Financials Unshackled Issue 13: 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. It contains the usual round-up of key news items but I keep comments on most developments short this time as there is a significant focus within the note on Lloyds, Barclays and NatWest Group (who reported 3Q results last week). Any feedback on this ‘pilot 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 (UK bank 3Q updates; UK Court of Appeal ruling in motor finance context; UK Budget; mortgage rates; savings rates; banking complaints data)
UK company developments (detailed selective review of Lloyds, Barclays, and NWG 3Q updates; HSBC changes)
Ireland developments (high-level thoughts ahead of PTSB & BIRG 3Q updates; Bankinter updates on Avant Money; mortgage drawdowns & approvals; AIBG updates*3; Starwood writes down Dublin office mezz loans by 50%; instant payments)
Global developments (ECB Supervisory Board member speech on bank regulation; IMF cautions on SRTs)
Calendar for the week ahead:
Firstly, here is what to watch for in the week ahead:
Tue 29th Oct (04:00 BST): HSBC (HSBA) 3Q24 Earnings Release (for the three months to 30th September 2024)
Tue 29th Oct (07:00 BST): PTSB 3Q24 Trading Update (for the three months to 30th September 2024)
Tue 29th Oct (07:00 BST expected): Santander UK 3Q24 Results (for the three months to 30th September 2024)
Tue 29th Oct (07:45 BST): HSBA 3Q24 Investor/Analyst Zoom Meeting (click to register here)
Tue 29th Oct (09:30 BST): Bank of England (BoE) Money and Credit Statistics (September 2024)
Tue 29th Oct (09:30 BST): BoE Effective Interest Rate Statistics (September 2024)
Wed 30th Oct (04:15 BST): Standard Chartered (STAN) 3Q24 Results (for the three months to 30th September 2024)
Wed 30th Oct (07:00 BST): Bank of Ireland (BIRG) 3Q24 Interim Management Statement (for the three months to 30th September 2024)
Wed 30th Oct (08:00 BST): STAN 3Q24 Investor/Analyst Webcast (click to register here)
Wed 30th Oct (c.12:30 BST expected): UK Budget
Thu 31st Oct (02:30 BST): Sabadell (owns TSB UK) 3Q24 Quarterly Report (for the three months to 30th September 2024)
Thu 31st Oct (12:00 BST): Sabadell (owns TSB UK) 3Q24 Earnings Presentation (click here to register)
Thu 31st Oct (11:00) BST: Central Bank of Ireland (CBI) Money and Banking Statistics (September 2024)
Fri 1st Nov (11:00 BST): CBI Monthly Card Payment Statistics (September 2024)
UK Perspectives & News Snippets:
Select UK Sectoral Developments Update
UK bank results beat consensus expectations so far
This newsletter caters for a widely dispersed audience. For those who like to get stuck into some (selective) detail, there are three individual notes on key take-aways from the Lloyds (LLOY), Barclays (BARC), and NatWest Group (NWG) 3Q updates below. If you are more interested in high-level terms, here are some key take-aways:
Earnings beats across the board in 3Q with better-than-expected NII supported by slightly improved mortgage margins, lower deposit churn - and, to an extent, loan growth.
All reaffirmed medium-term targets - with some near-term guidance upgrades procured. Continued commitment to capital optimisation and shareholder distributions.
Positive assessment of UK macro backdrop on the part of all three management teams again - with the three banks ‘leaning into this’ as it were, delivering lending expansion.
LLOY and BARC continuing to move up the risk curve in UK consumer lending - with LLOY reporting strong q/q growth again in card and unsecured personal lending balances and BARC driving higher-margin loan growth through its higher-LTV Kensington mortgages model as well as decent q/q growth in Barclaycard balances (albeit some seasonality at play in unsecured lending it must be noted too). NWG growth in non-mortgage consumer lending has been much more contained albeit the bank churned out strong business lending growth in the quarter - specifically calling out an increase in term loans in the commercial mid-market portfolio, which is also a bet on a continued healthy macro backdrop.
Deposits growth is beginning to slow but so too is churn out of current accounts.
Cost management has been strong and the overall message on credit performance is positive.
UK Court of Appeal ruling in motor finance context
Close Brothers Group (CBG) issued a RNS at 11:27 BST on Friday (click here) noting the publication of the judgment in respect of the “Hopcraft” case, upholding the claimant’s appeal against Close. Specifically, the Court has determined that that motor dealers acting as credit brokers owe both a disinterested duty and a duty of loyalty (fiduciary duty) to their customers. CBG notes that this sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than that required by current FCA rules, or regulatory requirements in force at the time of the case in question. The financial impact of the specific case is not material for CBG but the issue here is the precedent that it sets - with CBG noting that the range of outcomes in this context is uncertain and that it will be temporarily pausing new UK motor finance business origination. CBG intends to appeal the decision to the UK Supreme Court.
This news comes as a further significant blow for CBG shareholders - with the stock price tumbling by 24.5% on Friday. Indeed, Lloyds (LLOY) also experienced significant selling pressure (stock down 7.3% on Friday) owing to its exposure to the segment. Bloomberg also reported on Friday that FirstRand (owner of Aldermore) is seeking permission of the Court of Appeal to appeal the judgment to the Supreme Court. The issue now for the lenders is twofold: i) more prospective legal liability as this potentially ‘opens the floodgates’; and ii) how the FCA will think about this ‘higher bar’ in the context of its impending motor finance review (with any Supreme Court hearing likely to be later than the FCA’s current May 2025 timetable in my understanding).
All eyes on UK Budget
I have written a lot on prospective increases in UK bank taxes of late. Hard to see Government refrain from doing anything - but I suspect any moves will be contained given that the lobbying effort (in terms of the individual bank executives as well as UK Finance) appears to have done a good job at hammering home the point that, in both an economic growth facilitation and an international competitiveness context, any move to upsize bank tax rates would be retrograde. Let’s see what Wednesday brings.
Other Snippets
A few more developments to quickly flag:
Mortgage pricing up last week: Rightmove’s latest weekly mortgage tracker (click here) shows a modest lift in mortgage pricing in the week to 24th October (+3-4bps on 75% LTV product; +4-5bps on 60% LTV product) but, interestingly, rate changes on 95% LTV product have been more contained. 2Y and 5Y swap rates were +12bps and +18bps respectively last week so this should translate into higher pricing over the coming weeks as lenders seek to replenish front book spreads - but a lot will obviously depend on next week’s Budget given the influence that could have on swap rates.
Savings rates keep reducing: Moneyfacts reported last Monday that savings rates continued to reduce materially through September (click here) and it was interesting to see NS&I announce material rate cuts on Tuesday last (click here) - which suggests to me that, as I have been writing in recent weeks, the government is unlikely to deploy levers to pressurise the banks on deposit rates for the foreseeable future.
Banking complaints on the rise: The Financial Ombudsman Service (FOS) issued its half-yearly complaints data for the period from 1st January to 30th June on Friday (click here), which show a staggering 40% y/y rise in the number of complaints in the period.
Select UK Company Developments Update
Lloyds (LLOY) 3Q24 numbers excl. ECLs modestly ahead of consensus
Lloyds Banking Group (LLOY) published its 3Q24 (three months to 30th September) Interim Management Statement (IMS) on Wednesday 23rd October. In overall terms it was a strong set of numbers - with u/l PBT coming in at £1,853m, which was >11% ahead of consensus sell-side analyst expectations* (cons) for £1,667m. The end-3Q CET1 capital ratio printed at 14.3%, which was a touch below cons for 14.4%. TNAV per share came in at 52.5p, ahead of cons for 50.8p. 3Q24 RoTE was 15.2%, taking YTD reported RoTE to 14.0% (ahead of cons for 13.5%). FY24 guidance was reaffirmed in full and the CFO flagged “increased” confidence in FY26 targets on the investor/analyst call.
Separately, see above write-up on motor finance risks in the context of the “Hopcroft” case.
Zoning in on some key points:
Decomposing the earnings beat: The most significant factor underpinning the £186m (11.2%) 3Q u/l PBT beat was lower impairment charges (£172m vs. cons for £271m, albeit a one-off debt sale writeback of £77m explains 78% of the delta here) though LLOY reporter stronger NII (+0.8% vs. cons), stronger OOI (+3.2% vs. cons), and lower operating costs (-1.2% vs. cons, largely owing to lower-than-expected remediation costs). However, the operating lease depreciation charge of £315m was 4.0% ahead of cons. If you strip the one-off debt sale writeback of £77m out of the numbers, the 3Q u/l PBT beat was +6.5% - impressive but not as strong as what we got from Barclays (BARC) and NatWest Group (NWG).
One key point of focus as we look to 4Q is NII: There were reassuring messages on Banking NIM build q/q in 4Q (295bps in 3Q vs. cons for 294bps) with stable (to slightly positively drifting) mortgage completion margins, continued easing in deposit churn, and continued structural hedge income tailwinds supportive in this context (CFO, unsurprisingly, specifically noted that Banking NIM will tick up a few bps q/q in 4Q). However, cons is already looking for a material q/q uplift in Banking NIM (to c.299bps) and some of the CFO’s remarks on the call took some of the shine off what initially looked to be a set of numbers and messages that would drive a meaningful q/q cons NII upgrade for 4Q. Specifically, Chalmers noted that: i) 4Q NII is expected to be “broadly stable” vs. 3Q and given that cons is already looking for £3,272m of NII in 4Q (vs. actual 3Q NII of £3,244m) this surely reduced the propensity for upgrades in and of itself; and ii) in a directly interrelated context, the non-banking NII (NBNII) charge is expected to pick up from 3Q (£118m actual vs. cons for £125m) and given cons is at just £121m for 4Q it looks too light (especially given CFO noted that NBNII charge expected to be at upper end of guided £450-500m range for FY24 as a whole - which suggests to me the £121m charge is likely to move to somewhere in the c.£135-140m range). Moreover, it seems likely that the FY25 cons NBNII charge will ratchet up by c.£20-25m reflecting base effects (the changed FY24 expectation) - and given the CFO made the point quite firmly that it will tick up further next year (the lag of the benefit accruing from lower base rates is lengthy). However, the likely change in the expected 4Q NBNII charge would not fully explain “broadly stable” q/q NII in 4Q (though this is a somewhat vague reference, I accept), which brought the structural hedge maturities modelling into question (guidance for >£700m of structural hedge income uplift y/y in FY24 retained but CFO downplayed expectations for a materially better outcome despite swap curve movements relative to pre-existing expectations).
Looking to the FY26 targets: While noting the CFO’s “increased” confidence in achieving these targets, two points merit reflecting on: i) the NII dynamics discussed above - with 4Q cons expectations unlikely to move up much (if at all) in overall terms, and there are base effects going forward in the context of the implied 4Q NBNII guidance (though possibly less so into FY26 to be fair given eventual impact of lower rates on the NBNII charge); and ii) far more importantly, the pace of TNAV accretion has materially surpassed expectations (profitability but cashflow hedge reserve tailwinds in response to the evolving rate backdrop playing a major role here too) which exerts more pressure in the context of the target RoTE delivery. I would also add that as you model out beyond FY26, the structural hedge income tailwinds, ceteris paribus, obviously eventually ought to taper so, ceteris paribus, FY26 earnings are, arguably, likely to be somewhat inflated anyway relative to what should be a normalised through-the-cycle level. One final parting thought on this is that it could indeed suit LLOY for FY24 NII guidance to be a bit conservative (mortgage spreads have expanded a bit and deposit churn continues to ease with NS&I slashing rates last week too; possible hedge income upside albeit difficult to be precise given maturities / yields on maturities can move around a bit), though, with that said it is sensible to be cautious anyway - if so, then there could be prospective cons upgrades to come then at FY24 which would support improved forecasts in outer years at that point as FY26 comes more into focus (with likely improved AQR guidance as well, though growth in unsecured lending will likely contain this), potentially getting the sell-side towards that >15% RoTE FY26 target (which is also contingent on what the Budget brings) early next year.
Balance Sheet evolution: It’s also worth quickly flagging: i) net loans +£4.6bn q/q to £457.0bn - with growth predominantly from Retail (mortgages the main contributor); ii) it was notable that unsecured personal lending was up a highly material +7% q/q / +28% YTD (to £8.8bn) which is reflective of increased risk appetite; and iii) deposits growth has slowed (+£1.0bn q/q to £475.7bn - with the YTD increase +£4.3bn) - indeed, deposit churn is still evident with a £1.1bn outflow from PCAs in the quarter (which has possible implications for the structural hedge notional) albeit it’s slowing as this was less than the £1.4bn of outflows observed in 2Q.
* based on company-compiled sell-side analyst consensus publication of 4th October
Barclays (BARC) delivers strong 3Q - quite a broad-based earnings beat
Barclays (BARC) published its 3Q24 (three months to 30th September) results on Thursday 24th October. This was a very strong update, which was well received by the market. U/L PBT printed at £2,232m, which was 13.4% ahead of consensus sell-side analyst expectations* (cons) for £1,968m - with the beat stronger and, more importantly, more evenly distributed across line items than for LLOY (more below on this). The end-3Q CET1 capital ratio printed at 13.8%, which was a touch above cons for 13.7% (lower RWAs, mainly owing to FX) - with TNAV per share coming in at 351p, bang in line with cons. 3Q24 RoTE was 12.3%, taking YTD reported RoTE to 11.5% (well ahead of cons of <10.5%). While BARC retained FY24 Statutory RoTE guidance it is notable that there was another income upgrade - with Group NII (excl. IB and Head Office (HO)) lifted to >£11.0bn from c.£11.0bn, of which Barclays UK (BUK) is c.£6.5bn (up from c.£6.3bn). Notably, as well, HO income was well ahead of cons expectations in 3Q - meaning strong total income upgrades are likely (though, while notoriously difficult to model, I suspect you’ll see cons 4Q HO income cautiously come down materially from £100m now given the strong 3Q print and, more particularly, given retained FY24 RoTE guidance (which may be a bit conservative, especially given it’s on a statutory basis - and given lots of chat on the earnings call about the inorganic activity in train as well as possible further adverse FX impacts I guess in what could be ‘a choppy period’ for cable)). FY26 targets are reaffirmed (which Venkat noted BARC is “on track” to achieve) - and, positively, but rather unsurprisingly, the timing of regulatory change-driven RWA inflation is pushed out.
Zoning in on some key points:
Decomposing the earnings beat: The beat was broad-based - with: i) total income +1.3% vs. cons (though while BUK and HO income were well ahead of expectations and IB income was also ahead, the US Consumer Bank (USCB) was notably behind - and the UK Corporate Bank (UKCB) as well as Private Banking & Wealth Management (PBWM) were also behind); notably NII was also 1.3% vs. cons (BUK 3.3% ahead, UKCB 4.4% ahead, PBWM marginally behind, USCB 4.1% behind); ii) opex (incl. litigation & conduct) 2.0% below cons (1.3% below if net regulatory levies addback of £27m stripped out); and iii) credit impairment charges of £374m materially lower than cons for £452m (with a notable downdrift in USCB reserve build following a pre-emptive bulk-up in recent quarters - and USCB write-offs were down marginally q/q too).
NII got a lot of attention on the call: Positive messages on UK asset pricing, positive message on deposit churn (broadly neutral now), and deposit pricing reductions in train (albeit lag effects in terms of passthrough mean some liability margin suppression near-term (which will be more pronounced in 4Q) before easing as the lag effects dissipate; this will also be a relevant factor in FY25 assuming a declining rate backdrop). Positive messaging on USCB NIM prospects (strong confidence expressed that this is a >12% NIM business) - albeit CFO set out some factors that have limited and will continue its ability to get there in the near-term. Overall, it would appear that there is material upside to FY24 income guidance (in a NII-specific context) and FY25 NII cons but a good question was fielded in relation to the rate sensitivity disclosures (provided at 1H24) that show that BARC would suffer just £50m of annualised NII erosion in Year 1 in response to a 25bps downward parallel shift in interest rate curves (i.e., just 0.45% of cons FY24 NII, for example) which is a materially lower proportional impact than for LLOY (-£300m, or 2.3% of FY24 cons NII) and NWG (-£167m, or 1.5% of FY24 cons NII), for example (although the sensitivity picks up substantially in Year 2 and, particularly, Year 3). Management noted that BARC was less rate sensitive on the way up, so will be less sensitive on the way down and that the very active yet programmatic management of the structural hedge is constructive in this respect. I am getting into the zone of speculation now but it does feel like cons will be hesitant to push through the extent of NII expansion for 4Q implied by guidance (and for FY25 based on run rate analysis and imposition of, perhaps more conservative, rate sensitivities) with the extent of Year 1 rate sensitivity that BARC will actually experience possibly weighing on minds a bit - especially given no change to FY24 RoTE guidance (and no other obvious adverse trends relative to pre-3Q24 expectations are set to drag on profitability in 4Q - but, inorganic activity can weigh as we saw in 2Q24 and there is a lot happening on this front). So, I don’t see FY26 cons RoTE get to >12% just yet.
Quick word on the Investment Bank (IB): Very little focus on the IB on the call Q&A but it would be remiss not to flag given strong performance again in 3Q (income +6% y/y following income +10% y/y in 2Q): i) 3Q Experience: Global Markets income +3% y/y (+5% y/y in 2Q), Equities income +3% y/y (+24% y/y in 2Q), FICC income +3% y/y (-3% y/y in 2Q), Investment Banking income +13% y/y (+18% y/y in 2Q); and ii) CEO Venkat flagged on the call that BARC has achieved improved market share here YTD and reminded that the strategy to reduce RWA proportionality attributable to the IB is a function of targeted growth in other segments of the business rather than a de-emphasis of IB.
Balance Sheet evolution: It’s also worth quickly flagging: i) BUK net loans +£0.6bn q/q to £199.3bn - with growth stemming principally from mortgages (Personal Banking (mostly mortgages) balances +£0.8bn q/q to £168.1bn; Barclaycard balances +£0.4bn q/q to £10.6bn; Business Banking balances -£0.6bn q/q to £20.6bn); ii) BUK deposits -£0.5bn q/q to £236.3bn; and iii) USCB balances +$0.4bn q/q to $31.6bn.
Separately, it’s worth quickly flagging a Sky News report from Tuesday noting that BARC is in discussions in relation to a potential acquisition by Brookfield of a majority shareholding in the business. Click here for the article and note that there was no discussion on this at the results update on Thursday.
* based on company-compiled sell-side analyst consensus publication of 11th October
NatWest Group (NWG) 3Q24 results show a big broad-based beat
NatWest Group (NWG) published its 3Q24 (three months to 30th September) results on Friday 25th October. This was a particularly strong update in overall terms - with u/l PBT coming in at £1,674m, which was almost 15% ahead of consensus sell-side analyst expectations* (cons) for £1,458m. The end-3Q CET1 capital ratio printed at 13.9%, which was a touch ahead of cons for 13.8%. TNAV per share came in at 316p, ahead of cons for 312p. 3Q24 RoTE was a mighty 18.3%, taking YTD reported RoTE to 17.0% (almost a full percentage point above cons). Indeed, management upgraded guidance too - with FY24 RoTE now expected to be >15% (from >14% - though a ‘back of the envelope’ suggests that cons should move closer to 16.0% than 15.0% as this does appear to be somewhat cautious guidance) and income excl. notable items is now expected to be c.£14.4bn (from c.£14.0bn). FY26 target RoTE of >13% is reaffirmed (which the market clearly sees as more plausible guidance than LLOY’s - and BARC’s - target FY26 RoTE) and NWG notes that its initial assessment of the impact of Basel 3.1 reforms will be an uplift in RWAs of c.£8bn on 1st January 2026.
Zoning in on some key points:
Decomposing the earnings beat: The earnings beat was, arguably, the most broad-based of the pack - with total income +4.6% vs. cons (NII +4.1%; OOI +6.4%) and opex (excl. litigation & conduct costs) 5.3% lower than cons (with litigation & conduct costs also coming in below cons) - partly offset by a higher than expected impairment charge of £245m vs. expectations for £173m.
Income in focus again: Income (particularly NII) was a key talking point on the results call, with a few points to note in this vein: i) CFO reaffirmed (as implied by revised income guidance) that NWG expects to see sequentially lower income q/q in 4Q (which implies both lower NII and lower OOI q/q - CFO confirmed the latter specifically); ii) current cons (before taking into account the 3Q beat) is for total income of £14,300m in FY24 implying 4Q total income of £3,587m (vs. £3,744m for 3Q) - split between NII of £2,819m (vs. actual 3Q print £2,899m) and OOI of £767m (vs. actual 3Q print of £845m) - so cons is already baking in q/q decline for 4Q; and iii) however, initial scepticism in relation to the guidance (at first glance it appears highly cautious) was likely tempered as the CFO noted a few points: a) treasury income tailwinds not expected to repeat in 4Q (though she did emphasise that this active balance sheet management will likely be pursued again in due course); b) the lag in terms of the passthrough of lower base rates to deposit customers is quite meaningful and will continue to inhibit the delivery of normalised NII in the context of the refreshed rate backdrop in the near-term (especially relevant for 4Q as more rate cuts assumed within guidance); and c) 3Q sees naturally higher income owing to an extra day as well as seasonality particularly in OOI. Appreciate this is a mouthful but, with all that said, while these messages will likely constrain 4Q-specific upgrades it is clear that 4Q income will not be representative of a run rate and FY24 income upgrades will still likely emerge owing to the strong 3Q performance - so, if anything, FY25 total income expectations are, on balance, more likely to nudge up a bit rather than down.
Quick word on costs and asset quality: Firstly, on costs, the CFO reaffirmed that opex are expected to be broadly flat y/y in FY24 - following the strong beat in 3Q, I would expect cons opex to nudge down a bit. On asset quality, while there was a material above-cons £245m charge in 3Q the overall message was positive in terms of credit performance - while we saw the retail banking book impairment charge normalise in 3Q the focus of the market was on Stage 3 charges in the Commercial & Institutional book “due to flows into default on individually assessed customers”, the CEO reassured on the call that management is very comfortable with coverage on individual exposures (without identifying specifically, of course - but there has been plenty of press coverage on this over 2024 anyway).
Balance Sheet evolution: It’s also worth quickly flagging that NWG’s net loans were +£7.4bn q/q to £386.7bn at end-3Q - with growth coming from: i) Retail lending +£4.1bn q/q (o/w £3.7bn mortgages, incl. Metro Bank portfolio); ii) Commercial & Institutional lending +£4.2bn q/q; and iii) some offset owing to reverse repo activity in the Central portfolio. Deposits (excl. central items) were up £2.2bn q/q to £427.4bn, driving some greater Balance Sheet efficiency which will be important in a lower rate backdrop.
* based on company-compiled sell-side analyst consensus publication of 18th October
HSBC Updates
HSBC issued two announcements on Tuesday: i) Pam Kaur has been appointed Group CFO and Board Director with effect from 1st January 2025 (click here); and ii) organisational structure recalibration (including an integration the Commercial and Global Banking & Markets business) into four separate businesses: a) Hong Kong; b) UK; c) Corporate and Institutional Banking; and d) International Wealth and Premier Banking (click here). The update on the reshaping of the firm structure has raised many questions. While a separate Hong Kong and UK bank does not mean that the actual intention is to break up the business along the lines argued for by Ping An in due course, it does, however, enhance longer-term optionality in this respect. More detail is likely to be forthcoming when HSBC reports 3Q24 results on Tuesday 29th October.
Ireland Perspectives & News Snippets:
Key Updates:
PTSB and Bank of Ireland (BOI) and PTSB are due to issue 3Q trading updates this week: Neither bank typically does an analyst/investor call at the stage of the 3Q update so we’ll likely get a relatively detailed - albeit short - trading update from both. In overall terms I expect the main messages to be: i) continued strong financial performance supported by continued favourable Irish deposit funding costs as well as mortgage pricing dynamics (though they might not articulate all of this in detail given the historical brevity of the statements), improved OOI (BIRG), strong cost management, and continued reassuring credit performance. I would not expect changes to FY24 guidance for either bank. Nor do I expect any changes to medium-term targets - though some caution may be expressed in the context of the evolving outlook for base rates. As I have written previously, base rates are obviously the key determinant of the NII trajectory but downside rate sensitivity disclosures likely err on the side of caution in overall terms across the listed banks - given limited passthrough thus far at least of lower base rates to mortgage customers (though all are watching Avant no doubt - more below on them), continued structurally low deposit pricing and limited churn, and structural hedging programmes (with AIB Group’s (AIBG) hedging strategies procuring some particular near to medium-term NII resilience).
Bankinter updates on Avant Money: Interesting to note, in Bankinter’s 3Q24 slide deck (click here) that new lending in Ireland was €0.3bn in the quarter (consistent with origination volumes in both 1Q and 2Q) - taking its new lending for 9M24 to €0.9bn, which is +37% y/y. Net loans were +34% y/y to €3.7bn at end-3Q (mortgages €2.7bn (+41% y/y), consumer credit €0.9bn (+18% y/y)). Bankinter does disclose some slightly dated market share statistics in the deck, noting that Avant’s market flow share in mortgages was 8.0% over the 12-month period to June (down marginally from 9.0% in the 12 months to May, as disclosed at the stage of the 2Q update). So, no major shifts for now. Some interesting comments on Ireland on the earnings call, as follows:
CFO Jacobo Diaz (scripted comments): “We continue to work towards the expansion of our products and services in Ireland through the opening of a branch of Bankinter. This will not only reinforce Avant Money's product offering and expand services to clients, but will also allow for local financing to support their asset growth, diversifying the deposit franchise across the group to a third country with favorable market dynamics and macro environment. We expect to start gathering deposit by mid-'25. We continue to see solid loan growth in mortgages, up 41% and consumer credit up 18%. Asset quality indicators remain very low and stable. Total operating income up 6% and profit before taxes close to EUR30 million, a very successful growth year for the business and contribution to the group.”
CEO Gloria Ortiz (Q&A comment): “Regarding Ireland, I mean, in Ireland, we are not aiming only to have a franchise that gathers deposits to close the gap. Actually, we have enough excess liquidity in Spain up to EUR10 billion. So that is not the problem here. What we want to have is a franchise that replicates what we already have in Portugal so that we can cross-sell more products to our clients and we can engage more with them. We think there is an opportunity. We have seen that in the mortgage market, where, as you have seen, we have grown very quickly, and we have taken a significant market share there, and we basically want to expand the span of business there. So our ambition, just to answer your question is broader, and we don't have any pressure to gather more deposits in Ireland. So we will go slowly, but surely, and it is more a question of client acquisition and engagement.”.
Y/Y growth reported in both mortgage drawdowns and approvals: Banking & Payments Federation Ireland (BPFI) reported 7.4% y/y / 19.4% q/q growth in mortgage drawdowns in 3Q24 (click here). BPFI also reported on Friday that mortgage approvals by value were +12.4% y/y but -5.1% m/m in September 2024 (click here). In overall terms this data bodes well for expansion in Irish bank mortgage lending books.
AIBG updates: 1) AIBG issued a press release on Monday noting that it will invest €40m by the end of 2025 in upgrades to its Irish branch network (click here) which makes sense given its renewed commitment to the branches in 2022. There is a sense that other banks have, in the past, issued press releases like these ahead of reporting numbers to warm the market up for commentary on cost pressures. However, AIBG already alluded to this initiative at the stage of the 1H24 results flagging a one-off opex charge (of €25m) in FY24 to account for branch estate investment and operational efficiency measures. So, maybe this does, in and of itself drive some marginal incremental FY24 costs beyond what was communicated at the stage of the 1H24 results given the slight divergence in the numbers (it’s hard to know and I could be comparing apples and oranges here) but, regardless, I think it’s very unlikely that there will be an adverse change to overall FY24 costs guidance on 5th November. 2) AIBG issued a press release on Friday flagging an expansion in its green mortgage offering and a new lowest mortgage rate of just 3% (click here). That’s a highly competitive rate but I do not see wider negative readacross for market-wide mortgage spreads owing to this initiative. 3) Interview with Goodbody CEO Martin Tormey in The Irish Times on Friday (click here) - the discussion is mainly centred on Capital Markets (with indications that some chinks of light are emerging there), but, most importantly in an AIBG OOI context, were his comments on the Wealth business where the business has scope for material share gains: “…I think there is a big opportunity now, particularly on the wealth side, as part of a very supportive group” with Tormey also, notably, commenting that “The business is shaped structurally now in a way that it doesn’t need the more volatile areas to make it profitable”.
Starwood marks down value of mezzanine loans on Dublin office portfolio: Interesting to read the announcement issued by Starwood European Real Estate Finance on Monday noting that it has written down the value of the mezzanine loans it has provided against a portfolio of 12 central Dublin office properties, flagging uncertainties with respect to the capex required to upgrade the properties to Grade A status (click here). It must be remembered that these are mezzanine loan facilities and therefore this 50% figure does NOT form readacross to the overall value of the portfolio or to the valuation of senior facilities - save to say that older office stock is clearly going through a valuation adjustment process. While loans against dated office stock in particular will likely continue to weigh on minds, it is worth remembering that AIBG (particularly) and BIRG appear to have strong excess provisions in other books to cope with any potential shortfall in provisioning on office portfolios.
Instant payments coming to Ireland: Click here for an excellent Business Post article on the topic from last Monday.
Global Perspectives & News Snippets:
Select Global Sectoral Developments Update
Just a few Snippets this week
Interesting ECB Supervisory Board Member speech on banking regulation: Elizabeth McCaul, Member of the Supervisory Board of the ECB, spoke on Friday on banking regulation - click here for the speech. The undertone to the first part of the main body of the speech was McCaul hinting that there will not be any reprieve for eurozone (EZ) lenders in a Basel 3.1 reforms implementation context following recent such decisions in both a US and a UK context - indeed, she reminds us of the ECB’s assessment that “…when we account for differences in how banks calculate risk-weighted assets, it becomes clear that average capital requirements for significant institutions in the banking union would be somewhat higher under US rules”. McCaul also makes a case for pushing on with banking union, flagging what needs to be done to get there - and noting that “The incompleteness of the banking union is a significant impediment to creating a truly integrated banking sector in Europe and optimising its competitiveness”. Finally, McCaul wraps up on NBFIs, noting that “The private credit market is a particular concern” - her concerns appear to me to be well-founded but many will argue that it is regulators across the globe who have, at least in part, driven this by tightening bank capital / broader bank regulatory requirements without regulating the entities that have absorbed the assets that have, consequentially, shifted out of the regulated banking sphere.
IMF warns on SRTs: Bloomberg reported last week on data compiled by Chorus Capital Management which show that the size of SRTs outstanding has reached c.$70bn, up from c.$50bn a year ago (click here). Banks have been increasingly pursuing these trades, effectively as a means of arbitraging between regulatory and market assessments of risk. Indeed, the IMF, in its latest Global Financial Stability Report (click here - and see Box 1.1 on page 44 of the linked PDF document) also issued a word of caution last week in relation to prospective systemic risks attached to the increased deployment of these SRTs (noting that, globally, >$1.1trn in assets have been synthetically securitised in the last eight years). For more reading, I recommend consulting an interesting WSJ article on SRTs, NAV loans, etc., from Wednesday last (click here).
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