Financials Unshackled: Week In Review (UK / Irish / Global Banking Developments) - Issue 36
The independent voice on banking developments - No politics, no nonsense!
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
Welcome to Financials Unshackled Issue 36. This ‘Week In Review’ covers key newsflow in a UK and Irish context from the last week as well as select global banking developments. As usual, please email me at john.cronin@seapointinsights.com if you have any feedback. If you prefer an audio version of this article click ‘READ IN APP’ above and then press the PLAY button.
Calendar for the week ahead
Mon 3rd Mar (c.09:00 BST): UK Finance Household Finance Review - Q4 2024
Mon 3rd Mar (09:30 BST): Bank of England (BoE) Money and Credit Statistics (including Effective Interest Rates) - Jan 2025
Tue 4th Mar (07:00 BST): PTSB FY24 Results
Wed 5th Mar (07:00 BST): AIB Group (AIBG) FY24 Results
Wed 5th Mar (09:00 BST): Paragon Banking Group (PAG) AGM
Wed 5th Mar (09:00 BST): European Central Bank (ECB) Euro Area Bank Interest Rate Statistics - Jan 2025
Wed 5th Mar (11:00 BST): Central Bank of Ireland (CBI) Monthly Card Payment Statistics - Jan 2025
Thu 6th Mar (07:00 BST): Funding Circle Holdings (FCH) FY24 Results
Thu 6th Mar (c.07:00 BST): Aldermore 1H24 Results (for the six months to 31st Dec 2024)
Thu 6th Mar (12:45 BST): European Central Bank (ECB) Monetary Policy Decision (Press Release following the ECB Governing Council Meeting)
UK Newsflow
Sector Developments:
Plenty of media reports on Friday on how thousands of First Direct (HSBA), Lloyds Banking Group (LLOY), Nationwide Building Society, NatWest Group (NWG), and TSB Bank (Sabadell) customers were hit by IT outages for a period on Friday - with this report in The Guardian providing a useful summary of the matter. An inconvenience that was remedied on the same day but these outages, more broadly, happen too often and raise the perennial question around whether banks are investing enough in systems. To be fair, while it is difficult to compare individual lender systems investment / ‘maintenance capex’ spend with a great degree of accuracy, the UK banks have ploughed large sums into technology investment in recent years (which their elevated CIRs relative to many European banks partially reflect as I see it) as UK Finance’s following response to Friday’s debacle notes: “All banks invest heavily in their systems and technology to ensure customers have easy access to banking services”. And politics gets in the way of driving efficiencies to the best extent possible on occasion too in a branch closures context (though that is admittedly something of a ‘Catch-22’). However, the facts remain that the traditional lenders are at a significant disadvantage to digital-only players in an operating model context - though not, for now at least, in a funding model and a customer trust context.
S&P Global published a detailed piece on Thursday last here reviewing the provisions taken by a selection of UK banks in relation to the motor finance debacle - which is a helpful note if you want a refresh on the subject.
Rightmove published latest average mortgage rates on Friday 28th February, showing that weekly rates were broadly unchanged in the last week - despite numerous headlines around rate cuts effected by the likes of Nationwide Building Society, Virgin Money (NWIDE), TSB, and Coventry Building Society. Average 2Y fixed rates now sit at 4.87% (-1bp w/w; -31bps y/y) while average 5Y fixed rates now sit at 4.69% (-1bp w/w; -12bps y/y). Average 2Y fixed rates range from 4.26% at 60% (or less) LTVs to 5.59% at 95% LTVs. Average 5Y fixed rates range from 4.16% at 60% (or less) LTVs to 5.31% at 95% LTVs. Average price moves in the last week imply some front book margin expansion (with 2Y swap rates -8bps and 5Y swap rates -9bps in the week) albeit it’s just one week of data.
It is also worth flagging that Nationwide’s latest House Price Index for February (published on Friday here) shows that average house prices were +0.4% m/m in February to £270,493 (+3.9% y/y, down from +4.1% y/y to end-January). While housing market activity has remained resilient in recent months (indeed, HMRC data published on Friday here show that the seasonally adjusted estimate of the number of UK residential transactions was +14% y/y in January), there appears to be a cooling in appetite to transact amongst landlord purchasers (as reported by Hamptons last week too here and picked up in The Telegraph here - noting that landlord purchases accounted for just 9.6% of purchases in house purchases in Great Britain in January, the lowest figure since at least 2009) - and Nationwide’s Chief Economist makes the following valid observation in a near-term forward-looking context: “Looking ahead, the changes to stamp duty at the start of April are likely to generate volatility in transactions in the near term, as buyers bring forward their purchases to avoid the additional tax. This will likely lead to a jump in transactions in March, and a corresponding period of weakness in the following months, as occurred in the wake of previous stamp duty changes.”.
The FT reports today here that HMRC is set to drop Barclays (BARC) from the list of approved lenders it uses for banking services for hundreds of government organisations and is poised to agree a new £99m contract with Lloyds Banking Group (LLOY).
Finally, in a UK sectoral context, it’s worth a quick skim of a This Is Money article from Friday evening here questioning whether the outperformance of UK large cap banks can continue. It’s a valid question given the substantive rerating we have seen over the last 12+ months - however, there is scope for sector cost of equity to fall further. Will it is the burning question - and, regardless, there are idiosyncratic cases that merit an examination anyway. For a brief run-through UK bank key terminology and valuation methodologies, Investors Chronicle published a piece in this week’s edition - and subscribers can access it here.
Company Developments:
Leeds Building Society (LBS) reported FY24 results on Friday 28th February here. For context, LBS reported net loans of £24.6bn and members funds of £24.5bn at end-FY24. Reported underlying (u/l) Profit Before Tax (PBT) came in at £187.5m, +3.3% y/y - supported by NII expansion and a net credit impairment writeback, partially offset by higher operating costs. No updated CET1 capital ratio or liquidity ratio information yet - though it is notable that LBS reported a strong common equity tier 1 (CET1) capital ratio of 25.1% and a very healthy liquidity coverage ratio (LCR) of 224% at end-3Q24, according to its 3Q24 Pillar 3 Disclosures.
The FT reported on Thursday last here that Lloyds Banking Group (LLOY) incorrectly classified £44.1bn of customer deposits in figures submitted to the Bank of England (BoE), which had knock-on consequences for the data used by the Financial Conduct Authority (FCA) in its review of the cash savings market. The error was corrected in late 2024 and there are no material consequences. Separately, in a further blow to net zero pledges, The Telegraph reports today here that LLOY will no longer include staff international business travel in its net zero calculations and instead only count travel across the UK.
Metro Bank (MTRO) published FY24 results on Thursday 27th February, posting a £14.0m underlying (u/l) loss before tax for the year - though it was a tale of two halves, with the bank reporting u/l Profit before Tax (PBT) of £12.8m in 2H24. I joined the results call on Thursday and the roundtable on Friday. A few key observations are: 1) Running the numbers indicates that the mid to upper-teens 2027+ RoTE financial targets are reasonable (assuming base rates remain higher for longer) to the extent that MTRO can deliver the growth in commercial lending that it purports to achieve within acceptable risk parameters (the fresh CoR guidance of 40-60bps TTC 2025-28) is helpful in this context, which is broadly where you would have gotten to anyway via a guidance backsolving exercise). 2) Stepping back, it’s a rather straightforward story - the ability to deploy relatively low cost deposits (benefiting from a current account franchise) into relatively high-yielding commercial and specialist mortgage lending (differentiated focus to mainstream high street banks) while managing costs and risks keenly to drive returns. It is doable in theory. But patience is required. Stakeholders will likely grow in confidence as the commercial lending growth within acceptable risk parameters - and the corresponding improved balance sheet efficiency - continues to be evidenced. 3) Patience aside, what materialises in terms of changes (if any) to the MREL regime, could be very interesting in a near-term MTRO context. It is not clear what changes (if any) will be effected at this stage. But 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. There is a possibility that MTRO will fall out of the regime. The prize would potentially be quite significant given that MTRO dishes out approximately £52m in interest payments to MREL debtholders annually - stripping that out in its entirety in FY24, for context, would have seen total revenues come in almost 20% higher at c.£322m. A potential game-changer, But, that being said, it’s much too early to be getting in any way excited.
Indeed, MTRO’s results followed the company’s announcement here on Wednesday 26th February that it has agreed a sale of a portfolio of c.£584m performing unsecured personal loans, accelerating its asset rotation strategy - a transaction that is both CET1 (pro forma CET1 ratio expected +c.81bps at completion) and MREL ratio (pro forma MREL ratio expected +c.129bps at completion) accretive and is expected to deliver a gain on sale of c.£11m at completion.
Metro Bank (MTRO) is also going ahead with a General Meeting on 18th March “to consider, and if thought fit, approve the allotment of, and the disapplication of pre-emption rights in connection with, Company shares related to any potential future regulatory capital raise (including the issuance of contingent convertible securities but not ordinary shares in the Company (common equity))”, according to a RNS released on Friday here - notably a broader resolution to disapply pre-emption rights was, understandably, not supported at the AGM on 21st May last and MTRO subsequently issued a RNS on 19th November noting that it has consulted with shareholders who voted against the resolutions and understands their reasons. It seems that the shareholders’ views have been taken into account given the narrower disapplication of pre-emption rights that is now contemplated.
Ian Rand, CEO of Monument Bank, noted to CityAM during the week (see here) that the bank’s initial instinct to consider NASDAQ for a potential listing (which I reported on last week) is predicated on a desire for “…the smoothest, simplest journey onto a listing but then, critically, you’re looking for that depth of market”.
Bloomberg reported on Wednesday afternoon here that NatWest Group (NWG) is preparing a significant risk transfer (SRT) linked to a portfolio of leveraged loans - with the size of the reference portfolio understood to be almost £1bn and the size of the SRT aid to be c.£90m. It is constructive to see NWG utilise this lever to drive capital and return efficiencies (and derisking) - indeed, the CEO Paul Thwaite noted at the BoA Financials conference on 24th September last that NWG has historically underutilised SRTs and intends to become “a more systematic user” of SRTs going forward - which I covered in Financials Unshackled Issue 8 here.
Bloomberg reported on Thursday here that Revolut’s investors are pressing the Board to offer another secondary share sale - with some shareholders reportedly interested in selling their stock at a $60bn valuation (up 33% from the $45bn valuation implied by the recent secondary share sale round!). Who could have known! However, formal preparations for a further sale process are not yet underway, according to the article. It is indeed remarkable that Revolut, given its relative infancy, has been able to achieve such an enormous valuation (I’m referring to the $45bn valuation) and a valuation of $60bn would propel it to a valuation level that surpasses all UK banks with the exception of HSBC (HSBA) - though Revolut is clearly much more than just a mainstream bank. One can philosophically see how Revolut can grow into and justify this valuation in time but, to achieve a valuation like this in the public markets, it will need careful thought to facilitate pitching the story to a wider audience than just bank PMs on any IPO roadshow. Despite the fact that the business has teething problems to work through, that might well be a reasonable expectation for an international business of the scale of Revolut (Nubank did it after all).
Skipton Group published FY24 results on Wednesday 26th February here. For context, Skipton Group reported net loans of >£30bn and members funds of >£28bn at end-FY24. In short, the business reported underlying (u/l) Group Profit Before Tax (PBT) of £302.3m, -2.0% y/y. The y/y dip in u/l profitability was a function of a material y/y reduction in Skipton Building Society PBT (-26.0% y/y to £209.9m) owing to net interest margin (NIM) pressures (society NIM was -25bps y/y to 1.28%) as well as lower profitability in the Skipton International business - partly offset by much improved profitability in other areas including Connells Group. Skipton Group reported very strong capital and liquidity positions at end-FY24 with a CET1 (common equity Tier 1) capital ratio of 28.7% (note that the leverage ratio printed at 6.6% indicating the relatively low RWA density of the book) and a LCR (liquidity coverage ratio) of 193%.
Yorkshire Building Society (YBS) reported FY24 results on Thursday 27th February here. For context, YBS reported net loans of £49.7bn and members funds of >£52bn at end-FY24. Statutory Profit Before Tax (PBT) came in at £383.7m, -14.7% while Core Operating Profit (the society’s preferred metric for gauging underlying financial performance) printed at £345.7m, -23.2% y/y. The downdraft in the year was predominantly a function of: i) lower net interest income (NII) y/y (with net interest margin (NIM) -15bps y/y to 1.16%); and ii) higher operating costs y/y. YBS reported strong capital and liquidity positions at end-FY24 with a CET1 (common equity Tier 1) capital ratio of 18.1% (note that the leverage ratio printed at 6.6% indicating the relatively high RWA density of the book given that YBS still deployed standardised models at end-FY24 to the best of my knowledge (the 3Q24 Pillar 3 Disclosures confirm that it had not become IRB-accredited at that point) - though its FY23 Annual Report noted that the society continues to progress towards IRB accreditation) and a LCR (liquidity coverage ratio) of 203%.
Shareholding Changes / Director Transactions:
Barclays (BARC) issued a RNS on Thursday 27th February noting that Taylor Wright (Global Co-Head of Investment Banking) disposed of 27,163 shares in BARC (transaction effected through a nominee account) on Thursday 27th February at a price of 301.7p per share, netting him gross proceeds of c.£82k.
HSBC (HSBA) issued a RNS on Monday 24th February noting that: i) Richard Blackburn (Interim Group Chief Risk and Compliance Officer) disposed of 114,000 shares in HSBA on Thursday 20th February at a price of 881p per share, netting him gross proceeds of c.£1m; ii) Barry O’Byrne (Chief Executive, International Wealth and Premier Banking) disposed of 182,514 shares in HSBA on Friday 21st February at a price of 883p per share, netting him gross proceeds of c.£1.6m; and iii) Stuart Riley (Group Chief Information Officer) disposed of 119,018 shares in HSBA on Thursday 20th February at a price of 879p per share, netting him gross proceeds of c.£1.05m.
Investec (INVP) announced on Monday 24th February that Public Investment Corporation’s shareholding in INVP reduced to 14.92% (previously disclosed shareholding: 15.07%) following a transaction on Friday 21st February.
Lloyds Banking Group (LLOY) issued a RNS on Monday 24th February noting that Andrew Walton (Chief Sustainability Officer and Chief Corporate Affairs Officer) disposed of 75,300 shares in LLOY on Friday 21st February at a price of 66.4p per share, netting him gross proceeds of c.£50k.
NatWest Group (NWG) announced on Friday 28th February that Treasury’s shareholding in NWG reduced to 5.93% (previously disclosed shareholding: 6.98%) following a transaction on Thursday 27th February.
Irish Newsflow
Sector Developments:
The Central Bank of Ireland (CBI) published its Money and Banking Statistical Release for January 2025 on Friday 28th February here. On lending: i) net lending to households was -€31m in the month, a sharp reduction from +€597m in December, though annual net lending flows to end-January 2025 were unchanged on the annual flows for 2024 as a whole of +€3.2bn (implying very strong growth of +3.2% y/y); and ii) non-financial corporate (NFC) net lending was -€92m in January, taking 12M net lending flows to +€302m (+1% y/y). On deposits: i) household deposits were +€1.9bn in January to €161.3bn, taking 12M net deposit inflows to +€9bn (+5.9% y/y) which includes growth in overnight deposits of €1.2bn on a 12M lookback; and ii) NFC deposits were -€4.1bn m/m in January following m/m growth of €4.9bn in December (with the reduction driven almost entirely by overnight deposits, which were -€3.9bn m/m following growth of €4.7bn m/m in December), taking 12M net deposit inflows from to +€147m. In overall terms we continue to see, in looking at annual data, decent broad-based growth in lending which is constructive in a bank loan book expansion context in what remains a positive macro backdrop - as well as a highly buoyant environment for household deposit volumes (with the CBI separately reporting on Friday here that Irish household net wealth grew by €56.2bn in 3Q24 alone to €1,205.1bn - with positive revaluations of housing and other financial assets underpinning the bulk of the uplift).
The CBI also published its Regulatory & Supervisory Outlook for the year ahead here on Friday together with a short document setting out its approach to supervision in 2025 here. These publications were covered in The Irish Times here and follow a letter from the CBI Governor to the Irish Finance Minister on 12th February last here. The detailed outlook report contains a specific section on the banking sector (see p.60-67) - which flags that cybersecurity risks, CRE lending exposures, and inter-sectoral linkages that stem from SRTs are a focus and are important to monitor. However, nothing stands out that we haven’t heard before from regulators and the long and the short of it is that no material changes to bank capital / funding / liquidity regulations are mooted and it doesn’t appear that there are any sea changes of concern to investors in bank financial instruments on the horizon in a broader supervisory context either.
The Sunday Times reports today here that Ged Nash, the Labour finance spokesman, has commented to the newspaper that “The divestment of all state shares in Allied Irish Banks, which is looking inevitable, isn’t good business sense for Ireland and for the indigenous economy, especially in light of the effective duopoly we have in the market and the absence of meaningful competition for consumers”. Labour already noted within its 2024 General Election manifesto last November here that the State should retain its then “current strategic shareholding” in AIB Group (AIBG) and should not let its shareholding in PTSB fall below 30% - as well as other draconian proposals like: i) a doubling of the bank levy, which don’t appear to have been fully thought through given the consequences that would have for PTSB (though, to be fair, there are always ‘ways around’); and ii) a retention of the bankers’ bonus cap, which would only widen the divide between top brass remuneration and the rest of the staff and/or drive inflated fixed pay as top executive remuneration restrictions fall away. Worth noting but not particularly relevant as Labour doesn’t have much of a voice in a policymaking context.
Company Developments:
Bank of Ireland Group (BIRG) reported FY24 results (for the 12 months to 31st December 2024) on Monday 24th February - and the share buyback programme (for up to €590m aggregate consideration) duly commenced on Tuesday. Here are my key observations:
Three key highlights to flag: 1) BIRG reported underlying (u/l) Profit Before Tax (PBT) of €2.13bn (driving an adjusted RoTE of 16.8% for FY24), which was a c.2% beat versus consensus - within this revenues were marginally behind cons (all OOI-related; small beat on NII); costs were slightly lower than cons; these revenue and cost differences offset one another; and the most meaningful delta was the materially lower impairment charge print relative to cons expectations (with beats on this line typically not held in anywhere near the same level of import as a revenue or costs beat). So, really, broadly in line with to, perhaps, ‘a marginal touch better’ than expectations. 2) BIRG booked net non-core charges (outside of underlying results) of €275m, including a €172m provision in respect of the FCA’s industry review of historical motor finance commission arrangements - while this provision charge has been in focus given it represents a lower proportional provision (relative to current loan stock share) versus some peers, there are significant differences between lenders’ exposures, in how originations have evolved over a lengthy historical period (in comparison to current stock shares) - and there is a very wide range of potential outcomes in any event. The Board clearly recognises the risks that more provisions will be necessary given the very strong end-FY24 capitalisation of the group (post-accounting for buyback, prior to accounting for Basel 3.1 benefit) and, in my view, is sensibly conserving capital given the wide range of possible outcomes for now at least (indeed, we should know a lot more by the time of the 1H25 results). 3) The share price responded favourably to the update and this appeared to be mostly driven by the fresh guidance for RoTE to build to >17% by 2027 (assuming a 14.0% CET1 capital ratio). Note that this does not include DTA-related benefits.
On the fresh return targets specifically, let’s be clear here - nothing has changed. I remarked in Financials Unshackled Issue 28 of 12th January last here that I expect that BIRG will outearn AIBG again in time (in a lower official rate backdrop) due to its lower risk weights and more efficient Balance Sheet. Running the numbers at that point indicated that RoTEs of >17% (and, potentially, up to the c.20% territory) are indeed attainable for BIRG though that depends on ‘everything going right’ as it were - in terms of a continued strong and growing domestic economy, official rates stabilising at the 1.5-2% level, decent ROI loan growth (mortgages particularly), minimal ROI deposits attrition, cost containment et al. (good piece here in the Business Post which is worth a read) - while there is more conservatism baked into AIBG’s (albeit nearer-term (FY26)) returns guidance, for example. Ultimately, the >17% FY27 BIRG RoTE target is ahead of where consensus had been perched and the market liked it. I did feel BIRG management were likely feeling the pressure to impart some positive news relative to expectations in the update given recent relative share price performance and this (together with a contained motor finance provision for now perhaps) was it - I alluded to this point in Financials Unshackled Issue 34 of 16th February last here. Some might say that the Business Post article today (see below) on BIRG executive pay suggests there was another reason too for making sure the market responded warmly to the update this time round.
The refreshed guidance is currently the strongest of all Irish banks and, arguably, lays down a gauntlet for AIBG next week - and while I see possibilities for AIBG to address Balance Sheet inefficiencies (its very low LDR) as well as improve its risk weights materially (remember that AIBG has only recently started executing SRTs and has noted it will be more ambitious in terms of sizing and structuring going forward) my gut is that AIBG management will not issue 2027 guidance just yet and will just hold firm and retain their medium-term target RoTE of 15%. While there might be a temptation to nudge up the target to >15% from c.15% I don’t think they’ll don that for a few reasons: i) they don’t need to give the market more at the moment is how I see it (the State will be off the register within months regardless); ii) given the lack of clarity around what the Trump administration will do next there are considerable uncertainties in terms of tariffs and foreign direct investment (FDI) from the US (stock as well as flow - while I am personally more concerned about the latter, both are at risk), which presents significant macro risk - so, might as well let the BIRG CEO do the ‘heavy lifting’ of selling the Ireland Inc. story (and, effectively, lobbying for higher (sectoral) pay) on the likes of Bloomberg and CNBC for now (with BIRG top management; and iii) assuming that the State doesn’t repeal the banker pay caps until it has fully exited its investment in AIBG (which IS an assumption - as a repeal could, of course, come sooner), then later in the year would surely be a better time to be accentuating the positives (and given the pace at which the Trump administration moves we will likely know a lot more about the risks to the Irish macro by then). For what it’s worth, running the numbers indicates that AIBG can absolutely beat its FY26 target (which also, notably, doesn’t reflect DTA benefits, so, it’s an arguably materially suppressed RoTE given DTA stock longevity), especially in view of where market expectations for official rates currently reside - I suspect AIBG management won’t deny this if questioned on the earnings call on the point (as well as allude to >15% likely being a realistic medium-term expectation) but I suspect that’s as far as they will go in quantitative terms and it will be made clear that any such colour does not represent official guidance.
One final note - which is of equal relevance to banks in other jurisdictions - is whether or not enough investment spend is embedded in the plans. It’s all well and good to issue lofty return targets but, even if the macro remains strong and the competitive landscape remains supportive, if you’re underinvesting in the franchise (with the digital bank upstarts in mind particularly) then those return targets are highly unlikely to be sustainable in the longer-term (and even though BIRG made a play last week of working towards a leaner organisation, it is hard to gauge whether truly enough spend is earmarked for investment / maintenance capex). One could potentially take some confidence that BIRG’s Chair, given his background, appreciates the gravity of the matter - with its recently announced Head of Strategy seemingly a good fit too (and these backgrounds are somewhat differentiated to what you see at peer domestic banks). But one could potentially harbour concerns given the frequency with which BIRG particularly features in the domestic media in relation to service outages, the cumbersome nature of its underinvested app (my personal view) versus peers, and where it ranks relative to UK banks in personal customer quality of service surveys.
In other BIRG-related news, the Business Post reports today here that BIRG executives’ remuneration is potentially set to increase significantly - with the newspaper reporting that, while the CEO’s gross salary (€950k for FY24), pension entitlements (10% of gross salary), and annual bonus entitlement (capped at €20k currently; struck at €17k for FY23) would remain unchanged, plans are afoot to increase the maximum fixed share allowance (FSA) for the CEO and other executives can receive from 50% of salary to 100% from 2026. This is a very reasonable compensation proposal in my view that sets the tone for the broader sector given the likely repeal of pay caps in their entirety (at least) later this year (Ian Guider at the Business Post wrote on this topic today here) - and is similar to what we have recently seen in the context of the mainstream large UK banks, improving the alignment of shareholder and management incentives. While the UK banks’ recent refreshed executive remuneration proposals captured an element of fixed pay forfeiture, the BIRG executive team’s salaries are relatively lean to begin with (especially considering the far more limited upside) and, all in all, it feels like a sensible proposal which should receive the requisite shareholder supports. Indeed, it is sensible for such draft proposals to first surface in the media as it allows time for shareholders and other stakeholders to properly digest the draft proposals / facilitates a tweaking of the draft proposals - and the final set of proposals will be voted upon by shareholders at BIRG’s AGM on 22nd May. Two final points I want to make here: 1) It feels like we are moving away from an environment of largesse in basic pay to more incentive-driven performance-related pay so my own view is that, going further on basic pay (aside from inflation-related increases perhaps) would potentially be seen as egregious (for example, Barclays’ (BARC) latest remuneration proposals are for its CEO’s fixed salary to reduce to £1.59m and BARC’s market capitalisation is >4x that of BIRG - though BARC executives have far more upside). Indeed, the Irish bank executives should have to deliver - from these share price levels - for substantial paydays in my view given how supportive the external operating environment has been in terms of the pick-up in returns generation in the last few years. 2) I think there’s an argument here that the FSA incentives for BIRG executives could be a bit stronger (it seems to be a graduated process - they started at a maximum of 25%, are currently at 50%, and are now proposed to go to 100% - perhaps a doubling to 200% will, not unreasonably, be on the agenda this time next year) but perhaps the Government will do away with the annual bonus caps this year meaning more performance-driven upside can be delivered through that mechanism.
The Currency reported on Wednesday here that the shareholders of the Dublin-based alternative lender First Citizen Finance (majority-owned by Magnetar Capital) are in advanced discussions in relation to a potential sale of the business to Arrow Global. First Citizen’s loan book is understood to be c.€500m in size (predominantly motor finance but is also engaged in commercial real estate (CRE) lending) and it dipped into loss-making territory in FY23 as funding costs soared in response to the higher official rate backdrop.
PTSB issued a RNS on Tuesday morning here announcing the immediate appointment of Barry D’Arcy as CFO and Executive Director of PTSB following a competitive selection process. D’Arcy joined the bank as Chief Risk Officer (CRO) in October 2023 having held the same role (and an Executive Director seat) at KBC Bank Ireland - where he also previously held senior positions in a finance and treasury context. There is no mention of the appointment being subject to regulatory requirements so that is presumably boxed off at this stage. D’Arcy appears to be a strong fit for the role and strikes me as a detail-oriented CFO who also has a strong handle of the big picture - so, an appointment that is likely to be welcomed by the investor base as it familiarises itself further with him. For background context, the seat became vacant in the wake of Nicola O’Brien’s resignation which was announced by PTSB on 29th August last - and subsequent press reports have noted that O’Brien is set to join Monzo’s European operation in Dublin. Separately, PTSB issued a RNS on Friday 28th February noting that INED Ronan O’Neill will retire from the Board at the end of his nine-year term of office on 30th July and that the Board is at an advanced stage in the recruitment for his successor.
P.S.: For those following PTSB and the review process it is undergoing with the regulator to apply lower risk weights within its IRB models, it’s worth reading the piece on ‘ECB Supervisory Board member notes that the regulator is expanding the range of changes that can be made to IRB models’ in the ‘Global (incl. European) Newsflow’ section below.
Global (incl. European) Newsflow
Select Developments:
Sentiment towards European banks remains bullish: Three items to flag in the context of the prevailing mood music in a European banking context: 1) The Wall Street Journal reported on Monday on Jefferies’ latest musings on European banks, with its analysts reportedly remarking that earnings momentum remained strong in 4Q, that consensus might have become too bearish on NII after a 3Q sector miss, and that the sector has beaten PBT expectations for 18 successive quarters now (though the extent of outperformance decelerated in 2Q24 and 3Q24). 2) The Wall Street Journal also reported last Monday that KBW has increased its target prices for Southern European banks by 15% on average following another quarter in which earnings beat expectations. 3) TwentyFour Asset Management published a blog on Tuesday last here noting that European banks are on the “front foot” heading into 2025 - while the piece makes some helpful observations in a P/B valuation multiple context noting that investors consider the sector is on average delivering its CoE, I would make the point that this CoE is very high for some banks who are trading at the c.1x tangible book value level and delivering RoTEs far higher than that (BIRG example above as a case in point - a stock that is currently trading at 1.09x end-FY24 TBV for a FY24 adjusted RoTE of 16.8% and medium-term guided RoTE of >17%).
ECB Supervisory Board member notes that the regulator is expanding the range of changes that can be made to IRB models: It was interesting to read on Bloomberg on Wednesday here that Steven Maijoor, a member of the ECB’s Supervisory Board has noted that the ECB is widening the range of changes that banks can make to their internal models without going through the full rigours of the regulator’s approval process. While this is not akin to deregulation, if the ECB does indeed deliver here, it will be undoubtedly welcomed by the sector.
ECB considering changes to bank inspection processes: Bloomberg reported on Friday morning here that several banking regulators from various pockets of Europe have informed the news agency that ECB on-site inspections of banks need to become more effective - with some noting that the ECB’s current approach isn’t adequately coordinated with local regulators and others noting that there is a need to reduce the burden on banks. It sounds to me like: i) an attempt by local regulators, in the context of the joint supervisory mechanism, to acquire more power in the equation; and ii) an attempt to see these inspections become less “intrusive” (to borrow the ECB’s own characterisation of what these inspections are like). The article further notes that ECB staff are considering how to improve the process.
ECB remains committed to Climate and Nature Plan 2024-25: Lastly in an ECB-related context, the central bank issued an update on its Climate and Nature Plan 2024-25 on Wednesday last here, which reaffirms its commitment to do its part to address climate change - in the wake of dissolving interest elsewhere. Let’s see how it all plays out in practice.
European Commission has concerns with ‘opt-in’ for bank trading book rules: Bloomberg published a detailed article on Tuesday last here noting that the European Commission (EC) has expressed “serious concerns” in relation to the European Banking Federation’s (EBF) proposal to permit banks to “opt-in” to the FRTB (fundamental review of the trading book) rules, which are a strand of the final Basel 3.1 implementation reforms package. Such an approach would mean that there would be two alternative approaches available to banks for the purposes of calculating capital requirements for market risk. A spokesperson for the EC reportedly remarked to the news agency that “The front-loading of the FRTB on voluntary basis would raise serious concerns from a policy, regulatory, supervisory, legal and Single Market perspective”. It then emerged on Friday afternoon (according to another Bloomberg article here) that the EC is planning to launch a consultation in March on its plan for implementing the FRTB. Interestingly, the first news report referred to above followed a report earlier that morning on Bloomberg here noting that the Dutch National Bank Governor Klaas Knot has said: i) that he is open to delaying the implementation of the Basel 3.1 reforms package to align with the expected US timetable (see below); and ii) that there is a strong case to be made that the implementation of the FRTB should be as synchronised as possible at a global level. As an aside, it’s also worth reading a detailed piece on Bloomberg here from Monday last here which covers Knot’s concerns in a potentially emerging deregulation context.
US FDIC in ‘wait-and-see’ mode in a Basel 3.1 context: The Wall Street Journal reported on Friday last that Acting FDIC Chairman, Travis Hill, noted at a Columbia University conference that the Federal Deposit Insurance Corporation (FDIC) is in ‘wait-and-see’ mode in the context of the final Basel 3.1 implementation reforms package and is keen to see how the Federal Reserve proceeds in a bank supervisory and regulatory context before proceeding further. Hill also confirmed that the FDIC is suspending its deliberations on Basel 3.1 pending any policy input from the White House on the matter, according to the newspaper. At the same conference Hill also reportedly remarked that the FDIC is likely to shrink in size during the Trump administration’s reign.
AT1 issuance strong in the YTD: Twenty Four Asset Management published a blog on Wednesday last here on how AT1 primary issuance “has begin 2025 with a bang” - with issuance of >€16bn in the YTD, which is more than double the volume we saw over the same period in each of the last five years. The post is well worth a read.
BoE Governor seen as a leading candidate to chair the FSB: Bloomberg reported on Friday evening here that BoE Governor Andrew Bailey is a leading candidate to become the next Chair of the Financial Stability Board (FSB) when the current Chair, Klaas Knot’s, term expires in July.
CBDCs in focus: Finally, it’s worth quickly flagging: i) an excellent piece penned by Toby Nangle in the FT on Friday here on how the benefits of central bank digital currencies (CBDCs) are too great to ignore; and ii) a post on the ECB’s website on Friday last here penned by Piero Cipollone (ECB Executive Board Member) on the role of the digital euro in digital payments and finance. It is a topic of great debate and I know I will stoke some strong disagreement with my own philosophical view which is that, to the extent that central banks as a collective formally roll out CBDCs at scale (an IF I appreciate), these digital dollars / euros / etc. will largely spell the death knell for cryptocurrencies. I’m ‘old school’ and I agree with the views of the likes of the BoE Governor to the effect that cryptocurrencies have no intrinsic value. Fire me an email with your own views!
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