Financials Unshackled: Weekly Banking Update (UK / Irish / Global Banking Developments)
Key UK / Irish / Global Banking Developments from the last week
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 33. It has been a relatively quiet week from a newsflow perspective and today’s note is a brisk run through select key developments - ahead of more detailed and frequent notes through the upcoming listed UK & Irish banks results season. Please email me at john.cronin@seapointinsights.com if you have any feedback, which is always welcome.
Calendar for the week ahead
Tue 11th Feb (07:00 BST): S&U (SUS) 4Q24 and FY24 Trading Update
Wed 12th Feb (11:00 BST): Central Bank of Ireland Retail Interest Rates - Dec 2024
Thu 13th Feb (07:00 BST): Barclays (BARC) FY24 Results and Progress Update
Fri 14th Feb (07:00 BST): NatWest Group (NWG) FY24 Results
UK Updates
Main Updates:
Santander Group reported 4Q24 / FY24 (for the period to 31st December) results on Wednesday 5th February. Santander UK Group Holdings’ FY24 return on tangible equity (RoTE) came in at 8.8% (down from 14.4% in the prior year), weighed down by lower y/y profitability (lower NII and OOI, higher costs, etc.) and motor finance provisions of £295m taken in 3Q. In seeking to understand what an underlying RoTE looks like for the UK business, one could crudely: i) strip out the £295m motor finance provision charge; and ii) assume a more normalised average FY24 CET1 capital ratio of 13%. This would get you to a c.13% RoTE for FY24. Some other points to call out:
“Active margin management” saw NII +3% q/q, with NIM +8bps q/q to 225bps. 7bps of the q/q movement in NIM was attributable to improved deposit margins and Santander Group Executive Chair Ana Botin noted on the earnings call that management expects NII to be “slightly up next year” - and further noted, in response to a question on the group’s commitment to the UK market, that “there is more upside to our profitability” in the UK more broadly. The CEO noted later on the call that the UK revenue target growth for FY25 (on a constant currency basis) is +11% y/y. Indeed, a cost efficiency programme that the bank is pressing forward with is likely to see some operating cost savings manifest in time too - as reported in The Guardian here.
On the topic of the group’s commitment to the UK, the following comments made by Botin were noteworthy: “We can do much more in the UK by leveraging the global platforms, bringing our global scale to benefit the UK…It remains a core market, as we have said”. Furthermore, the CEO noted that there is a sizeable cross-selling opportunity in the UK - “…we have 40 million clients in the UK. We're starting to sell different products to them…we have a basically mortgage franchise over there, but we're starting doing some other businesses with them. We're starting to do credit cards, cards are starting to grow. It's the second largest market in the world. So we'll start to cross-sell into that client base. And that basically is helping us out to have a much better franchise and we have the capabilities to do it because we have a business at scale that allow us to do so”. Indeed, Botin also commented on a Bloomberg Television interview (see here) that “In order for us to allocate capital to different geographies, we don’t need to sell”. Let’s see what happens but it seems clear that the group will not exit the UK ‘on the cheap’ (i.e., much below or even at tangible book value in my view).
It’s also worth flagging that the FT published a detailed article on whether Santander Group will seek to exit the UK or not on Tuesday last here - and I was delighted to contribute to the piece.
Snippets:
The Times published an interview with Sam Woods, CEO of the Bank of England (BoE) Prudential Regulation Authority (PRA) on Monday last here. Nothing particularly new in it with Woods reinforcing that he is of the view that it is worthwhile seeking to declutter the regulatory regime while highlighting that “I don’t think there’s anything that we are currently doing that seems very likely to sow the seeds of the next crisis”. On Basel 3.1 reforms, Woods notes that if the US walks away “that will be a very significant global problem” - given the focus on competitiveness and growth as well as international regulatory co-operation, it would seem likely that the UK’s near-final proposed reforms (the implementation of which has now been further delayed) will be diluted further if the US does indeed walk away. When Woods was asked by the interviewer about what he would like to do after his term at the PRA concludes, he said that he would like “another big role” either in the public or private sector.
Bloomberg reported here on Wednesday that new City Minister Emma Reynolds told the House of Lords Financial Services Regulation Committee on Wednesday that the government is actively working with the Bank of England (BoE) on the potential alteration of regulations, which I wrote about - in an MREL context (the main focus of the Bloomberg article) - in Financials Unshackled Issue 32 here following the publication of UK Finance’s response to the BoE consultation. Reynolds noted that Treasury is “engaging very closely with the Bank on this and they are considering feedback that they have had on it”. The key question is will the regulators have the bravery to do the right thing and lift the thresholds substantially for once and for all (indeed, the PRA has proven itself to be a highly pragmatic and strong regulator in very many respects over the years) - or will it just run with a light ‘inflation fudge’ to keep some would-be new entrants out rather than let some existing MREL-compliant firms fall out of the regime completely. A key question for the challenger banks sector and the wider industry is watching with bated breath.
BoE Governor Andrew Bailey also made positive soundings around a potentially softer capital regime for smaller firms in his speech at TheCityUK annual dinner on Thursday evening - with a useful piece here in The Telegraph on it.
The Times published an interview with Nikhil Rathi, CEO of the Financial Conduct Authority (FCA) on Friday here in which Rathi flags the progress that the regulator has made in a consumer protection vein. Naturally the trade-offs between the government’s growth objectives and the risks attached to looser regulation formed part of the discussion too. Indeed, Rathi remains, as always, tight-lipped about what the future holds for him - just like he did in his recent interview on the Following the Rules podcast here.
The government has officially extended the deadline for landlords to tighten energy requirements in the privately rented sector (PRS) by two years to 2030.
As of 2030, all private landlords will be required to meet a higher standard of Energy Performance Certificate (EPC) C or equivalent in their properties – up from the current level of EPC E. This was expected but the confirmation has undoubtedly been welcomed by lenders serving the BTL market.
No surprises in the UK Finance mortgage arrears and possessions data for 3Q24 which was published on Thursday here. The number of homeowner mortgages in arrears was down 2% q/q and the number of BTL mortgages in arrears was down 3% q/q. Charles Roe, Director of Mortgages at UK Finance neatly summarised recent trends as follows: “The number of mortgages in arrears has seen a slight decrease compared to the previous quarter. Having peaked in Q1 2023, arrears appear to now be on a confirmed downward trend. This reflects the fact that, while pressures remain, the challenges of higher interest rates and cost of living increases have begun to ease.”. So, confirmation of a continued benign (and improving) credit backdrop in a mortgages context at least.
The Intermediary Mortgage Lenders Association (IMLA) published its Q4 2024 Mortgage Market Tracker here on Friday, which shows that broker confidence dipped in 4Q despite strong system-wide lending volumes.
The Financial Ombudsman Service (FOS) published a Policy Statement here on Friday stipulating that it will, from April, start charging claims management companies (CMCs) £250 for every case they bring after the first 10 each year. A reduced fee of £75 will be applied if a claim is successful. This is a highly welcome change in my view and it will hopefully go some way to minimise the large volume of spurious and opportunistic claims. A useful FT piece on it here too.
Barclays (BARC) announced here on Monday 3rd February that Barclays Bank Ireland PLC (Barclays Europe) has successfully completed the sale of its German consumer finance business at a small premium to tangible book value. The transaction is expected to reduce risk-weighted assets (RWAs) by c.€4.0bn, increasing BARC’s CET1 capital ratio by c.10bps. Separately, Bloomberg reported here on Monday that both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are in close contact with BARC following its recent systems outage which I reported on last week.
Sky News reported here on Thursday that HSBC (HSBA) is preparing a revised remuneration package for its CEO, which will see his maximum annual pay rise to £15m (though he will see his fixed pay roughly halved in exchange for this upside). More variable incentive packages with more upside appear to be ‘all the rage’ now - a positive development in he eyes of most shareholders I suspect. FT article on the development here too.
It was widely reported in the media that Lloyds Banking Group (LLOY) has lost the first round of a legal dispute with HMRC in relation to tax relief on Irish loan losses incurred in the wake of the GFC. LLOY has been ordered to pay HMRC a tax bill of £1bn. However, LLOY has said it will appeal the findings to the Upper Tribunal. It would likely take years to resolve in the event that it ends up at the Supreme Court. FT article here on the development. Separately, CityAM reported here on Friday that LLOY told some 6,000 tech and engineering staff on Wednesday that their jobs may be at risk of redundancy as it overhauls the structure of the business and creates new roles designed to accelerate technology development
OSB Group announced here the appointment of Sally Jones-Evans (former Chair of Principality Building Society where she oversaw a complete strategy refresh and the management of a major IT project) as NED with effect from 1st April. OSB also announced that NED Sarah Hedger has decided to retire from the Board after six years at the upcoming AGM on 8th May.
Standard Chartered announced here the appointment of existing NED Maria Ramos to succeed Jose Vinals as Group Chair (as he approaches the end of his nine-year term). Ramos will, subject to regulatory approvals, start her new position on 8th May when Vinals will retire from the Board.
Sabadell reported 4Q24 / FY24 numbers on Friday and TSB published its results summary here and Annual Report here, which shows that profitability continues to trend favourably. Statutory PAT printed at £207.9m, +18.9% y/y - which was driven by lower operating costs (-3.6% y/y to £821.9m) and lower credit impairment charges (£30.1m for FY24 versus £68.3m for FY23) - which drove a double-digit reported RoTE of 10.6%, up 1.7 pps on the FY23 outturn. The bank reported marginal growth in gross loans to £36.3bn (+£0.1bn y/y) and customer deposits to £35.1bn (+£0.3bn y/y) and the strong capital position (end-FY24 CET1 capital ratio of 15.4%) positions TSB to propose to pay its parent a dividend of £300m.
Shareholding Changes:
Secure Trust Bank (STB) issued a RNS on Friday 7th February noting that Premier Miton’s shareholding in STB increased to 5.97% (previously disclosed shareholding: 4.32%) following a transaction on Wednesday 5th February.
Vanquis Banking Group (VANQ) issued a RNS on Wednesday 5th February noting that Norges’ shareholding in VANQ increased to 6.02% (previously disclosed shareholding: 5.24%) following a transaction on Monday 3rd February.
Irish Updates
Snippets:
Banking & Payments Federation Ireland (BPFI) published its Personal Loans Report for 3Q24 on Thursday here. While it is somewhat dated at this stage, it makes for interesting reading. In overall terms, personal lending drawdowns of €670m in the quarter were +21.5% y/y (car loans +21.4% y/y, home improvement loans +17.6% y/y, other loans +25.0% y/y, and green loans +18.6% y/y). The trends are indicative of expansion in the domestic banks’ consumer lending portfolios.
Bank of Ireland Group (BIRG) has agreed a 4% pay increase for its unionised staff base for 2025, following a deal struck with the Financial Services Union (FSU), according to The Irish Times here. The scale of the increase is the exact same as what AIB Group (AIBG) reportedly agreed with the FSU late last year. It would have been incredibly difficult for BIRG to achieve an agreement at a lower level so this news does not come as a surprise. The article notes that PTSB has yet to strike a deal with the union. The Irish banks appear to have managed costs quite well through the recent inflationary backdrop.
Separately, The Irish Times reported here on Friday that Bank of Ireland Group (BIRG) has sought to effectively ‘manage expectations’ in the context of the upcoming awards under its performance scheme which are capped at 10% of salary and/or €20k in total, whichever the lower. BIRG paid 5% last year. The email reportedly states: “In 2024 we have continued to make strong strategic progress while managing several challenges, including the changing interest rate environment and competition, along with the need to continue to invest in our business…We have also responded to some regulatory and customer-related issues within our UK motor finance business. We will need to continue to focus on these risks and areas of challenge during 2025, along with any further risks which may arise – such as geopolitical risks that could have an impact on international trade.”.
It was reported in the media on Friday that PTSB expects to cut about 300 jobs over the course of 2025 following its assessment of the applications received in relation to its voluntary redundancy scheme, which is understood to gave been heavily oversubscribed. This equates to a c.9% reduction in staff numbers. Crudely taking 9% off the staff costs base would trim c.€22m from, annualised underlying costs. However, that is likely to understate the true annualised savings that will be achieved due to: i) likely weighting of departing staff towards those with a longer tenure who are more likely to therefore command higher salaries (especially given degree of oversubscription - meaning management can choose carefully); and ii) natural attrition will likely be somewhat higher than normal given the reported degree of oversubscription. So, you’re getting to a high single-digit territory reduction in the Cost/Income ratio (CIR) owing to this rationalisation effort potentially. That all said, there will be one-off costs associated with the scheme and PTSB will likely have to strike an inflationary pay deal with the FSU in the near-term. Read The Irish Times article here and the Irish Independent article here.
The Irish Independent reported here on Saturday that non-bank lender Nua Money is trimming mortgage rates by up to 75bps. Nua’s rates had been considerably higher than where the domestic banks’ rates are perched.
Shareholding Changes:
AIB Group (AIBG) issued a RNS on Tuesday 4th February noting that BlackRock’s shareholding in AIBG increased to 10.87% (previously disclosed shareholding: 10.59%) following a transaction on Friday 31st January.
Bank of Ireland Group (BIRG) issued a RNS on Thursday 6th February noting that BlackRock’s shareholding in BIRG reduced to 5.99% (previously disclosed shareholding: 6.32%) following a transaction on Wednesday 5th February.
Global (incl. European) Updates
Snippets:
Bloomberg reported here on Wednesday that Germany, France and Italy are stepping up their lobbying efforts in a bank regulation loosening context so that European banks can better compete with US players. The article quoted from a draft paper shared by the trio with other member states as follows: “A number of metrics hint towards European banks being less and less competitive especially when compared to their international peers…This potential negative trend – if confirmed and if un-tackled – risks having significant repercussions”.
Satyajit Das penned an opinion piece for the FT here on Monday last arguing that AT1s should be phased out chiefly for similar reasons that underpinned the Australian Prudential Regulation Authority’s (APRA) decision late last year to propose their phase-out in that market, i.e., AT1 does not absorb losses to stabilise a bank early in stress conditions and it would be challenging to use to support resolution without complexity, contagion and litigation risk - with Das noting that “…they do not work well in countering distress or rescuing a non-viable bank”. Additionally, Sam Theodore, an independent banks analyst, put forward an argument for a gradual conversion of AT1 into Tier 2 in this LinkedIn post during the week. Notably, Dan Lustig and Jason Tan at L&G Investment Management (LGIM) issued a note last September here, posing the question as to whether a similar proposal could be adopted in Europe. While they acknowledge that AT1 tends to behave more like ‘gone concern’ than ‘going concern’ capital in times of crisis, they conclude that we should not expect to see any efforts to redesign or phase out the instrument in a European context because of: i) market size considerations (with the European bank AT1 market sitting at more than €200bn in size); ii) potential for higher cost of capital in the event of a redesign / phase-out; iii) less risk of financial instability in the event that European bank AT1s need to be converted to equity or permanently written down given that ownership of European bank AT1 paper is heavily concentrated in the institutional investor segment (unlike the case in Australia where >50% of AT1 paper is held by retail investors); and iv) the recovery in the AT1 market since the fall-out from Credit Suisse is evidence that the instrument ‘works’.
Disclaimer
The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.
Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.
Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.