Financials Unshackled Issue 29: Weekly Banking Update (UK / Irish / Global Developments)
Perspectives & Snippets on UK / Irish / Global Banking Developments
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Welcome to the latest issue!
Welcome to the latest issue of Financials Unshackled. This note is split into four sections: i) Calendar for the week ahead; ii) UK Highlights (key UK sectoral and company developments since the last issue); iii) Irish Highlights (key Irish sectoral and company developments since the last issue); and iv) Global / European Highlights (select key developments in a Global / European context since the last issue). Today’s note is later than the target c.17:00 BST circulation timeline as a few other things turned up earlier - back to normal again next week.
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Calendar for the week ahead
Wed 22nd Jan: UK Finance Buy-to-Let (BTL) Mortgage Lending Update
Fri 24th Jan (07:00 BST): Paragon Banking Group (PAG) 1Q25 Trading Update (for the three months to 31st December 2024)
UK Highlights
Sector Snippets
The Bank of England (BoE) Prudential Regulatory Authority (PRA) announced on Friday morning that, in consultation with HM Treasury, it has been decided to delay the implementation of Basel 3.1 in the UK by one year until 1st January 2027 to allow more time for greater clarity to emerge about plans for its implementation in the US (see here). This is not a surprise and the government’s exertion of pressure on regulators to relax the rules is clearly working (despite various regulators’ remarks later on Friday - though it does seem that the FCA is putting up the harder fight). In this instance I believe this is the right decision as UK banks must maintain a competitive global footing and waiting to see how it all plays out in the US is important in this respect (for what it’s worth I am much less clear on the merits of easing mortgage rules, which regulators are reported to be examining according to an article in The Times here on Thursday night - though it depends on the detail as there are nuances). I expect that the incoming US administration will discard the implementation reforms in most part (at least) and I therefore see the BoE’s decision as a prelude to a material further dilution in the reforms (and I was delighted to be quoted in this Reuters piece on the development on Friday). As I have written before more and more pressure will build for Europe to change tack too - and a Reuters report on Friday afternoon here noting that the EU said it was considering its options in the wake of the UK decision tells you all you need to know despite the EU adding its standard line to the effect that it is in “everyone’s interest” to implement the reforms fully and on time).
The Bank of England (BoE) published its quarterly Credit Conditions Survey (click here) and its quarterly Bank Liabilities Survey (click here) for Q4 2024 (i.e., the three months to end-November 2024) on Thursday 16th January. These are important surveys - which were conducted between 18th November and 6th December - as they give a sense of lenders’ expectations for the months ahead. In overall terms, the survey findings are broadly consistent with lenders guidance for modest net loan growth expansion in the months ahead (accounting for maturities) though, while credit supply to households and corporates, demand for mortgages is expected to reduce and demand for corporate loans (for small, medium, and large businesses) is expected to remain unchanged.
It’s worth reading Nathanaël Benjamin’s (Executive Director, Financial Stability Strategy and Risk at the Bank of England (BoE)) speech on Wednesday on the BoE’s new approach to stress testing banks (which combines regular cyclical risk stress testing and stress testing different risks) and developments in stress tests of other parts of the financial sector here.
Rightmove published its weekly current mortgage rates update on Saturday 18th January here. Rates were -4bps week-on-week - with average 2Y fixed rates now sitting at 5.00% (-6bps y/y) and average 5Y fixed rates sitting at 4.76% (flat y/y). Banks have been slow to raise pricing in response to the substantial pick-up in swap rates in early January (much of which has now reversed) in a bid to sustain volumes / volatility / lag effects (this was explored in a Reuters piece on Wednesday here) but I expect mortgage rates to pick up a bit over the coming weeks assuming swap rates stabilise.
Jakub Lichwa at TwentyFour Asset Management penned a piece here on Monday last on how higher gilt yields impact on banks and insurers following the significant rise in gilt yields the previous week (much of which reversed this week), which saw UK banks’ AT1 spreads move c.20bps wider.
Company Snippets
Reuters reported here on Wednesday that Apple is in talks with Barclays (BARC) to replace Goldman Sachs as its credit card partner. The card issuer, Synchrony Financials, is also reported to be in discussions with Apple.
Reuters broke the news on Monday here that Barclays’ (BARC) Group Head of Sustainability Laura Barlow stepped down at the end of 2024 to pursue other opportunities. Daniel Hanna, the Head of Sustainable Finance for CIB, has taken on an expanded role as Group Head of Sustainable and Transition Finance, in the wake of Barlow’s departure.
Coventry Building Society issued a RNS here on Thursday noting that Andrea Melville will join the Group as CEO of The Co-op Bank and Group Chief Commercial Officer, subject to regulatory approval. Melville is currently Head of Everyday Banking, Business Banking and CEO of Cater Allen at Santander UK.
Close Brothers Group (CBG) issued a RNS on Friday 17th January noting that Jupiter has appeared on the share register with a shareholding of 5.59% (no previously disclosed shareholding) following a transaction on 16th January.
Distribution Finance Capital Holdings (DFCH) issued a RNS on Tuesday 14th January noting that Davidson Kempner’s shareholding in the company reduced to 12.96% (previously disclosed shareholding: 13.32%) following a transaction on 10th January.
Bloomberg covered the risk of bonus cuts at HSBC (HSBA) given impending substantial restructuring costs - click here for the article which was also covered by eFC here.
The Guardian broke the news here last Monday that senior bankers at Lloyds (LLOY) will face the risk of having their bonuses trimmed if they fail to comply with the firm’s return to office (RTO) policy, which stipulates that they must attend the office on at least two days per week. The Telegraph reported here on Wednesday on LLOY’s plans to curtail its back office functions which will see a reduction of about 500 FTEs according to the FT here. The Telegraph also picked up on LLOY’s plans to close locations in both Liverpool and Dunfermline.
Mortgage Advice Bureau (MAB1) issued a RNS on Monday 13th January noting that Kayne Anderson Rudnick’s shareholding in the company increased to 5.09% (previously disclosed shareholding: 4.91%) following a transaction on 6th January.
NatWest Group (NWG) issued a RNS on Tuesday 14th January noting that the government’s shareholding in the company fell to just 8.90% (previously disclosed shareholding: 9.99%) following a transaction under the ongoing share trading plan on 13th January.
Paragon Banking Group (PAG) issued a RNS on Tuesday 14th January noting that BlackRock’s shareholding in the business increased to 5.09% (previously disclosed shareholding: <5%) following a transaction on 10th January. A subsequent RNS issued by PAG on Thursday 16th January noted that BlackRock’s shareholding once again fell below 5% following a transaction on 14th January.
Sky News reported last Monday here that Revolut Founder & CEO Nik Storonsky has disposed of >$400m of Revolut stock in the ongoing secondary share sale.
The FT reported yesterday that Santander is exploring a number of strategic options, one of whish is exiting the UK market, according to people familiar with the matter - who also added that no deal is imminent and that the review is at an early stage (click here for the article). Frustrations with high costs, the onerous ringfencing regime, its independent Board, and the fact that it did not capture as much benefit in the UK as it did in other markets from rising interest rates are said to be behind the decision to contemplate options. I noted in my write-up on Santander UK’s 3Q24 update (in Financials Unshackled Issue 21 here) that “…in the absence of a desire to significantly push up wholesale funding issuance / parental funding dependence, given its LDR, Santander UK will likely either have to start growing its UK customer deposit base and/or run down the size of its UK loan book at a faster clip (could a portfolio sale(s) be on the cards in early 2025 perhaps?) given required FY25 TFSME repayments (though, with that said, the Board may be comfortable running with a higher LDR given readily available funding).”. Indeed, there have been many questions in the industry around Santander’s long-term commitment to the business in the past and, to the extent that a sale process is in / is put in place, then I would expect Barclays (BARC) and NatWest Group (NWG) in particular to take a very close look - indeed, a Reuters report this evening here notes that BARC reportedly approached Santander about a possible offer for the UK business in 2024.
Secure Trust Bank (STB) issued a RNS on Thursday 16th January noting that IG’s shareholding in the company (likely to be held in a nominee capacity) reduced to 2.95% (previously disclosed shareholding: 3.05%) following a transaction on 14th January.
Irish Highlights
Sector Snippets
The Central Bank of Ireland (CBI) published its monthly Retail Interest Rates update for November 2024 on Wednesday 15th January. Click here to read the release (and to get links to all the data). All in all, the data point to pretty favourable lending volume and pricing conditions for the banks once again - with some reduction in term deposit costs (particularly in business deposits) and some business deposit outflows observed. Key points:
The weighted average interest rate on new Irish mortgage agreements at end-October was 3.97% (-6bps m/m, -28bps y/y) - though average rates are now 54bps higher than the euro area average (up from 40bps higher at end-August and 51bps higher at end-October), meaning Ireland remains 6th highest in the euro area for mortgage originations pricing. This didn’t get any meaningful attention in the run-up to the recent General Election and I suspect the political system is unlikely to apply any great pressure on the banks in this vein in the relative near-term. I expect that Irish banks will seek to recoup some loan spread in a mortgages context as official rates continue their descent - I don’t see them arriving back at the top of the charts with that said (as it could generate political heat) though there would be adequate reasons for them to do so at one level given the onerously high risk weights attached to mortgage stock (and flow) - though that would require one to examine asset pricing through a singular lens (i.e., leaving the low associated funding costs out of the argument). So, essentially a gradual grind back up the charts is on the horizon in my view - but over time and not all the way (and competition from other players outside of the three domestic listed banks will, in time, bear more influence too on front book pricing decisions too I suspect).
The volume of new mortgage originations was +20% y/y in November to €1.0bn, following +28% y/y growth in October (renegotiated agreements were -€150m m/m to just €148m in November - though this followed months of stellar growth (+30% m/m in October to €298m, following +66% m/m growth observed in September). Outstanding mortgage stock stood at €85.4bn at end-November, +2.0% y/y.
Fixed rate mortgages represented 70% of the volume of new mortgage agreements in November (down from 72% in October) with standard variable rate agreements comprising the residual 30%.
The interest rate on new consumer loans increased by 5bps y/y (-6bps m/m) to 7.81% in November. The total volume of new consumer loans was €187m in November, down from €196m in October - and -3.1% y/y. However, it must be noted that the pricing on, and volume of, new consumer loans can fluctuate quite wildly on a monthly basis. Outstanding consumer loan stock stood at €18.2bn at end-November, +2.9% y/y.
New NFC (non-financial corporate) borrowing in November fell back to €935m, -21% y/y - but the data is notoriously choppy m/m and this followed a substantial print of €2.4bn in September, which was +124% y/y (which was followed by a 10% y/y drop in October). The weighted average interest rate on new lending was -91bps y/y / +6bps m/m to 5.13% in November (which was 73bps ahead of the average euro area equivalent rate - of 4.40%). Outstanding NFC loan stock stood at €58.1bn at end-November, -0.3% y/y.
The average rate on household overnight deposits was unchanged m/m at 0.14% in November 2024 while the average rate on NFC overnight deposits was -1bp m/m to just 0.11%. The majority of listed Irish banks’ customer funding sits in current accounts and other overnight product so this data, once again, illustrates the enormous liability margin benefits that the listed banks have enjoyed since official rates started to rise. The weighted average interest rate on new household agreed maturity deposits and new NFC term deposits was -4bps m/m to 2.60% (-2bps y/y) and -25bps m/m to 2.51% (-99bps y/y) respectively in November . The corresponding average euro area rates were 2.61% for new household agreed maturity deposits and 2.89% for new NFC agreed maturity deposits.
The total stock of deposits stood at €231.5bn at end-November (household €161.5bn (+€1.6bn m/m), NFC €69.9bn (-€5.7bn m/m)), -1.7% m/m and +2.9% y/y.
The Programme for Government was published during the week and contains very little of note in a banking context. Of relevance to investors will be the remark to the effect that the Government will “Complete the task of normalising the domestic banking system to best serve the interests of the economy”, which indicates policy continuity - though that won’t come as a surprise. You can access the document here and p.19-20 contain the Government’s commitments in a Financial services & Banking context if you wish to have a read.
Susan Russell, Chief Executive of Retail Ireland at Bank of Ireland Group (BIRG) has been appointed as President of Banking & Payments Federation Ireland (BPFI). BPFI press release here.
Company Snippets
Jon Ihle at The Sunday Times writes today that government officials “…are believed to be weighing up a share placing in the short window between the appointment of a new minister for finance this week and the beginning of AIB’s pre-results close period on February 5”. This stands to reason given the recent AIB Group (AIBG) share price strength as well as the possible readacross from the recent heavily oversubscribed AT1 issue. I was delighted to be quoted in the article opining that I expect there would be demand for 10% of the issued share capital at an acceptable discount (albeit at a wider discount to what a 5% placing could be expected to be executed at I suspect) were the State tempted to expedite its exit (taking advantage of the strong share price particularly). For investors looking to form a view on how the government is likely to approach placings this year it will be important to run the numbers to see what the State stands to recoup in the context of its total investment in AIBG at various price points for the remaining share sales as I suspect that government will be very keen to message that it got all its money invested in AIBG back at the stage when it falls off the share register given that it is likely in break-even territory assuming the share price holds up well to support future placings, though I don’t have a precise updated calculation on this (the domestic brokers should have a recently refreshed calculation of where things stand currently and can probably help you there).
It was widely reported in the media last Monday that Avant Money (Bankinter) has begun to inform customers that it “…will merge into a newly established Irish branch of Bankinter…” on 1st April or shortly afterwards (click here for The Irish Times news report). This news does not come as a surprise as the CFO of Bankinter noted that “We continue to work towards the expansion of our products and services in Ireland through the opening of a branch of Bankinter” on its 3Q24 earnings call last October (which I covered in Financials Unshackled Issue 13 here), going on to note that Bankinter expects to start gathering deposits in Ireland by mid-year. The Irish Times published an interview with the Avant Money CEO Niall Corbett on Friday, which is well worth a read - Corbett reaffirmed that Bankinter will expand in Ireland using a digital model and that it will start its life as a branch by offering deposits first (though, understandably, he wouldn’t be drawn on pricing strategy or volume ambitions). I suspect it will be a gradual approach to growth as the Bankinter CEO suggested on the 3Q24 earnings call: “…we basically want to expand the span of business there…we will go slowly, but surely…”. It also seems likely that the bank will need to offer attractive demand account and term account (and, potentially, offer a rate on current accounts??) to win business from the incumbents. However, I have written extensively in the past around Irish deposit customer inertia and I think it is wise for Bankinter management to be thinking about just gradual growth. I continue to expect that AIB Group (AIBG) and PTSB will follow Bank of Ireland Group’s (BIRG) recent decision to trim rates on certain deposit products (covered in Financials Unshackled Issue 28 here) - and I expect the banks to trim deposit rates materially further (provided no political / public backlash, which seems very unlikely) before Bankinter launches its own deposit product. The Business Post also covered the development in some depth today, reflecting the views of bank stock analysts - you can read it here.
Bank of Ireland Group (BIRG) issued a RNS on Tuesday 14th January noting that FMR’s shareholding in the company reduced to 2.87% (previously disclosed shareholding: 3.03%) following a transaction on 10th January.
PTSB announced significant reductions to its fixed rate mortgage prices of 15-95bps on Wednesday (see press release here), setting a rate of just 3% on its <60% LTV 4Y fixed rate product - which is a market-leading rate. While one could argue that this decision flies in the face of the view that I expressed above to the effect that Irish banks will climb back up the charts a bit from a euro area mortgage pricing perspective, I would disagree. We will still see cuts - just not to the same extent as in other jurisdictions (that is already the case as can be seen in the widening gap between average Irish mortgage rates and average euro area mortgage rates) and this particular move is a bid by PTSB to drive much-desired flow share growth (which fell back considerably in response to Bank of Ireland Group (BIRG) leading the market with highly competitive rates through the higher rate backdrop).
Global / European Highlights
Snippets
Aaron Brown at Bloomberg penned an interesting US-focused piece on how AI will disrupt banking jobs over the remainder of this decade, specifically zoning on how KYC specialists (which, Brown notes, employs c.10-15% of bank workers) are at risk: “A relatively small number of technologists — AI specialists, not KYC specialists — will be needed, along with a few very senior people to set policy and investigate major cases. The armies of investigators can be replaced by algorithms running 24x7, collating customer information with all kinds of structured and unstructured data on the internet, and deploying the understanding of the world that AI has developed in recent years.”. Clearly AI will disrupt more broadly as well and I can see it having profound implications for the research industry too.
US banks’ 4Q24 results were well-covered in the financial press last week. One particular initiative I want to pick up on, though is J.P.Morgan’s (JPM) digital retail lending proposition, Chase. The Wall Street Journal published a detailed piece on JPM’s plans to launch Chase in Germany in late 2025 or early 2026 on Tuesday here - though original plans had been to launch in 2022. Chase UK has grown its customer base to >2 million and c.$25bn of deposits and Kuba Fast, Chase UK CEO, noted to The Wall Street Journal that “Our ambition is to become a universal retail bank” (and is expected to be profitable in 2025). This is a long-term play, but, given JPM’s considerable strategic vision and ambition, financial and intellectual resources, and technological capability, one suspects they’re not getting involved to become just a 5% market share player in UK or German mortgages (for example). Indeed, I expect that Chase will end up proving a significant disruptive force in the UK and other large Continental European markets (to begin with) in time.
The Wall Street Journal reported on Tuesday that UBS has said that, while investors seem upbeat on the prospects for European banks in 2025, they are waiting for more certainty before adding to their existing positions in the near-term, with the analysts reportedly commenting that “Attractive valuations aside, with potentially more clarity on several big issues just around the corner, it seems good portfolio and career management to wait before adding bank exposure”.
Sharon Donnery and Mario Quagliariello of the ECB penned a blog on the ECB’s website on Tuesday here on the ECB’s supervisory priorities for the 2025-27 period (also covered by Bloomberg here). In summary, the authors note that “Our supervisory priorities for 2025-27 focus on strengthening banks’ ability to withstand macro-financial and geopolitical shocks, and on ensuring that banks remediate material and persistent shortcomings in a timely manner and address emerging challenges”. The piece goes on to note that geopolitical risks will feature prominently in the EU-wide stress test in 2025. In the context of banks remediating material and persistent shortcomings, the blog goes into some detail on how past supervisory work has revealed major shortcomings in banks’ RDARR (risk data aggregation and risk reporting) capabilities and that this will be a key area of focus from a supervisory perspective over 2025-27. Finally, on emerging challenges, the blog picks up on the risks that can emerge from increasing digitalisation (while acknowledging that digitalisation is expected to strengthen banks’ resilience in the long-term) and notes that a better understanding of the broad trends in the sector, such as the use of digital platforms, strategic partnerships, and AI needs to be developed.
An interview with Frank Elederson, Member of the Executive Board of the ECB, with Het Financieele Dagblad was published on Friday here. It zones in on the increasing efforts by large banks and asset managers in the US to distance themselves from climate policies and how that may leave European banks at a disadvantage. Elderson is very clear that “Among international supervisors there’s complete agreement that the physical and transition risks that we are discussing are extremely relevant.”.
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