Financials Unshackled Issue 7: 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 latest edition of Financials Unshackled! This issue covers perspectives (and snippets) on select developments from the weekend and the past week in a UK, Irish, and a Global Financials context. Any feedback on the note is most welcome - and you can reach me directly at john.cronin@seapointinsights.com.
What’s in this note:
Calendar for the week ahead
UK sectoral developments (bank / building societies M&A; mortgage and deposit pricing trends; Strong & Simple Framework; P2P lending returns)
UK company developments (HSBC prospective changes, Investec pre-1H24 close trading update; further Metro Bank job cuts; JPM on track for profitability in the UK in 2025; Revolut hits 10 million customers in UK)
Irish sectoral developments (banker pay caps; bank levy expectations in upcoming Budget; fintechs ability to compete with banks in lending markets; Central Bank mortgage arrears trends for Q2 2024)
Irish company developments (AIB CEO positive commentary at Barclays FS conference; Ulster Bank tracker mortgage ruling; An Post / Grid Finance partnership)
Global developments (LGIM AT1 perspectives; euro area banking consolidation)
Calendar for the week ahead:
Firstly, a few select items to watch for this week:
Tue 24th Sep (07:00 BST): Mortgage Advice Bureau (MAB1) 1H24 Results for the six months to 30th June 2024
Tue 24th Sep (08:30 BST): LendInvest (LINV) AGM
Tue 24th Sep (08:45 BST): Barclays (BARC) CEO Fireside Chat at BoA Financials Conference (register here: https://bofa.veracast.com/webcasts/bofa/financialsceo2024/idC69Z25.cfm)
Tue 24th Sep (10:15 BST): Standard Chartered (STAN) CFO Fireside Chat at BoA Financials Conference (register here: https://bofa.veracast.com/webcasts/bofa/financialsceo2024/idJbUp39.cfm)
Tue 24th Sep (11:00 BST): NatWest Group (NWG) CEO Fireside Chat at BoA Financials Conference (register here: https://bofa.veracast.com/webcasts/bofa/financialsceo2024/idZ2z1DD.cfm)
Wed 25th Sep (11:00 BST): Central Bank of Ireland (CBI) Financial Stability Note: Who uses Help to Buy Scheme
Fri 27th Sep: Nationwide acquisition of Virgin Money UK (VMUK) - Court Hearing to sanction Scheme of Arrangement
UK Perspectives & News Snippets:
Recap from Thu Sep 19 note - CBG deep dive; FCA cash savings market review; BoE MPC meeting minutes
In the Thursday (19th Sep) ‘Financials Unshackled’ note I penned a deep dive on Close Brothers Group’s (CBG) FY24 results for the year ended 31st July 2024 (available for free on my Substack website at the link below). CBG reported strong financial performance for FY24 and the update captured the remarkable progress made by management in the year in the context of delivering on its capital-strengthening action plan - however, the focus was on likely earnings downgrades and increasing concerns about the outcome of the FCA review (outside of management’s control) which overshadowed the strong progress achieved (following some selling pressure on Thursday, the stock price decline intensified on Friday, dropping by >13%). The 19th Sep note also covered the FCA’s update on the cash savings market and key take-aways from the BoE MPC meeting minutes.
Select UK Sectoral Developments Update
UK bank / building societies M&A in focus: Delighted to contribute to an interesting piece penned by Jill Treanor in The Sunday Times today which zones in on Coventry Building Society’s agreed acquisition of Co-Op Bank - which follows Nationwide’s agreed acquisition of Virgin Money UK (VMUK) (see: https://www.thetimes.com/business-money/companies/article/is-there-a-point-to-building-societies-if-theyre-all-buying-banks-3tj75jpkk). While the article raises the question as to whether the building societies space is really any different to banks, it is important to remember that societies have a member ethos rather than a shareholder value maximisation philosophy. This means savers benefit from higher savings rates, on average, than are available from the high street lenders - with, for example: i) Nationwide noting in its FY23 results update (for the 12 months to 31st March 2024) that the average rate paid on its customer deposits in the period of 3.21% was 73bps ahead of the market average, based on BoE data; and ii) Yorkshire Building Society noting in its 1H24 results update (for the six months to 30th June 2024) that the average rate paid to its savers of 4.21% in that half-year period was 91bps ahead of the market average. On balance I believe that the acquisitions pursued by Coventry and Nationwide are sensible in the context of scale benefit capture and strategic fit and I suspect we will see more M&A activity involving UK building societies in the years to come (both amongst societies and, potentially, more bank acquisitions of societies). There are 43 BSA-member building societies in the UK according to the Building Society Association’s website - while the top 10 or so are sizeable, the size shrinks massively when you look beyond the largest players. More scale would be constructive in an operating leverage benefit context, in terms of risk management capability, and in the context of facilitating further investment as the way in which customers ‘bank’ evolves (but, with that said, there tends to be enormous loyalty amongst the building societies’ local member base).
UK mortgage and deposit prices in focus: Rightmove’s latest weekly tracker on UK mortgage rates shows a further decline in pricing in the week to Thursday 19th September with: i) average rates on 2Y/5Y fixed rate mortgages at 75% LTV down by 4bps/5bps week-on-week to 4.74%/4.39%; and ii) average rates on 2Y/5Y fixed rate mortgages at 60% LTV down by 8bps/8bps week-on-week to 4.20%/3.89%. Elsewhere, the media picks up on Santander UK’s move last week to offer 2Y fixed product at a 60% LTV at a rate of <4% (3.99%), becoming the first major lender to do so in this cycle. On deposits, it was interesting to digest the content of the latest Moneyfacts UK Savings Trends Treasury Report on Tuesday 17th September, which points to material declines in deposit pricing through the month of August, with: i) average easy access and term deposit rates both -7bps m/m in August to 3.07% and 4.23% respectively at the start of September (with far more pronounced rate changes in fixed ISAs pricing, which saw their largest monthly reduction since February 2024); and ii) average pricing on 1Y fixed rate bonds -20bps m/m to 4.43% at the start of September. Stepping back, I expect we will see further material reductions in deposit pricing over the coming months (and, for what it’s worth, I don’t expect the FCA or the TSC to be intrusive in a meaningful context) - this softening of funding cost pressures will ensure mortgage pricing also remains competitive and I expect the overall impact of these two specific trends to be broadly neutral from a NIM perspective in the case of the high street banks (with NIM accretion support largely emanating from structural hedging programme rollovers). However, I expect these same trends will be conducive to NIM expansion in the case of specialist lenders in time given: i) limited reliance on current account funding (thereby capturing proportionately more benefit from falling easy access and term deposit product rates); and ii) different competitive dynamics at play in the lending markets in which they specialise.
BoE Executive Director speech on the Strong and Simple Framework: David Bailey, Executive Director for Prudential Policy at the BoE spoke at the Building Societies Association (BSA) on Friday 20th September on the PRA’s recently published Consultation Paper (CP) on the capital-related aspects of the Strong and Simple prudential framework for small banks and building societies with total assets of £20bn or less (speech here: https://www.bankofengland.co.uk/speech/2024/september/david-bailey-speech-at-building-societies-association). Bailey emphasised that the proposals, together with the changes implemented in 2023, “…deliver meaningful benefits for smaller, domestically-focused deposit takers in the UK by reducing complexity and costs, as well as provide greater certainty on their capital requirements”. To recap, the CP contemplates various further simplifications, including: i) a simplified Pillar 1 framework for SDDTs; ii) simplifications to the Pillar 2A methodologies for credit risk, credit concentration risk, and operational risk; iii) a new Single Capital Buffer (SCB) framework; iv) the replacement of the current cyclical stress testing framework with a non-cyclical framework; v) removal of the CCyB adjustment between buffers and Pillar 2A; vi) simplifications to the ICAAP process and a reduction in the frequency of ILAAP reviews; vii) simplifications to certain complex capital deduction rules; and viii) simplifications to certain reporting requirements. The new regime is earmarked for implementation on 1st January 2027 and it is not expected to lead to any reduction in minimum capital requirements.
UK P2P lending delivered annual average returns of 7.36% over the last 10 years: Interesting to read a report on Friday in Alternative Credit Investor, which picks up on findings from the recently-launched 4thWay P2P And Direct Lending (PADL) Index. The index in question shows that average returns (after bad debts) from P2P lending investments came in at 7.36% p.a. over the last decade, significantly outshining the FTSE 100’s performance over the same period.
Select UK Company Developments Update
More press on HSBC: Bloomberg published an extensive piece on Monday last on prospective changes afoot at HSBC under its new leader, CEO Georges Elhedery, which I was grateful to contribute to (see: https://www.bloomberg.com/news/articles/2024-09-16/hsbc-s-new-ceo-georges-elhedery-sets-out-to-make-his-mark?srnd=phx-industries-finance). The article notes that: i) fresh cost targets are expected to be unveiled before the end of the year, with middle management layers specifically under the spotlight; ii) a few non-core businesses are likely to be earmarked for disposal; and iii) organisation streamlining is a likely agenda item (with recent reports surfacing in relation to a possible merger of the commercial and investment banking units). On a separate note, it is also worth flagging an article penned by Kalyeena Makortoff in The Guardian today - which reports that David Callington, Head of Fraud at HSBC UK, is calling for tech firms to also face liability for APP fraud, which seems a sensible perspective: “What we would urge for is a shifting of some of those obligations into regulation, so there is an actual obligation on other sectors who are part of the ecosystem to take action and protect what are our common customers, our common users”.
Investec (INVP) Pre-1H24 Close Briefing: Investec (INVP) published a pre-1H24 close briefing on Friday ahead of its 1H24 results (for the six months ending 30th September 2024) which are set to be announced on 21st November. The update covered the five-month period to 31st August, and the following were noteworthy: i) 1H24 pre-provision operating profit expected to be £520-550m, representing y/y growth of 6.7-12.9%; ii) 1H24 credit loss ratio expected to be at the upper end of the TTC range of 25-45bps - with INVP noting that overall credit quality remains strong, with no evidence of trend deterioration (however, INVP expects to report a credit loss ratio above the upper end of the guided range of 50-60bps in the case of the UK Specialist Bank, driven by certain specific impairments); iii) unsurprisingly, UK deposits repricing has been a headwind; and iv) INVP has seen growth in both private client and corporate client lending in the UK in the five months to 31st August.
Metro Bank pushing for further job cuts: The Daily Mail reported on Tuesday morning that Metro Bank (MTRO) was set to announce an additional wave of job cuts later that day - with 300 additional roles set for the chop (in business operations, IT and support divisions) following the recent decision to reduce headcount by over 1,000 employees. MTRO’s relentless focus on cost rationalisation (as well as its wider loan asset mix repositioning efforts) is supporting its path to achieving an adequate level of returns for shareholders in due course and the market has rewarded the progress made, with a significant recovery in its share price YTD.
J.P.Morgan on track for profitability in UK in 2025: Bloomberg reported on Friday that, according to sources, J.P.Morgan (JPM) has now amassed c.£20bn in UK deposits (up from c.£15bn this time last year) and is on track to become profitable in the UK in 2025. The article further notes that JPM, the globe’s largest credit card issuer, has begun to internally test a new credit card product as part of its overall product expansion efforts in the UK - and that the offering will start with basic cards but other more sophisticated card offerings are expected to be rolled out in due course. JPM is likely to become a major competitor to the high street banks in time (as well as give existing neobanks ‘a run for their money’ so to speak) in my view - it’s effectively strategically building a low cost full service retail digital bank with a focus on building primary banking relationships and is wiling to tolerate cash burn for an elongated period (high priced deposit product rates have served as a constructive customer acquisition tool thus far). Separately, but in a somewhat interrelated vein, it was interesting to read earlier in the week that JPM is in talks with Apple around replacing Goldman Sachs as Apple’s credit card partner - another highly strategic manouevre I would argue (Big Tech partnering with - the right - banks in a bid to take ‘a slice of the pie’ without all the regulatory obligations). I will likely return to the lender’s ambitions in the UK (and other highly populated Continental European markets) in more depth soon.
Revolut hits 10 million customers in the UK: Revolut issued a press release on Friday noting that it has added almost 2 million UK customers in 2024 thus far, taking its UK customer count to 10 million (see: https://www.revolut.com/news/revolut_reaches_10_million_customers_in_the_uk/). Revolut has been pushing hard to grow both its retail and business customer base. Whatever you say about how much it is earning from its customers this is enormous penetration which brings Revolut much optionality in the longer-term.
Irish Perspectives & News Snippets:
Select Irish Sectoral Developments Update
Banker pay caps in focus - again: Just to quickly flag that I wrote on the topic of banker pay caps in my inaugural Business Post article earlier today (see: https://www.businesspost.ie/news/john-cronin-ptsb-finance-chiefs-departure-shows-pay-cap-is-holding-back-irish-banks-digital-drive/). I also want to flag that I didn’t choose - or input in any way to - the article headline. Anyway, those of you who have been reading my Substack posts may have picked up on a detailed piece I penned on this topic on 12th September last, which is available at the link below. It’s set to be a hot topic domestically in the months ahead.
Bank levy expected to remain unchanged in the upcoming Budget: Jon Ihle at The Sunday Times (Ireland) writes today that, informed sources have noted to him that the bank levy will not be increased in the upcoming Budget on 1st October as, to do so, would penalise PTSB at a time when its returns sit far behind peer banks AIB Group (AIBG) and Bank of Ireland Group (BIRG). This is a view that I absolutely concur with. I previously expressed the view that petitions aired to extend the bank levy to become payable by other players in the market (outside of the three aforementioned deposit takers) are likely to be something of a ‘red herring’ (given the negligible impact it would have for the three listed lenders) in a bid to deflect against other possible adverse moves against the sector in the Budget. For what it’s worth I don’t see any adverse changes for the banking sector in the Budget primarily given the health of the fiscal coffers - as well as the government’s interests in the sector (be it changes in the bank levy, restrictions on DTA usability, etc.). The only way I would foresee a prospective upward shift in the quantum of the annual €200m bank levy (which I expect to be in situ again for FY25 to be clear) is if a threshold were introduced to obviate PTSB from suffering an uplift in the annual cost borne by it - but I categorically don’t expect that to be on the agenda (certainly not in the forthcoming Budget anyway).
PTSB CEO raises doubts in relation to fintechs’ ability to compete with mainstream banks in lending markets: The Business Post reports today on a debate held at last week’s BPFI (Banking & Payments Federation Ireland) fintech conference in which Eamonn Crowley, the PTSB CEO, expressed his measured scepticism in relation to fintechs’ ability to compete with the Irish banks in a lending context. Crowley acknowledged that fintechs have “set new benchmarks” in a customer experience context but went on to note that “There’s a few downsides too. Trust is probably the largest downside. They do not establish trust – it’s a shortcoming. And we know in any bank relationship, any financial services relationship, trust is at the core of that relationship…When they start lending, it’s a whole new game. That’s when the regulatory environment will start to bite, and will start to cause some damage”. I flagged the trust point and the issue of ‘regulatory perimeters’ in recent ‘Financials Unshackled’ notes. Crowley’s comments appear sensible - there have been well-documented issues in a customer trust context (as well as in a fraud payouts context) in the case of newcomers (in both an Irish and an overseas market context) as well as in a customer interface context. Furthermore, regulatory challenges - given complex administrative and compliance issues involved in developing a lending proposition (not to mention lack of proof of concept in newcomers’ ability to effectively manage and price risk) - will, in my view, mean that encroachment in a lending market share will be slow and very limited into the medium-term. But, some new players (see JPM report above in UK section, for example) will get it right on a longer-term view I suspect which will eventuate in structural changes in the competitive landscape in banking markets. It is also worth mentioning that, to be fair, most incumbents of scale have been upping their game in a ‘fintech capability’ context as well.
Central Bank of Ireland publishes residential mortgage arrears and repossessions update; favourable trends clear: The Central Bank of Ireland (CBI) published its latest update on ‘Residential Mortgage Arrears & Repossessions Statistics’ for Q2 2024 on Friday last. The number of permanent dwelling home (PDH) or owner occupier (OO) accounts in arrears >90 days was just 4% of all PDH/OO accounts, the lowest proportion since 4Q 2009 (notably, just 39% of PDH accounts in arrears are held by banks following intensive NPE remediation efforts since the GFC) - trending favourably on both a q/q and a y/y basis. Indeed, the number of accounts in early arrears was -7% q/q. 11.4% of outstanding BTL accounts (total outstanding BTL debt is just €8.6bn) were in arrears of >90 days at the end of June, also trending downwards on both a q/q and a y/y basis. Nothing greatly surprising in any of this given the strong macro, low unemployment, and much-tightened risk management at an individual bank level.
Select Irish Company Developments Update
Press report on AIB Group CEO positive commentary at Barclays Financial Services Conference in early September: The Sunday Independent reports today on comments made by AIB Group (AIBG) CEO Colin Hunt at the recent Barclays Financial Services conference in NY, which the newspaper reportedly picked up on via a Barclays analyst report that came to its attention. Hunt’s comments were overwhelmingly positive and likely came as reassuring to shareholders and wider stakeholders. Specifically, Hunt reportedly noted the following: i) strong macro supportive in a loan growth context in broad terms; ii) mortgage lending growth supported by increased housing supply; iii) personal lending growth annual run rate at the c.10% mark helped by higher customer numbers; and iv) some recovery evident in SME lending (consistent with CBI data I reported on during the week) following an elongated period of deleveraging - and supported by improved process digitisation at an AIBG level. AIBG’s particular market-leading focus on green lending also featured in the article - which noted that AIBG has now invested c.€14bn of its €30bn Climate Action Fund. Finally, the article also noted that Hunt expressed the view that a marked shift in deposit migration seems unlikely given official rates are now falling - I concur with that assessment and made this very point in my Financials Unshackled pilot newsletter launch announcement on 1st September last.
Other AIB Group news: Sticking with AIB Group (AIBG) it is worth quickly flagging: i) Joe Brennan reported in The Irish Times on Saturday morning that Goodbody (100% subsidiary of AIBG) is on track to report a full year profit for FY24 as commissions on structured product transactions and interest margins earned on depositing client monies contribute to improving profitability at the brokerage (notably, both The Currency and the Business Post report today on the improving picture at Cantor FitzGerald Ireland, which reported pre-tax profits of €9.4m in FY23 with income +23% y/y - and, more importantly now, is understood to be targeting revenue growth “in the high teens” in FY24); and ii) AIBG is finally moving to enhance its outdated mechanism for validating online payments (which currently requires customers to deploy a physical card reader every time a transfer is made to a new recipient) by introducing a new process named Selfie Check which will verify users’ identities through biometrics.
Ulster Bank (NWG) wins tracker appeal - readacross relief: Various Irish media outlets reported on Friday afternoon that the Court of Appeal ruled (on Friday) that the Financial Services and Pensions Ombudsman (FSPO) was incorrect to conclude that two Ulster Bank tracker mortgage borrower complainants had a contractual entitlement to return to the tracker rate after switching to a fixed rate deal that subsequently expired. The outcome of this case was undoubtedly watched by the wider industry as concerns had prevailed that, were the Court of Appeal to side with the FSPO’s conclusion, there could have been further negative ramifications from a tracker mortgage redress costs perspective for the banks at large. This decision will have come as a relief to bank shareholders and stakeholders more broadly.
An Post partners with Grid Finance: Worth quickly picking up on the news from Friday that An Post has entered into a partnership with Grid Finance (a working capital-focused cashflow lender that was established in 2013) that will see the post office network refer business customers to the lender. Not something that is likely to be a material development in the context of the listed lenders’ flow share in the SME lending domain in my view.
Global Perspectives & News Snippets:
LGIM perspectives on the future of AT1 bonds: Following the decision of the Australian financial regulator (APRA) to propose the phase-out of AT1 bonds I came across an interesting piece penned by Dan Lustig and Jason Tan at L&G Investment Management (LGIM) on Tuesday last posing the question as to whether a similar proposal could be adopted in Europe (see: https://blog.lgim.com/categories/markets-and-economics/fixed-income/australia-is-considering-phasing-out-at1-bonds.-will-europe-do-the-same/). To summarise, the authors 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’. On balance, I agree with the authors’ assessment - who also acknowledge that AT1 behaves in times of crisis more like ‘gone concern’ than ‘going concern’ capital, a view that I expressed many moons ago.
ECB’s de Guindos reiterates desire to see more European bank M&A: It has been clear for some time that European policymakers are keen to see more cross-border bank M&A to improve sectoral profitability (efficiency benefits capture) and, therefore, valuations (indeed, the ECB confirmed a favourable treatment to negative goodwill on acquisitions in its ‘Guide on the supervisory approach to consolidation in the banking sector’ back in 2020, going further than most other jurisdictions). However, apart from occasional efforts at further in-market consolidation we have seen little by way of action - and I commented last week that Unicredit’s move to take a position in Commerzbank, to the extent that it manifests in an outright bid, is really only representative of further in-market consolidation manoeuvring given Unicredit’s ownership of HVB in Germany. I suspect a real ramp-up in cross-border M&A activity will remain a panacea until we see the introduction of a European-wide deposit insurance scheme (EDIS; and, to be fair, there is a significant push to - finally - get that done) but it also needs other supportive measures like a European securitisation framework (interestingly, these points were picked up in an excellent interview with Colm Kelleher, UBS Chairman, hosted by Simon Brewer of the Money Maze Podcast on Thursday last (link below and it’s well worth a listen in my view)). Anyway, the point I want to make is that Luis de Guindos (Vice-President of the ECB) was on the wires late last week again on the point, with Expresso quoting him as follows: “Cross-border consolidation is important and we hope that it continues to make progress in the near term”. In a Reuters article on the interview, it was reported that de Guindos went on to note that lower European (versus US) bank valuations are a function of euro area inefficiencies such as national approaches and a lack of complete integration from a euro area bloc banking system perspective.
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