Financials Unshackled Issue 10: 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 (BoE Money and Credit Statistics & Effective Interest Rates Updates; BoE notes risks to financial stability broadly unchanged and CCyB remains at 2.0%; Moody’s upgrades UK banking outlook; mortgage rate cuts continue)
UK company developments (Nationwide completes VMUK acquisition and my catch-up with the management team; Barclays Investment Banking Deep Dive; HSBC costs in focus; MTRO completes sale of residential mortgages to NWG; FCA fines Starling bank £29m; Shawbrook completes acquisition of JBR Auto Holdings; 11:FS podcast interview with Atom Bank CEO)
Irish sectoral developments (Irish bank share prices take a tumble; CBI Money and Banking Statistics show positive lending & deposit trends; lack of bank staff incentives in focus)
Irish company developments (BIRG appoints new Chair; PTSB culling c.20 senior managers (and I belatedly flag recent Moody’s upgrade); Bunq Chief of Staff notes Irish market is “core”)
Global developments (quick word on European banking M&A)
Calendar for the week ahead:
Firstly, a few select items to watch for in the week ahead in what looks to be a relatively quiet period for scheduled updates:
Tue 8th Oct (07:00 BST): S&U plc (SUS) 1H24 results (for the six months to 31st July 2024)
Tue 8th Oct (12:00 BST): S&U plc (SUS) Investor Presentation (register here)
Thu 10th Oct (09:30 BST): Bank of England (BoE) Quarterly Credit Conditions Survey and Quarterly Bank Liabilities Survey
Fri 11th Oct (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates (August 2024)
UK Perspectives & News Snippets:
Select UK Sectoral Developments Update
BoE update shows modest growth in outstanding credit and mortgage approvals
The Bank of England (BoE) published its monthly Money and Credit Statistics (including Effective Interest Rates) for August 2024 on Monday 30th September.
Key points from a lending volume perspective: i) net mortgage borrowing of £2.9bn in August, up from £2.8bn in July (with the annual growth rate rising to 0.7% y/y from 0.6% y/y in July); ii) net mortgage approvals of 64,900 in August (up from 62,500 in July), which is the highest monthly mortgage approvals print since August 2022 (notably, remortgaging approvals inflected in August - +2,000 m/m to 27,200 - following five consecutive m/m decreases); iii) net consumer credit borrowing £1.3bn in August (+7.6% y/y), up from £1.2bn in July - with growth driven by personal loans such as car dealership finance and term loans while outstanding credit card debt was broadly unchanged; iv) a decent m/m pick-up was observed in business lending with non-financial businesses borrowing a net of £1.7bn in August compared with just £0.3bn in July (while the monthly data can ebb and flow a bit the trend is clear, i.e., growth is picking up - and, notably, the annual rate of growth in large business lending rose to +2.9% y/y in August from +1.7% y/y in July).
Key points from a loan pricing perspective: i) the effective interest rate on new mortgage drawdowns was 4.84% in August, +3bps m/m (which likely reflects a very modest tilt towards higher LTV lending); ii) the average interest rate on the outstanding stock of mortgage debt was +3bps m/m to 3.72% in the month; iii) the effective interest rate on interest-charging overdrafts was +15bps m/m to 22.71% in August; iv) the effective interest rate on new personal loans was +13bps m/m to 9.27% in August; v) the effective interest rate on interest-bearing credit cards was +2bps m/m to 22.61% in August; and vi) the average cost of new borrowing by UK non-financial businesses was -15bps m/m to 6.75% in August while the effective interest rate on new SME loans was -30bps m/m to 7.30%.
Key points from a deposit volume and pricing perspective: i) household deposits were +£7.3bn in August, up from +£5.9bn in July (with c.83% of the gross inflows allocated to interest-earning accounts); ii) the effective interest rate paid on new time deposits was -5bps m/m to 4.37% in August and the effective rates on the outstanding stock of time and sight deposits were 3.97% and 2.14% in August respectively (unchanged from July); iii) business deposits were -£0.6bn in August (following net outflows of £0.1bn in July); and iv) the effective rate in new time deposits from non-financial businesses was -34bps m/m to 4.23% in the month while the effective rate on stock sight deposits was -7bps m/m to 2.70% in August.
So, what does all of this data tell us?: i) the outstanding stock of credit is expanding at a modest pace, supported by lower interest rate expectations and rising business confidence in future growth prospects - and growth in retail lending is outstripping business lending (a message that the bank executives consistently conveyed at both the Barclays and BoA investor conferences last month) with mortgages standing out particularly (and mortgage approval numbers bode well for future flows); ii) pricing trends on new lending and deposit flows appear modestly favourable from a net interest margin expansion perspective (however, this observation does not account for legacy loan stock rolling off and structural hedge rolls). As I opined recently I expect that UK banks will continue to pass through most of the impact of lower official rates to deposit customers (albeit with a lag) and I don’t expect much further pressure from the Treasury Select Committee or the FCA (despite the comments made in the recently published FCA cash savings review) as the wider sector seeks to expand the spread between loan and deposit pricing.
BoE finds risks to UK financial stability are broadly unchanged and UK banking system is in a strong position; CCyB remains at 2.0%
The BoE published (on Wednesday 2nd October) its Record of the Financial Policy Committee (FPC) meeting held on 19th September last. Some key findings were:
Risks to UK financial stability broadly unchanged since the June 2024 Financial Stability Report (FSR): However, the FPC noted that: i) if the deleveraging behaviour observed in some markets repeated and were to spill over into core rate markets, this could pose broader financial stability risks; and ii) elevated geopolitical risk, high government debt levels in major economies, and stresses in global commercial real estate (CRE) markets could have consequences for UK financial stability.
Further signs of easing in UK credit conditions: The improved UK macro outlook has supported further easing in UK credit conditions though UK households and businesses remain resilient to the higher rate environment. In particular, the FPC noted: i) gross mortgage and corporate lending volumes rose to around pre-Covid average levels in 2Q24; ii) loan pricing has continued to move closely in line with swap rates; and iii) credit demand and availability have increased.
UK banking system remains in a strong position to support households and businesses; CCyB retained at 2.0%: The UK banking system is well capitalised and highly liquid, asset quality is strong, and the sector remains well-positioned to support households and businesses in the event that economic and financial conditions were to substantially worsen. For this reason, the FPC decided to maintain the UK countercyclical capital buffer (CCyB) at “its neutral rate” of 2.0%.
Markets remain susceptible to a sharp correction: More broadly, markets remain susceptible to a sharp correction, which could affect the cost and availability of credit to UK households and businesses. The short-lived spike in volatility across global financial markets observed in August highlights the potential for vulnerabilities in market-based finance (MBF) to amplify shocks.
Moody’s upgrades UK banking Outlook to Stable
Moody’s moved on Wednesday (2nd October) to upgrade its Outlook for the UK banking system to Stable (from Negative) as it expects bank balance sheets to remain resilient in the face of declining interest rates. Moody’s expects that capital and liquidity positions “will remain robust” while the strength of banks’ deposit franchises will ensure continued provision of stable funding - also noting that asset quality is set to remain strong. However, Moody’s does note that profitability is expected to “ease” from record FY23 levels (which is a known trend). The upgrade marks an about-turn from the credit rating agency’s downgrade to Negative (from Stable) in March and reinforces the positive messages we have heard from the BoE as well as the banks and building societies themselves over recent months. The upgrade is helpful in a broader wholesale funding costs context as well as constructive in terms of investor sentiment.
Mortgage rate cuts continue
Rightmove’s latest weekly tracker on UK mortgage rates shows slightly reduced mortgage pricing (albeit at the higher LTVs only) in the week to Wednesday 2nd October, with: i) average rates on 2Y/5Y fixed rate mortgages at 75% LTV down by 2bps/0bps week-on-week to 4.66%/4.37%; ii) average rates on 2Y/5Y fixed rate mortgages at 60% LTV up by 0bps/2bps week-on-week to 4.15%/3.89%; and iii) notable reductions in the order of 1-4bps across 85% and 95% LTV product. It was also notable that, late last week, we saw a raft of major lenders (including Barclays UK, HSBC UK, Halifax (Lloyds), Santander UK, and NatWest) trim rates further following the decline in swap rates observed in the wake of the BoE Governor’s comments to The Guardian (published in the newspaper on Thursday) to the effect that the BoE could become a “bit more aggressive” in cutting interest rates if inflation prints remain contained - and these latest announced reductions mean we should see average mortgage pricing decline further next week.
Separately, in a mortgages context, it was interesting to read FT Lex on Friday in a column arguing that the resurgence of ‘jumbo loans’ illustrates that risk is returning to the UK mortgage market, picking up on: i) Nationwide’s recent decision to up the income multiple it will lend at to select first-time buyers (FTBs) to 6.0x (from 5.5x); and ii) Lloyds’ (LLOY) and Halifax’s (LLOY) recent decision to up the income multiple at which they are prepared to lend to first-time buyers to 5.5x (but a number of other lenders offer mortgage product to FTBs at up to 5.5x income already). It’s a well-written piece in the FT (which rightly flags that affordability is stretched with average house prices sitting at c.8.3x average incomes in 2023, according to ONS data published in March) but I shall repeat here why I don’t believe that the recent Nationwide decision (the decision in most focus) amounts to anything other than sensible selective strategic risk-taking: 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.
Select UK Company Developments Update
Nationwide completes acquisition of Virgin Money UK (VMUK)
As expected, Nationwide announced on Tuesday that the scheme of arrangement between Virgin Money and its shareholders to implement the recommended cash acquisition of the entire issued and to be issued share capital of Virgin Money by Nationwide has become Effective and that the acquisition of VMUK by Nationwide is now complete. I caught up with Debbie Crosbie (CEO), Muir Mathieson (CFO) and other senior members of the Nationwide management team late last week to recap on the acquisition now that it has completed. In short, the deal presents a substantial value creation opportunity for Nationwide in my view, given: i) the acquisition price at just c.0.6x tangible book value (based on VMUK’s reported tangible equity (excl AT1) position of c.£4.67bn at end-1H24); ii) prospective funding cost synergies; iii) acceleration of Nationwide’s business banking ambitions and, therefore, diversification of revenue / funding streams; and iv) some cost takeout in time. Integration is always a tough challenge but Nationwide CEO Crosbie has strong familiarity with the acquired business given her prior roles as COO of VMUK and as Acting CEO of Clydesdale Bank, leading preparations for its demerger from National Australia Bank and its subsequent IPO in 2016. Moreover, the turnaround she achieved at the helm of TSB as well as her measured ‘no-nonsense’ management style inspires confidence in Nationwide’s ability to carefully execute and deliver in a risk averse manner.
Barclays Investment Banking Deep Dive
Barclays (BARC) held another ‘Deep Dive’ webinar last week - on its Investment Banking unit this time - click here for a webcast replay link, here for a link to the presentation, and here for a transcript of the management speech section (you’ll have to watch the webcast to get the Q&A). The CEO C.S. Venkatakrishnan (aka ‘Venkat’) opened the session and reiterated that BARC’s strategy is to reduce the weighting of Group risk-weighted assets (RWAs) attributable to the investment bank to c.50% by FY26 (from c.58% at end-FY23). The IB presenters Cathal Deasy and Taylor Wright (Global Co-Heads of Investment Banking) reaffirmed recent messages conveyed by group management in relation to RWA productivity, top client focus, etc., noting: i) the ‘bringing together’ of the investment bank (IB) and the international corporate bank (ICB) means that BARC now offers its clients “coordinated delivery of complementary products and services”; ii) BARC is focused on maintaining its existing Top 5 Global IB position in DCM, Investment Grade and Leveraged Finance, and Financial Sponsors - but is also focused on growing other products around these areas; iii) within the ICB there is a strong focus on building out the Transaction Banking capabilities, which span both the ICB and the UK Corporate Bank (thereby “creating platform synergies from shared technology and infrastructure across these two businesses”); iv) strategic hiring and a more disciplined and accountable approach to capital allocation will serve to enhance RWA productivity; v) how an integrated Treasury coverage is compelling for increasing client penetration and for driving simplification across the organisation; and vi) how BARC is focused on growing its market share in M&A and ECM given the capital-light nature of these businesses as well as the incremental opportunities these businesses can generate across event financing, deal contingent FX and other risk management solutions, and equity derivatives and margin loans. All in all, it was a compelling update with the clear objective being to deliver higher returns on a sustainable basis. Execution and consistent sustained delivery over time will be needed for the market to buy into the credibility of this objective with the IB weighting apparently continuing to present a material drag on the Group’s implied trading multiples relative to peer UK banks.
Costs in focus at HSBC
Bloomberg reported on Friday afternoon that HSBC has cancelled some internal events and further curtailed staff travel as the new CEO Georges Elhederey remains laser-focused on cost control ahead of its 3Q results update on Tuesday 29th October - at which stage we will likely learn a bit more about Elhederey’s plans for the group. Refreshed (lower) operating cost targets, a possible merger of the commercial and investment banking arms, and further asset sales are all potentially in the offing - as articulated in a recent detailed Bloomberg article, which I was pleased to contribute to.
Metro Bank completes disposal of c.£2.5bn mortgage portfolio to NatWest Group
Metro Bank (MTRO) issued a RNS on Monday 30th September noting that it has now completed the sale of a c.£2.5bn prime residential mortgage portfolio to NatWest Group (NWG). MTRO announced that it had agreed to enter into an agreement to sell this portfolio to NWG on 26th July last - a few days prior to the publication of its 1H24 results on 31st July. The portfolio had a book value of c.£2.4bn at the date of completion (30th September), resulting in a total cash consideration of c.£2.3bn (MTRO had, in the 26th July RNS, noted that the cash consideration was expected to be “up to £2.4 billion”), with the proceeds set to be deployed to repay TFSME funding (MTRO had £3.05bn of outstanding TFSME funding at 30th June, as disclosed in its 1H24 results report here). The RNS reiterates that the transaction is earnings, NIM, and capital ratio accretive (particularly MREL) and that the sale builds additional lending capability to support MTRO’s journey to reorient the asset side of the Balance Sheet towards higher-yielding lending (in the commercial. corporate, SME, and specialist mortgage domains). This rotation towards higher-yielding lending segments is the strategy that Dan Frumkin CEO has been pursuing since his installation at the top of the organisation - and it is a strategy that I have argued in favour of for years (prior to Dan’s appointment) as the only way forward for MTRO given its scale and risk weighting disadvantages relative to mainstream UK banks and building societies. Indeed, from a NWG perspective, it is worth adding that the acquisition of the book is consistent with its ambitions to bulk up in mortgages.
Starling Bank hit with £29m fine by the FCA
The Financial Conduct Authority (FCA) published on Wednesday (2nd October) a Final Notice (dated 27th September) that was issued to Starling Bank notifying it that it has imposed a £29m fine on the bank for a failure to adhere to a voluntary requirement (VREQ) that the bank agreed with the FCA in September 2021 not to open any new accounts for high or higher risk customers while it improved its anti-money laundering (AML) control framework as well as issues with the bank’s financial sanctions framework. The language in the FCA document is damning, with references to “Starling’s senior management as a whole lacked the experience and capability to effectively implement the VREQ” and “Starling’s senior management failed to adequately oversee and monitor the day-to-day compliance with the VREQ” particularly noteworthy. The development was well covered in the media last week with commentators including Nils Pratley at The Guardian arguing here that it puts paid to any IPO ambitions for the medium-term and the various comments on a related FT piece (here) providing a sense of the industry’s perspective on the development. While Starling Bank is understood to be currently recruiting for a Head of Investor Relations it does seem like this development will, to put it diplomatically, present something of an obstacle to achieving the ‘bumper valuation’ at IPO that has been mooted in the press in recent months.
Shawbrook completes acquisition of JBR Auto Holdings
Shawbrook Bank issued a RNS on Monday 30th September noting that it has now completed the acquisition of JBR Auto Holdings, a UK specialist motor finance lender focused on high-end vehicles. Shawbrook initially announced that it had signed an agreement to acquire the business on 17th June last and noted in its 1H24 results report that the acquisition will help the bank extend the JBR proposition to more customers and to broaden its offering within the specialist motor finance market. Note that pricing and terms have not been disclosed by Shawbrook. The acquisition continues Shawbrook’s strategy to selectively acquire businesses in its chosen niche lending segments. The specialist lending model has been delivering for its investors with Shawbrook printing a return on tangible equity (RoTE) of 14.5% in 1H24 - albeit lower than in recent reporting periods (notably, Shawbrook printed a RoTE of 20.5% for FY23 as a whole), though a declining rate backdrop will be constructive in a liability yield context over the coming quarters (especially given Shawbrook has already repaid a substantial quantum of TFSME funds extended - with TFSME balances sitting at £1.0bn at end-1H, down from £2.0bn at end-FY23).
Interesting interview with Atom Bank CEO Mark Mullen
As I scrubbed my underarms yesterday morning I tuned in to a highly insightful interview that 11:FS recently held with Mark Mullen, CEO of Atom Bank - which was aired on Thursday 3rd October. I interviewed Mullen before and I highly recommend tuning into this easy listen to get a real sense of perspective on UK banking sector trends (and how change comes but not at the pace that everyone expects), to learn about how Atom Bank has delivered profitability on the back of focusing on doing a few things well, and to hear Mullen’s latest (and, as always, measured) comments on the topic of a prospective IPO.
Ireland Perspectives & News Snippets:
Select Ireland Sectoral Developments Update
Irish bank share prices take a tumble
The shares of the largest listed lenders (AIB Group (AIBG) and Bank of Ireland Group (BIRG)) have fallen back materially over the last couple of weeks as ‘the rate trade’ has been in vogue. Indeed, Kathleen Gallagher of the Business Post picks up on this in a piece today, which I was delighted to contribute to. Given increasing comfort that inflation shall remain contained (with many ECB policymakers proffering their views on same in recent weeks), market expectations for the speed and extent of interest rate cuts has increased. Given the Irish banks’ substantive reliance on interest revenues (relative to European banks), they will always screen poorly to traders who play that theme. It’s worth delving into this topic in much more detail in due course but it should be remembered that: i) implied Irish banks CoE (using 2Y forward earnings estimates) is already materially higher than for peer European banks; ii) there is, in my view, strong longevity to favourable deposit trends (albeit ultra-low blended average deposit passthrough rates obviously become less of a benefit as rates fall back); and iii) I strongly suspect that the listed lenders will seek to recoup some of the liability margin benefit erosion in a declining official rates climate through higher mortgage spreads (and recent - albeit limited - evidence thus far is that mortgage rates are only being reduced on a highly selective basis in response to official rate changes).
CBI Money and Banking Statistics - August 2024
The Central Bank of Ireland (CBI) published its monthly Money and Banking Statistics for August 2024 on 30th September. On lending: i) net lending to households was +€52m in August, taking YTD net lending flows to +€2.3bn (+2.3% y/y); and ii) non-financial corporate (NFC) net lending was +€34m in August, taking YTD net lending flows to +€570m (+1.9% y/y). On deposits: i) household deposits were +€1.4bn in August, taking YTD net deposit inflows to +€5.2bn (+3.4% y/y) though overnight deposits have reduced by €3.9bn in the YTD (though hardly enough to significantly ‘move the dial’ in a sectoral deposit beta context); and ii) NFC deposits were -€0.5bn in August, though the YTD net deposit inflows from NFCs remains very strong at +€4.9bn (+6.1% y/y) and the monthly NFC data can be volatile in any event. All in all, the update points to continued modest growth in lending which is constructive in a bank loan book expansion context in a positive macro backdrop - as well as a buoyant environment for deposit volumes with continued limited rotation out of current accounts into interest-earning product, a positive trend from a bank profitability resilience perspective.
Bank bonuses in focus
Just to quickly flag I penned an article during the week in the Business Post arguing that the Irish Government ought to: i) abolish the unorthodox 89% supertax on banker bonuses above €20,000; ii) separately, but in an interrelated vein, remove the €20,000 limit on annual banker bonuses; and iii) permit all bank boards to put in place long-term incentive plans for top executives to drive long-term performance and to support talent retention and acquisition. I wrote in detail on this topic on Substack recently and it’s also worth quickly drawing your attention to a LinkedIn poll that I ran on the topic (which is still live if you want to participate!) which reveals, at the time of writing that 87% of 159 voters (thus far) agree that the supertax should be repealed (though, admittedly, it’s no double blind survey - with some self-selection bias naturally at play!).
Select Ireland Company Developments Update
Quick synopsis of company developments
Substack tells me I’m running out of space in this note (thank God!) so I’ll keep it brief on other Irish company developments!:
BIRG appoints Akshaya Bhargava as Chair and Governor with effect from 1st January 2025: Bhargava seems to me to be an outstanding choice in the context of helping the bank evolve for a future more sophisticated banking landscape given his rich experience across the financial services ecosystem and deep experience in a change and transformation context.
PTSB offering voluntary redundancy package to senior managers: The Irish Independent reported on Friday that PTSB is offering an exit package to around 20 of its senior managers as part of its strategic business transformation change initiatives - showing costs are clearly in focus. I also forgot to pick up last week on the news that Moody’s has upgraded PTSB’s long-term deposit ratings and senior unsecured ratings to A1 from A2 and has changed the Outlook to Stable, which is positive from a PTSB wholesale funding costs standpoint.
Bunq going for growth in Ireland: Interesting interview with Bunq Chief of Staff Bianca Zwart in the Irish Independent on Thursday in which she flags that Ireland is a “core” market for Bunq and that its suite of services in the country is likely to expand soon.
Global Perspectives & News Snippets:
Select Global Sectoral Developments Update
Keeping it short this week given space constraints, it’s worth just briefly touching on the Unicredit / Commerzbank hostilities again. I recently opined that, even if Unicredit does eventually acquire Commerzbank it is still just representative of another effort at in-market consolidation given Unicredit’s ownership of HVB in Germany before going on to note that synergies tend to be lower for cross-border deals and issues like trapped capital and unpredictable local regulatory regimes can be obstructive. However, it is a real test for cross-border M&A with all of that said given the ECB is fully supportive of Unicredit’s consolidation efforts. Indeed, I wouldn’t be the first to remark that Orcel is perhaps - in anticipation of the predictable political resistance that has manifested in the wake of Unicredit’s opportunistic and strategic stake-building efforts - seeking via the stake-building to, amongst other things, catalyse the institution of a European Deposit Insurance Scheme (EDIS), which we have been talking about for more than a decade. Indeed, finally seeing the implementation of a EDIS would greatly facilitate cross-border European banking M&A more broadly and could open up (many) further prospective opportunities for Unicredit and other predators - though trapped capital and local regulatory regime considerations are still relevant factors too. A topic to delve into more deeply soon!
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