underlying strength of the market. But, providing the economy continues to recover steadily, as we expect, the underlying pace of housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth. The latter is likely to return to the 2-4% range in 2025 once stamp duty related volatility subsides.”. You can read the release here.
Other property-related articles worth a read are:
The Times on Friday on what to expect from the UK housing market in 2025 here.
Mortgage Solutions reported here on Thursday on research from Yorkshire Building Society which shows that, based on UK Finance data up to end-October, it has predicted that there were 330,000 first-time buyer (FTB) mortgage transactions in 2024, +13.8% y/y. Mortgage Finance Gazette also covers this topic here.
Harriet Line, Deputy Political Editor at This Is Money penned a piece here on Friday on the IFS’ warnings to the effect that mortgage rates will not return to the low levels seen over the past decade any time soon.
Neal Jannels, Managing Director of One Mortgage System, wrote here on Mortgage Solutions on Friday on how AI is revolutionising the mortgage market.
Grant Hendry, Director of Sales at Foundation Home Loans penned an article on BTL Insider earlier this week here on how 2025 brings a greater degree of stability and certainty for landlords and that the PRS market is underpinned by strong fundamentals that will continue to mean it is attractive to those with a long-term investment horizon. This Is Money today also contains a piece on what landlords can expect in 2025 here.
An article in Mortgage Solutions on Friday here reminds us that the Renters’ Rights Bill will return to Parliament on Tuesday 14th January for the report stage.
A Bloomberg article on Saturday (read it here) picks up on a recent (20th December) Bank of England (BoE) Staff Working Paper (read it here) on the effect of mortgage brokers on banks’ business models. The BoE research concludes that the rise in broker-intermediated mortgage lending between 2013 and 2020 coincided with more households choosing mortgages with a short fixed term, due to brokers steering households towards these mortgages to increase fees from repeat business: “We show that regions that experienced 10pp increase in broker intermediation tend to experience a 1.8–2 percentage point increase in the proportion of mortgages with a short fixed term, suggesting that brokers play an active role in steering households towards mortgages with a short fixed term”. This is important research given that the Intermediary Mortgage Lenders Association (IMLA) is forecasting that intermediaries will account for >90% of UK mortgage lending in 2026 (see here).
The Standard reported here on Thursday on a KPMG survey that found that just 17% of adults switched a bank account in the past year - but what was most interesting was to see that 45% of 18 to 24-year-olds surveyed switched in the last year, with that figure falling to just 4% for the over-65s. This is important detail in the context of propensity to switch into the medium and longer-term.
Sky News reported on Wednesday last that the Post Office is proposing a significant increase in the fees that it charges banks to allow their customers to access its network - from c.£250m p.a. under the current deal to a new framework costing c.£350-400m p.a. (see here). Sources reportedly indicated to the news service that the 30 banks and building societies with whom the Post Office has a partnership are due to respond to the proposal in early Spring.
Company Snippets
Jill Treanor at The Sunday Times penned a lengthy feature on NatWest Group (NWG), which I was delighted to contribute to (read the article here). The article focuses on the impending exit of government from the share register - and the newspaper estimates that, all-in, the government will have incurred a c.£20bn loss on its investment (which reduces to <£10bn when accounting for past and likely future dividends and fees) as well as how the CEO Paul Thwaite might feel emboldened to push for growth in a non-interest revenue context - with the key challenge, according to Thwaite at the Barclays conference on 10th September last, that there is a large disconnect between the price expectations of vendors of fee-focused businesses and the price that NWG is willing to pay.
Coventry Building Society and Co-op Bank announced on Wednesday last that the acquisition of Co-op Bank by Coventry completed on 1st January 2025. Co-op Bank is now a wholly owned subsidiary of Coventry. Each entity will retain their respective banking licences. As confirmed on 28th November last, the combined group will be led by David Thorburn as Chairman, Stephen Hughes as CEO and Lee Raybould as CFO.
Sky News reported on Friday afternoon that it understands that Tide - the SME financial platform that offers bank accounts, loans and a variety of tools - has been holding talks with investment banks including Morgan Stanley in relation to the potential launch of a £50m fundraising exercise in the coming months. Any such transaction may include the issuance of fresh equity as well as facilitate the sale of a portion of existing investors’ shareholdings. The article notes that it is unclear what valuation would be attached to any fresh funding to be raised. Read the article here.
International Personal Finance (IPF) issued a RNS on Thursday 2nd January noting that ABRDN’s shareholding in the company reduced to 5.20% (previously disclosed shareholding: 10.00%) following a transaction on Friday 27th December.
Other Irish Highlights
Sector Snippets
My latest piece for the Business Post was published today (read here). It takes a look at some of the key themes for the year ahead in an Irish banking sector context (rates, profitability, State shareholding in AIB Group (AIBG), banker remuneration restrictions, competition, UK motor finance exposures, and PTSB’s cost rationalisation programme as well as its project to achieve meaningful RWA density reduction).
Daft.ie published its Irish House Price Report for Q4 2024 on Thursday 2nd January, noting that the average price of a home listed for sale in Ireland in 4Q24 was just over €330k, which is +9% y/y in like-for-like (lfl) terms (read the report here). The publication goes on to note that “…growth in demand is probably close to something like five percent: incomes are growing by 3-4% a year ‐ and demand for housing goes up as incomes go up ‐ and that interacts with demographic growth of perhaps 1%…With very strong growth in demand, the country needs very strong growth in supply. And while completions of new homes have doubled in the last five years, it's important to remember that the overall addition to the stock of housing is quite small: a country with roughly two million homes is adding about 1.5% to that stock a year, instead of adding just 0.75%.”. Indeed, The Irish Times editorial (on Thursday evening) opined that the fundamental issue of such a significant supply shortfall and the consequential persistence of upward pricing pressure reflect a dysfunctional market (read it here). To add to these concerns, it is noteworthy that a report published by the Construction Information Services (CIS) industry analysis group (covered here in the Irish Independent on Friday) warns that sustaining momentum from a new build perspective (which is running at well below needed levels) will be challenging and it foresees a decline in housing commencements in 2025 and 2026, intensified by a skills shortage in the construction industry. These demand and supply factors are likely to mean that house prices remain buoyant in the year(s) ahead (absent a significant external shock from a macro perspective - with Finance Minister Jack Chambers warning today in the Business Post here on risks to the Irish economy emerging from the incoming Trump administration), positive for lender transaction values and asset quality. For further coverage of the housing market, see: i) Pat Leahy’s opinion column in The Irish Times on Saturday here); ii) the key conclusions in The Sunday Times Property Price Guide today here; iii) further expert opinion on the outlook for 2025 in the Sunday Independent today here; and iv) the Sunday Independent today on the expansion of the First Home Scheme (a shared equity scheme which sees the State pledge up to 30% of the market value of a home in exchange for a home equity stake - in partnership with the three listed banks, who provide mortgage finance alongside the equity) in the year ahead here and the Business Post today on the 2024 year-end update from the First Home Scheme here (the report is not yet available on the First Home Scheme website but you can keep an eye out for it here).
Some commercial property-related articles worth a read from the past few days include:
The Irish Independent reported here on Wednesday last on the outlook for the commercial property market in the year ahead - with agents opining that the value of transactions could return to the €3-4bn range, up from €2.0-2.3bn in 2024. Interestingly, Kyle Rothwell of CBRE remarked to the newspaper that “Private equity is showing interest in offices where they see buildings offering exceptional value at below replacement cost. Debt liquidity for offices has also improved. We expect to see more liquidity events occurring either as a result of end-of-fund life or debt reaching maturity…With the recently completed sales of a number of secondary Dublin offices, there is more pricing transparency in the sector. This will lead to more lenders marking asset values to current market valuations next year, which could lead to more sales”.
Iain Sayer, Managing Director of HWBC, writes in the Business Post today on the outlook for the commercial real estate (CRE) market in 2025, noting: “Retail will continue its resurgence, offering chances to take profits, while prime offices and alternatives such as sheltered living continue to show promise. In contrast, secondary office buildings and parts of the residential market remain under pressure, with structural issues and pricing challenges demanding caution.”.
Joan Henry, Chief Economist and Director of Research at Knight Frank Ireland, also writes in the Business Post today on the outlook for the CRE market in 2025, noting: “As funding levels improve in line with interest rate expectations, overall investor activity is expected to increase in 2025. As well as increased demand for industrial assets, prime office assets are expected to see an increased share of market activity in 2025…The vacancy rate in the office market will peak and is set to fall throughout 2025 and 2026. Space with sustainable credentials will be absorbed at the fastest pace, with evidence from Q1-Q3 2024 showing that close to 80 per cent of demand for office space in Dublin 2 was for space with sustainable credentials.”.
Company Snippets
The Business Post reports this afternoon here that Bank of Ireland Group (BIRG) has lost two key executives in recent weeks. Henry Dummer, its Director of Everyday Banking and Christian Pierce, Chief Data and Analytics Officer are both reported to have left the bank to pursue other opportunities.
The Irish Times reports this afternoon here that PTSB staff have to make their decision as to whether or not to apply for the voluntary redundancy scheme by a deadline of Friday 10th January. The article also notes that it is likely to be February before final decisions are taken and communications effected on how many staff to make redundant. I covered this cost rationalisation exercise in some detail in Financials Unshackled Issue 24 on 16th December last here.
Global / European Highlights
Snippets
Rupak Ghose published an interesting detailed note this afternoon on Substack that zones in on whether neobanks are really tech or banking - focusing on Nubank, Revolut, Monzo, Starling, and OakNorth. I highly recommend this excellent reading material which you can access here.
Interesting Lex piece in the FT on Wednesday last on how private credit is likely to face more regulatory scrutiny as it expands into new lending segments (read it here) which Andreas Dombret also wrote about on LinkedIn here on Thursday last - and John Plender’s piece in the FT on Saturday here on how private credit is likely to be where the next financial crisis will emerge from is excellent required reading material as always. Asset-based finance (ABF) and commercial real estate (CRE) lending look likely to be the next significant growth segments for private credit penetration. However, it was interesting to read in Alternative Credit Investor here on Thursday that Stephan Caron, BlackRock’s Head of Global Direct Lending, reportedly recently commented that there is a lot of unnecessary “hype” in an ABF market context and that he sees a limited size to the market.
The Wall Street Journal reported on Thursday last on the withdrawal of Morgan Stanley, Citi and BoA this week from the United Nations-backed coalition, the Net-Zero Banking Alliance (following the recent withdrawal of both Goldman Sachs and Wells Fargo), leaving JPM as the only major US bank left in the coalition whose members vowed in 2021, to align “lending, investment and capital markets activities with net-zero greenhouse gas emissions by 2050” (article here and editorial comment here; Bloomberg also covered the development on Saturday here). This is disappointing but is understandable as banks look to shield themselves against potential political pressure emerging from the incoming Trump administration.
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