Financials Unshackled Issue 28: 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
Welcome to the latest issue - and an important upfront message
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).
I want to bring something to my readers’ attention upfront. As many of you know I write regularly for the Business Post and I enjoy doing so with the team there. For clarity purposes, this week’s article (published in the newspaper today and covered below) was intended to work through recent history in a sectoral net interest income evolution context, taking AIB Group (AIBG) as an example - to provide foundational underpinnings for my views on how loan and deposit pricing will play out in 2025 across the market. It was categorically not written as a piece about AIBG specifically, but it was the most obvious name to select to illustrate the points I was seeking to make given that AIBG has been the greatest beneficiary of low deposit rates purely due to its Irish bias (versus Bank of Ireland Group (BIRG)) and its Balance Sheet structure (i.e., its relatively keen loans-to-deposits ratio). AIBG was not doing anything materially different to its competitors in a deposit pricing vein in recent years and essentially got to take advantage of its deposit-raising capabilities as well as the fact that it never chose to expand aggressively in the UK, meaning relatively more surplus liquidity benefit. My conclusions largely didn’t make ‘the final cut’ which I appreciate happens at times but it changed the whole genesis of the piece on this occasion (as the very different title to what I had proposed attests to). More detail below in the ‘Essential Updates’ section.
Calendar for the week ahead
Mon 13th Jan (10:00 BST): ECB Households and non-financial corporations in the euro area - Q3 2024
Wed 15th Jan (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates - Nov 2024
Thu 16th Jan (09:30 BST): Bank of England (BoE) Credit Conditions Survey and Bank Liabilities Survey - Q4 2024
Fri 17th Jan: UK Finance Card Spending Update - Oct 2024
Essential Updates
PRA CEO agreeable to relax rules for banks (and insurers)
Sam Woods’, the CEO of the Bank of England (BoE) Prudential Regulatory Authority (PRA) comments at a House of Lords committee on Wednesday 8th January were extensively reported on in the media. He reportedly outlined at the committee hearing some of the expected changes to regulations in train - though these were mainly in an insurance context. In terms of banking specifically, he spoke about the 12th September Policy Statement in relation to the implementation of the ‘near-final’ Basel 3.1 standards, changes already effected to bankers’ bonus rules, and that the PRA will outline plans to cut banks’ reporting requirements this year.
Woods noted that he is working on the PRA’s response to the letter received from the Chancellor late last year (which I reported on in Financials Unshackled Issue 20 here) which noted that “It is vital that you [the PRA] continue to fully embed the secondary competitiveness and growth objective throughout your organisation, accelerating its adoption…”. While Woods’ comments have come in for some criticism (see the comments on this FT article, for instance) he is between a rock and a hard place - and while it can be argued that he is potentially overly bending to the will of his political masters (which all regulators / supervisors are not prepared to do - with recent developments in the US a case in point here), to be fair, he does give a sense of balance and proportion in his thinking - while he agrees that financial resilience and economic competitiveness can “go hand in hand” he is clear that changes can be made without unleashing a “race to the bottom” in financial regulation terms.
Ultimately we will have to see what the final shape of the regulatory reforms look like before we can be conclusive - and, what will be most interesting will be to see what the shape of the final Basel 3.1 reforms implementation package will look like especially given that all signs are that the US will strike ‘a red pen’ through the recent (watered down) proposals. While the PRA was careful to buy itself some headroom by making it clear last September by noting that PS9/24 (covered in Financials Unshackled Issue 5 here) represented ‘near-final’ proposals, Woods seems to be giving the impression that he will not dilute these proposals easily when one reflects on his comments at the committee last week where he noted that the new rules will mean that the UK is out of step with international requirements though “to a degree that is tolerable” (see Bloomberg article here and Reuters article here on this point) - but maybe that’s all just a smokescreen in a bid not to be seen as overly agreeable and to be willing to put up some fight. However, all in all, my strong suspicion is that the PRA will succumb to pressure and will dilute the proposed reforms further, which will be good news for the banks.
How will Irish loan and deposit pricing evolve in 2025?
My latest piece for the Business Post was published today and my intention had been to zone in on how lending (particularly mortgages) and deposit pricing are expected to evolve in 2025 (read it here). In short, Irish banks have fallen from carrying the most expensive weighted average mortgage rates in the euro area in December 2021 to sixth most expensive based on latest published data. However, I expect that the banks will climb back up the charts gradually this year as they seek to contain the adverse impacts accruing from lower official rates (and owing to the continued onerous mortgage risk weights that they suffer) - and I also expect that further deposit pricing reductions lie ahead (for the same fundamental reason).
* As an aside, I set out some foundational detail in terms of how net interest income has evolved in recent years within the piece to explain my thinking on expected pricing evolution. Within that I wrote in general terms about the stark difference between the rise in income on interest-earning assets versus the rise in deposit expenses. However, it should be noted that, were one to examine the evolution in Irish-only interest income and Irish-only deposit interest expense then the differences would be even more stark. Indeed, Jon Ihle at The Sunday Times also picks up on the depressed deposit pricing theme today (read it here) - an article which I was delighted to contribute to.
My conclusions from a pricing perspective largely didn’t make ‘the final cut’ (which seemingly changes the whole genesis of the article) - but they are set out below for those who are interested.
So, what can we expect to see from a pricing perspective as official rates continue their descent?
The ECB effected its first 25 basis point rate reduction in June 2024 and that was followed by three further 25 basis point cuts in subsequent months. The lower rates automatically pass through to loan customers sitting on floating rate contracts – including tracker mortgage customers. The lower rates also impact on the income that banks generate on their substantial surplus liquidity pools – much of which sit on reserve at the ECB. So, the sector will suffer material income erosion owing to lower official rates as floating rate asset pricing adjusts.
The banks are understandably keen to mitigate the near-term income hit. Various hedging arrangements are helpful in this context but fixed rate asset pricing management will also likely be a key component of the toolkit. Indeed, we have seen limited passthrough of ECB rate reductions to fixed and variable rate mortgage pricing thus far, for example. That is not greatly different to the experience in other euro are markets but I strongly expect that Irish banks will gradually climb back up the euro area charts in an average mortgage rates context on a 12-month forward-looking view.
Additionally, we are now seeing some deposit pricing cuts in the aftermath of the General Election. Despite the limited impact of same – given that the vast bulk of Irish bank deposits sit in current accounts and other overnight deposit product – I strongly expect numerous further such rate reductions in 2025.
So, absent a marked shift in competitive conditions – which seems unlikely in the near-term – expect fixed and variable mortgage rates to remain elevated even as official rates reduce further and expect to see lower rates on deposits. Provided that official rates don’t fall back towards the zero zone again I would expect that Irish bank return profiles will remain strong but, consistent with management guidance, will approach more normalised levels over 2025 and 2026.
Other UK Highlights
Sector Snippets
The Wall Street Journal reported on Monday 8th January that KBW has estimated that UK banks could face a total liability of c.£28bn arising from the motor finance debacle. The estimate assumes that the Supreme Court will uphold the recent Court of Appeal judgment. The analysts reportedly estimate a total hit of £4.2bn for Lloyds (LLOY) (up from £2.0bn), £460m for Close Brothers Group (CBG) (up from £350m), and £29m for Vanquis Banking Group (VANQ) (unchanged). KBW reportedly notes that “The biggest area of uncertainty is the quantum of commission, which varies between 2% and 26% in the Court of Appeal and Financial Ombudsman cases”. ‘The Big Read’ in the FT on Thursday focused on the motor finance debacle - while there is nothing particularly new in the piece, it is well worth a read here for some excellent context.
Rightmove published its weekly current mortgage rates update on Saturday 11th January here. Rates were broadly stable week-on-week - with average 2Y fixed rates -2bps to 5.03% (-13bps y/y) and average 5Y fixed rates unchanged at 4.80% (-5bps y/y). While there have been scores of negative headlines around the UK’s bond market rout it is also notable that US Treasury yield have been rising and the upward movement in swap rates hasn’t been gigantic, all things considered - we have seen 2Y swap rates climb by 11bps week-on-week to 4.60% on Friday while 5Y swap rates rose by 18bps week-on-week to 4.49%. Still though, the relatively abrupt uptick in rate expectations largely puts paid to the usual January mortgage sales and I expect mortgage rates to pick up over the coming weeks on a lagged response basis (unless we see a rapid significant reversal in swap rates).
Halifax published its monthly House Price Index for December 2024 last week here. Halifax found that prices fell by 0.2% in December to an average of £297,166 - which implies annual growth of +3.3% (compared with +4.7% in the 12 months to end-November).
Bloomberg reported here on Wednesday 8th January on a Fitch report that concludes that “the nonconforming [mortgage] sector is now entering an acutely risky phase in its life cycle”. The report flags the significant spike noted in non-conforming mortgage borrowers failing to make full monthly payments according to a RMBS index tracked by the agency. Arrears of one month or more reportedly surged by 11.1 percentage points to 24.2% from December 2021 through November 2024 while 3M+ arrears increased by 8.6 percentage points to 17.7% over the same period.
Company Snippets
Bloomberg reported on Tuesday 7th January that Barclays’ (BARC) investment bankers are preparing for a wave of M&A activity in 2025 as US companies, in particular, deploy their financial firepower for acquisitive purposes (click here for the article). Stephen Dainton, Head of Investment Bank Management, noted to the news agency that: “I’m hopeful that the capital markets cycle in equities and in M&A will evolve during the course of 2025…Importantly, I think driven perhaps by the multiple divergence that you have in the US and in Europe”. Indeed, The Wall Street Journal also reported last Monday (6th January) on recent RBC Capital Markets research, which reportedly notes that global investment banking activity should continue to recover in 2025 - with capital markets’ revenue growth set to outpace growth in other banking segments in the year ahead. The FT also included a piece on how investment banks “are bracing for a crunch year” in 2025 on Monday last here.
Mortgage Introducer published an interesting article on how well the Barclays (BARC) acquisition of Kensington is working on Tuesday last (click here for the article). The article mainly reflects the observations of Frances Cassidy, Head of Mortgage Intermediary Partnerships at BARC and it is quite an interesting read in terms of the broader benefits of running a dual-brand multi-proposition strategy.
Close Brothers Group (CBG) issued a RNS on Tuesday 7th January noting that Adrian Sainsbury and the Board have agreed that he will step down from his position as Group CEO and Executive Director with effect from 6th January to focus on his health - and that he is recuperating well and expected to make a full recovery (click here for the RNS). The Board announced the appointment of Mike Morgan as Group CEO on a permanent basis, subject to regulatory approval. While I wish Sainsbury a continued and full recovery, it is also reassuring to have a sense of permanence at the top of the organisation with Mike Morgan, meaning that plans for a new Group CFO can now be pushed forward. In my view Morgan has done an outstanding job to steer the ship in what has been a highly turbulent period for the Group and he appears an excellent choice as successor to Sainsbury. The Times reported on Wednesday (read it here) that Fiona McCarthy, a planning director at CBG, is being lined up for the permanent CFO seat. The same article notes that CBG declined to comment on a Bloomberg report from Tuesday (see here) that Winterflood has recently suffered an exodus of talent with at least nine traders leaving to join rival firms.
H&T Group (HAT), the pawnbroker, issued a RNS on Friday 10th January noting that Octopus Investments’ shareholding in HAT reduced to 9.98% (previously disclosed shareholding: 10.94%) following a transaction on Thursday 9th January.
Sky News reported on Wednesday 8th January that the former Economic Secretary to the Treasury (and former HSBC (HSBA) employee) Bim Afolami is set to be appointed as a Non-Executive Director of HSBC UK soon (click here for the article).
Leeds Building Society issued a Prospectus for its £2bn EMTN Programme on Thursday 9th January, which you can access here.
The FT reported on Wednesday 8th January on mounting union concerns in relation to further potential branch closures and associated staff reductions at Lloyds (LLOY) in the wake of the company’s decision to allow Halifax, Lloyds, and Bank of Scotland customers use any of its branches across the three brands (click here for the article). Seems a sensible strategic decision to me. The development was also covered in The Guardian on Thursday here.
Mortgage Solutions reported on Wednesday on how OSB Group (OSB) sees bridging and commercial lending as two important growth areas in 2025 and walks through recent divisional management changes following the split of the bridging and commercial lending division into two separate teams. Click here for the article.
Paragon Banking Group (PAG) issued a RNS on Tuesday 7th January noting that BlackRock’s shareholding in PAG has reduced to <5% (previously disclosed shareholding: 5.00%) following a transaction on Monday 6th January.
Paragon Banking Group (PAG) issued a RNS on Thursday 9th January noting that JPM AM has appeared on the PAG share register with a shareholding in PAG of 5.05% (previously disclosed shareholding: undisclosed) following a transaction on Tuesday 7th January. A further RNS published by PAG on Friday noted that JPM AM’s shareholding increased further to 5.15% following a transaction on Wednesday 8th January.
Vanquis Banking Group (VANQ) issued a RNS on Thursday 9th January noting that Norges’ shareholding in VANQ has increased to 5.24% (previously disclosed shareholding: 4.51%) following a transaction on Tuesday 7th January.
Other Irish Highlights
Sector Snippets
The Banking & Payments Federation Ireland (BPFI) published mortgage approval data for November 2024 on Friday 10th January - click here for the press release and here for the report. In short, mortgage approvals by value came in at €1.365bn in November, which was +13.0% y/y (and -8.0% m/m). First-time buyer (FTB) mortgage approvals represented 62% of approvals by value (down marginally from 63% in October). There were 50,538 mortgage approvals in the 12M to end-November 2024, valued at €15,044m. Annualised mortgage approval activity to end-November increased in volume terms by 0.39% compared with the 12M to end-October and increased in value terms by 1.06% over the same period. This data is positive in a continued loan book growth outlook context and, as Brian Hayes, CEO of the BPFI noted: “…the strong approvals activity in the past year has resulted in a healthy pipeline for mortgage drawdowns in the months ahead”.
The Central Bank of Ireland (CBI) published its monthly Money and Banking Statistics for November 2024 on Wednesday 8th January, which you can read here. On lending: i) net lending to households was -€57m m/m to +€351m in November, taking 12M net lending flows to +€2.9bn (implying very strong growth of +2.9% y/y); and ii) non-financial corporate (NFC) net lending was -€481m in November, taking 12M net lending flows to +€406m (+1.4% y/y). On deposits: i) household deposits were +€471 m/m in November to €159.6bn, taking 12M net deposit inflows to +€7.8bn (+5.1% y/y) and overnight deposits have reduced by just €100m y/y, which represents the smallest 12M reduction since annual overnight deposits turned negative in 2024; and ii) NFC deposits were -€3.8bn m/m in November, taking 12M net deposit inflows from to +€1.6bn (+1.1% y/y). Note that I have independently calculated the y/y growth rates based on the granular tabular data published alongside the release itself. All in all, the update points to continued modest broad-based growth in lending which is constructive in a bank loan book expansion context in a positive macro backdrop - as well as a buoyant environment for deposit volumes with declining rotation out of current accounts into interest-earning product, a positive trend from a bank profitability resilience perspective (and consistent with recent messaging from bank management teams).
MyHome’s Q4 2024 Property Report was published on Thursday 9th January here and finds that national asking prices were +8.4% y/y in 2024 - while the average residential transaction is now being settled for 9% over the asking price. The average mortgage loan is now above €300k for the first time, +7% y/y. Positive for the banking sector in a transaction values and an asset quality context.
Company Snippets
It was widely picked up in the media last week that AIB Group (AIBG) successfully issued a €700m NC7 AT1 instrument at a yield of just 6.00% on Tuesday 7th January. Initial pricing talk is understood to have been in the 6.50% territory so this is a strong result - and reflects the degree of demand for the paper, with the order book understood to be almost four times oversubscribed. The result undoubtedly reflects the very strong capital position of the lender - as well as confidence in its ability to continue to deliver strong organic capital generation in the years ahead. As an aside, given where AIBG’s share price sits in comparison to the underlying RoTEs that it is generating (and can be expected to generate over the coming years), this pricing is massively divorced from the implied cost for investing in the equity of the bank which is something that shareholders and prospective shareholders should be reflecting on (especially considering the further wave of capital returns that shareholders can expect on a near-term view).
The Irish Times reported on Tuesday 7th January that Deutsche Bank has downgraded its rating on AIB Group (AIBG) to HOLD from BUY following its recent outperformance - and the analysts reportedly estimate that AIBG will see net interest income (NII) fall by 11% in FY25 compared with -c.6% for Bank of Ireland Group (BIRG) and PTSB. This is significantly dependent on how the official rate environment evolves in 2025, of course. I made the point above that Irish bank returns will gradually begin to normalise over 2025 and 2026 - to the extent that official rates fall back materially further, then I would strongly expect that BIRG will eventually once again start to outearn AIBG in a RoTE delivery context given its Balance Sheet structure (higher loans-to-deposits ratio) and lower risk weights - with its more mechanistic structural hedging strategies favoured by longer-term investors as well (indeed, I will likely explore this topic in far more depth in a ‘Deep Dive’ note soon). However, it will be important to keep an eye on how active AIBG is in the SRT market over the coming years as it seeks to bridge the RWA density gap in a bid to maintain strong returns - though its strategic foray into Energy, Climate Action & Infrastructure lending does carry very high risk weights (see page 27 of the FY21 results slide deck here to get a broad sense), driving some natural inflation too. Finally, Deutsche also notes that it expects that a resolution to the UK motor finance review “ultimately will end up a positive” for BIRG.
AIB Group (AIBG) issued a RNS on Wednesday 8th January noting that BoA’s shareholding in AIBG has reduced to 4.183% (previously disclosed shareholding: 4.421%) following a transaction on Tuesday 7th January. A further RNS published by AIBG on Thursday noted that BoA’s shareholding climbed again to 4.206% following a transaction on Wednesday 8th January. This is likely to be held in a nominee capacity.
The Irish Times (and other media) reported on Tuesday 7th January on Bank of Ireland Group’s (BIRG) decision to trim rates on certain deposit products - by reducing the rates on its 12M and 18M fixed term deposit products by 25bps with effect from Friday 10th January (click here for the article). BIRG is the first bank to effect rate reductions, which demonstrates that its management team is not afraid to be the first bank to take action in this respect in the wake of four 25bps reductions to the ECB Deposit Facility Rate last year. As discussed above, I expect peer domestic banks to follow suit soon. Despite my regular discussion of depressed deposit pricing (to explain bank profitability), these management teams are acting entirely rationally from a shareholder value maximisation perspective. The Irish Independent followed up the news on Wednesday with a piece on deposit rate cuts effected by overseas players in the Irish market thus far, cautioning savers that they should act soon ahead of further cuts (click here for the article).
Global / European Highlights
Snippets
The Wall Street Journal reported on Monday 6th January on a recent KBW research report which reportedly argued that investors ought to be careful not to short European banks that could be takeover targets. The KBW analysts also reportedly note that PTSB and OSB Group, amongst other European banks (including Monte dei Paschi and Unicaja) could be potential targets, which seems a sensible conclusion. Indeed, it’s not just trade buyers that could materialise for prospective ‘value plays’. Looking again at Warburg Pincus’ acquisition of United Trust Bank (which I covered briefly in Financials Unshackled Issue 24 here) at a reported equity valuation of c.£520m, United Trust Bank did PAT of £63.3m in FY23, implying a P/E of 8.2x (based on FY23 earnings), which is not especially rich considering that profits have been growing strongly (PAT was £45.4m in FY22). Furthermore, tangible book value was £277.7m at end-FY23, implying a P/TBV of 1.87x - that is clearly very high relative to where listed banks trade but must be seen in the context of a business that delivered a RoE of c.24% for FY23. However, there are indeed other specialist lenders around Europe (including the UK) printing high returns close to that territory and this particular transaction could potentially have interesting readacross for them. More on this theme in a separate note soon - and it’s also worth checking out an article in the FT today here on how PE firms ramped up deal activity in Europe (in a multi-sectoral context) last year to take advantage of depressed valuations.
The Wall Street Journal further reported on Monday last that KBW’s recent research finds that loan growth is re-emerging for European banks and that profitability will remain more resilient than feared owing to this dynamic ad well as a slightly upward sloping yield curve - noting that “2025 will therefore be a crucial year for the banks to prove the doubters wrong”.
Bloomberg reported on Friday here that the ECB is considering pushing banks to use loan data from the region’s historic banking crisis when predicting future credit defaults, a move that could result in lower capital strength for some of the affected lenders. This is unlikely to affect Irish banks who already suffer from onerously relatively high risk weights (explaining the above-average mortgage pricing that the consumer has suffered from over the years) owing to the reflection of historical loan losses in Probability of Default (PD) computations particularly as well as Loss Given Default (LGD) computations.
Rupak Ghose has published some interesting posts on Substack in recent days,, which are well worth a read. Firstly, Ghose published ‘Neobanks in pictures’ on Monday 7th January (click here for it) and he also published an interesting note ahead of US banks results season earlier today (click here for it).
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