Financials Unshackled Issue 30: Weekly Banking Update (UK / Irish / Global Developments)
Snippets (with some perspectives) 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!
Any feedback on the note is most welcome and you can reach me at john.cronin@seapointinsights.com
Calendar for the week ahead
Mon 27th Jan (09:00 BST): European Central Bank (ECB) Survey on the access to finance of enterprises - Q4 2024
Tue 28th Jan (09:00 BST): ECB euro area Bank Lending Survey - Q4 2024
Wed 29th Jan (09:00 BST): ECB Monetary developments in the euro area - Dec 2024
Thu 30th Jan (09:30 BST): Bank of England (BoE) Money and Credit Statistics (including Effective Interest Rates) - Dec 2024
Thu 30th Jan (13:15 BST): ECB Governing Council Monetary Policy Decision announced
UK Snippets (with some perspectives)
The Chancellor Rachel Reeves took steps last Monday to seek permission to intervene in the forthcoming Supreme Court case which will hear an appeal to the Court of Appeal’s Hopcraft judgment in a UK motor finance context. The FT published a particularly informative piece here on Reeves’ move noting that the Supreme Court permits official bodies to apply to intervene in cases it hears but that permission is granted only in circumstances where the court thinks the intervention will offer “significant assistance” to the judges who will hear the case. It is a welcome step but we will have to wait and see what the outcome will be. The share prices of the most exposed lenders had a strong run last week, with this news appearing to serve as a significant catalyst.
Good piece here on Propertywire setting out Ray Boulger of John Charcol’s views on the most likely changes that will be effected to the mortgage macroprudential regulations. There are some nuances where requirements could be sensibly loosened in the case of first-time buyer lending in my view but many are of the opinion that it will be quite broader than this (with the 4.5x loan-to-income limit widely expected to be destined for the chop, for example) as the Labour government plough ahead in their push to tear up rules and regulations. I remain to be convinced of the wisdom of some of the upcoming expected changes in this particular context but the devil will be in the detail.
UK Finance published a BTL lending update for 3Q24 (the three months to 30th September) on Wednesday last here. It’s quite dated now but contains useful information nonetheless with some key points being: i) 3Q advances totalled £8.6bn, +8.9% y/y; ii) average gross BTL rental yields of 6.93% in 3Q, +40bps y/y; iii) average BTL interest coverage ratios (ICR) were 195% in 3Q; and iv) the number of BTL mortgages in arrears of >2,5% was -4.2% q/q / +19.0% y/y.
The Prudential Regulatory Authority (PRA) published the letter sent by its CEO Sam Woods to the Prime Minister of 15th January on Monday last. It’s worth reading the content here particularly in relation to the “Further actions the PRA intends to take”. Good piece here on it on Bloomberg too.
Compliance Corylated zoned in here on the PRA’s decision to delay the Basel 3.1 implementation date until January 2027 (covered here in Financials Unshackled Issue 29) and also wrote about the pause in the Basel 3.1 data collection exercise for off-cycle review of firm-specific Pillar 2 capital requirements - in an article I was delighted to contribute to.
Very interesting to read a Bloomberg article on Thursday last here which reported that Thomas Jones, a Policy Adviser at the Bank of England (BoE) commented in a panel discussion at an industry event last week that, in his personal view, AT1s should not be part of the future capital stack if and when the BoE decides to overhaul its rules - arguing for a much simpler regime consisting of just common equity and bail-in debt. One can see the merits underpinning his argument but it is a deeply divisive topic. The future of the AT1 instrument seems likely to increasingly become a matter of debate - especially in the wake of the Australian regulator’s proposal late last year to extinguish AT1s from Australian banks’ capital stacks over time but it is also important, in this context, to note that there are critical differences between the European / UK and Australian AT1 markets (which L&G investment Management wrote about last year and were picked up on, together with my own views, in Financials Unshackled Issue 9 here).
Sky News reported here on Thursday that Barclays (BARC) has written to its largest shareholders notifying them of detailed proposals in relation to changed remuneration arrangements for its CEO and Group Finance Director which would see reduced fixed annual remuneration levels (the CEO’s fixed pay is proposed to reduce considerably from £2.95m to £1.59m, for example) in exchange for more potential upside (with the CEO’s total maximum annual package proposed to increase to £14.3m from £9.8m, for example - though this upper limit would only be achieved if BARC were to deliver a RoTE >14%). This highlights management’s confidence in the bank’s prospects and, arguably, puts their money where there mouth is - and I would be surprised if shareholders (who tend to like strong management incentives for obvious reasons) rejected the proposals (which will be tabled at the upcoming AGM) as the uplift in maximum awards does not appear egregious for what would be a substantial trimming in guaranteed pay (and the hurdle to achieve the revised proposed maximum award is a very high one in any event). Separately, Bloomberg reported here on Wednesday on the BARC CEO’s upbeat comments at Davos in relation to the outlook for investment banking activity.
Kalyeena Makortoff, Banking Correspondent at The Guardian, published an interesting interview with Kuba Fast, Chase UK (J.P.Morgan) CEO on Tuesday last here in which Fast discusses the broader ambitions for the Chase digital lending business: “We want to be in multiple countries. And in each of these countries, we want to be a prominent presence: top five”. He also notes that Chase UK is targeting break-even in 2025: “In 2025 we would like the UK business … to make money and start contributing towards defraying the cost, the investment, that we’re putting into global platform technologies”.
Interesting to read an interview with Lisa Jacobs, Funding Circle Holdings (FCH) CEO with Ben Martin in The Times on Friday here - in which Jacobs gives a good sense of the journey so far. There isn’t much focus on the future in the piece but one point Jacobs did make was that FCH management has thought about the merits of applying for banking licence from time to time in the past but that it’s not something they are focusing on pursuing for now, highlighting the attraction of the ‘capital-light’ nature of the existing model.
The FT reported here on Monday that Monzo’s Board is debating whether to pursue a listing in the UK or US - with an IPO expected to be on the horizon for 2026. Indeed, it’s an opportune time to be highlighting that the 'powers that be at Monzo are agonising over this decision. I casually set out my views on LinkedIn on the debate earlier this week (please forgive the bad grammar): “I hope Monzo Bank chooses the UK. They'll be tempted to go for the US in a bid to get a stronger growth multiple but, fundamentally, it's difficult to see how the pitch will be to an audience that is much different to traditional bank equity investors. On the other hand it's a UK bank first and foremost - for now anyway - so there could be a lack of familiarity challenge in going west. On balance I'm gonna say UK - and I'm assuming that prospective large UK IPO candidates will extract significant further concessions (stamp duty?, further changes to listing rules?) by lobbying the Labour gov't hard over the coming months. That doesn't mean that Monzo can't command a strong earnings multiple on the back of expected profitability expansion but the market will need a lot of convincing here. It seems to me that Starling Bank is placing more emphasis than Monzo is on recurring SaaS-type revenue, for example, though the jury is out - to say the least - on how valuable the market perceives that prospective revenue stream to be for Starling. In reality, the traditional UK banks haven't been disrupted in any major way by these players and it feels like the greater threat in the long-term is from the likes of Revolut and Chase.”
Mortgage Advice Bureau (MAB1) published a trading update for the year ended 31st December 2024 on Thursday last here - ahead of the publication of its final results on 18th March. Group revenues were +11% y/y to c.£266m and the Board expects to report c.31% y/y adjusted PBT growth to £30.5m for FY24, which is c.4% ahead of consensus estimates. Outlook commentary was positive too with the statement noting that “Clear signs of pent-up demand were evidenced by the increase in mortgage applications in Q4 2024 (+15% compared to Q4 2023) and we expect this positive momentum to be maintained” as well as flagging that the delivery of new technology enhancements and lead generation initiatives are expected to drive further growth this year. More detail will likely be forthcoming at MAB1’s Capital Markets Day on 5th February.
Paragon Banking Group (PAG) issued a broadly upbeat 1Q25 trading update for the three months to 31st December 2024 on Friday last here. FY25 guidance was preserved in its entirety (which is not surprising at this early stage though the RNS does note that margins are currently running ahead of expectations), net loans were +1.0% q/q / +5.5% y/y to £15.9bn, and new lending volumes were +10.9% y/y in 1Q to £677.4m (BTL +25.8% y/y to £423.2m; commercial lending -7.4% y/y to £254.2m - though the reduction here was primarily a result of timing differences)). The BTL pipeline was £691.9m at end-1Q25, +23.6% y/y while the new business pipeline and undrawn facilities within Development Finance were +33.5% y/y and +16.1% y/y respectively at end-1Q, all of which bodes well for further volume growth. Deposits growth of +0.9% q/q strategically represents a slowing pace of growth given that the bulk of TFSME refinancing was completed in FY24. Finally, on capital: i) the end-1Q CET1 ratio came in at 14.0%; and ii) the statement notes that “The Group continues to make progress with the PRA on its buy-to-let IRB application and had made its application to access the Interim Capital Regime (“ICR”) before the most recent announcement by the Bank of England, delaying the implementation of the Basel 3.1 rules” - which is somewhat encouraging in relation to eventual potential RWA relief (which would potentially materially advantage PAG relative to its main listed competitor, OSB Group). All in all, no great surprises and further evidence of consistent delivery from the strong and solid PAG management team.
I reported in Financials Unshackled Issue 29 here on the FT press report from last weekend to the effect that Santander is considering pulling out of retail and commercial banking in the UK. Plenty of coverage of the topic in the media this week (check out an article in The Sunday Telegraph here, which I was delighted to contribute to) and, following my poll on LinkedIn here in relation to most likely acquirers (for which voting remains open), I will circulate a detailed note on the topic next week.
Bill Winters, CEO of Standard Chartered (STAN) was reportedly in ebullient form at Davos last week - with a Bloomberg article on Wednesday here noting that he still thinks that STAN’s share price has scope for significant growth: “I think we’ve got a lot further to go…our share price has gone up because we’re making more money and our earnings are improving, and our earnings are improving because we’ve got some really good strategic positioning…We’re still trading below book value, which doesn’t make any sense to me given the returns that we’re generating”.
Tracey Graham has been appointed as Non-Executive Director (NED) of Virgin Money UK and Clydesdale Bank PLC (Nationwide), according to a Virgin Money UK RNS issued on Thursday last here.
Irish Snippets (with some perspectives)
AIB Group (AIBG) announced on Monday last that the State’s shareholding fell to just under 18% following a transaction on Thursday 16th January. Separately, the focus of my article in the Business Post this weekend here was on the prospective 2025 exit of the State from the AIBG share register - I picked up on how c.€17.2bn of the original €20.8bn investment has already been recouped on my calculations, and how the gap to full recovery is just €1.2bn when you add in the current market value of the State’s shareholding. It is unlikely that this gap will be bridged in its entirety but there is certainly a decent prospect that the State will have banked €20bn by the time it sells down the final rump (and will maintain warrants, which could present further upside in the future). To the extent that AIBG’s FY24 results update is well received by shareholders - and I can see potential for that in terms of: i) potential expectations-beating >100% payout; ii) possibly more detail on capital efficiency trades (SRTs) in the offing; and iii) perhaps more colour on the ambitions the bank has in an Energy, Climate & Infrastructure context which could be an angle to provide an outlet for some surplus liquidity redeployment while also reducing interest revenue dependence (with, for example, possibilities to partner with private credit firm(s) to engineer this) - then €20bn+ of proceeds could well become a reality. Indeed, the Business Post also ran an editorial piece on this very topic today too here. Let’s see how it all plays out.
AIB Group (AIBG) issued a press release on Wednesday here noting that it is reducing rates on its 1Y and 2Y term deposit products by 25bps each. The move does not come as a surprise. The press release also notes that AIBG is reducing the minimum balance required to open a fixed term deposit account from €15k to €5k. Indeed, as previously noted, I expect we will see further reductions across the market before Avant launches its own deposit product.
Updated financial information on Avant Money was published on Thursday last within Bankinter’s 4Q24 earnings documentation (for the three months to 31st December). Avant’s net loans were +27% y/y to €3.8bn, up from €3.7bn at end-3Q (mortgages €2.9bn, +31% y/y and up from €2.7bn at end-3Q; consumer credit €1.0bn, +17% y/y and up from €0.9bn at end-3Q). Bankinter also noted that Avant’s share of mortgage originations in the YTD to end-November was 7.1%, which is actually down (the 3Q24 update noted that its market flow share in mortgages was 8.0% over the 12-month period to June - which was down from 9.0% in the 12 months to May, as disclosed at the stage of the 2Q update). Avant’s NPLs stood at just 0.34% at end-4Q. All in all, we know that Bankinter is deeply committed to the Irish market but I will repeat my strong view to the effect that it will build its presence slowly and gradually (see below for more detail) - however, the opportunity to expand over time is clear from the CEO’s comment on the earnings call to the effect that “By focusing on our business activity and customers and avoiding any external distractions, we can achieve incredible organic growth rates” - as well as a further comment that she made in the Q&A as follows: “…in Ireland, we…think we still have a market share that will allow us to grow”. Other points of note from the earnings call were: i) the CEO reiterated that Avant expects to start gathering deposits in Ireland by mid-2025 but noted later in the Q&A that “…2025 is going to be a transitional year. So don't expect masses of volumes in Ireland in deposits” and gave a sense of how long-term the thinking is later on again in the Q&A: “…we would like in eight years time that Ireland actually almost funds itself with their own deposits”; and ii) the CFO noted during the Q&A that Bankinter management is expecting “similar new production” levels in mortgage originations in 2025 compared with 2024 (which hardly points to runaway growth). Please consult the Bankinter 4Q24 press release here, the slide deck here, the results document here, and the earnings call transcript here.
Financial News reports here that Bank of Ireland Group’s brokerage business, Davy, is reported to be cutting around 10 jobs within its UK capital markets business.
The Irish Independent reported here on Tuesday last that PTSB is set to offer monthly cash payments to its existing mortgage customers who use its current account rather than solely to new customers.
The Business Post reported on Thursday that the fintech Raisin, which allows customers access deposit accounts with select institutions in multiple jurisdictions across Europe, is planning to ramp up the competitiveness of its savings offerings to Irish consumers in 2025. Eoghan O’Hara commented to the newspaper that “We are aggressively adding banks and continuing to add choice for consumers”. Despite Raisin’s push, I suspect that migration of savings from domestic banks will remain suppressed given strongly evidenced historical deposit customer inertia in spite of higher interest-earning available options.
It was reported in the media last week that Revolut is introducing a feature to allow customers to pay off their credit card debts in instalments in a bid to “further increase competition and shake up the Irish lending market, whilst changing the way that Irish consumers utilise credit and manage their finances”. This is not an entirely novel feature in the Irish market but it’s a clear push to target would-be buy-now pay-later (BNPL) customers as well as just offer more options to customers.
Global / European Snippets (with some perspectives)
The ECB issued a press release last Monday noting that it will examine 51 of the euro area’s largest banks as part of the regular European Banking Authority (EBA)-led EU-wide stress test in 2025. Parallel stress test will be run for 45 further banks (list of these banks is here) outside of the EBA sample. A major focus is on how insufficiently prudent submissions will be subject to additional scrutiny, including on-site visits (with a separate blog published by the ECB on this topic here). The ECB press release is here, the ECB’s FAQs are here, the EBA press release is here, the EBA press release is here, the EBA’s FAQs are here, the Methodological Note is here, the Template Guidance is here, and the European Systemic Risk Boards’s (ESRB) letter to the EBA on the adverse scenario is here.
The European Banking Authority (EBA) published an Opinion on the interaction between the output floor and Pillar 2 Requirements (P2R) in the context of the mandate set forth in the Capital Requirements Directive (CRD) on Tuesday last here. The Opinion considers that the nominal amount of P2R is not to increase as a result of an institution becoming bound by the output floor and highlights the possibility of double counting in setting the P2R of risks already covered by the effects of a binding output floor.
Bloomberg reported here on Friday that the EU is also expected to further delay the implementation of the Basel 3.1 reforms until early 2027, which is news that will not surprise. Bloomberg also reported here on Friday that ABN Amro CEO Robert Swaak was pushing for this in an interview at Davos.
Bloomberg published an interesting piece on Monday here on how banks and private credit are working constructively together to maximise opportunities for both sides and I was delighted to contribute to the article. While the partnerships are mutually beneficial, there is a risk that private credit and banks will eventually become competitors in select lending segments - indeed, that very point was the focus of an interesting FT article published on Tuesday last here.
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