Financials Unshackled Issue 41: Week In Review (UK / Irish / Global Banking Developments)
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Welcome to the latest issue
Welcome to Financials Unshackled Issue 41. This ‘Week In Review’ includes: i) a calendar for the week ahead; and ii) perspectives on select key developments from the last week in a UK, Irish and Global banking sector context. As usual, please email me at john.cronin@seapointinsights.com if you have any feedback.
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Corrections & Clarifications - Close Brothers Group (CBG)
I originally noted in Financials Unshackled Issue 40 on Monday 24th March that Close Brothers Group (CBG) took a “substantial further provision in relation to motor finance commissions of £165.0m” in its 1H25 accounts. The use of the word ‘further’ was a mistake on my part. For clarity, this was the first provision that the bank has taken in relation to the ongoing motor finance commissions debacle. Furthermore, CBG noted in its 12th February trading update that it expected to book a provision of up to £165m in 1H25 - which I did not mention in Issue 40 (and which I covered in Financials Unshackled Issue 34 here). I recognise that this omission could have led a reader to conclude that such a substantial provision charge was entirely unexpected when, in fact, management had already signposted the possibility (FY25 consensus related provision charge as at 28th February: £148m). These clarifications have now been made to the online version of Financials Unshackled Issue 40 here.
Calendar for the week ahead
Mon 31st Mar (09:30 BST): Bank of England (BoE) Money and Credit Statistics and Effective Interest Rate Statistics - Feb 2025
Mon 31st Mar (11:00 BST): Central Bank of Ireland (CBI) Money and Banking - Feb 2025
Mon 31st Mar (11:00 BST): Central Bank of Ireland (CBI) Private Household Credit and Deposits - Q4 2024
Tue 1st Apr - Thu 3rd Apr: UK Supreme Court Hearings: i) Hopcraft and another (Respondents) v Close Brothers Limited (Appellant); ii) Johnson (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant); and iii) Wrench (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant)
Wed 2nd Apr (09:00 BST): European Central Bank (ECB) Euro area bank interest rate statistics - Feb 2025
Wed 2nd Apr (11:00 BST): Central Bank of Ireland (CBI) Monthly Card Payment Statistics - Feb 2025
Fri 4th Apr (10:00 BST): European Central Bank (ECB) Euro area households and NFCs statistics - Q4 2024
Select UK Developments
BoE launches 2025 Bank Capital Stress Test
The Bank of England (BoE) launched the 2025 Bank Capital Stress Test (the successor to the Annual Cyclical Scenario (ACS)) on Monday 24th March (news release and link to documents here). Seven credit institutions - representing 75% of lending by the UK banking system - will participate: Barclays (BARC), HSBC (HSBA), Lloyds Banking Group (LLOY), Nationwide, NatWest Group (NWG), Santander UK, and Standard Chartered (STAN).
Key elements of the stress scenario include: i) UK GDP contracts by 5% in the early years; ii) global GDP contracts by 2%; iii) UK unemployment hits a peak rate of 8.5%; iv) world trade falls by 20%; v) oil and gas prices rise sharply; vi) inflation peaks at 10% before falling back to 2%; vii) the bank base rate (BBR) peaks at 8% before falling; viii) Uk residential property prices fall by 28%; ix) a peak-to-trough fall (from peak levels in recent years) of c.50% is applied to UK, US and euro area commercial real estate (CRE) prices; and x) important changes in a IFRS 9 context have been introduced wherein the size and timing of shocks have been altered so as to avoid IFRS 9-related implications leading to an “unwarranted increase in capital requirements for the banking system” (click here to read Box A for more on this particular change).
The results will be published in 4Q25 and the credit institutions look well placed to prove, once again, that they can withstand an adverse scenario while continuing to support the real economy.
HSBC considers outsourcing parts of trading business
Bloomberg reported here on Monday that HSBC (HSBA) is considering outsourcing parts of its trading business in an efficiency drive. The news agency reports that HSBA has engaged in preliminary discussions about directing parts of its fixed income trading order flow to an external market maker - with a source indicating to Bloomberg that firms like Citadel and Jane Street are in the mix. However, initiatives like these are challenging to successfully execute - indeed, Paul Davies penned an opinion piece on Bloomberg on Wednesday here exploring how the outsourcing of the lowest margin trading desks does not necessarily drive substantive net cost reduction given that the same systems and administrative investments support the remaining trading systems. It depends on how far HSBA elects to go from an outsourcing perspective with a piecemeal approach seen as less likely to succeed - with Christian Schmid, Senior Partner at BCG, commenting as follows (extracted from the aforementioned Davies article): “Banks are thinking about outsourcing the lowest yielding business, like government bonds, but they aren't thinking enough about how much costs they'll actually be able to cut from their remaining trading systems…Doing it in a piecemeal way is tricky, banks will likely be left with stranded IT and other costs”.
In separate HSBA-related news this week a number of media reports surfaced regarding the bank’s decision to terminate investment bankers’ employment contracts on bonus day - with the affected bankers at VP level or higher informed that they would receive a zero bonus for 2024. There was a good piece on this in the FT here and it is worth having a flick through the comments on the article - it has stoked plenty of debate and some commentators noted the unorthodox nature of this move to contain costs, observing that even the US banks don’t go this far.
Stepping back here, it is clear that the new CEO Elhedery is on a ruthless drive to deliver the target returns and must be admired for the sheer scale of change he and the wider Board is pursuing to fulfil this objective - at pace. That said, a key challenge for all management teams is where to draw the line between efficiency initiatives that deliver net benefit and those that can backfire - with one case in point being what longer-term damage the ‘doughnut bonus’ move has inflicted on HSBA’s reputation as an employer in Investment Banking despite the fact that it is an employer’s market right now.
On a final note, both S&P Global Market Intelligence here and Investors Chronicle here penned deep dives on HSBA this week, exploring the investment case.
Metro Bank inaugural AT1 issuance
Metro Bank (MTRO) announced its inaugural issuance of AT1 notes on Monday - a £250m 13.875% issue with a 7.00% CET1 conversion trigger (RNS here and Offering Circular available here). The RNS notes that the issuance is “in line with Metro Bank’s capital management framework and strategy and is aimed at optimising the capital structure and providing further flexibility for growth” - and will boost the bank’s pro forma end-FY24 Tier 1 capital ratio by c.410bps to 17.5%.
This is an extremely chunky coupon - and, at first glance, raises questions as to why MTRO felt compelled to go ahead with the issue, especially given that MTRO noted in its FY24 results announcement on 27th February last that “Pro forma on completion of the performing unsecured personal loans portfolio sale in late Q1 2025 is estimated to result in a total capital plus MREL ratio of 24.5%…”. It suggests to me that some confidence may be emerging at Board level that a reprieve from the MREL rules may be forthcoming in 2025 and that the AT1 issuance, by demonstrating capital markets access, could be helpful to the extent that there is any hesitation at a regulatory level (in a capital markets access context) to changing the MREL thresholds in a way that could see MTRO fall out of the regime. MTRO is running neatly below the lower bound (£20bn total assets) of the BoE’s proposed revised lower bound threshold - albeit the transactional accounts threshold is relevant to MTRO too. Let’s see what comes and, for what it’s worth, I see the probability of some reprieve for MTRO from the existing MREL regulations as >50% now.
Shawbrook delivers strong double-digit RoTE in FY24
Shawbrook Group published FY24 results for the 12 months to 31st December on Wednesday last (summary here, slide deck here, Annual Report here, and Pillar 3 Disclosures here). Underlying (u/l) Profit Before Tax (PBT) came in at £293.8m (-2.7% y/y) and the u/l RoTE was 16.7% (-350bps y/y) - however, returns momentum has improved with 2H24 RoTE of 18.5% up from 14.5% in 1H24.
Other financial highlights include: i) net interest margin (NIM) -c.60bps y/y to 4.3% though the 2H24 print was c.10bps ahead of the 1H24 outturn; ii) improved cost efficiency in 2H24 (with the u/l CIR dipping by 240bps h/h to 39.6%); iii) stable credit performance (FY24 CoR 47bps, -4bps y/y - and the 2H24 print of 31bps was well below the 64bps charge recorded in 1H); iv) continued strong loan book growth with net loans +14% y/y to £15.2bn (+16% y/y when you strip out the impact of structured asset sales); v) deposits +16% y/y to £15.8bn; and vi) strongly capitalised with a CET1 capital ratio of 13.0%, which is well ahead of the minimum requirement of 9.7% (excl. Pillar 2B).
Stepping back, Shawbrook, once again, demonstrates the opportunity set afforded to specialist lenders - to grow high-RoRWA lending across a diverse set of niche markets, leveraging its scalable and adaptive technology to facilitate this growth and maintain balance sheet efficiency. Further liability repricing across the sector should be constructive for some light further NIM accretion. A key win, in a higher for longer rate backdrop post-TFSME repayments, would be if Shawbrook and peer specialist banks could grow their share of demand accounts as a percentage of their deposit funding.
Snippets:
A few other highlights from the past week:
Interesting piece in the FT today here ahead of the Supreme Court hearings in the context of the motor finance debacle. The article zones in on the separate Court of Appeal ruling last week which cleared Engie, an electricity supply business, of liability for a broker’s breach of its fiduciary duty to fully disclose the commission because the electricity supplier was not shown to have acted “dishonestly”. While I am not a lawyer, non-disclosure of specific commissions does not seem to me to be tantamount to ‘dishonesty’ in the context of the motor finance commissions saga and it appears to me that the readacross from this case is positive.
The Financial Conduct Authority (FCA) launched a new 5Y strategy 2025 to 2030 on Tuesday with supporting sustained economic growth one of its four stated key priorities. Press release here and strategy document here - there is, notably, a significant focus on driving significant further growth in take-up of Open Banking within the strategy document.
The Financial Conduct Authority (FCA) outlined next steps in the context of the review of its Consumer Duty rules on Tuesday - with proposals to simplify the burden of regulation. Press release here and Feedback Statement here.
Useful report published by Interpath on the UK specialty finance sector available here.
Stuart Riley, Group CIO at HSBC (HSBA) sold 60,347 shares in HSBA at a price of 876p per share on 20th March - for gross proceeds of >£500k.
Lyndon Subroyen (PDMR) sold shares in Investec (INVP) last week for gross proceeds of almost c.£200k.
Interesting to note that Stephen Shelley, Chief Risk Officer at Lloyds Banking Group (LLOY) sold 2.25 million shares in LLOY at a price of 70.26p per share on 21st March - netting him gross proceeds of almost £1.6m. More broadly there has been a wave of director sales of UK bank stocks in recent weeks - with the exception of Metro Bank (MTRO) and Secure Trust Bank (STB) which have seen directors buying stock. While there may be a ‘time of the year’ element underpinning the sale decisions (following options vesting, etc.) it feels like more than that.
NatWest Group (NWG) announced on Monday that Treasury’s shareholding in the bank has now fallen to 3.95%.
BlackRock’s latest disclosed shareholding in Paragon Banking Group (PAG) is 5.08% (previously disclosed shareholding: <5%). Separately, Richard Woodman (CFO) and Susan Woodman (PDMR) sold a total of 101,497 shares in PAG on Friday at a price of c.778p per share for gross proceeds of almost £800k.
Julian Hartley, MD of Savings & Vehicle Finance at Secure Trust Bank (STB) acquired 9,643 shares in STB at a price of 619p per share on 20th March - for an outlay of almost £60k. Additionally, a company which is a PCA to Jim Brown the STB Chair acquired 17,182 shares in STB at a price of 598p per share on Tuesday last - for a total outlay of just over £100k.
United Trust Bank issued a press release on Tuesday here noting that Warburg Pincus has completed its transaction in which it has acquired a minority equity interest in UTB. The transaction values UTB’s equity at c.£520m. UTB reported PAT of £65.8m in FY24 (FY24 Annual Report here), implying a deal P/E of 7.9x, which is not especially rich considering that profits have been growing strongly over recent years and UTB continues to churn out decent loan book growth. Furthermore, tangible book value was £339.2m at end-FY24, implying a deal P/TBV of 1.53x - that is clearly high relative to where listed banks trade but must be seen in the context of a business that delivered a RoE of c.20% for FY24 (and c.24% for FY23).
Schroders’ latest disclosed shareholding in Vanquis Banking Group (VANQ) is 17.04% (previously disclosed shareholding: 16.16%).
Select Irish Developments
Mortgage approval volumes decline on a y/y basis in February
Banking & Payments Federation Ireland (BPFI) published mortgage approvals data for February 2025 on Friday last - press release here and report here. In short, while the value of mortgage approvals was +6.6% y/y to €1.08bn, this was driven by higher average transaction values (with higher housing prices given the ongoing supply shortfall and deficit of stock on the market) - and volumes were down by 4.5% y/y. It is too soon to get swayed by just one month of data (notably, approval volumes were +4.1% y/y in January and +28.6% y/y in December) but the slowdown in first-time buyer purchases (-3.2% y/y) may be seen by some as a function of the recent reduction in housing completions and affordability constraints. With that said, one further important to bear in mind in my view when looking at the February data is that the working day count of 19 days was -5.0% y/y (i.e., down from 20 days in 2024) due to the prior year leap year effect (and taking into account the early February bank holiday in both years) which may have been an important factor in the context of the 4.5% y/y dip in volumes recorded.
Listed Banks Developments (AIBG, PTSB)
It’s worth flagging a few news items in an AIB Group (AIBG)-related context from the past week. Firstly, BlackRock moved last week to trim its shareholding substantially to 8.47% on Wednesday (previously disclosed shareholding: 11.88%). This move undoubtedly exerted downward pressure on the share price last week (which was -10.6% for the week). While one can only speculate as to why BlackRock has been selling, there has been no noteworthy negative company-specific newsflow of late but, clearly, the Irish macro outlook is now in full focus with market participants at pains to figure out what kind of ‘long game’ the US is playing to reshore pharma companies in particular - and what kind of damage that could cause from an economic perspective. A couple of other developments in an AIBG-related context worth highlighting are: i) the bank issued a RNS on Friday here noting that it intends to call its €625m 6.250% AT1 - which can be called on any date between 23rd June and 23rd December 2025. In the event that the securities are not redeemed, interest will be reset to the relevant 5Y fixed rate plus a margin of 662.9bps p.a.; and ii) NED Helen Normoyle will not be putting herself forward for re-election as a Director at the forthcoming Annual General Meeting on 1 May 2025 and will step down as a Director at the conclusion of that meeting, having served just over nine years on the Board.
Separately, PTSB issued a press release on Wednesday here noting that it is reducing rates by 50bps on new personal and business term and variable rate deposit products. PTSB has been paying a premium for deposit funding relative to peer listed banks, AIBG and Bank of Ireland Group (BIRG) - particularly in the case of term product. The move does not come as a surprise to close observers and deposit rate reductions are captured in the bank’s FY25 net interest margin (NIM) guidance. Still though, the move comes early in the year so it’s positive to see that management isn’t ‘hanging around’ - and given that PTSB’s deposit product proposition remains competitively priced, I suspect the bank will not experience any adverse unexpected volume consequences especially given churn (or flow to term) has now reduced considerably across the market.
Finance Ireland to discontinue mortgage lending
It was reported in the media this week that Finance Ireland raised €717m in two securitisation transactions - a €359m auto-backed securitisation and a €348m CMBS transaction. It was further reported that the company has decided to discontinue mortgage lending. The latter does not come as a surprise. Indeed, Finance Ireland has been largely absent from the mortgage originations market since the onset of official rate reductions in earnest - with its CEO Billy Kane repeatedly speaking about how the banks are “cross-subsidising” their mortgage lending with cheap deposit funding in recent years. It will be interesting to see if Finance Ireland elects to do anything with its back book of mortgages. If keen to read further on this development I suggest three articles in The Irish Times here, here and here.
Snippets
A few other highlights from the past week:
While the talk of the town is centred on tariffs (and pharma reshoring more broadly) and what broader macro damage such measures could entail, I wrote in the Business Post on Monday here on ‘opportunities’ for the listed lenders - zoning in at a high-level on credit growth opportunities as well as fee income augmentation and capital optimisation initiatives which you can read here.
The Central Bank of Ireland (CBI) published its revised Consumer Protection Code on Monday last here - and you can access a transcript of the Governor’s speech on the development here.
Select Global Developments
ECB opposes use of Danish Compromise in Banco BPM / Anima deal
The European Central Bank (ECB) has issued a negative opinion on Banco BPM’s request to apply the ‘Danish Compromise’ rule in its acquisition of the asset manager Anima - see Reuters report here along with its ‘Explainer’ here. If the European Banking Authority (EBA), which acts as the final arbiter on regulatory capital treatment, agrees with the ECB’s view then it would mean that the adverse capital impact associated with the acquisition will be significantly higher than if Banco BPM were permitted to apply the ‘Danish Compromise’ (the Reuters report notes that the incremental CET1 capital ratio hit would be almost 240bps). It is a surprising decision in my view as I had thought that the ECB would issue a positive opinion to stimulate further acquisitions of insurance companies and asset managers, supporting further diversification and resilience of bank revenue streams. I made a significant contribution to an article published on this topic in The Insurer on 10th December last, which you can access here.
Snippets
A few other highlights from the past week:
Interesting article on Bloomberg here on how the strength of demand for AT1 paper is leading to an increased risk of skipped calls. The piece follows the news that Deutsche Bank skipped a call on an AT1 bond last week.
The Bank for International Settlements (BIS) published its latest Basel III Monitoring Report which is based on data as of 30th June 2024. Basel III risk-based capital ratios increased while leverage ratios and NSFRs remained stable for large internationally active banks in 1H24. Press release here and full report here.
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