Financials Unshackled Issue 12: 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 (what to look for in next week’s bank earnings; banks make their views known to government; regulatory loosening a key theme; mortgage rates up strongly week-on-week)
UK company developments (Revolut / digital banks in focus; Barclays updates; Santander SRT?; OSB director share sale)
Ireland developments (perspectives on Irish banks coming under selling pressure; could State fully divest of AIBG shareholding in 2025?; competition in Irish banking)
Global developments (Claudia Buch speech on bank profitability; Lautenschlager comments; TwentyFour AM on reduced AT1 extension risk; McKinsey Global Annual Banking Review 2024; Pimco concerns in a private credit context)
Calendar for the week ahead:
Firstly, here is what to watch for in the week ahead:
Wed 23rd Oct (07:00 BST): Lloyds (LLOY) 3Q24 Interim Management Statement (for the three months to 30th September 2024)
Wed 23rd Oct (09:30 BST): LLOY 3Q24 Investor/Analyst Webcast (click to register here)
Wed 23rd Oct (14:00 BST): Peterson Institute For International Economics (PIIE) Geneva Report launch - Much Money, Little Capital, and Few Reforms: The 2023 banking turmoil (click to register here)
Wed 23rd Oct (14:00 BST): The Banker Webinar - Launching Cloud-Native Architecture Amid Neobank Competition: Modernising legacy systems and defining implementation plans (click to register here)
Thu 24th Oct (07:00 BST): Barclays (BARC) 3Q24 Results (for the three months to 30th September 2024)
Thu 24th Oct (09:30 BST): BARC 3Q24 Investor/Analyst Webcast (click to register here)
Fri 25th Oct (07:00 BST): NatWest Group (NWG) 3Q24 Results (for the three months to 30th September 2024)
Fri 25th Oct (09:00 BST): NWG 3Q24 Investor/Analyst Webcast (click to register here)
UK Perspectives & News Snippets:
Select UK Sectoral Developments Update
UK bank earnings season kicks off on Wednesday
Upcoming earnings reports: Lloyds (LLOY) kicks off the UK bank earnings season on Wednesday 23rd October - with Barclays (BARC) and NatWest Group (NWG) set to report on Thursday 24th and Friday 25th October respectively. HSBC and Santander UK report on Tuesday 29th October - and Standard Chartered reports on Wednesday 30th October. Others due to report in the next few weeks include OSB Group (6th November), Vanquis Banking Group (7th November), Secure Trust Bank (13th November; to include a Capital Markets Event), and Metro Bank (14th November).
What to look for next week: i) Continued conviction of executives in outlook for modest loan book expansion (particularly in retail UK books) owing to the new Government’s pro-growth agenda (positively impactful in a longer-term returns capability context); ii) Continued confidence in NII/NIM outlook (see my detailed notes on the Barclays conference here and the BoA conference here) and, given swap rates are broadly now where they were at the stage of the conferences in September (at a time when the UK bank executives were very confidently messaging on their ability to meet pre-existing NII guidance), I suspect that we will see some marginal NII/NIM upgrades (I suspect we’ll get some more comfort in relation to stability of mortgage spreads - and in relation to prospects for passing through lower rates to deposit customers without much political (TSC) / regulatory (FCA) fuss); iii) Improved asset quality guidance - some scope for improved guidance here given resilience of macro (albeit likely to be just modest until the detail of, and the reaction to, the Budget is known - so, some prospective CoR upgrades likely to be deferred until 4Q, albeit qualitative management messaging will likely be modestly bullish relative to what’s implied by consensus expectations); and iv) Reiteration of messages around RWA efficiency capture and guidance for shareholder distributions (dividends and buybacks). In overall terms I expect the sentiment of executives to be optimistic with a peppering of some modest caution. Notably, bank share prices have performed strongly ahead of next week’s updates - with LLOY, BARC and NWG seeing their share prices climb by 6-8% last week so the market view on the earnings outlook is likely a bit more favourable than the published sell-side consensus view already (though, with that said, some of this outperformance last week appears to be due to diminishing concerns in relation to a severely adverse bank taxes shock as well as the positive soundings coming from regulatory voices).
Banks being heard in Westminster
I noted in ‘Financials Unshackled Issue 11’ (click here) that the Chancellor was due to meet the CEOs of the top 5 UK banks on Wednesday 9th October (according to Sky News - click here) but that no information was leaked in relation to what was discussed. The bankers issued a rare joint opinion piece subsequent to that meeting that was published in The Times last Monday (penned by the CEOs of Barclays, Lloyds, HSBC, NatWest Group, and Santander UK; click here) - ahead of last week’s investment summit - in which they argued for selective investment to support economic growth and to rebalance the need for regulation with the need for growth (indeed, we have seen some positive soundings on this front since the letter was penned, as set out below). It does feel like the new Government does recognise the centricity of UK financial services (and the large UK banks within that) in the context of delivering on its pro-growth agenda (though not every decision will please every constituent interest in a growth context with that said). I believe that this has likely given the Chancellor considerable pause for thought in a bank taxes context - though, with that said, I do expect some pain for the sector in the upcoming 30th October Budget (I just think Government won’t be able to help itself here in what’s going to be a tough Budget in overall terms) and remain of the view that we will see a two percentage point uplift in the bank surcharge to 5% (worst case scenario is a doubling to 6% in my view) with the €100m threshold remaining unchanged.
Regulatory loosening a key theme over the last week
On Monday a statement issued by Tulip Siddiq, Economic Secretary to the Treasury, confirmed that the Government will implement a package of reforms to bank ringfencing rules as soon as parliamentary time allows (click here for the statement and here for a timely Reuters article on it, which I was delighted to contribute to). Notably, the reforms will include an increase in the primary deposit threshold for ringfenced banks from £25bn to £35bn - which is helpful for the likes of Chase UK (JPM) particularly.
The Bank of England (BoE) published a Consultation Paper (CP) on Tuesday in relation to potential amendments to its approach to setting a minimum requirement for own funds and eligible liabilities (MREL) - click here for the CP. Of most particular note, the BoE is consulting on potentially increasing the indicative total assets threshold (before which firms become subject to MREL requirements) from £15-25bn to £20-30bn, reflecting nominal economic growth (notably the Government issued a ‘Financial Services Policy Update’ later on Tuesday (click here) in which it stated that “The government welcomes the publication of these proposals for consultation and recognises the importance of ensuring the MREL regime maintains financial stability while being calibrated in a way that supports competition and competitiveness within the UK’s financial services sector.”). While such a change would indeed be welcomed by smaller banks like Aldermore, Close Brothers Group (CBG), Paragon Banking Group (PAG), and Shawbrook my own view is that the ceiling should be lifted to a significantly higher level and the BoE’s position continues to stand in marked contrast to both the EU position (€100bn total assets trigger point though non-Pillar 1 banks can also be subject to MREL requirements; click here for more details) and the US position (applies only to US G-SIBs and the US operations of the largest and most systemic foreign banking organisations). The low thresholds in a UK context are unnecessarily damaging to smaller lender viability as we saw with Metro Bank (MTRO) in 2019 where, perversely, the need for the bank to issue MREL-eligible debt proved to be the tipping point that pushed the bank into financial instability (when, prior to the issuance, its deposits were actually stable), thereby - ironically and entirely unnecessarily at the time - increasing the risk of depositor losses. So, while some progress is good, I for one am of the view that the thresholds should be increased materially further (to £50-75bn at least). That’s my view on the outright total assets threshold - but, separately, I understand why the BoE is disinclined to meddle with the transactional accounts indicative threshold (40,000-80,000 accounts) given the SVB UK experience. On a final note on this I can’t hep but feel there are likely to be factions within the BoE who absolutely regret going with such a low threshold of £15-25bn all those years ago (and maybe some always felt it was too low…) - but, to lift it materially now could backfire as it could be interpreted as ‘admission of guilt’ as it were (I would imagine certain MTRO shareholders making their grievances known as just one example) so it seems easier to hide behind nominal economic growth as the underpin for a small increase (or maybe I’m just being too cynical…).
Sam Woods, Deputy Governor for Prudential Regulation at the BoE and CEO of the Prudential Regulatory Authority (PRA), spoke at the Annual City Banquet at the Manion House on Thursday (click here for the speech) on ‘Competing for growth’. Woods noted that “…the UK has become something of an outlier in terms of the length of [bonuses] deferral that we require, and that this may well be damaging for competitiveness”, going on to note that “We will propose to move to a five-year deferral period for all senior managers, down from the eight years some are subject to at present, and to a four-year deferral for others captured by the regime”. While I personally welcome regulatory easement in certain contexts (and I agree with all of the aforementioned ‘easement measures’ to be clear), stepping back, it does feel like a lot of political pressure is being exerted on the FCA and the PRA - the danger, over time, is that this can ultimately become excessive and the independence of regulatory authorities is paramount.
Finally, to end on a regulatory tightening note, the Government, on Thursday last, published a much-awaited consultation setting out its plans for regulation of the Buy-Now, Pay Later (BNPL) market. These plans aim to ensure people using BNPL products receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise. Click here for the consultation and click here for the FCA response. The consultation is welcome in an area that merits much closer regulatory scrutiny in my view.
Mortgage rates up strongly week-on-week
Rightmove’s weekly mortgage tracker (published on Wednesday 16th October; click here for it), unsurprisingly, shows mortgage pricing moving back up. I noted in ‘Financials Unshackled Issue 11’ that “…I would expect we will see a marginal uptick in average rates in next week’s Rightmove data as lenders increasingly seek to reflect higher swap rates in mortgage pricing (although, clearly, a lot can change in a short space of time in an outright pricing context)”. Indeed, we saw: i) average rates on 2Y/5Y fixed rate mortgages at 75% LTV up by 3bps/7bps week-on-week to 4.67%/4.42%; and ii) average rates on 2Y/5Y fixed rate mortgages at 60% LTV up by 9bps/13bps week-on-week to 4.19%/4.01%. Interestingly we didn’t seen a raft of downward rate moves last week as swap rates reduced considerably (notably, 2Y and 5Y swap rates, which have been jumping around a bit lately, fell by 15bps and 16bps respectively last week to 4.12% and 3.90% respectively.). In fact the most prominent rate moves during the last week were Barclays’ and Halifax’s (LLOY) decisions to nudge pricing further upwards. For what it’s worth I think the UK banks and building societies will now largely hold pricing at current levels until post-Budget - which will also be somewhat helpful (in a recency bias context more than anything else) in the context of mortgage spreads messaging at the stage of the 3Q updates.
Select UK Company Developments Update
Revolut / digital banks in focus
For those of you who may not have seen my LinkedIn post on Tuesday last, it’s worth repeating here. Note that the arguments presented do not apply equally to all digital banks and this is a topic that I will delve into in further depth soon.
As last Monday evening’s BBC Panorama show on Revolut (click here to watch) reinforced, it's time to GET REAL about digital banks. Many intellectual / strategy heavyweights have been in my ear for years proclaiming that traditional banks are dead - like you're naive if you can't see that coming on a super short-term horizon...
It is indeed undeniable that the traditional banking industry in Western markets faces many disruptive challenges. Focusing on digital banks specifically, philosophically speaking, the playbook is to develop business models that can outearn the traditional banks over time. How? Some key reasons, though by no means an exhaustive list:
Low cost highly scalable business models driving competitive advantage from an operating leverage perspective.
Slicker technology denoting competitive advantage in a customer proposition context (relevant but overplayed in my view as traditional banks strengthen propositions organically as well as through select fintech partnerships).
Younger people using these banks as primary current account provider when they enter the workforce as they have 'grown up with' them.
That's all great in theory but the reality is that modern digital banks have categorically NOT YET delivered proof of concept in a risk-managed maturity transformation context (the core business of banking), i.e., the recycling of funds (principally deposits) into higher-priced loan product while adequately managing credit & operational risk - AND playing by the rules of the system - to deliver adequate risk-adjusted returns. Anyone observing what has been going on at Revolut (indeed anyone closely following the company is well aware of these issues anyway - before the BBC Panorama documentary ever aired) or Starling Bank (the FCA Notice in relation to its £29m fine was truly fascinating reading) as just two cases in point can see that significant issues have prevailed in relation to robustness of systems & controls and, therefore, customer trust.
While I wouldn't underestimate the potential for longer-term disruption, these are not quick fixes. While constituent interest may be 'rolling out the red carpet' for now, regulatory perimeters, etc., could evolve. There is a long road to travel here to build trust (and deep risk management capability) - and most (though not all) digital banks haven't converted their substantial "customer" numbers into primary bank relationships.
Put simply, as Frances Coppola noted on the BBC Panorama show, banking is not an industry in which you can 'move fast and break things' because you're dealing with people's money.
Taking the UK market, the one prospective disruptor I would be most worried about is in fact Chase UK (a digital bank initiative that is being rolled out by a deep-pocketed experienced traditional player, i.e., J.P.Morgan). More thoughts on Chase in due course...
Barclays updates
Two updates to quickly flag: 1) Barclays (BARC) confirmed last Monday (click here for the press release) that it has now entered into a long-term partnership agreement for BARC to be the exclusive issuer of the GM Rewards Mastercard and the GM Business Mastercard in the US starting next summer. BARC displaces Goldman Sachs (GS) as the partner for GM as GS seeks to backpedal from its recent foray into consumer banking. While detail is light within the press release a Bloomberg article of 10th September last (click here) noted that the portfolio is of c.$2bn in size and that BARC was poised to acquire the book at a discount to book value. 2) It was reported in the media last week (click here for Bloomberg article and click here for Reuters article) that BARC has commenced a Court appeal against a ruling that it failed to treat a customer fairly when she bought a used car, arguing that the decision would serve as a template for how future complaints are handled ahead of the findings of the impending FCA motor finance review.
Other Snippets
Santander is reported to be exploring a potential c.£90m synthetic risk transfer (SRT) linked to a portfolio of c.£1bn of UK loans, according to a Bloomberg report (click here) on Thursday.
Interesting to note a RNS issued by OSB Group (OSB) on Friday afternoon flagging that Peter Hindle, Group Chief Information Officer, disposed of 19,110 shares in the lender on Wednesday last (via a nominee account) at an average price of c.391p per share, netting him c.£75k.
Ireland Perspectives & News Snippets:
Irish banks come under more selling pressure - Some perspectives
Given the evolution in market expectations in relation to the pace and extent of impending further ECB official rate reductions it is no surprise to see the Irish banks’ share prices take a further hit (down 3-4% over the last week) as they are particularly rate sensitive relative to peer banks in other European jurisdictions (indeed, RBC’s initiation of coverage note on Wednesday probably didn’t help either). Their especially high reliance on interest revenues stems from multiple factors - including lower customer charging custom & practice / more stringent regulations in this vein; disposal of non-core fee-earning businesses years ago in a bid to rebuild capital post-GFC (as directed by the EC) with AIB Group’s (AIBG) disposal of Ark Life one such example; and a greater degree of benefit capture in a net interest income (NII) context versus other European banks when official rates lifted (owing to extremely contained deposit pricing passthrough in the main) meaning more downside then when rates fall.
To recap on some numbers, AIBG’s most recent point-in-time NII sensitivity estimates based on its 30th June Balance Sheet indicate that annual euro-related NII would be €333m lower for a 100bps downward parallel movement in rates (broadly unchanged assessment relative to the euro-related NII sensitivity based on its 31st December 2023 Balance Sheet), i.e., c.8.3% of guided FY24 NII for context. The equivalent figure for BIRG is €255m (broadly similar to the €260m euro-related downward NII sensitivity based on its 31st December 2023 Balance Sheet), i.e., c.7.2% of guided FY24 NII for context. PTSB is an Irish pure play bank and discloses that it is estimated that a 100bps downward rate move would drive a c.€25m annualised reduction in NII, i.e., c.4-5% of implied FY24 guided NII for context. AIBG is understandably more sensitive to downward rate moves than is BIRG due to: i) greater reliance on euro interest revenues; and ii) in an interrelated context, proportionally more liquid asset balances sitting at the ECB which automatically adjust when official rates change. Furthermore, in a PTSB context, it is not surprising that its rate sensitivity is less than the other two names as: i) it has proportionally far less balances sitting at the ECB; and ii) it has a greater proportion of interest-earning deposits in its funding mix, on which pricing is adjustable. That said, the variable pay leg of the swaps entered into by AIBG and BIRG as part of their structural hedging programmes (more below on this) is a helpful offset in the context of their downward rate sensitivities within these computations.
Another observation on these rate sensitivities is that, despite that fact that, in net terms, one would expect PTSB to be slightly less rate sensitive the differences are more significant than I would expect based on some ‘back of the envelope’ analysis. Indeed, the psychological impetus for AIBG and BIRG management is to be very conservative on guidance given strong profitability levels, etc. (and we have seen that play out in recent years), but the considerations for PTSB management are slightly different in various contexts. Something to think about. And, one more thing on this, is if the neutral official interest rate is going to be lower than what the markets have been expecting, then the challenges for PTSB in terms of getting to an adequate level of returns will be more pronounced (even if the downward rate sensitivities are more contained). Which brings its RWA intensity review programme more into focus…
There are a couple of things for investors to be thinking about here in my view: i) AIBG (especially) and BIRG guidance / rate sensitivity disclosures have erred on the side of considerable caution through the rate rising cycle (albeit moderated assumptions now - on deposit beta particularly - mean that guidance is less conservative than it once was); and ii) a number of fixed assumptions form the key inputs in a disclosed rate sensitivities context and it is unlikely that these banks have been over-optimistic in this vein. Indeed, we have not seen much passthrough of lower base rates to mortgage customers thus far since official rates started going into reverse (with swap rate moves obviously preceding that) - and it was interesting to study CBI data earlier this month that show term deposit pricing has been coming down meaningfully (the weighted average interest rate on new household term deposits and new NFC term deposits was -15bps m/m to 2.62% and -14bps m/m to 3.10% respectively in August - and composition shift remains muted). It’s early days I appreciate but I suspect it’s unlikely that these dynamics are fully captured in the disclosed downside rate sensitivities or in investors’ models (and I have made the point repeatedly that Irish banks will seek to recoup some of the inevitable liability margin compression by letting mortgage spreads widen as official rates decline - which isn’t too hard to achieve given competitive dynamics…).
Furthermore, Balance Sheet growth (or, indeed, front book / back book dynamics) is also unaccounted for in downside (and upside) rate sensitivities given the static Balance Sheet assumption embedded in the exercise (and the Irish banks are delivering growth here at a decent clip).
And one more thing pertains to the structural hedging programmes in place. While the typical rate sensitivity computation automatically applies the assumed reduction in rates (i.e., the 100bps referenced above) to the variable pay leg of the swaps (thereby offsetting some of the NII hit accruing from lower rates), no account is taken of the continuing roll of the fixed receive leg onto higher rates (albeit slightly lower fixed receive rates now give the decline in swap rates). Indeed, the longer average duration of the hedges in place (versus, for example, UK banks) is also helpful in a declining rate backdrop, i.e., in terms of longevity of income streams on high fixed receive swaps - and that’s not captured in point-in-time sensitivities either.
So, to cut a long story short here, the NII sensitivities are likely to be quite conservatively struck in my view, and, now that rate reduction expectations have picked up, I’d say we might learn on the AIBG earnings call on 5th November that the CFO expects the downward impact to be less in fact than what was disclosed in the 1H24 update. On the other hand, I am strongly of the view that BIRG is likely to wait until the stage of its FY24 update to revise disclosures in this respect (though there may be some qualitative language hinting at a potentially better outcome embedded within its 3Q24 RNS - although that’s a low probability I think).
State could fully divest of its shareholding in AIBG in 2025 - Some thoughts
AIBG CEO Colin Hunt appeared on Bloomberg TV on Wednesday last (click here to watch a replay). One of the comments he made was that the Irish Government could potentially exit the company’s share register in 2025. The Government’s latest disclosed shareholding is 21.99% (following a transaction on 26th September) and that’s likely to be below 20% by the time the bank reports 3Q24 numbers on 5th November (it was initially scheduled for 6th November according to my calendar but maybe that was my mistake) given the ongoing trading plan. That’s entirely possible if one extrapolates the pace of the divestment of the State’s shareholding that we have observed over the past year or so. However, is one potential ‘fly in the ointment’ here the fact that AIBG’s share price has slipped by 11.5% on a one-month lookback? Most importantly here is the fact that the current share price of 492.4c is just a sliver above the 490c price per share achieved by the State in its last placing that was announced on 26th June (and, notably, well below the price of 544.5c per share paid by AIBG in the recent buyback of stock from Government). The State has never yet placed stock at a lower price than it did in the past (that’s different to the ongoing trading plan obviously) and there is likely to be a certain angst amongst the powers that be in relation to the possible media headlines that could ensue if they were to reverse course and do this. My own view, for what it’s worth, is that we are 16 years on from the financial crisis and the vast bulk (if not all) of the investments made in AIBG will be recouped (and the State notably made a material profit on its investments in BIRG) so, strategically, the State should just get on with it and sell down its residual shareholding regardless (within reason obviously) - which would be congruent with the consistent statements made by Ministers for Finance to the effect that the Government is not a long-term shareholder in banks. But, given an upcoming general election (29th November or 6th December?), will this give the Government pause for thought in a bid to avoid potentially negative press at the wrong time - meaning that there might not be a November placing? Hard to know but the reality is that the share price performance from here is realistically most dependent on how market expectations for official rates migrate. Then again, another earnings upgrade at the stage of the 3Q update (and warmer vibes in relation to prospective downside rate sensitivities) could be helpful here too. All very interesting!
Competition in Irish banking
Pleased to pen my latest Business Post article (published earlier today; click here for the article) on competition (or relative lack thereof) in the Irish banking market and I was also pleased to join an old schoolfriend Karl Fitzpatrick on the Business Matters radio show (click here to listen back) to discuss the same topic. I’m not going to write a treatise on it here but, suffice to say, here are my views:
Competition is very limited at the moment.
Some new entrants are emerging and the non-bank lenders may become more active again in the mortgage market as official rates reduce.
It will take a reasonably lengthy period of time for the Irish banks to lose material share (the non-banks really don’t present much of a threat in terms of material share erosion) - and the listed players can, collectively, easily afford to cede some share (and have been clear that current conditions should not be modelled as reflecting the longer-term reality to be fair). Bankinter is the ‘wildcard’ here and probably the player the incumbents are most worried about in the relative near-term - but change in banking does not come thick and fast and Bankinter is unlikely to majorly disrupt the market on a 3Y view in my opinion (though that is not to say that they won’t be impactful). As for the likes of Revolut, etc., it’s longer-dated again I believe though some innovation aficionados will think I’m a fossil upon reading this no doubt.
With that - and with the long weighted average life structural hedging programmes in the case of AIBG and BIRG - in mind, investors need to be careful about how quickly they assume returns normalisation (two years seems pessimistic unless market expectations around official rate normalisation evolve meaningfully further downwards, of course).
In the longer-term the banks need to ‘up their game’ - which is not dissimilar to other markets. Revolut, which has clear international ambition may well get ‘its house in order’ in due course (though it will absolutely take time) and is in fact taking definitive steps in that direction. Others like JPM’s Chase UK digital banking initiative, are gaining traction in large population centres too (UK, Germany, France) and are unlikely to stop there.
Global Perspectives & News Snippets:
Select Global Sectoral Developments Update
Just a few Snippets this week
Claudia Buch speech on bank profitability: Claudia Buch, Chair of the Supervisory Board of the ECB, spoke in Milan on Wednesday on the topic of bank profitability (click here to read). A long speech reflecting on historical profitability developments and the most interesting observation in the speech for me was that the past is not a predictor of the future, with Buch summarising in the conclusion on this very point: “Sustaining future profitability and strengthening business models requires banks to have a clear vision: a vision for how to adapt business models; a vision for how to bolster IT systems to provide the best service to customers; and a vision for how to protect against cyber risks. Much of this requires long-term investment, long-term funding and a strong capital base. Shareholders benefit from visionary long-term investment strategies as the value of their shareholdings rises.”. Indeed, this is a contribution we have heard many times from ECB supervisors over the years but a useful reminder nonetheless.
Former Vice Chair of ECB Supervisory Board is supportive of ECB efforts to test banks’ responsiveness to geopolitical developments and cyber shocks: Interesting to come across comments from Sabine Lautenschlager once again - who was the Vice Chair of the ECB Supervisory Board from 2014-2019 - in a Bloomberg article on Friday morning. Lautenschlager noted that the ECB is correct to be preparing lenders for risks in relation to geopolitical shocks or cyber attacks, succinctly noting that “The last decade was about capital. The next decade will be about operational resilience.”. Click here to read the article.
Interesting blog post from Jakub Lichwa at TwentyFour Asset Management on how banks’ early pre-funding reduces AT1 extension risk: Lichwa notes that about 25% of AT1 deals callable in 2025 have already been pre-funded given recent pricing conditions (note that I flagged last week reports that some credit investors have ben switching out of AT1 into Tier 2 given the narrowing in the spreads between the two instruments). Click here to read Lichwa’s piece.
McKinsey Global Annual Banking Review 2024: While it’s always a great read I didn’t find this year’s edition as insightful as prior year publications (with the 2017 and 2018 editions still sticking out particularly in my mind). Anyway, to cut a long story short, McKinsey notes that “Despite the recent value creation, over the past decade, the sector has eroded economic value when measured against cost of capital” and sets out a hotchpotch of prospective solutions, acknowledging that there is no ‘one-size fits all’. Click here to read.
Pimco expresses reservations in a private credit context: I’ve been following private credit for many years now (albeit not reporting on it as it’s not my specialism). Indeed, Paul Davies at Bloomberg and the FT have produced some fascinating materials on the topic recently. Anyway, I think it’s worth listening back to an alternative view from Mohit Mittal, CIO for core strategies at Pimco, who notes on the Bloomberg Credit Edge podcast on Thursday (click here to listen back) that fundamentals are deteriorating in more levered portions of the credit markets: “You’re seeing more complacency, so you have to be very thoughtful, you have to be very careful”. There are definitely areas where private credit has stepped in because bank risk / capital considerations mean it makes more sense for them to stay away (in a bank-specific context SRTs spring to mind and these are transactions that make sense to me in the context of both counterparties to the trades). But the private credit market structure (in terms of leverage on leverage) and exponential growth in lending in certain pockets of the private credit market give pause for thought.
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