Financials Unshackled: Weekly Banking Update (UK / Irish / Global Developments) - Issue 35
The independent voice on banking developments from the last week - 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 35. I am still in recovery mode post-man flu (first time I ever had it and I wouldn’t wish it on anyone…) but in a bid to maintain the consistency of this weekly note I set out below the key developments from the past week - albeit much later than normal and in slightly shorter form. I will endeavour to publish a note ‘taking stock’ post UK-banks results season later next week / at the weekend - and I just quickly pick up on recent results updates within this note for that reason. As usual, please email me at john.cronin@seapointinsights.com if you have any feedback.
Calendar for the week ahead
Mon 24th Feb (07:00 BST): Bank of Ireland Group (BIRG) FY24 Results
Thu 27th Feb (07:00 BST): Metro Bank (MTRO) FY24 Results
Thu 27th Feb (09:00 BST): European Central Bank (ECB) Monetary Developments in the euro area - Jan 2025
Thu 27th Feb: UK Finance Later Life Mortgage Lending Statistics - Q4 2024
Fri 28th Feb (11:00 BST): Central Bank of Ireland (CBI) Money & Banking Statistics - Jan 2025
Fri 28th Feb (11:00 BST): Central Bank of Ireland (CBI) Irish Household Wealth Statistics - Q3 2024
Highlights
Lloyds FY24 Results - Quick Recap
Lloyds (LLOY) reported 4Q24 & FY24 results on Thursday 20th February. In overall terms the update was very well received, with investors seeing the update as reaffirmation of the constructive outlook for UK large cap domestic banks - with Barclays (BARC), LLOY, and NatWest Group (NWG) all pushing higher last week. In terms of actuals versus consensus for 4Q, it was something of a mixed bag for LLOY with a +0.9% net revenue beat (NII +0.9% vs cons; OOI +1.6% vs cons; operating lease depreciation charge 4.1% higher than cons), a slight miss on costs (-1.2% vs cons), higher remediation charges (owing to motor finance provisions), better impairments (£160m charge vs cons for £280m), and a lower pro forma CET1 capital ratio (13.5% vs cons for 13.7% - though this is a function of the higher provisioning, partly offset by a - not entirely unrelated - materially lower end-FY24 TNAV print than cons had been expecting) - but when you strip out the incremental motor finance provisions of £700m (taking total provisions to £1,150m), I would surmise that the results were a net positive relative to expectations. Moreover, LLOY’s fresh guidance for FY25 points to a RoTE of c.13.5%, which is well ahead of cons for 9.8% - reflecting the frontloading of provisions as well as the positive outlook for earnings growth (given balance sheet expansion, structural hedging income dynamics, suppressed AQR, etc.). FY26 targets were reaffirmed and the earnings presentation was longer than usual and two key take-aways for me (or, perhaps more aptly, reaffirmation of previous messages) were: i) how the outlook is favourable for LLOY and how the bank can grow more strongly than the economy by continuing its focus on higher growth economic areas (e.g., housing, infrastructure, Mass Affluent); and ii) LLOY’s continued focus on increasing its adoption of new technologies to drive proposition differentiation as well as operating efficiencies (with GenAI a particular case in point that was emphasised on the call).
Corollary: Efficiencies are the key battleground for banks
Following on from LLOY, I believe that harnessing the benefits of technology will be where the game is won and lost amongst mainstream traditional incumbent banks in Western markets on a 5+-year view. The neobank experiment has had mixed success and has not seen the big names (e.g., Monzo, Starling, N26) make enormous inroads - yet at least. The trust point (see ‘Sector Snippets’ below) is a huge factor here in my view. Revolut will face those challenges too - but has huge multi-jurisdictional vision and gallons of funding. And then you have the likes of JPM’s Chase that is pursuing a digital bank model within a traditional bank - with a view to disrupting as I see it (wiling to take losses for an elongated period as it ‘plays the long game’). Add to that the substantive investments that many European / UK banks are making (and have been for some time) - some of whom already benefit from very keen CIRs (e.g., Bankinter, Unicredit, and BBVA reported Cost/Income ratios of just 36% / 38% / 40% for FY24). Some of the suppression in CIRs will be reversed as official rates continue their descent (if they do…) but, suffice to say, it’s not all down to higher NII and there are banks like these ones that are reaping the benefit of stripping out costs and concurrently investing (I appreciate every bank is doing this to an extent and it’s a question of degree). Those that don’t will get left behind. Given Europe is so fragmented, certain jurisdictions where all banks have been slow to invest sufficiently (typically the less competitive jurisdictions where complacency and arrogance breathe like wildfire) will not see much change in the short-run but if true cross-border consolidation ever takes hold (Banking Union, anyone?) then real pain will be felt eventually. The problem is it is very difficult to do a proper cross-bank comparison as every bank defines investment differently and it is extremely difficult to get under the bonnet on what cost efficiencies one bank is generating versus another. It is an elaborate independent exercise - normalising revenues for a neutral rate backdrop (views anyone?!) - that I would like to do on UK, Irish, and European banks in due course and if anyone can point me to good resources I may have missed or offer views of any kind in an effort to do this please email me!
UK Updates
Sector Snippets:
A five-member panel of judges, including Supreme Court President Lord Reed, decided on Monday last to prevent Treasury from intervening in the forthcoming Supreme Court case which will hear an appeal to the Court of Appeal’s Hopcraft judgment in a UK motor finance commissions context (over the 1st through 3rd April period) - good FT piece on the development here. While UK-exposed banks sold off in response to the news, the development does not tell us any more one way or another what way the judiciary will sway. My thinking on it is that this decision was almost an inevitability (easy to say in hindsight one might say) - and here’s why. Judges are a conservative bunch and typically a safe pair of hands. They won’t have enormous difficulty educating themselves on the facts of the case. They read the papers too and will undoubtedly be aware of the arguments in favour of reversing the Court of Appeal’s decision in simple terms. The low risk option here was to reject the application to intervene - if they didn’t then undoubtedly many would likely have argued that permitting Treasury to intervene would have amounted to excessive closeness between the executive and the judiciary - arguments which would be likely to intensify in the event that the Supreme Court ended up reversing the Court of Appeal’s decision. I know what I would have done if I was on the panel of judges - educate myself on the facts and reject any government effort to intervene. Let’s see what comes in April.
Fascinating to see that Chase UK came out on top in the Competition and Markets Authority’s (CMA) latest survey of overall personal banking service quality (conducted by Ipsos between January 2024 and December 2024), with a score of 81%. I believe that the whole ethos underpinning Chase in the UK and Europe is to play the digital banks at their own game - a blueprint in the UK that can be rolled out across multiple jurisdictions if successful (indeed, The Wall Street Journal reported here on 14th January that JPM plans to launch Chase in Germany, another large population centre, in late 2025 or early 2026). The top ranking externally validates Chase UK’s service proposition, which is no accident (see link to Ipsos website for the full list - click here for UK and here for Northern Ireland - indeed the NI list is interesting with the neobanks up at the top, then Nationwide, then the UK banks, and then the Irish banks sit at rock bottom). A handy snapshot from the IPSOS website showing he results is portrayed below:
Continuing on from the above, I highly recommend readers to check out Rupak Ghose’s Substack post from Tuesday last on Chase UK’s performance. Ghose writes about how, despite the fact that Chase UK has a smaller customer base than Monzo and Starling, it is likely to have an older and more affluent base - and therefore represents a more real risk of disruption (which I have been arguing for a long time for the same reasons). Ghose pins this down to one word: Trust - the “one major competitive advantage of being a smart well-respected incumbent, that all of the Innovators Dilemma crowd typically forget”. I couldn’t agree more with Ghose on this point. While there was plenty of bank bashing in the years preceding the financial crisis, customers still feel safer to place their monies with traditional well-known financial institutions - and quite logically so in my view. Chase is a different disruptor - it’s a neobank playing the traditionals at their own game. With the exception of a few successful digital bank initiatives (e.g., Bankinter, BBVA, Bunq), JPM is streets ahead again. Read Ghose’s piece here.
EY Item Club published a batch of rosy forecasts for UK lending in 2025/26 on Monday last. In short, its forecasts are for: i) mortgage lending growth of 3.1% in 2025 and 3.2% in 2026 as rates fall and consumer confidence grows; ii) bank-to-business lending growth of 4.5% in 2025 and 5.6% in 2026 as rates fall; and iii) consumer credit demand to remain “steady” with growth of 5.8% in 2025 and 6.8% in 2026. Access the detail here.
The Competition and Markets Authority (CMA) announced on Friday morning that it reached a settlement with four banks in respect of separate cases related to past exchanges of sensitive information concerning UK government bonds. Citi, HSBC (HSBA), Morgan Stanley and RBC will pay fines totalling over £100m while Deutsche Bank has immunity for reporting its conduct which began in 2009 and ended in 2013. The case related to individual traders at each of the banks taking party in private one-to-one Bloomberg chatrooms in which they shared sensitive information relating to buying and selling gilts on specific dates. Read the detail here.
Company Snippets:
HSBC (HSBA) and Standard Chartered (STAN) both reported 4Q24 & FY24 results last week. My primary focus is on the domestic UK banks but worth noting a few key points: i) HSBA is committed to delivering c.$1.5bn in cost savings by FY26 - including a substantial trimming of staff expenses of c.8%; and ii) STAN CEO Bill Winters remarked that the group’s strategy is “firing on all cylinders” and caught the headlines in his usual provocative yet charismatic fashion noting that the impact of bonus caps was “…a grotesque increase in fixed pay”. I will cover these names in high-level thematic terms in the ‘Taking Stock’ note that will issue later next week / at the weekend.
Sky News reported here on Friday afternoon that Monument Bank is in talks in relation to a £200m pre-IPO private Series C fundraising (of which £30m is understood to be already secured) ahead of a potential NASDAQ listing, which it is targeting by the end of 2027 - with a secondary listing on a major Middle Eastern or Indian exchange said to be a possibility for 2028. Monument’s focus is on the mass affluent market and the average size of individual customer deposits is reported to be in excess of £60k.
Interesting piece penned by Lionel Laurent and Paul Davies on Bloomberg on how Revolut’s IPO will test fintech’s hype from last Wednesday here. I am normally a massive fan of Davies’ material but I think the comparisons made in this piece between Revolut’s efficiency ratio and the efficiency ratios of traditional banks is something of an irrelevance given the stage of Revolut’s maturity. However, I do agree with the concluding remarks of the article: “Neobanks are whizzy and convenient — but that sales pitch alone won't seduce traditional portfolio managers into replacing the firm's venture capitalist backers”.
Together Financial Services published its quarterly update for 2Q24 (the three months to 31st December) on Thursday last - see here (and you can get the results document and presentation on the website here). In short, u/l EBITDA came in at £174.8m for the quarter, +18% y/y - and reported u/l RoTE was 14.2% (up from 14.1% in 1Q). Net loans of £7.72bn were +1.8% q/q while net debt gearing of 84.0% was +30bps q/q. The CEO Richard Rowntree spoke positively about the outlook, noting: “Looking forward, the UK economy is expected to perform better in 2025, driven by higher consumer and government spending and a continued reduction in interest rates, although the pace at which rates fall may be limited by persistent inflation. With long-term structural trends including changing employment patterns, a rise in multiple incomes and a continued lack of funding for SMEs supporting an increase in customers looking to specialist lenders for solutions, we will continue to be there to help people realise their ambitions as we have for the last 50 years.”.
Shareholding Changes:
Mortgage Advice Bureau (MAB1) announced on Monday 17th February that Octopus Investments’ shareholding in MAB1 increased to 9.11% (previously disclosed shareholding: 8.21%) following a transaction on Friday 14th February.
Paragon Banking Group (PAG) announced on Monday 17th February that BlackRock’s shareholding in PAG fell to <5% (previously disclosed shareholding: 5.14%) following a transaction on Friday 14th February.
Standard Chartered (STAN) announced on Friday 21st February that Capital Group has amassed a shareholding of 5.04% in STAN (previously disclosed shareholding: N/A) following a transaction on Wednesday 19th February.
Vanquis Banking Group (VANQ) announced on Tuesday 18th February that Norges’ shareholding in VANQ increased to 6.65% (previously disclosed shareholding: 6.02%) following a transaction on Monday 17th February.
Irish Updates
Sector Snippets:
Davy’s (BIRG) Irish Banks FY24 previews got some attention in the Business Post here this weekend. One point of note is that Davy is now forecasting €200m / €150m of provisions related to the UK motor finance debacle for Bank of Ireland Group (BIRG) in FY24 / FY25. Davy’s note was published on Wednesday (which strikes me as a good bit later than normal) and these numbers might be somewhat (though not precisely) instructive for what we will learn tomorrow at the BIRG update. In any event investors will have their own views on the ultimate hit to capital (plenty of readacross from LLOY/CBG/etc. but, to borrow Goodbody’s (AIBG) language, there is a very wide range of potential outcomes here to be fair) and the company’s own worst case scenarios will inform the Board’s thinking from a capital management perspective in any event no matter what the immediate accounting provision.
The Business Post reported on Tuesday last here that the Taoiseach (Prime Minister) Micheal Martin has called on the banks to “do more” to help finance the cost of home-building: “The banks should do more and I do think the cost of financing house building is an issue”. The comments are in the context of the ongoing debate about how much housing Ireland needs and the substantial shortfall of housing supply - which has led some to, logically, argue (given increased government focus) that we are on the verge of a multi-year credit boom in Ireland as housing output explodes, which ought to be constructive in the context of domestic banks’ loan book expansion efforts. Let’s see. One financing issue is that the Irish banks have been extremely reluctant to extend development finance (high risk, high capital requirements, etc.) - it is extremely unlikely that we will see a marked shift in risk appetite so the door is open here to alternative lenders in my view. I will also add my own personal view to the effect that well-thought-through tax breaks should be offered to developers to stimulate construction activity - a blanket refusal to entertain this prospect is just politicking as I see it and the ‘powers that be’ can surely distinguish prospective sensible incentives from silly incentives that prevailed during the ‘Celtic Tiger’ era (don’t get me started on this amateur irrational argument that prevails in respect of so many political debates - ‘it didn’t work the last time’ - as if nothing has changed since then or that the former solution cannot be adjusted to reflect the learnings of the past….it reminds me of the ‘securitisation is evil’ view of less capable (or perhaps excessively political) European policymakers over the years!!). It’s not without risk but the country needs to try something.
There is undeniably an enormous housing shortfall in Ireland. However, one doesn’t need to cast their mind back too far to remember that Ireland quickly started to see net emigration in the aftermath of the ‘Celtic Tiger’ which saw the received wisdom in relation to annual net required homebuild evolve rapidly. I’m not saying we face the same risks now - and my own view is that the economy will hold strongly over the coming years (I suspect some FDI flow risk - but I’m much less concerned from a stock perspective for the brief reasons I outlined in Financials Unshackled Issue 19 here) - but expect expectations to bounce around a bit. Trump is likely to play some games with the Irish political system over the coming months I suspect (stimulated by recent comments / moves made by certain local politicians which don’t play to his ego). For what it’s worth I wouldn’t be surprised to see this start in earnest with a snub to the Taoiseach (Prime Minister) in respect of the customary annual White House St. Patrick’s Day visit (notably, Martin hasn’t been issued with an invitation yet). Confidence is fragile in relation to foreign direct investment flow (and stock to an extent too) given the significant dependence of Irish employment and fiscal receipts on same. If that eventuality were to unfold (no invitation to the White House for the Taoiseach) then I can imagine a ‘media tailspin’ about what it means - with domestic-focused stocks in focus too. It probably wouldn’t mean much in fact - just Trump’s unorthodox - and effective you could argue - way of doing business but it might see short-term panic set in with question marks to surfacing in relation to the housebuilding targets. Trump’s bark is typically far worse than his bite - provided he gets some kind of concession. But let’s see how the next few months play out.
Company Snippets:
It was reported in the media during the week that the latest submission from the Department of Finance to the Minister for Finance in relation to the disposal of AIB Group (AIBG) stock picked up on the fact that the relationship between the State and AIBG will have to be normalised as the government’s shareholding falls towards zero. The bottom line is, yes, the remuneration restrictions for AIBG executives will surely have to be lifted when the State’s shareholding in the bank reaches zero if not before then - mirroring the treatment extended to BIRG executives. The bigger questions are: i) will the limits on staff bonuses more broadly (as well as the 89% supertax on variable pay in excess of €20k) be lifted; and ii) will PTSB executives continue to be (the only bank executives in the State) subject to the cap or will the government opt for a blanket removal. I previously penned an extensive piece on this (see Financials Unshackled Issue 4 here) and I strongly believe that all remuneration restrictions should be lifted unless we want to unduly penalise PTSB (and turn investors off investing in the bank) and/or guarantee a talent deficit / bloated fixed pay for Irish banks. But judging by the ongoing focus of the debate over the years and AIBG’s and BIRG’s decisions to cap variable remuneration for staff at a level, on a blended average basis, that is considerably below the maximum of €20k per employee permitted for FY23 (more detail below, extracted from Footnote 2 of Financials Unshackled Issue 4), it seems that executive pay is what is most in focus and these decisions only send a signal to government that it doesn’t need to worry about changing the supertax - which is both wrong and short-sighted in my view.
Footnote 2 (Financials Unshackled Issue 4): “As an aside one could reasonably argue, in my view, that both AIB and BOI’s decisions to cap variable remuneration for staff at a level, on a blended average basis, that is considerably below the maximum of €20k per employee permitted pursuant to the above-referenced changes to the remuneration restrictions effected following the publication of the Department of Finance-led Retail Banking Review was a missed opportunity. While cost containment and/or political optic-related motivations may have underpinned the decisions to constrain (and despite the fact that BOI is still exercising considerable constraint at top executive level with the CEO and CFO paid far less than international peers working in similar-sized banks from a market capitalisation perspective) it has, arguably, created the perception that the whole debate is just about the top brass getting paid.”
Global (incl. European) Updates
Snippets:
The ECB’s latest Supervision Newsletter here is well worth a read. Of particular note: i) the ECB has worked with the European Banking Federation (EBF) to develop a fast-track process for assessing significant risk transfers (SRTs) in securitisations which should substantially reduce the time for sufficiently simple securitisations meeting certain requirements - and the ECB is also set to closely monitor banks that provide leverage to credit funds to invest in SRTs (click here - and see Bloomberg article on the latter point here); ii) operational resilience is set to remain in significant focus - with the ECB flagging increased risks associated with outsourcing (e.g., the shift towards cloud-based solutions) in these testy geopolitical times (click here); and iii) banks’ risk data aggregation and reporting capabilities must improve and the ECB is determined to use all its tools to drive meaningful enhancements (click here).
The Wall Street Journal reported here on Thursday that Olli Rehn, Member of the ECB Governing Council, noted that the ECB is monitoring moves to loosen regulation of the US financial system with “concern” - making the valid observation that: “It is perhaps something of a paradox that the longer macroprudential policy is successful – the more the memory of the last financial crisis fades – the more probable it is that financial stability will be overlooked in public debate”.
The ECB published on Thursday last the transcript of an interview that ECB Executive Board Member Frank Elderson recently conducted with NVDE - which largely focused on climate risks, rather unsurprisingly (click here for it). The most relevant comments he made concerning banks were: “Encouragingly, most banks met the targets set by the 2023 deadlines, and frameworks for climate and nature-related risks are now broadly in place. However, a few banks are still lagging behind and could face potential penalties. For the third and final deadline, which just passed at the end of 2024, we are proceeding with our compliance assessments in the same way as for the two previous deadlines.”.
The ECB issued a press release on Thursday here noting that it wishes to establish a blockchain-based payment system that allows financial institutions to settle transactions in central bank currency - which would be a potentially highly significant step towards the introduction of a wholesale central bank digital currency (CBDC). Bloomberg also covered the development here.
Interesting article in The Economist here last Thursday on why US credit card delinquencies have suddenly ‘shot up’. It zones in on how the current rise in delinquencies is “…concentrated among a group of particularly overextended borrowers, who stand out on three counts: for their age, location and creditworthiness…the cohort skews young. Some 11% of borrowers between the ages of 18 and 29, and 9% aged between 30 and 39, fell into serious delinquency in the final three months of last year, compared with just 5% of those in their 60s.”. While delinquencies in these cohorts impact upon subprime lenders in the main, the broader trends are well worth keeping an eye on. Indeed, Barclays (BARC) reported last week that there was a higher flow into and through delinquency in its US cards business in 4Q and that delinquency rates are expected to climb further (which informed its 4Q impairment charges).
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