Financials Unshackled Issue 2: Weekly Banking Update (UK / Irish / Global Developments)
Perspectives & Snippets on UK / Irish / Global Banking Developments
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 first Weekly Banking Update. This edition covers perspectives (and snippets) on select developments from the weekend and the past week in a UK, Ireland, and Global / European context. I hope you enjoy reading - and please send through feedback as I seek to refine the style, coverage and frequency of this newsletter through its ‘pilot phase’. You can reach me directly at john.cronin@seapointinsights.com and all feedback will be treated confidentially.
Calendar for the week ahead
Firstly, a few select items to watch for in the week ahead:
Mon 9th Sep (14:00 BST): Fireside Chat with William Chalmers, CFO of Lloyds Banking Group at the Barclays Annual Global Financial Services Conference in NY. Webcast registration here: https://event.webcasts.com/starthere.jsp?ei=1685379&tp_key=2881407042&tp_special=8
Mon 9th Sep (17:45 BST): Fireside Chat with C.S. Venkatakrishnan, CEO of Barclays at the Barclays Annual Global Financial Services Conference in NY. Webcast registration here: https://event.webcasts.com/starthere.jsp?ei=1688063&tp_key=09677d2b82&tp_special=8
Tue 10th Sep (14:00 BST): Fireside Chat with Paul Thwaite, CEO of NatWest Group at the Barclays Annual Global Financial Services Conference in NY. Webcast registration here: https://event.webcasts.com/starthere.jsp?ei=1683078&tp_key=60e39fa26c&tp_special=8
Wed 11th Sep (11:00 BST): Central Bank of Ireland Retail Interest Rates (July 2024)
Thu 12th Sep: BoE PRA publication of: i) Near-Final Basel 3.1 Rules; and ii) Consultation Paper (CP) on the capital-related aspects of its Strong and Simpler regime for smaller firms
Thu 12th Sep (12:45 BST): ECB Monetary Policy Decision (Press Release following the ECB Governing Council Meeting). Note that the market was yesterday ascribing a 98.7% probability of a further 25bps cut on Thursday.
Thu 12th Sep (13:30 BST): ECB Monetary Policy Press Conference
Fri 13th Sep (11:00 BST): Central Bank of Ireland Mortgage Arrears and Repossessions Statistics (Q2 2024)
UK Perspectives & News Snippets
Bank taxes in focus: The Mail on Sunday reported last evening that UK bank CEOs have been invited to meet with the new Chancellor Rachel Reeves next week to discuss the BoE’s ‘final interpretation’ of the Basel 3.1 reforms but expectations are that prospective windfall taxes will also feature on the agenda ahead of the 30th October Budget. Indeed, The Banker also reported on Thursday that, according to sources, a meeting to discuss bank taxes was on the cards for “the coming days”. Fears have mounted within the industry since Starmer remarked that, in a bid to bolster the public finances, the burden should fall on those with “broader shoulders”. So, what are the options if the Labour Government is determined to impose higher taxes on the sector? Firstly, and the most likely direction of travel in my view, is an increase in the bank CT surcharge. This is currently levied at 3% on profits in excess of £100m - and was reduced from 8% to 3% by the then Sunak Government in 2021 in a bid to offset the impact of the increase that the Conservative Government applied to corporation tax rates. Secondly, it is a possibility that the UK could follow in the footsteps of measures applied to other industries (e.g., energy) or what overseas governments have done in the form of windfall taxes. Finally, Labour could meddle with the reserves remuneration regime, i.e., reducing the interest rate paid to lenders on the reserves they hold at the BoE (aka ‘deposit tiering’) - however, this brings other widespread complications and I would encourage anyone who is interested in this fascinating topic to have a read of the transcript of a seminal speech made by Andrew Bailey, BoE Governor, on 21st May 2024 to understand these issues (see: https://www.bankofengland.co.uk/speech/2024/may/andrew-bailey-lecture-london-school-of-economics-charles-goodhart). Indeed, it is also worth noting that the FT reported on 12th June last that Rachel Reeves (in her then shadow Chancellor capacity) noted that Labour has no plans to interfere with the reserves remuneration regime (and, for what it’s worth, I believe she will stick to her word on this with her comments to the newspaper indicating that she understands the nuances involved): “We have no plans to do that. And actually the paying of interest on reserves is part of the transmission mechanism for monetary policy, it’s one of the ways that higher interest rates filter through to the real economy”. While the likes of UK Finance and PwC have - rightly - been pointing out again in recent days that the banking industry is already a disproportionately high contributor to the fiscal coffers relative to other industries, I suspect that will not be enough to stop the Government from extracting more rent from the sector given it is in such strong shape. All eyes on next week’s developments and my view is that we will see an increase in the surcharge - but I expect the £100m allowance (before it becomes payable) to remain unchanged.
Basel 3.1 Reforms - UK Implementation: Bloomberg reported on 29th August last that, according to sources, the BoE is poised to announce, when it publishes its second and last set of near-final Basel 3.1 rules on Thursday 12th September, that it will postpone the implementation of the package of Basel 3.1 reforms until January 2026 at the earliest as it monitors international developments. CityA.M. reported on Tuesday last on the BoE PRA CEO’s comments on the ‘Following the Rules’ podcast (link below) that the regulator is reassessing its timetable due to a lack of clarity around the shape of the reforms in the US. Let’s see what Thursday brings but this is further evidence of the pragmatism of the UK regulator in the context of ensuring that the UK banking sector remains competitive in an international context, with Woods noting that the PRA is “extremely mindful of what’s happening in other jurisdictions”.
Mortgage pricing continues to fall: There were many press reports on UK lender mortgage rate reductions over the last week - with the FT picking up on NatWest offering a 5Y fixed rate at 60% LTV at just 3.71% (although The Telegraph ran a piece on Thursday last noting that the bank has been accused of “ripping off” existing mortgage customers by failing to offer them the same rates as new customers) and cuts from Barclays UK, Halifax (Lloyds), HSBC UK, Paragon Bank, and Santander UK (amongst others) also reported on in the media. The reduction in mortgage pricing is not a surprise given swap rates have been on a declining path again of late (as expectations around the extent of official rate reductions strengthen - with the market now expecting to see c.133bps of rate reductions by the end of the 7th August 2025 MPC meeting). 2Y swap rates fell to their yearly low on Friday, coming in at 3.97% (down from 4.11% a week earlier) while 5Y swap rates also fell last week, printing at 3.62% on Friday. Rightmove reported on Wednesday 4th September that average 60%/75% LTV 2Y fixed rate mortgage prices sat at 4.30%/4.79% at that date while average 60%/75% LTV 5Y fixed rate mortgage prices sat at 3.97%/4.45% at that date. So, mortgage pricing is now back to September 2022 (before that infamous ‘Mini-Budget’) levels (which has been constructive in the context of the rebound in mortgage approvals and mortgage lending volumes, which the BoE reported on in late August). Stepping back, while the pricing moves, once again, serve to illustrate the relentless competition at play in the UK mortgage market (with LLOY reporting keen completion margins of c.70bps in 2Q, for example) the prognosis, based on latest consensus sell-side analyst estimates, is broadly positive from a net interest margin (NIM) accretion context over the coming years in the case of the large mainstream UK banks - with quite disciplined deposit pricing behaviour (as well as strong deposit volumes slightly reducing wholesale funding issuance requirements) evident of late (albeit there is a lag effect at play here in terms of the passthrough of lower rates to customer deposit books) and as structural hedging swap rollovers drive higher income from hedging activities. I will likely set out a detailed analysis on UK bank margin dynamics / outlook over the coming weeks given this is a perennial topic of interest to those in the markets.
UK house prices in growth mode: Given I’ve been scribbling on the topic of mortgages in the above piece, it’s worth quickly flagging that the Halifax HPI (House Price Index) for August 2024 was published on Friday last. Prices were +0.3% m/m, +0.8% q/q, and +4.3% y/y - with the average house price across the UK coming in at £293k. These figures are stronger than what Nationwide HPI (slightly northern bias) reported for the same month (prices -0.2% m/m, +2.4% y/y; average price £265k) but there are always differences between the two. In overall terms, both reports point to the “resilience” of house prices and note that housing market activity is likely to strengthen. Good news for bank asset quality and mortgage lending volumes.
UK Finance Household Finance Review (2Q24): UK Finance published its quarterly Household Finance Review for 2Q24 last week. While the findings are somewhat dated given we have had (overwhelmingly positive) BoE Money and Credit data for July 2024, it is worth briefly recapping on the key conclusions: 1) While household confidence rose q/q in 2Q, concerns in an employment and a General Election context adversely impacted upon the appetite to take on larger purchase commitments (though, notably, the BoE reported growth in mortgage borrowings in July to £2.8bn for the month - the highest since November 2022). 2) Despite the mortgage lending growth observed in 2Q, forward data indicate that growth in mortgage completions is uncertain for 2H24 - however, it is worth noting that the BoE reported a strong uptick in net mortgage approvals for house purchases in July (to 62,000, the highest since September 2022). 3) The recent spike in longer term lending in the case of mortgages persists and appears to be a bid on the part of customers to stretch affordability to get the loan size they want (notably, affordability criteria are generally a lot more stringent than they were a number of years ago). 4) The extent of ‘rate shock’ for customers reaching the end of their fixed rate deals and seeking to refinance looks to have passed its peak - this makes sense as swap rates (and, consequentially, mortgage rates) have been on a downward trajectory, which is continuing (as explored above). 5) Savings rates have begun to rise again while households have, in the main, avoided relying on overdrafts or credit cards to address budgetary deficits. 6) Mortgage arrears stabilised in 2Q.
UK maximum fraud payout set for substantial reduction: It was widely reported in the media last week that the PSR (Payment Systems Regulator) is set to reduce the maximum fraud payout substantially from £415k to just £85k, in line with the maximum protection conferred by the FSCS deposit guarantee. Britons are reported to have lost £460m to authorised push payment (APP) fraud in 2023 and there is a wide variation in reimbursement rates amongst banks and payments companies. The new regime is set to become effective on Monday 7th October.
BTL property sale instructions picking up: More reports out in the last week on the pick-up in the proportion of rental properties listed for sale. Rightmove reported that 18% of homes now for sale were previously available for rent, up from an average of 14% over the last five years - however, Tim Bannister, property expert at Rightmove, rightly sought to allay headline-grabbing concerns to the effect that this constitutes a ‘mass exodus’. Separately, The Telegraph picked up on TwentyCi’s findings to the effect that, in July, 22% of all newly listed homes for sale in London were previously available for rent - up from 15.6% in July 2023 and 12.9% in July 2019, indicating that the exit of BTL landlords is skewed towards the capital (rather unsurprisingly). Notably, Hamptons reported in July that the proportion of homes purchased by landlords in 1H24 fell to a 14-year low. BTL landlords are concerned about a CGT hike in the upcoming Budget and don’t know where the Labour Government stands on rental reform - all eyes on the 30th October Budget for some certainty in both contexts. As an aside, it’s also worth noting that, in a listed UK BTL lender context, OSB Group and Paragon Banking Group are predominantly focused on lending to professional landlords (those with four or more rental properties). While lending volumes have been subdued of late in this territory too (OSB Group notably downgraded FY24 net loan growth guidance from c.5% y/y to c.3% y/y at the stage of its interim results on 15th August last), there is evidence (in the form of research from Pegasus Insight) that declining landlord instructions to purchase new properties (as has been reported by RICS) has been more concentrated amongst amateur landlords.
New HSBC CEO committed to build on current strategy: Reuters reported on Monday on an internal HSBC staff memo that it has reportedly seen, which notes that the new HSBC CEO Georges Elhederey is committed to build on the bank’s current strategy. A sense of strategy continuity is always helpful but it’s also a rather vague commitment in all fairness. Stakeholders will remain tuned in to learn of how the new leadership team seeks to drive fee income growth and extract costs, with Bloomberg recently reporting that Elhederey is “weighing” taking the knife to middle management layers across the bank.
Nationwide / VMUK update: Virgin Money UK (VMUK) issued a regulatory announcement on Friday last noting that the FCA and the PRA each gave written notice to Nationwide on Friday approving the acquisition of VMUK. The Court hearing to sanction the Scheme is expected to take place on 27th September and the Effective Date of the Scheme is expected to be 1st October 2024. Muir Mathieson has been appointed CFO and Executive Director of Nationwide with effect from Friday 6th September while Chris Rhodes is standing down from the Nationwide Board with immediate effect and will spend the period until completion preparing to become the CEO of Virgin Money.
BBVA receives approval to acquire TSB UK: BBVA issued a statement last week noting that the UK PRA has approved BBVA indirectly controlling TSB UK. Notably, the ECB also authorised BBVA’s offer for Sabadell (the owners of TSB UK) last week. It remains a hostile situation.
Revolut focusing on business account growth: The Times reported on Wednesday last that Revolut is set to “aggressively” focus on growing its business account share. James Gibson, Head of Revolut Business, remarked to the newspaper that more than 250,000 businesses access Revolut’s business accounts per month, with growth picking up over the last year - and Revolut is reportedly adding c.20,000 companies on average per month.
Ireland Perspectives & News Snippets
AIB announces €500m directed buyback: AIB announced on Monday last (following a well-informed report in the Business Post the weekend prior) that it has agreed with the Minister for Finance to make an off-market purchase of 91.8 million ordinary shares (representing 3.8% of the company’s issued share capital) at a price of 544.5c per share for a total consideration of €500m. This follows the confirmation at the stage of the company’s interim results that regulatory approval for a further €500m share buyback had been received. On completion of the transaction on Monday, the Finance Minister Jack Chambers noted: “The completion of this share buyback transaction with AIB is a further positive step for both AIB and the State. It further normalises the relationship between both parties with the ultimate aim of getting the bank back into full private ownership. It continues to be this Government’s belief that banking in the main is an activity that should be provided by the private sector and that taxpayer funds which were used to support the banking sector should be recovered and put to more productive uses like enhanced delivery of public services and helping us to overcome many of the challenges we face now and into the future including areas like housing and public infrastructure”. This latest transaction has contributed to the State’s shareholding in AIB falling to just 21.85% (according to a RNS published on Tuesday last). AIB’s shares have outperformed in recent years on the back of an enormous turnaround in return on tangible equity delivery in response to higher official rates, sensible loan book acquisitions struck at a good price, and the changed competitive landscape (as well as astute hedging strategies et al.).
BOI fresh AT1 issuance at keen pricing: BOI announced a tender offer on Tuesday last in respect of its 7.5% €675m May 2020 AT1 notes (well ahead of the First Call Date of 19th May 2025) and, simultaneously, announced a fresh €600m AT1 issuance. I understand that the coupon on the newly-issued AT1 bonds came in at a keen 6.375% (EURIBOR+390bps), with strong oversubscription (orders for c.€2.85bn) and more than 250 investors participating. The keen pricing is testament to the healthy financial condition and strong capitalisation of the Group.
Revolut impending entry to the Irish mortgage market: Following newsflow in July to the effect that Revolut is planning to start offering mortgages in Ireland in 1H25, it has been reported that the timing launch is set for 2Q25 (some time between April and Jun)e. The company is understood to have engaged with domestic mortgage brokers and is debating whether to offer loans directly or through intermediaries (or, perhaps, a combination of both I suspect). The three listed lenders continue to dominate mortgage product flow, with a combined market share of drawdowns in excess of 90% in 1H24. While Revolut is a household name in Ireland (it reports c.2.8 million customers there), its foray into the mortgage market is a fresh one. Pricing and speed of turnaround are the most important factors in the customer decision and it seems likely that Revolut will provide some competitive challenge in these contexts. However, while it is widely understood that Revolut intends to be disruptive by making the application process quick and seamless, there are hurdles within the system (particularly in a third party reliance context) that it will have to cope with just like any other bank. Nor is it clear what Revolut’s plan for more complex applications is. We think it will take the newcomer time to eke out a material share of flow for many reasons but, philosophically, one can see how it will work in due course - and it’s not as if the listed banks are expecting to maintain current flow share levels into perpetuity anyway (and they don’t need to either to sustain healthy double-digit RoTEs).
Revolut in the press again today: On a separate (to the above), but interrelated note, the Sunday Independent features an extensive piece today on whether young people in Ireland are turning their back on traditional banks, with a significant emphasis on Revolut within the article. While Revolut reports a large number of customers in Ireland (c.2.8 million as noted in the above piece, though there have been some question marks in a customer number definitional context) it is important to remember that, for now at least, it appears that the vast bulk of this customer base do not pay any fees to Revolut. But, for sure (and despite the fact that it appears, according to multiple media reports, that Revolut has some issues to work through like human interface, trust, lending risk management capability, etc.), the newcomer is developing a seriously strong brand, which ought to bring much optionality in due course.
Monzo in focus: The Currency published an in-depth piece on Monzo’s ambitions in Ireland on Thursday last, which is worth a read if you have a subscription. One of the key points that the author flags is that Monzo, which confirmed within its recently published Annual Report that Ireland is destined to serve as its gateway to European markets, will need to obtain a banking licence from the Central Bank of Ireland to start on the journey to fulfilling its European ambitions - which is no mean feat going by previous efforts on the part of overseas firms. The article also flagged the late-August report in The Irish Times to the effect that Nicola O’Brien (who recently resigned as PTSB CFO, immediately stepping down from the Board) is headed to Monzo.
Davy argues in pre-Budget submission that government policies have a “distorting effect” on investor behaviour: The Business Post reports today that Davy (BOI) has argued, in a pre-Budget submission, that government policies deter Irish residents from investing in higher-yielding instruments like equities. Davy reportedly flags the standard pension fund threshold, deposit interest retention tax (DIRT), CGT, and the investment undertaking tax in its submission. It is difficult to disagree with these arguments. I would also add that the high rate of DIRT on bank deposit income (33%) and the high rate of tax on interest income from Irish government bonds (the investors’ marginal tax rate applies) have, in my view, been key underpins for the strong (low interest-earning deposit volumes enjoyed by the listed domestic banks.
Finance Minister publishes the report of the Interdepartmental Mortgage Arrears Review Group: The Department of Finance published a report setting out the findings of the Interdepartmental Mortgage Arrears Review Group on Tuesday last. The report reminds us of the success that the banking sector has had in tackling mortgage arrears over the last decade or so - noting that the number of Irish mortgage accounts in long-term arrears has reduced from 18% of total mortgage accounts in 2013 to just 6.7% (albeit a rump that needs addressing). Greater engagement by borrowers in arrears with the options available under the mortgage arrears resolution framework is a key objective for Government. One particular finding of note (as picked up on by The Irish Times on Tuesday in response to the publication) is that the group has called for the scrapping of the current €3m secured debt limit for individuals to secure a personal insolvency arrangement.
European / Global Perspectives & News Snippets
European leveraged finance volume growth running at strong levels: Bloomberg reported last Monday that, based on data compiled by the information platform, the total volume of leveraged finance lending in Europe reached €204bn in August, more than twice the amount in the same period last year and the second-highest level in more than a decade. So, growth continues unabated despite the ongoing ECB review, which is planned to conclude later this year - and which the ECB has warned may culminate in “adjustments in risk classification and measurement at an individual level” (i.e., potentially higher capital requirements). The ECB has previously reported that European banks’ leveraged finance exposures grew by 59% between 1Q18 and 1Q23.
UBS Chairman notes that regulators should not ignore non-banks: The Banker reported on Tuesday last on UBS Chairman Colm Kelleher’s comments to the effect that global regulators should not ignore risks related to NBFIs following the intense focus on bolstering the resilience of the regulated banking space in the aftermath of the GFC. Kelleher was speaking at a conference jointly organised by the ECB and the EBA in Frankfurt on Tuesday and remarked that “I’m not saying for a second [to] regulate NBFI like we regulate banks…But let’s not just ignore what’s happening elsewhere by just focusing on the banks”. A sensible observation and it chimes with the calls of the global Financial Stability Board, which has consistently highlighted the high debt levels and vulnerabilities in NBFIs as key risks to financial stability. A topic I will likely do some detailed analysis and reporting on over the coming months. On a separate note, but sticking with the institution in question (i.e., UBS), it was interesting (albeit unsurprising) to read articles in both Bloomberg and Reuters yesterday reporting that the SNB has effectively said that capital requirements for UBS need to increase - the publications were reporting on comments made by the SNB President Thomas Jordan to Neue Zuercher Zeitung. It is widely expected that UBS may need to set aside an additional $15-25bn of capital to meet likely higher minimum requirements but the SNB President reportedly noted that “It will…not be the case that UBS will have to hold additional equity capital overnight…It would be given enough time to make adjustments”.
US set to propose Basel 3.1 rule revisions later this month: Bloomberg reported yesterday that the US Federal Reserve, FDIC and OCC are expected, as soon as 19th September, to unveil wholesale revisions to the Basel 3.1 reforms package in a US implementation context following an intensive lobbying campaign on the part of the US banking sector. It sounds like, for one, Claudia Buch (Chair of the Supervisory Board at the ECB) will be disappointed, considering her remark in a speech on 2nd September last to the effect that: “The swift and faithful implementation of the Basel framework in all major jurisdictions is essential”.
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