Financials Unshackled: Week In Review (UK / Irish / Global Banking Developments) - Issue 37
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Welcome to the latest issue
Welcome to Financials Unshackled Issue 37. This ‘Week In Review’ is in a slightly different style and includes: i) a calendar for the week ahead; ii) analysis on select key developments in a UK / Irish /Global context from the last week; and iii) snippets flagging other select newsflow together with links to the stories. As usual, please email me at john.cronin@seapointinsights.com if you have any feedback.
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Calendar for the week ahead
Tue 11th Mar (09:30 BST): Bank of England (BoE) Mortgage Lenders and Administators Statistics - Q4 2024
Wed 12th Mar (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates - Jan 2025
Thu 13th Mar (07:00 BST): OSB Group (OSB) FY24 Results
Thu 13th Mar (09:00 BST): UK Finance Business Finance Review - Q4 2024
Fri 14th Mar (07:00 BST): Vanquis Banking Group (VANQ) FY24 Results
Fri 14th Mar (11:00 BST): Central Bank of Ireland (CBI) Mortgage Arrears Statistics - Q4 2024
Fri 14th Mar (11:00 BST): Central Bank of Ireland (CBI) SME and Large Enterprise Credit and Deposits Statistics - Q4 2024
Key Newsflow
UK (1): BoE data show continued growth in loans and deposits
The Bank of England (BoE) published its monthly Money and Credit Statistics (including Effective Interest Rates) for January 2025 on Monday 3rd March. You can access the Money and Credit Statistics here - and some granular effective interest rate information here. Note that it appears there have been some (relatively minor) revisions to the prior month (December) lending volume data, remortgaging approval numbers, and household deposit volume data since original publication on 30th January last.
Key points from a lending volume perspective: i) net mortgage borrowing was up again, to £4.2bn in January from £3.3bn in December with the annual growth rate rising to +1.8% y/y from +1.5% y/y in December, continuing the upward growth trend observed since April 2024; ii) net mortgage approvals fell marginally by 300 m/m to 66,200 in January following a small m/m uptick in December (notably, remortgaging approvals were +2,200 m/m to 32,900); iii) net consumer borrowing increased m/m to £1.7bn in January (+6.4% y/y) - with the annual growth strongly supported by expansion in credit card borrowing (+8.5% y/y); iv) businesses borrowed a net £2.4bn in January following £0.4bn of net repayments in December (while the monthly data can ebb and flow a bit the trend is still clear, i.e., growth has been picking up - and, notably, the annual rate of growth in large business lending was +4.0% y/y in January (from +3.9% y/y in December) though net lending to SMEs still remains lower y/y at -1.7% y/y in January (though improved on the -1.9% y/y in December)).
Key points from a loan pricing perspective: i) the effective interest rate on new mortgage drawdowns was 4.51% in January, +4bps m/m; ii) the average interest rate on the outstanding stock of mortgage debt was +2bps m/m to 3.81% in January; iii) the effective interest rate on interest-charging overdrafts was +57bps m/m to 23.07% in January; iv) the effective interest rate on new personal loans was -6bps m/m to 8.79% in January; v) the effective interest rate on interest-bearing credit cards was +28bps m/m to 21.85% in January, a series high; and vi) the average cost of new borrowing by UK non-financial businesses was +18bps m/m to 6.47% in January while the effective interest rate on new SME loans was -6bps m/m to 7.00%.
Key points from a deposit volume and pricing perspective: i) household deposits were +£8.4bn in January (following growth of +£4.7bn in December); ii) the effective interest rate paid on new time deposits was -5bps m/m to 3.91% in January and the effective rates on the outstanding stock of time and sight deposits were 3.69% and 2.11% in January respectively (-5bps and -6bps m/m respectively); iii) business deposits were -£9.5bn in January but this followed growth of +£13.0bn in December (which followed net withdrawals of £5.9bn in November); and iv) the effective rate on new time deposits from non-financial businesses was -12bps m/m to 4.09% in the month while the effective rate on stock sight deposits was -1bp m/m to 2.57% in January.
Key concluding remarks: i) the outstanding stock of household and business credit is continuing to expand, supported by lower interest rate expectations though it is likely that we will see a downdrift in mortgage drawdowns from April as the new stamp duty rules come into effect; ii) deposits are growing (and deposit churn experience has improved considerably in recent quarters); and iii) there is evidence of loan spread compression (particularly in mortgages) in January (as I have previously written) but swap rates were volatile in the month and volumes are not at a ‘settled’ level (given impending stamp duty changes, etc.) so I would expect that some of the recent downdrift in mortgage spreads to reverse. Moreover, at an individual lender level, there are powerful offsets to loan spread compression in terms of structural hedge income, reduced funding costs, and low-yielding legacy loan stock and investment maturities.
UK (2): Upcoming Supreme Court hearing central to Aldermore’s future
Aldermore Group published interim results for the six months to 31st December on Thursday last here. Profit before tax (PBT) came in at £119.4m for the period, +14% y/y though -20% h/h (though the prior half-year period PBT was flattered by significant credit impairment writebacks) and reported return on equity (RoE) was 10.0%. Aldermore has felt some net interest margin (NIM) pressure in response to lower official rates but has managed costs well, with operating expenses (opex) broadly flat y/y in the first half. Net loans and deposits were both +2% h/h and the results release notes that “The Group enters 2025 well-positioned to drive continued portfolio growth and repay its remaining TFSME funding…”. Aldermore finished the period with a robust CET1 capital ratio of 16.2% and, to the extent that motor finance commission-related redress, etc., costs remain contained, it seems reasonable to expect that action will be taken to optimise the capital stack in due course.
On the motor finance commissions debacle, Aldermore has already taken a provision of £15m for the potential impact of the FCA review. The results release notes that “Following the Supreme Court hearing in April 2025, and the FCA’s update in May 2025, the Group may have greater insights, particularly with regard to potential remedy scenarios. At that point the Group will revisit the need to raise a further provision for the year to June 2025.” - with FirstRand’s (Aldermore’s owner) appeal to be heard over the three-day period from 1st through 3rd April as I understand it. Indeed, it was interesting to watch the interview with FirstRand’s CEO Mary Vilakazi on Bloomberg Television on Thursday here in which she noted that the outcome of the appeal hearing “…would have an implication of how we think about lending and whether we can actually still get appropriate returns…If sanity prevails, I think we’ll work through these things and I think we can get to a better landing. But if not, I suppose questions have to be asked about our ability to generate returns in the long run.”. This seems a genuine observation in relation to how FirstRand will think about capital deployment internationally (given it sees potential contagion risk for other lending segments) as distinct from the seemingly strategically timed soundings made by the Santander Group CEO in January - and, as others have cautioned, to the extent that the Court of Appeal’s decision in the Hopcraft case is upheld by the Supreme Court, it appears likely it could have adverse consequences in a broader UK investibility context.
UK (3): FCA set to ease mortgage rules
The FCA set out some further detail in relation to how it will improve access to mortgages in a press release on Friday here - which specifically notes that “…the current market approach to interest rate stress testing may be unduly restricting access to otherwise affordable mortgages”. The regulator will shortly launch a call for evidence on current and alternative approaches to stress testing. It will subsequently, in May, launch a consultation proposing early ideas to simplify its rules to make it easier to: i) remortgage with a new lender; ii) discuss options outside of a regulated advice process; and iii) reduce the mortgage term. Furthermore, the FCA will, in June, open a public discussion on the future of the mortgage market. Unsurprisingly the FCA update was welcomed with open arms by the Chancellor. It seems that the FCA is charging ahead with what are likely to be quite meaningful changes - with stress testing rules as well as loan-to-income (LTI) and loan-to-value (LTV) restrictions all seemingly under the microscope. While the repeal of unnecessary regulation is welcome in broad terms, there is grave danger here of excessive easing in underwriting criteria. The devil will be in the detail so let’s see what the FCA ends up proposing - but some undoubtedly feel uneasy about the easing. You can read the FCA’s latest letter to the Economic Secretary to the Treasury on the matter here and an interesting FT report on the developments here.
Ireland (1): AIBG churns out another year of enormous profits
AIB Group (AIBG) published FY24 results on Wednesday 5th March which showed that the good times are continuing for Ireland’s most highly returns-generative bank. On the numbers themselves, AIBG delivered another beat with underlying (u/l) profit before tax coming in at €2.77bn versus consensus for c.€2.6bn. The primary driver of the beat was a low credit impairment charge of €55m for the period, implying a cost of risk (CoR) of just 8bps (versus guidance for the lower end of a 20-30bps range). However, there was a healthy beat on revenues too (NII was 4% ahead while OOI was 1% ahead of consensus expectations) and costs were just negligibly higher than consensus. The numbers resulted in a reported return on tangible equity (RoTE) of 26.7% (based on an assumed optimised 14% CET1 capital ratio) and AIBG notes that FY25F RoTE is expected to be meaningfully ahead of its 15% 2026 medium-term target. Guidance for FY25F is strong - with loan growth of 5% expected, cost growth expected to be contained (+c.3% guided), and NII resilience underpinned by structural hedge income. In overall terms, the NII guidance for FY25F appears somewhat conservatively struck and management appears to be guarding against prospective rate volatility - and the CoR guidance is arguably quite conservative too. That said, on the CoR, it seems sensible to bake in an extra layer of prudence given macro uncertainties stemming from geopolitics - and AIBG’s coverage ratios dropped in FY24 (though still remain at very strong levels, particularly the 6.6% coverage on Stage 2 loans) as did its total PMA. On the other side, I would note that the 2026 target for costs <€2bn is indeed a ‘stretch target’ to paraphrase management. The bank finished FY24 with a very strong CET1 capital ratio of 15.1% after accounting for further announced distributions of €2.1bn (€1.2bn buyback, €861m cash dividend), which lifts to 16.3% when one incorporates the 1st January Basel 3.1 benefits.
AIBG also notes that it has returned €18.5bn of the State’s €20.8bn investment in the bank and the government’s shareholding was 12.39% as at the date of the results. As part of the State’s exit from its residual investments in AIBG, management noted that it will engage with the Finance Minister in relation to the early retirement of the warrants that were issued to the Minister at the stage of the June 2017 IPO, estimating that this would be likely to cost AIBG in the region of c.40bps of capital (i.e., €250m). If we, very simply, add the current value of the State’s remaining shareholding of just more than €2.0bn to the €18.5bn already returned to the Minister, that gets you to just over €20.5bn. Add the c.€250m from an early retirement of the warrants and you get back to €20.8bn - meaning the State breaks even in monetary terms on its investment in the bank.
This did not appear to be a likely outcome a few short years ago. Stepping back, the question is what has changed because it isn’t down to deep innovation or strategic wizardry. The answer is pretty simply the rate backdrop (Jon Ihle at The Sunday Times writes on this topic today here) and, given: i) AIBG is Ireland’s largest deposit-taker and has gone from strength to strength in this vein (the bank always held a strong position but one should think back to the omni channel strategy and front-end digitisation efforts 10 years ago to understand the foundations for why it has gone from strength to strength) with >85% of its c.€110bn deposits sitting in current accounts (€62.7bn) and demand accounts (€31.1bn) that earn paltry rates; ii) growth in ROI deposits has been ‘off the charts’ owing to rising household wealth, an expanding population, and the exit of two of the (previously) five active banks in the market in recent years; and iii) AIBG re-deposits large pools of excess liquidity at the reserve account at the ECB and in investment securities, the ‘carry trade’ here is substantial (its loan-to-deposits ratio has been inching up, but still just sat at 64% at end-FY24). That’s not to mention that loan spreads are considerably higher than average eurozone bank loan spreads - though, on the other hand, Irish banks suffer inordinately high risk weights (as well as collateral enforcement challenges). And management hasn’t done anything to ‘blow a hole through the investment case’ like in bygone times - costs have been fairly well managed, credit risk has been minimised, and the structural hedging tactics paid off.
The good times look set to roll. BIRG management is out quite comfortably saying it can deliver RoTEs of >17% in the medium-term. AIBG can do better than that over the coming years - but if rates fall back towards 1% or less then BIRG should outearn AIBG again (though that assessment is based on a static Balance Sheet and strategy). The question is will the temptation for politicians to claw back some of these excess returns become just a bit too much in due course - after the State has exited its investments in AIBG. And, in the longer-term, regulatory barriers aside, there is a risk that the mainstream banks find themselves at a significant competitive disadvantage to low cost digital-only players and efficient cross-border banking businesses. Prospective returns evolution is not a linear assessment.
Ireland (2): PTSB delivers a reported 7.5% RoTE in FY24
PTSB also reported FY24 results last week - on Tuesday 4th March. The bank reported underlying (u/l) Profit before tax (PBT) of €180m, which compared favourably to consensus forecasts for just shy of €160m. However, this reported u/l PBT was flattered by a net credit impairment writeback of €39m (consensus had embedded a smaller net writeback, meaning that this explains most of the beat to consensus). PTSB reported a RoTE of 7.5% (excluding exceptional items) based on a 14.1% CET1 capital ratio - but this would have been slightly <5.5% if the net credit impairment writeback was ignored. It was encouraging to observe the pick-up in PTSB’s share of mortgage drawdowns to 20.2% in 4Q (16.4% for the full year). However, PTSB is still generating sub-optimal returns and is focusing hard on cost extraction, with its medium-term 2027 target for total operating costs of c.€500m. There is material upside to the bank’s medium-term 2027 RoTE target of c.9% if: i) it can take out more cost than is embedded in the plan (which may be challenging); and ii) more importantly, if it can attain some meaningful RWA relief from its model submissions to the Central Bank of Ireland (CBI) which seems significantly more likely than not in my view. Notably, its medium-term target 2027 cost of risk (CoR) also looks pretty conservative (especially relative to peers) given the expected bias of the bank’s loan book towards mortgages at that point - despite its foray into business lending.
Snippets
Other UK News
UK Finance published its Household Finance Review for 4Q24 on Monday last here - which notes that the mortgage market strengthened in the quarter and that savings levels continued to grow.
The British Business Bank (BBB) published its annual Small Business Finance Markets Report for 2024 on Tuesday last - which you can access here. The BBB reports that: i) the proportion of smaller businesses using finance declined from 50% in 3Q23 to 43% in 2Q24, stabilising at that level in 3Q24; ii) despite the fall in use of finance, aggregate flows of finance held up - specifically, gross bank lending totalled £62bn, +4.5% y/y, with the annual rise in bank lending exceeding that of asset finance for the first time since 2020; and iii) challenger banks’ share of bank lending inched up to 60% of total bank lending.
Zoopla’s latest Rental Market Report was published on Tuesday last here and shows that rents have risen by 3% over the last year, down from +7.4% in the prior 12 months - with affordability a growing constraint on rent increases.
Significant surge in motor finance complaints received by the Financial Ombudsman Service (FOS) in 4Q24 (rather unsurprisingly it must be said), based on its latest complaints data update on Tuesday last here. Compliance Corylated covers the update in detail here.
The BoE’s Prudential Regulatory Authority (PRA) issued a news release on Wednesday 5th March here noting that it is consulting on changing the retail deposits leverage ratio threshold to £70bn from £50bn. Consultation Paper here.
UK banks are borrowing the most since 2020 from the BoE’s Indexed Long-Term Repo (ILTR) facility, according to a report on Bloomberg on Tuesday last here - with outstanding usage now >£10bn.
The Treasury Committee published new data on Thursday last here that show that nine of the UK’s top banks and building societies accumulated at least 803 hours of unplanned tech and systems outages in the last two years. Be careful as you review this data as the number of incidents actually experienced and reported to the FCA does not equate to the number of incidents reported to the Treasury Committee in my understanding - and institutions like Barclays (BARC) particularly as well as Nationwide Building Society who, in my understanding, reported almost all incidents to the Treasury Committee therefore unfairly attracted adverse headlines. Further to these issues, we saw: i) Barclays (BARC) apologise again at the weekend following another outage on Saturday (covered here in CityAM) with services said to be back up and running again (according to a report in The Standard here); and ii) Santander UK’s customers had problems accessing their accounts - with The Guardian reporting here on Thursday evening on the issue, which was resolved by the time of the article. More broadly, all these outages undermine arguments that the credit institutions make to the effect that they are investing sufficiently in systems.
Rightmove’s latest update on UK mortgage rates from Saturday 8th March here shows that average 2Y and 5Y fixed rates fell by 3bps and 1bp respectively (to 4.84% and 4.68% respectively) last week - while 2Y and 5Y swap rates were +4bps and +8bps respectively over the same period.
Sky News reported on Friday here that Barclays (BARC) is close to agreeing a deal with Brookfield Asset Management that will see Brookfield acquire an initial 10% shareholding in the bank’s merchant acquiring division - with Brookfield set to acquire a further 80% on the third anniversary of deal completion. The deal terms are understood to include a £400m funding injection to the business from BARC - who will also provide the c.£250m of regulatory capital that the business will need.
Barclays (BARC) has estimated that it expects to pay out £5-7.5m to its UK customers for inconvenience or distress caused by the most recent major outage on 31st January, according to a letter from the bank to the Chair of the Treasury Committee dated 26th February here. FT article on this here.
This Is Money reported on Wednesday last here that Chase Bank UK (JPM) is set to taper its cashback benefits offering with effect from 7th April.
Close Brothers Group (CBG) announced on Monday last here that it has now completed the sale of Close Brothers Asset Management (CBAM) to Oaktree. The anticipated gain on disposal is c.£59m while the estimated CET1 capital ratio benefit (as at 31st January) is c.120bps which does not account for any prospective reduction in Group Operational Risk RWAs (and CBG estimates that a further capital benefit of up to c.25bps will materialise over the next three years on the back of lower Operational Risk RWAs).
Coventry Building Society reported Statutory profit before tax of £323m on Friday, down from £474m in FY23. However, this outturn included acquisition and integration-related costs of £26m. The society was well-capitalised at end-FY24 with a CET1 capital ratio of 28.0%. Read more here. Separately, Co-op Bank (now owned by Coventry) also published FY24 results on Friday, with the bank reporting: i) underlying (u/l) Profit before tax (PBT) of £116m, down marginally from £121m in FY23; and ii) an end-FY24 CET1 capital ratio of 18.7%. Read more here.
HSBC (HSBA) announced on Tuesday that Suzanna White (Group COO) disposed of 20,000 shares in HSBA on Monday 3rd March at a price of 931.6p per share netting her sale proceeds of c.£185k. Separately, HSBA is looking for a new chief for its UK business as Ian Stuart, current HSBC UK CEO, is set to become Group Customer and Culture Director when a successor is secured (see Bloomberg report on the news here).
Lloyds Banking Group (LLOY) announced on Friday that Chirantan Barua (CEO Insurance, Pensions & Investments) disposed of 362,761 shares in LLOY on Thursday 6th March at an average price of 73.8p per share netting him sale proceeds of c.£270k. Separately, there was an interesting interview with Craig Luttman, Chief Strategy Officer at Lloyds Living on Mortgage Solutions on Tuesday last here.
Metro Bank (MTRO) announced on Monday 3rd March that Marc Page (CFO) purchased 587,218 shares in MTRO at an average price of 83.6p per share (for a total outlay of almost £500k on Monday 3rd March.
OakNorth reported profit before tax (PBT) of £214.8m and an adjusted return on tangible equity (RoTE) of 22% in FY24, supported by strong growth in the US where it has lent $700m. Press release here and Annual Report here.
Other Irish News:
Banking & Payments Federation Ireland (BPFI) published mortgage approvals data for January 2025 on Friday, which, encouragingly, show that the value of mortgage approvals was +10.9% y/y in January to €1.02bn. However, there was a y/y decline in first-time buyer approval volumes. Read more in the press release here and in the report here.
AIB Group (AIBG) issued a RNS on Friday noting that Wellington’s shareholding in AIBG reduced to 3.96% (previously disclosed shareholding: 4.47%) following a transaction on Thursday 6th March.
Global News:
Bloomberg reported here on Friday that the European Commission (EC) has committed to expedite a planned review of the competitiveness of the EU’s banks and will publish a report on the EU banking system by the end of 2026 (the next scheduled review of banking regulation was due to be completed by 2028 but French, German and Italian lobbying efforts have paid off it seems).
Bloomberg reported last Monday here that the European Commission’s (EC) intended poll on regulatory changes for banks’ trading businesses will outline various options including concessions for as much as three years.
Claudia Buch, Chair of the Supervisory Board of the ECB, spoke on Monday last on laying the groundwork for the next decade in a banking union context - reiterating that a stronger banking union “should be the answer to the risks and uncertainties of the future” (link to speech transcript here). These speechmakers must get as tired of saying the same thing as I do writing about the same ‘news’!
Bloomberg reported on Tuesday last here on how 2024 was another record profitability year for European banks.
FT Alphaville published an insightful article on Monday last here on how banking’s critical infrastructure is increasingly “vanishing into the cloud” with banks becoming more reliant on a small number of critical third party service providers. Indeed, more broadly, I can think of examples of where a bank’s dependence on specific third party service providers is highly concentrated (on both sides) - and worrying.
The FT published an interesting article on Saturday here on how banks are offering deferred payment loans in a bid to compete with buy now pay later (BNPL) providers - and/or partner with BNPL companies to get a slice of the action.
Further in a BNPL context, Bloomberg reported here on Thursday that Klarna is seeking to raise at least $1bn in a US IPO and is set to file publicly as soon as next week - with plans to price the IPO in early April.
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