Financials Unshackled Issue 14: Latest UK & Irish Banking Updates
Stepping back from a very busy week of newsflow, zoning in on what's important
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
Good evening - and welcome to the 14th Financials Unshackled post! This evening’s post adopts a different format to the usual topic-by-topic commentary / analysis. A shorter read than normal and I hope you enjoy it.
What has been happening in UK banking this week?
What an exciting week…recapping the main events - so far
The fallout from the Court of Appeal ruling that motor dealers acting as credit brokers owe a fiduciary duty to their customers - and that lenders will be liable for dealers’ non-disclosures - continues to evolve and has overshadowed an upbeat results season for the domestic UK banks. Some early analyst estimates are that the industry could face a bill of up to £18bn arising from the fallout in a worst-case scenario - with The Times labelling the debacle ‘PPI 2.0’ - and that’s before one considers readacross to other intermediated lending products (the ruling is not specific to motor finance and there are widespread concerns that the decision could have repercussions for other lending segments - for example, mortgages, with 87% of UK mortgage lending conducted via intermediaries in 2023, according to the IMLA). Indeed, the fallout is wider than for the banking industry with The Telegraph reporting this evening that carmakers including Honda and BMW have temporarily halted sales to customers in recent days and that lawyers have been warning that this will be “bigger than PPI”. Absolutely frightening stuff.
On the results front the market responded very favourably to both the HSBC (HSBA) and Standard Chartered (STAN) 3Q trading updates - with both stocks up between 4.5-5.5% on a five-day lookback. I won’t set out a treatise on the results in this particular post but it’s worth quickly noting: i) in the case of HSBA there was a strong earnings beat driven by expectations-beating performance in Wealth and Wholesale Transaction Banking - as well as a fresh $3bn buyback; and ii) in STAN’s case a strong earnings beat was a function of a particularly strong quarter for its wealth and trading businesses - with the beat (and earnings momentum) underpinning guidance for improved shareholder distributions (at least $8bn over FY24-FY26, up from $5bn) and enhanced RoTE guidance (approaching 13% for FY26, up from 12%). HSBA’s strategic overhaul - announced last week - continues to receive a mixed reception but it appears to have been a clever move on the part of the new CEO to get that news out last week to avoid it overshadowing a very strong 3Q update / disrupting favourable stock price momentum.
I also caught up with the CFO and Head of Communications at TSB UK this morning following the publication of Sabadell’s 3Q update this morning (Sabadell is TSB’s owner and I wish to flag a correction to Sunday’s ‘Financials Unshackled Issue 13’ in which I incorrectly stated - in the Calendar section - that BBVA is the owner of TSB; this is now corrected in the online post). It was positive to note the reported 4% y/y growth in 9M24 profits after tax to £168m delivered by TSB despite higher y/y restructuring costs (notably, TSB’s NIM continued its upward trend, rising by 4bps q/q in 3Q24 to 2.11%). Elsewhere, Santander UK delayed its results owing to the uncertainties accruing from last week’s Court of Appeal decision though the Santander Group CFO did remark on Tuesday that he expects that the hit to the bank will be significantly below €600m (and a disclosure in the group’s 3Q update noted that “…it is not possible at this time to reliably predict the financial impact”).
It was a relief not to see any incremental taxes for the banking sector in yesterday’s Budget. Indeed, the lobbying effort on the part of the sector and UK Finance seems to have done a good job at convincing government that the sector already pays enough taxes and that a higher bill would risk curbing the lending growth that is much-needed to achieve the Labour government’s economic growth ambitions. To be fair I am sure there were many who disagreed with my prediction (included in my last two Weekly Banking Update posts) that the banking surcharge would increase by 2pps to 5% - the confidence expressed by the banks in their medium-term returns targets last week did give me pause for thought and I - admittedly wrongly - held my view. Anyway, good to see that I was indeed wrong as it’s important to avoid choking off in any way the continued transmission of credit into the real economy!
However, swap rates have been volatile of late and have charged upwards in the wake of the Budget - with many major lenders increasing mortgage rates in the last couple of days. Indeed, the OBR’s latest projections that the average mortgage rate will increase from 3.7% in 2024 to 4.5% in 2027 (and will stay there through end-2029) have grasped significant attention - as has the highly respected Institute for Fiscal Studies’ (IFS) warnings in relation to the large increases in taxes and fiscal borrowing that will result from the Budget. We’ll have to see where things settle over the coming days but, at the time of writing, the market now only anticipates circa three base rate reductions by the end of 2025 - from five expected reductions at the end of last week. Of course this is not unfavourable for credit institutions in broad terms - but concerns about the impact of higher taxes and government borrowing on the economic health of the UK raise question marks in a loan book growth outlook context.
Elsewhere, it’s worth quickly noting that: i) the BoE reported another strong month for mortgage approvals in September (net house purchase approvals of 65.6k which were above consensus estimates for 64.4k) and consumer credit growth (+6.4% y/y); ii) the government’s shareholding in NatWest Group (NWG) has now fallen below 15%; iii) Sainsbury’s has agreed to dispose of its Argos Financial Services credit card portfolio to the PE-owned NewDay for c.£720m, the latest transaction in the supermarket’s retreat from credit provision (though, interestingly and wisely in my view, it has announced the creation of a partnership with NewDay to create a new Argos-branded digital credit proposition - this is the way supermarket groups should have approached getting a slice of the banking pie from Day 1 in my view); and iv) BoE Deputy Governor Sarah Breeden noted in a speech earlier today that the BoE could use its annual stress tests “…to understand how AI models used for trading whether by banks or non-banks could interact with each other. We could look to better understand reaction functions; seek to identify where elements of objective functions might cause them to evolve in ways which actively amplify shocks and undermine financial stability; and use these results to inform where intervention is required.”.
A slightly quieter week in Irish banking - but some key highlights nonetheless
Bank of Ireland Group (BIRG) and PTSB reported 3Q trading updates earlier this week. No great surprises in either update. It was positive to see that FY24 guidance was unchanged for both (one minor tweak was that PTSB revised down FY24 NIM guidance to c.220bps from c.225bps following a materially lower q/q NIM print but total income guidance for FY24 was unchanged) despite lower expected base rates (which I noted was my expectation in Sunday’s ‘Financials Unshackled Issue 13’). Preservation of guidance is likely a function of both: i) slightly conservative guidance to begin with (mainly); and ii) to an extent, supportive evolution in mortgage spreads in my view (wherein the domestic banks seek to recoup some of the lost liability margin benefit in a declining rate backdrop by limiting the passthrough of lower rates to front book mortgage pricing). However, question marks around provisioning requirements in a motor finance context for BIRG overshadowed what was a positive update (with RBC, notably, lifting its worst-case scenario to £630m - which is multiples of the median pre-3Q update consensus estimate) - the bottom line is the market is very concerned here and this is just another example of a mismatch between market and consensus sell-side analyst expectations. On PTSB, while it was positive to see the pick-up in its market share of mortgage drawdowns in 3Q to 16.3% (from c.13.5% in both 1Q and 2Q) as well as the fresh guidance for a reduction in RWAs by up to 5% on transition to Basel 3.1 on 1st January 2025, it feels like the market continues to agonise over the cost base - with some delivery in the context of PTSB’s remark that “management remain committed to reducing costs in absolute terms over the coming years” likely needed to reassure on this front.
In a wider market context, official rate expectations continue to prove volatile. This week we saw a positive 3Q EZ GDP update, headline and core inflation coming in ahead of expectations, and a further downward revision in unemployment estimates - meaning that anything more than a 25bps rate cut in December looks unlikely. This is positive in a banking sector context (despite the structural hedge income shelter enjoyed by AIB Group (AIBG) and BIRG) but let’s see what comes.
The Central Bank of Ireland (CBI) published its monthly Money and Banking Statistics for September 2024 earlier today. Key points of note were that net lending to households and non-financial corporates (NFCs) continued to expand in September taking the YTD y/y growth to +2.6% in the case of households (+2.3% y/y YTD at end-August) and +3.9% in the case of NFCs (+1.9% y/y YTD at end-August). Household deposits shrank by c.€500m in the month and outflows from overnight deposits were €500m in the month (taking the YTD outflows from overnight products to €4.4bn, which remains very low in the context of the overall size of the deposit market).
In other news it’s worth noting: i) Avant Money (Bankinter) is cutting mortgage rates by up to 40bps following the ECB’s recent cuts to official rates and will introduce a new 1% cashback incentive on all mortgages drawn from January 2025 (while I expect Avant to continue to be competitive I don’t expect that they will drive the market down massively in a mortgage spreads context - and the indications from its CEO & CFO on last week’s Bankinter 3Q24 results call were that its ambitions in Ireland will be pursued at a measured pace; indeed its share of mortgage drawdowns has been pretty steady in recent quarters); ii) Revolut is reducing rates on its deposit product following the ECB’s latest rate cut - to be fair Revolut offers much higher rates than the mainstream banks so this isn’t too surprising but it also shows you that they do not seem to be overly-aggressively pursuing deposits growth for the time being; and iii) just touching on politics, the latest chatter domestically is that the most likely date for the General Election is 29th November - and Sinn Fein’s travails continue (polling poorly of late - and news today that Brian Stanley will contest the election in the Laois-Offaly constituency is yet another blow for the party), meaning a rerun of the current Coalition Government (perhaps, minus the Green Party) appears to be the most likely outcome - if that’s the outcome, such stability is likely to be welcomed by bank investors and market participants.
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