Financials Unshackled Issue 9: 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
Hello - 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 (PRA potentially proposing to permit unfunded SRTs; BoE letter to CFOs on IFRS 9 ECLs and climate risk accounting; potential FCA reforms; UK mortgage pricing shows modest decline; rented properties’ energy rating requirements)
UK company developments (UK Gov’t shareholding in NWG falls further; HSBC to appoint its first female CFO?; Nationwide offering mortgages to FTBs at 6x income; Revolut UK CEO speaks on working to address trust issues; OSB completes large refinancing deal)
Irish sectoral developments (BPFI mortgage approvals data; BPFI Housing Market Monitor)
Irish company developments (State shareholding in AIBG falls to <21%; AIBG cuts mortgage rates and increases business deposit rates; ICS cuts mortgage rates; Revolut flags deposit inflows)
Global developments (private credit poaching bankers; European banking M&A; record European bank AT1 issuance levels; climate-related credit risks in focus at the ECB)
Calendar for the week ahead:
Firstly, a few select items to watch for in the week ahead:
Mon 30th Sep (09:30 BST): Bank of England (BoE) Money and Credit Statistics (August 2024)
Mon 30th Sep (09:30 BST): BoE Effective Interest Rate Statistics (August 2024)
Mon 30th Sep (11:00 BST): Central Bank of Ireland (CBI) Money and Banking Statistics (August 2024)
Mon 30th Sep (11:00 BST): CBI Private Household Credit and Deposits Statistics (Q2 2024)
Tue 1st Oct: Nationwide / Virgin Money UK (VMUK) Scheme of Arrangement Expected Effective Date
Tue 1st Oct (11:00 BST): CBI Monthly Card Payment Statistics (August 2024)
Tue 1st Oct (expected c.13:00 BST): Ireland Budget 2025: Minister for Public Expenditure Speech
Tue 1st Oct (13:30 BST): Barclays (BARC) Investment Banking Deep Dive (webcast registration here: https://www.netroadshow.com/events/login?show=93b024e2&confId=69558)
Wed 2nd Oct (10:30 BST): BoE Financial Policy Summary & Record
UK Perspectives & News Snippets:
Recap from Wed Sep 25 note - Take-Aways from BoA Financials Conference
I reported in detail on the take-aways from the Barclays (BARC), Lloyds (LLOY), Standard Chartered (STAN), and NatWest Group (NWG) fireside chats at the BoA Financials Conference in London on Tuesday last (a link to the piece is provided below). In overall terms, consistent with the tone expressed at the Barclays Global Financial Services conference earlier this month, the disposition of the executives was positive in the terms of the macro and political climate as well as in an individual bank financial condition and performance outlook context. To recap, some of the key messages from an individual bank perspective were:
Barclays (BARC): All on track. Particularly confident tone in a BUK NII context. Rebalancing of business mix progressing well. RWA efficiencies deliverable - major focus on SRTs (with considerable experience of such transactions). Positive message in terms of US Cards CoR normalising at c.400bps level but it felt like Venkat wanted to move off the point fairly quickly (CFO conviction at the Barclays conference on this was not as strong as could be either in my view) so likely to drive sell-side analysts to pause for thought at the stage of next model revisions (though not imminently).
Lloyds (LLOY): All on track. Placed significant emphasis again on the accreting returns profile, reiterating confidence in the >15% FY26 RoTE target. Intelligently slotted in messages on non-interest-revenue focus / progress on a couple of occasions during the conversation (differentiating LLOY from its closest peer, NWG). Downplayed prospects for major M&A but I still wonder if TSB comes up for grabs would the Black Horse pounce to bring the bank ‘back home’.
Standard Chartered (STAN): Everything is on track. CFO particularly bullish on Wealth Solutions growth, cost efficiencies capture, credit quality resilience (guidance is for CoR to normalise towards the historical TTC 30-40bps range), and capital return (divis, buybacks) prospects. Keen to point out that while Standard Chartered (STAN) has many disparate businesses, it is NOT a complex business (a common investor criticism), and management has tried to simplify it as much as possible.
NatWest Group (NWG): All on track. Upbeat tone in a lending growth (including share build) and NIM expansion context (CEO acknowledged there would be upside to targets if the extent of base rate cuts NWG is assuming, which is more than what peers factor in, doesn’t come to pass); making strong progress on ‘micro simplification’ initiatives which should drive cost reduction (and revenue benefit). Acceptance that there is a very high reliance on interest revenues but no medium-term ‘quick fix’ from an organic perspective in that respect - and vendors of fee income businesses’ price expectations are too rich. SRTs to become more of a focus going forward.
Please consult the link below if you want to have a more detailed review of the overarching messages and the bank-by-bank discussions.
Select UK Sectoral Developments Update
PRA set to propose to amend securitisation rules, paving the way for unfunded synthetic risk transfers (SRTs): Bloomberg reported on Friday afternoon that, according to sources (and following a significant lobbying effort on the part of the industry), the PRA is expected to soon publish a Consultation Paper (CP) that will propose amending securitisation regulations (following the publication of DP3/23, a Discussion Paper on the evolution of securitisation capital requirements of 31st October last) and will specifically propose permitting unfunded SRT trades (which are already commonplace in the EU). UK banks are currently required to self-fund SRT trades, which is typically achieved through maintaining collateral (like cash) to cover potential losses on the loans transferred to the counterparty in a SRT transaction. However, the CP is expected to propose that banks could instead use portfolio credit insurance instead to cover potential loan losses. This would broaden the potential investor base in UK bank SRT transactions, which should be constructive in a pricing context for banks - and it is also notable that the net cost of unfunded deals can sometimes be less than the costs of unfunded deals. SRTs have been highly topical of late with some critics including Sheila Bair arguing that they “may…make the financial system less stable”. However, in my mind, the widespread deployment of SRTs for capital relief purposes is simply a reflection of the fact that onerous capital requirements on certain loans / tranches of loans are not perceived by the counterparties with whom banks transact in these risk transfer trades as representative of the true risk associated with the exposures in question - so, effectively, an arbitrage opportunity for banks to take advantage of (hopefully) efficient market (as opposed to regulatory) pricing of risk. More broadly, regulators would be better off focusing on how to think about some regulatory oversight in a NBFI context in my view. Those of you who have read my notes on the take-aways from the BoA conference will have seen that a number of the UK bank executives presenting at that conference mentioned future SRT trades as a key plank of their capital management strategies. Indeed, I would argue, in the event that it were ever to become apparent at a future point that these risk transfers had been materially mispriced (for example, in the event of the NBFIs who take on the loan risk in these trades suffering material unexpected losses), then the market would likely do the regulator’s job, quickly pushing up the cost of portfolio credit insurance to reflect a revised assessment of actual risk.
BoE letter to CFOs - thematic feedback on accounting for IFRS 9 expected credit losses (ECLs) and climate risk: The BoE Prudential Regulatory Authority (PRA) published a letter (here: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2024/thematic-feedback-on-accounting-for-ifrs-9-ecl-and-climate-risk.pdf) sent to UK bank and building society CFOs by David Bailey (Executive Director, Prudential Policy) on Friday 27th September, which sets out the main feedback from the PRA’s review of the annual reports of auditors (who examine issues of supervisory interest on behalf of the PRA) on this year’s focus topics, namely IFRS 9 ECLs accounting and accounting for climate risk. In overall terms, the letter struck a broadly positive tone in terms of the progress that has been achieved by supervised firms (most particularly from an IFRS 9 ECLs accounting perspective). However, the letter does emphasise that a wide variety of approaches and assumptions have been adopted in a climate risk accounting context and the evolution of climate risk models appears set to remain a key medium-term focus for the regulator. The overall message was that good progress has been made but, rather unsurprisingly, that there is much more to do (particularly on climate risk accounting).
On the topic of IFRS 9 ECLs accounting, the main findings were: i) model risk remains elevated and firms should challenge the completeness of post model adjustments (PMAs) to ensure that ECL provisions reflect actual expectations of credit losses - which should include the impact of higher official rates on affordability and refinancing risk for retail and corporate exposures, with the PRA noting that it sees scope for PMA calculations to be more robust (noting, in particular, that: a) it continues to see use of approximate approaches such as portfolio level scalars and PMAs at the overall ECL level, rather than for ECL components such as Loss Given Default (LGD) or Probability of Default (PD); and b) there were examples of refinancing risk only being considered for the next 12 months); ii) good progress has been made on IFRS 9 model updates and reducing reliance on aged models with limitations - and the PRA encourages firms to actively monitor their model redevelopment plans to better capture risk and to ensure alignment with Supervisory Statement (SS) 1/23 (Model risk management principles for banks); and iii) default experience remains limited and LGD models therefore remain calibrated on historical data - and firms should “challenge whether the recovery assumptions that drive LGD are realistic and to compensate for the risk of historical bias where uncertainty exists over recovery outcomes”.
On the matter of climate risk accounting, the PRA acknowledged that the availability and quality of data continue to be “pervasive challenges” and noted the main findings as follows: i) firms have improved their climate-related credit risk assessments but the regulator sees room for expanding further the coverage of portfolios for which climate-related risk drivers are formally assessed - and noted the importance of this in the context of identifying those drivers that could impact underlying collateral, refinancing risk, and borrower repayment capability; ii) firms are at varying stages of developing more granularity in terms of the quantification of the impact of climate-related risks on ECLs - and the PRA sees scope for firms to further enhance data and processes to challenge the completeness of overlays and embed climate risks in loan-level credit risk assessments; and iii) different approaches are evident in the context of firms’ adaptation of economic scenarios to incorporate climate-related risks - and the PRA sees potential for firms to consider a broader range of climate scenarios and indicators to allow for timely identification of borrowers and sectors more exposed to climate risk than the wider economy.
Chancellor exploring potential reform of the UK regulatory landscape: Lucy Burton at The Telegraph reported on Wednesday evening that UK Chancellor Rachel Reeves is orchestrating a review on how to make the Financial Conduct Authority (FCA) more effective at promoting the City’s competitiveness. Discussions are reported to be at an early stage and a break-up or outright overhaul of the regulator is reportedly not on the agenda. The FT published an article on the topic on Thursday last, reporting that the Chancellor will issue a formal “remit” letter to the FCA in October (at around the time of the 30th October Budget), which will require the regulator “to prove that it is acting to promote the expansion of the UK financial services sector”. The FT article notes that FCA CEO Nikhil Rathi told reporters on Thursday that the regulator has already done much to support growth and is “always keen to do more”. While it is understandable that both the political system and the wider financial services industry have been left somewhat frustrated at the regulator’s apparent lack of focus on boosting the industry’s competitiveness, political intervention in a regulatory context is always a delicate tightrope to navigate - but it does seem that Reeves means business and change is afoot.
UK mortgage pricing continues its modest decline: Rightmove’s latest weekly tracker on UK mortgage rates shows a further modest decline in pricing in the week to Wednesday 25th September with: i) average rates on 2Y/5Y fixed rate mortgages at 75% LTV down by 6bps/2bps week-on-week to 4.68%/4.37%; and ii) average rates on 2Y/5Y fixed rate mortgages at 60% LTV down by 5bps/2bps week-on-week to 4.15%/3.87%. Some notable individual lender developments last week include: i) Nationwide following in Santander UK’s lead to price mortgages below 4% - with a 5Y fixed rate of 3.74% and a 3Y fixed rate of 3.89% now available to refinancing / homemover customers; ii) NWG slashing new business rates by up to 44bps; and iii) Barclays UK (BUK) cutting select rates by up to 34bps. While swap rates picked up marginally last week (notably, the BoE Governor, in an interview with the Kent Messenger on Tuesday, reiterated that “…the path for interest rates will be downwards, gradually” while cautioning that the neutral rate is likely to be significantly higher than the near-zero rates we had until recently), the general trend is that mortgage spreads have remained broadly steady over recent quarters (consistent messaging from Lloyds (LLOY) and NatWest Group (NWG) executives at the BoA conference last week on this point, with both flagging that completion spreads are currently running at c.70bps). Indeed, most smaller UK banks and building societies don’t have the benefit of structural hedge roll tailwinds so this lessens the risk of spread-eroding competition emerging from outside of the larger banks I would add.
Rented properties in England must have EPC of ‘C’ or above by 2030: The Energy Secretary Ed Miliband confirmed this week that Labour intends to legislate to ensure that “every rented home reaches decent standards of energy efficiency” by 2030, with a specification that all rented properties in England will be required to have an Energy Performance Certificate (EPC) ranking of ‘C’ or higher by then. The previous Conservative Government had initially planned to impose a deadline of 2028 but this was subsequently dropped as part of the wider relaxation of net zero goals, in recognition that it would be an overly onerous requirement from a landlord perspective. The Times reported last week that c.2.9 million privately rented homes in England are thought to have energy efficiency ratings below ‘C’ (in the context of <5 million privately rented homes in England, according to ONS data) and that, while upgrades have been effected to many such homes in recent years, c.50% of the energy assessments carried out on rental properties in 2023 showed that the properties in question fell short of the new standard. The Times also picked up on recent analysis by Savills which has suggested that required upgrades would cost landlords in the region of £25bn. The Daily Mail also reported last week on these developments, noting that a spokesperson for the National Residential Landlords Association (NLRA) stated that “Some landlords may find that they are unable to finance the improvements needed, particularly in areas with lower property values”. These expected requirements are clearly a headache for landlords and are likely to drive further exits from the private rented sector. However, changes have been expected for some time (going back to the Conservative Party’s original plan as referenced above) and have already been a key underpin for landlords electing to sell properties in recent years. The two largest listed buy-to-let lenders (albeit professional BTL lending-focused), OSB Group (OSB) and Paragon Banking Group (PAG), saw their share prices creep up mildly on a 5-day lookback - partly reflecting the fact that expected changes to the EPC regime were expected anyway and that the intended changes are not ‘a worst case scenario’. In reality much will depend on the progress that landlords make and how the supply of much-needed private rented properties evolves over the coming years (as well as how the delivery of the Government’s social housing rollout plans plays out). It would not surprise me greatly to see further extensions to EPC timing requirements in due course but, with that said, ‘the direction of travel’ has been clear for some time and Government will undoubtedly stick with the 2030 ‘commitment’ for a few years now.
Select UK Company Developments Update
UK Government shareholding in NatWest Group (NWG) falls below 17%: NWG issued a RNS on Monday 23rd September noting that HMT’s shareholding has dropped to 16.92% (previously disclosed shareholding: 17.97%) following a transaction on Friday 20th September. It appears that Government is on track to fully exit its investment in NWG within the next six to 12 months (with another directed buyback potentially in FY24 - post-Budget?? - as the change in the UKLA Listing Rules means that there is no need to wait until May 2025 for Government to ‘go again’).
HSBC to appoint its first female CFO?: Bloomberg reported last Tuesday that, according to sources, HSBC is considering appointing a female CFO for the first time in its history, with Chief Risk and Compliance Officer Pam Kaur understood to be emerging as a leading candidate among several senior executives for the seat recently vacated by now CEO Georges Elhederey. Sources also reportedly noted to Bloomberg that Greg Guyett, Willard McLane, and Kavita Mahtani are in the mix for the role. It is encouraging to see that HSBC may move to further strengthen gender equality at the most senior levels within the organisation but, without doubt, if Kaur is appointed to the position it will be on merit alone.
Nationwide grabs the headlines with its decision to offer mortgages to first time buyers at 6x income: Nationwide is now offering mortgage product to first time buyers (FTBs) at up to 6x earnings (up from 5.5x). The offer applies to 5Y or 10Y fixed rate products at up to 95% LTV. This follows Lloyds’ (LLOY) decision in August to provide mortgages to FTBs, via its Lloyds and Halifax brands, at up to 5.5x income (from 4.49x). A number of other lenders also offer mortgage product to FTBs at up to 5.5x income. The move differentiates Nationwide from peers and has been seen as some by an excessive move up the risk curve. However, a few points to note on this: i) the terms are lengthy and borrowers will have to pass affordability tests which suppresses near-term refinancing risk / repayment capability; ii) borrowers will have to achieve higher than normal credit scores to qualify; iii) self-employed persons are not eligible; and iv) Nationwide shall, of course, remain subject to the BoE criterion to limit mortgage lending at a loan-to-income (LTI) ratio of >4.5x to less than 15% of annual originations. Given these qualifications - and given that the income trajectory of the average FTB typically exhibits a steeper slope than for homemover / refinancing customers - I feel it is fair to conclude, in broad terms, that this is sensible selective strategic risk-taking in a more stable constructive macro backdrop under the new Government.
Revolut UK CEO acknowledges customer trust issues and notes it is working to address: The Business Post reported on Tuesday last on comments made by Francesca Carlesi, UK CEO of Revolut, at the Labour Party conference in Liverpool last week. Carlesi noted that “We want to be recognised as a really trusted player in the industry” following widespread press reports in recent times (in various jurisdictions) on the challenges that Revolut customers have faced in terms of getting to interface with a company representative when problems arise - as well as widespread coverage of the apparent issues that Revolut customers have faced in a fraud reimbursement context. Carlesi also sought to reassure that Revolut is indeed taking regulatory compliance matters seriously (following lots of press on Revolut’s challenges in this respect), noting that “The company has invested a lot and everything we do would not be possible without compliance…We are known to be a disruptor…but we built that on a bedrock of security and safety”. Carlesi seems to be a ‘safe pair of hands’ (as well as a highly accomplished business leader) and was a strong appointment in a bid to tackle compliance, trust and cultural matters at Revolut UK.
InterBay (OSB Group) completes sizeable £42.5m refinancing transaction: Mortgage Introducer reported on Thursday that InterBay, OSB Group’s (OSB) specialist semi-commercial / commercial mortgage lending business in England and Wales, has completed a £42.5m refinancing deal involving 94 units spread across 17 limited companies (note: no press release on the Group or InterBay websites yet) - highlighting, according to Adrian Moloney (Group Intermediary Director at OSB), “…the expertise we have at Interbay in structuring bespoke portfolio finance”. InterBay occasionally does similar-sized deals (which is known from tracking its press releases over the years) and, while OSB downgraded FY24 net loan growth guidance to c.3% (from c.5%) at the stage of the interim results in August (i.e., end-FY24 expected u/l net loans of £26.5bn, up from £26.1bn at end-1H24), transactions like this are helpful for delivering growth (which is not to suggest that consensus expectations / company guidance will or should be impacted by this deal).
Ireland Perspectives & News Snippets:
Select Irish Sectoral Developments Update
Value of mortgage approvals in August +7.4% y/y: The Banking & Payments Federation Ireland (BPFI) published its timely monthly data on mortgage approvals on Thursday last. Mortgage approvals were +7.4% y/y in value terms and +2.6% y/y in volume terms (with values growing at a faster clip than volumes due to rising home prices - see below). First time buyer (FTB) approvals continue to dominate, representing 63% of approvals by value and 62% of approvals by number in the month. Looking at the data over a longer timeframe (and while a y/y comparison of the 12-month data to end-August 2024 shows that approvals were -8.7% y/y in volume terms and -4.9% in value terms), this latest monthly data shows that approvals are beginning to gradually trend upwards again (consistent with the July 2024 experience) - with 49,500 mortgage approvals over the 12-month period to end-August 2024 +0.23% compared with the 12-month period to end-July 2024 (and +0.67% in value terms compared with the 12-month period to end-July 2024). These trends ought to support some growth in mortgage originations, a welcome development for the banking sector.
Some nuggets from the latest BPFI Housing Market Monitor for Q2 2024: The BPFI published its latest quarterly Housing Market Monitor for Q2 2024 on Tuesday last. Some interesting points of note were: i) mortgage drawdowns +2.2% y/y in 2Q24 but mortgage approvals -0.8% y/y (however, see above mortgage approvals commentary); ii) 12,370 housing units completed in 1H24, -9% y/y (though, on a rolling 12 months basis, completions to end-June 2024 of 31,398 units were +3.2% y/y); iii) housing commencements have been on the rise, with 35,358 units commenced in the seven months to end-July 2024, +91% y/y - which is a key indicator that output is likely to increase over 2H24 and beyond (although it is worth noting that: a) >40% of new commencements in 1H24 related to apartment units, which present a longer lead time to completion; and b) there was a recent one-off boost to commencements in 1H24 as the temporary waiver on development contributions that was introduced by the Government for a 12-month period was due to end on 24th April meaning this is not a ‘run rate’ level of growth that one can extrapolate); and iv) the report reminds us that residential property price inflation printed at +8.6% y/y for the 12-month period to end-June 2024, according to CSO data (+2.1% y/y for the 12-month period to end-June 2023) - with the average price of Dublin dwellings now growing more quickly than average prices nationally. These trends are broadly supportive of increased mortgage originations activity.
Select Irish Company Developments Update
State shareholding in AIB Group (AIBG) falls to <21%: AIBG issued a RNS on Friday last noting that the State’s shareholding in the bank has now reduced to 20.99% (previously disclosed shareholding: 21.85% following a transaction on 2nd September) following a transaction on Thursday last. The trading plan is seeing the State divest of c.1% of the issued share capital in AIBG per month. Assuming that the trading plan is extended beyond its current 23rd January 2025 termination date (as has been done in the past) and assuming further on-market and directed buybacks (broadly akin to the experience over the last 12 months), the State ought to be fully divested of its shareholding in AIB within 12 months (ahead of Budget 2026) - taking into account a couple of short 30-day pauses in the trading plan*. Everyone in the industry is watching this closely - including AIBG’s closest peers Bank of Ireland Group (BIRG) and PTSB. BIRG’s exercise in pay restraint since the lifting of the caps has been seen by close industry observers as a judicious move to avoid possible ‘political heat’ (some would say they’re good at ‘reading the political tea leaves’ as it were) while its two closest rivals remain subject to caps and variable pay (including incentive plan) limitations (however, BIRG’s tactics could also potentially be seen as serving to avoid adding impetus to the debate around the removal of pay caps for the remaining banks subject to the cap). One senses that, once the State has fully exited from its investment in AIBG, the caps will have to be removed in their entirety - if the new Government doesn’t move before then to repeal the caps, i.e., it would make no sense to leave them ‘in situ’ at PTSB despite a likely continued material State shareholding in that entity for some time (unless an acquirer swoops for the bank, which isn’t out of the question I would add) as it would leave that bank at a serious competitive disadvantage in terms of talent retention and acquisition (and we have only recently seen its CFO resign to - reportedly - take up a position at Monzo Bank, a bank that is not subject to the pay caps). As an aside, one senses that the BIRG executive team rewards programme is just waiting to be juiced up significantly with that eventuality in mind. The bankers are beginning to get a visual on that pot of gold at the end of the rainbow it would seem.
* Notably, the Business Post reported on Wednesday that newly released documents show that the State has been consistently advised by Rothschild not to shorten the lock-up period following share placings but the State has gone against that advice, shortening the lock-up period applicable to share sales under the trading plan to just 30 days. The documents reportedly note that “…investors will not care much…”, which is a view that I concur with and the decision to shorten the lock-up period makes sense in the context of the State’s objective to get on with exiting its investments in the banking sector.
AIB Group (AIBG) cuts mortgage rates and increases business deposit rates: AIBG issued two press releases of note last week. Firstly, AIBG announced on Thursday that it is applying a 25bps reduction to 4Y and 5Y fixed rates on green mortgages (i.e., mortgages available for homes with a Building Energy Rating (BER) between A1 and B3) with effect from Friday 27th September - meaning that 4Y rates will be available from as little as 3.20% and 5Y rates will be available from 3.70%. These are highly competitive rates and the reduction “…aligns with our strategy to further green our business…” in the words of Geraldine Casey, MD of Retail Banking at AIBG. Secondly, AIBG noted on Friday that it has launched a 31 Day Business Notice Deposit account for business customers at a variable rate of 1.5% AER. This is a competitive rate in the context of the Irish market and is a positive customer initiative considering the following findings from research undertaken by AIBG earlier this year (as articulated in the press release): “Research undertaken by AIB early this year among business customers highlights that 90% have yet to open a deposit account that will give them a better return on their money. A key barrier identified was the need to access their cashflow and not lock money away for longer terms. However, 73% of businesses would consider depositing funds at one month’s notice if there was a clear benefit, showing interest among business customers for a 31 Day notice offering.”. However, customers must visit a branch to open the account, which may be something of an obstacle given ‘the hassle factor’ (although business customers tend to need to use branches than retail customers). A few perspectives on these developments: i) the reductions in mortgage pricing indicate that we will see some passthrough of lower official rates to mortgage customers but the banks will likely be selective in terms of how passthrough is effected (I would categorically not expect anything close to full passthrough as: a) we didn’t see anything close to full passthrough as official rates rose, meaning front book mortgage spreads are quite thin across the market; and b) some natural liability margin dissipation as official rates reverse that the banks will likely try to partially recover via increased mortgage spreads - though one should, in my view, not expect to see a marked shift in depositor behaviour); and ii) I suspect that AIBG has carefully evaluated the likely impact of its decision to offer a market competitive 1.5% rate on short term monies to business customers and I expect that the overall impact of the move on blended average customer deposit pricing will be very limited (and by applying it as a variable rate AIBG has the flexibility to alter it should take-up be higher than expected - and, potentially, as official rates fall further).
ICS (Dilosk) cuts mortgage rates: It was reported in the Business Post later on Thursday that ICS (Dilosk) has effected further reductions in its mortgage rates with its new 3Y and 5Y fixed rates for owner occupiers now starting from 4.5%. However, its rates are still very high relative to other rates available in the market. That said, as official rates continue to fall back, I suspect we see the non-bank lenders (including ICS) gradually and lightly increase their share of mortgage originations.
Revolut flags deposit inflows: Various media outlets reported last week on Revolut Ireland’s statement on Wednesday which noted that Irish customers deposited >€100m with the institution in the two weeks following the launch of its instant access savings account (with attractive rates of 2.00-3.49% (depending on the customer plan)) in May: “New sign-ups helped to attract deposits of over nine figures in the product’s first fortnight – with balances continuing to grow consistently every month”. In terms of the latter point (i.e., growth since the initial surge) Revolut noted that instant access savings balances grew at an average rate of more than 50% between June and September. The initiative is fantastic from a consumer choice perspective but the numbers are very small in a wider market context and, given well-documented customer trust and fraud reimbursement issues, Revolut likely has more to do to get customers comfortable placing significant deposits at the institution. That said, it’s on a growth trail and appears to be working to address these challenges (see above note on Revolut UK) so one would be naive to discount the prospects for the business (in multiple jurisdictions) in the medium to long-term in my view. For now I don’t see the savings proposition as presenting any great threat to the listed Irish banks’ enormous and unprecedented ‘liability margin story’.
Global Perspectives & News Snippets:
Select Global Developments Update
Private credit firms poaching bankers: Bloomberg ran an interesting article on Thursday noting that the trend for private credit firms’ to poach staff from banks has intensified of late - particularly posing a challenge to banks’ leveraged finance teams. The article kicked off with a rather entertaining soundbite, i.e., two of the four senior bankers who were vocally seeking to persuade the audience at the AFME’s High Yield and Private Debt Forum in London on 18th June that the private credit market is not a threat to banks have jumped ship to private capital firms since then! A disappointing bank bonus round in 2023, the allure of a slice of equity, and the more entrepreneurial and disruptive culture at private credit firms are reported to be among the chief reasons for the uptick in departures from the banking industry. Banker pay inflation is an inevitable consequence of such trends. But it is hardly very surprising news that buy-side private credit firms are plucking hires from sell-side investment banking businesses.
European banking M&A remains in the spotlight: Lots of news on Unicredit / Commerzbank last week which I’m sure you don’t need me to re-report to you but, a few comments of interest outside of that deeply political ‘situation’ to flag: i) The European Commission (EC) weighed in on the debate early last week, with Reuters reporting on the comments made by an EC spokesperson as follows: “Mergers could make banks more resilient to shocks due to greater asset diversification. And they would allow European banks to have more efficient business models, pursue growth strategies and invest in digitalisation”; and ii) The BBVA CEO Onur Genc (who is fighting his own battle to gain control of Sabadell at the moment) told Reuters on Wednesday that, if the BBVA / Sabadell deal fails to complete or if the Unicredit / Commerzbank transaction doesn’t happen, “…it’s going to be bad…We will lose an amazing opportunity to create some European banks who have scale enough to better invest in technology”. While the industry is in a frenzy on the topic of European banking consolidation, I will repeat here the views I expressed on the topic on 15th September last: “While the eurozone banking sector is undeniably far too fragmented, I would be hesitant to call this [Unicredit’ stake-building in Commerzbank] out as representative of the start of a wave of consolidation. Firstly, Orcel is a unique character with lots of energy and edge and was always going to move to strategically bulk up at some point since he was anointed to the top seat at Unicredit in 2021. Secondly, while the stake-building exercise may or may not lead to an outright bid for Commerzbank in due course, if a bid does eventuate it is really still just representative of another effort at in-market consolidation given Unicredit’s ownership of HVB in Germany. Pointing to the BBVA hostile bid for Sabadell as another example of the European banking M&A train getting into gear also misses the point - Sabadell is predominantly Spanish-focused (with the exception of its - arguably non-core - UK investment, TSB) and that proposed deal is therefore also an in-market one. Synergies tend to be lower for cross-border deals and issues like trapped capital and unpredictable local regulatory regimes can be obstructive.”. Just as a final point of note, the BBVA CEO was asked about what his intentions would be for TSB in the event that the proposed transaction were to complete, and he didn’t give the impression that it has been a topic that has garnered much attention in the BBVA boardroom thus far at least - noting that they will study TSB and reflect. It really doesn’t feel like TSB would be deemed core! I also note an article last week in The Banker, quoting various analysts who seem to unanimously agree that NatWest Group (NWG) would be the most likely acquirer for TSB were it to come up for sale - that’s rational for various reasons but I would also add that the former owner of TSB, (i.e., Lloyds (LLOY)) might well be tempted to have a look (though it may of course run into market share concentration challenges in the mortgages domain).
European bank Additional Tier 1 (AT1) issuance activity in full swing: Bloomberg reported on Friday that European banks have raised a record €13bn in AT1 issuance to date in September, with most activity taking place in USD (the norm). This shows that the Australian regulator’s (APRA) proposal to extinguish AT1 bonds from the capital stack over time is not impacting issuance appetite / investor demand in Europe. I reported on 22nd September on a recent interesting piece penned by Dan Lustig and Jason Tan at L&G Investment Management (LGIM), who 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’. These are solid arguments in my view.
Climate-related credit risks in focus: Just to quickly flag a short welcome address given by Frank Elderson (Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB) at an ECB conference on real estate climate data last Monday, in which he noted that “To manage credit risk in the real estate sector, we need data on buildings’ energy efficiency. This is crucial for collateral valuations or determining borrowers’ ability to pay back their loan, for example”. Elderson went on to note that while the ECB’s targeted review of energy performance data for the commercial and residential real estate sectors illustrated “good progress” in the case of new lending, the supervisor is “concerned about the existing stock of loans”. He wrapped up remarking that legislative changes will improve the availability of energy performance data but issued a warning shot noting that “banks cannot just sit back and wait” and commented that climate-related risk is still underpriced for the average bank (which, in my view, is another way of saying that banks should be on guard for higher capital requirements here).
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