Financials Unshackled Issue 5: Weekly Banking Update (UK / Irish / Global Developments)
Perspectives & Snippets on UK / Ireland / 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 morning - and welcome to the latest edition of Financials Unshackled! This piece covers perspectives (and snippets) on select developments from the weekend and the past week in a UK, Ireland, and a Global context. It’s a lengthy note but you should be able to navigate it easily to zone in on your own particular interest(s). I hope you enjoy reading - and please send through feedback as I seek to refine the style, coverage, timing, and frequency of this newsletter through its ‘pilot phase’ - and please participate in the poll below (your response will be confidential). You can reach me directly at john.cronin@seapointinsights.com and all feedback will be treated confidentially.
Calendar for the week ahead
Firstly, a few select items to watch for this week:
Wed 18th Sep (00:01 BST): Central Bank of Ireland Quarterly Bulletin (Q3 2024)
Thu 19th Sep (07:00 BST): Close Brothers Group (CBG) Preliminary FY24 Results (for the year to 31st Jul 2024)
Thu 19th Sep (09:30 BST): Close Brothers Group (CBG) Preliminary FY24 Results Analyst / Investor Call (register here: https://webcasts.closebrothers.com/results/FullYearResults2024)
Thu 19th Sep (11:00 BST): Central Bank of Ireland SME and Large Enterprise Credit and Deposit Statistics (Q2 2024)
Thu 19th Sep (12:00 BST): Bank of England Monetary Policy Summary & MPC Meeting Minutes
Fri 20th Sep (07:00 BST): Investec (INVP) Pre-1H24 (for the six-month period to 30th Sep 2024) Close Briefing
Fri 20th Sep (11:00 BST): Central Bank of Ireland Mortgage Arrears and Repossessions Statistics (Q2 2024) - note that these had initially been scheduled for Fri 13th Sep
UK Perspectives & News Snippets
Story of the Week: A busy week on the UK banking regulatory developments front
US Fed announced material dilution in impact of Basel 3.1 reforms package on Tuesday: It emerged on Tuesday 10th September that the Federal Reserve has effectively proposed that the increase to bank capital requirements owing to the (impending) implementation of the Basel 3.1 reforms package in the US should be more than halved (the re-proposals would increase aggregate CET1 capital requirements for the G-SIBs by just 9%, down from 19%).
BoE publishes its own Policy Statement on Thursday, highlighting a negligible impact accruing from the reforms: The BoE PRA, on Thursday morning (12th September), published the long-awaited Policy Statement on the ‘Implementation of the Basel 3.1 standards near-final part 2’ (PS9/24) as well as a number of Consultation Papers, which I will come to momentarily. In short, the (near-final) changes in capital requirements owing to the implementation of the Basel 3.1 reforms package in the UK have been watered down materially further and the BoE now estimates that “the impact will be less than 1% in aggregate on capital requirements phased in over 4 years” (down from the BoE’s assessment - published on 12th December 2023 - that, at that point, the impact of Basel 3.1 requirements “will…result in an average increase in Tier 1 capital requirements for UK firms of around 3% once fully phased in”). This is now in marked contrast to the EBA’s latest assessment of an expected 9.9% aggregate increase in CET1 capital requirements for EU firms when the reforms are fully phased-in across the EU. The BoE’s philosophy in relation to the implementation of the reforms is clear from the following sentence in the prelude to Phil Evans’ speech on the topic at UK Finance on Thursday morning: “Overall, the package supports the UK’s growth and competitiveness, the resilience of the banking system, and alignment with global standards”. Indeed, Sarah Breeden’s (Deputy Governor, Financial Stability at the BoE) speech in Washington DC on Tuesday warmed us up for a softening of the reforms, noting that “The best contribution we can make to sustainable economic growth is to ensure that the system provides vital services even as shocks occur. In doing so, we must avoid the stability of the graveyard”.
Scroll down beyond the detail for concluding remarks.
Some specifics on the meat of the changes (to pre-existing proposals) enshrined in the UK’s near-final reforms package:
Amendments to the treatment of SME lending to reduce the operational burden for firms and lower capital requirements: i) new firm-specific structural adjustment to Pillar 2A (the ‘SME lending adjustment’) to ensure that the removal of the SME support factor under Pillar 1 does not increase overall capital requirements for SME exposures; ii) new simplified definition of SME to reduce the operational burden for firms applying the definition and broaden the scope of exposures which qualify for preferential treatment as an SME; iii) removal of the requirement that standardised risk weights for CRE exposures should be no lower than 100% for exposures where repayment is not materially dependent on cashflows from the property (importantly, this will result in significantly lower risk weights for certain SME exposures secured by CRE than under the existing CRR treatment).
An approach to calculating the output floor which improves consistency between standardised approaches and the output floor: The output floor calculation is adjusted to reflect the different treatment of accounting provisions under the standardised and IRB approaches.
A more risk-sensitive and operationally simpler approach to the valuation of residential real estate under the credit risk standardised approach: i) inclusion of a ‘backstop’ revaluation event requiring firms to obtain a new valuation once 5 years (or 3 years in certain cases) has passed since the last revaluation event; ii) removal of the requirement for firms to adjust a valuation to reflect the value of the property that would be sustainable over the life of the loan; iii) requirement that firms revalue properties if they estimate that the market value of the property has decreased by >10% relative to the value recorded at the last valuation event.
Amendments to the treatment of infrastructure lending, reducing capital requirements: i) new firm-specific structural adjustment to Pillar 2A (the ‘infrastructure lending adjustment’) to ensure that the removal of the infrastructure support factor under Pillar 1 does not increase overall capital requirements for infrastructure exposures; ii) new lower risk weight of 50% for ‘substantially stronger’ project finance exposures under the slotting approach (down from 70%).
Lower, more risk-sensitive conversion factors for off-balance sheet items.
Other points of note: The PRA does not intend to change the policy or make substantive alterations to the instruments before the publication of the final policy materials. Implementation has been delayed until 1st January 2026 with a transitional period of 4 years ahead of full implementation on 1st January 2030. Given the shortened phase-in timetable the PRA has modified the transitional multipliers applicable through this period to: i) 1st Jan 2026: 55% (note that it had previously been envisaged that 50% would be the initial multiplier but that was assuming earlier implementation); ii) 1st Jan 2027: 60%; iii) 1st Jan 2028: 65%; iv ) 1st Jan 2029: 70%; v) 1st Jan 2030: 72.5%.
Concluding remarks on the UK’s Basel 3.1 reforms package: In overall terms I welcome the fact that the final shape of the reforms are expected to just have a negligible impact on overall - already strong - UK bank minimum CET1 capital requirements (though there is a lot in the documentation and work needs to be done to ascertain the impacts at an individual bank level). The sector has coped with multiple challenges since the overhaul of bank capital requirements in the wake of the GFC and has demonstrated its resilience (validating the adequacy of the - much-strengthened - existing capital requirements regime in my view) - both at a large bank, a challenger bank and a specialist bank level (some idiosyncrasies aside). The danger with ever-tightening bank capital requirements is that: i) bank lending appetite can be suppressed (which we see in certain - especially higher risk-weighted - segments of lending markets in other jurisdictions) which can serve to reduce wider economic competitiveness; ii) the effect of i) can push even more lending into the largely unregulated NBFI space, which is more opaque in terms of risk build and hardly improves things from an overall systemic risk perspective; iii) while the theory suggests that, for any given increase in capital requirements there should be a commensurate reduction in cost of capital (meaning, broadly, unchanged valuations if you want to consult the Modigliani and Miller playbook) but that doesn’t hold in practice and banks will likely examine other avenues (e.g., loan pricing, fees and commissions, etc.) in a bid to claw back forfeited returns; and iv) institutional investor portfolio managers, who already exhibit a level of reluctance to invest in banks relative to other sectors (albeit things have improved in recent years) are turned off by the ever-ensuing returns compression owing to higher capital requirements (which do not necessarily translate into a reduced cost of equity assessment), especially important now as we are entering into a downward rate cycle. I note a well-written opinion piece in the FT at the weekend penned by Daniel Davies at Frontline Analysts who argues that the US has started a race to the bottom (following the scaling back of the Basel 3.1 reforms there earlier this week as noted above) but, while I respect the author’s views, my own perspectives are that all we have seen so far is that it’s just an acknowledgment that ‘enough is enough’. While the author flags legitimate concerns like what the ultimate fallout owing to US CRE value depletion will look like, one has to place some confidence in the regular cycle of regulatory stress testing. Banks are not without risk - that much is clear. But we cannot completely eliminate risk or pursue ever-rising capital requirements initiatives in a bid to over-insure against failure. On this last point I would also add that Anat Admati’s well-documented contributions to the capital adequacy debate are admirable but are idealistic and completely inexecutable in practice - a topic I will return to in some depth. And let’s not forget that it is only surplus capital that is considered by the markets to be loss-absorbing on a going concern basis - not an insignificant point. The reforms have gone far enough (albeit I have been arguing for 4.5 years that liquidity risks need more attention) - and I expect pressures to begin to mount on the ECB from European bank managers and shareholders in the wake of these latest developments.
Other regulatory developments in the UK last week:
BoE publishes CP7/24 - The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs): In short, the BoE’s latest Phase 2 proposals (following the publication of PS15/23 last year) for a strong and simple framework for smaller UK banks and building societies with total assets of £20bn or less contemplate various further simplifications, including: i) a simplified Pillar 1 framework for SDDTs; ii) simplifications to the Pillar 2A methodologies for credit risk, credit concentration risk, and operational risk; iii) a new Single Capital Buffer (SCB) framework; iv) the replacement of the current cyclical stress testing framework with a non-cyclical framework; v) removal of the CCyB adjustment between buffers and Pillar 2A; vi) simplifications to the ICAAP process and a reduction in the frequency of ILAAP reviews; vii) simplifications to certain complex capital deduction rules; and viii) simplifications to certain reporting requirements. The new regime is earmarked for implementation on 1st January 2027 and it is not expected to lead to any reduction in minimum capital requirements.
BoE publishes CP8/24 - Definition of Capital: Restatement of CRR Requirements in PRA Rulebook: This Consultation proposes minor adjustments to certain capital requirements - including, for example, a change to the current requirement for firms to obtain PRA permission before including interim profits in their CET1 capital calculations, which would be replaced by a requirement to submit a notification to the PRA after they include any verified interim profits in CET1.
BoE publishes CP9/24 - Streamlining the Pillar 2A Capital Framework and the Capital Communications Process: The proposals in this Consultation Paper include: i) retiring the ‘refined methodology’ to Pillar 2A (that was introduced in PS22/17); ii) streamlining firm-specific capital communications and directions; and iii) introducing minor clarifications to the IRRBB and pension obligation risk Pillar 2A approaches.
BoE publishes CP10/24 - Updates to the UK policy framework for capital buffers: Relatively minor changes, none of which constitute proposed policy changes, are contemplated - particularly in relation to the PRA’s approach to both the G-SII and O-SII buffers identification and setting.
Company Results
Aldermore publishes strong FY23 results (for year to 30th June 2024)
Overall Comments: Aldermore, the UK specialist bank, published its results for the 12-month period to 30th June on Thursday 12th September. I caught up with the CFO Ralph Coates on Friday to discuss the update. In overall terms, Aldermore reported a strong financial performance for the year with PBT of £253.1m, +14% y/y (driven by a substantial impairment release), translating into a 11.8% reported RoE - broadly unchanged on last year (-c.20bps). Indeed, this RoE outcome is compressed by strong capitalisation levels with the end-FY23 CET1 capital ratio printing at 15.9% (+110bps y/y) - and, notably, the TCR printed at 18.4% at year-end (+100bps y/y), which was likely of comfort to credit investors (and follows the issuance of a £100m Tier 2 note in November 2023 and a £100m AT1 instrument in June 2024). It would appear that the high level of excess capitalisation should see the Group take action, within the next 12 to 24 months, to optimise the capital stack.
Some specifics to call out on Balance Sheet evolution: i) net loans +1% y/y to £15.3bn with this slow pace of growth a reflection of subdued lending markets and a decision to lend selectively across the three divisions to maintain a strong returns profile (notably, net loans in both the Property and Structured & Specialist Finance divisions were +4% y/y while Motor Finance net lending volumes saw a 6% y/y contraction); ii) customer deposits +8% y/y to £16.3bn - which is supportive pre-funding in both a TFSME roll-off and a growth context; and iii) notably the LCR printed at a very healthy 241% at year-end though it is likely that this will materially reduce over the coming reporting periods as the £1.1bn portfolio of TFSME funds begins to mature (note that basic arithmetic indicates that the LCR should still remain significantly above the 100% minimum requirement).
On the financial performance there a few items to call out: i) the NII print of £604m was -3% y/y (with NIM -7bps y/y to 400bps) reflecting deposit pricing pressures in particular (interest expense +81% y/y, with deposit costs +90% y/y within that); ii) opex +7% y/y to £351.0m (Cost/Income: 59.9%) though this was predominantly as a result of costs incurred in connection with the FCA’s ongoing Motor Finance commissions review (leading to incremental costs of £18.1m in the year, covering MotoNovo originations from May 2019 to January 2021 (FirstRand picks up the tab for pre-May 2019 originations as MotoNovo did not begin trading as part of the Aldermore Group until 5th May 2019)); iii) net impairment release of £18.3m (-12bps CoR following a 73bps CoR print in the prior financial year) reflecting the impact of a more stable macro outlook, the partial release of cost of living overlays raised in the previous financial year, and the release of provisions connected with Consumer Credit Act remediation activity in the Motor Finance division) - notably, the impairment coverage ratio is 1.93% and provisioning reflects an expectation that arrears will continue to rise in the current financial year, albeit at a slower rate than in the last financial year.
Select Company Newsflow
Barclays understood to be struggling to sell stake in its payments business: Reuters reported on Friday evening (13th September) that Barclays is experiencing difficulties in its push to dispose of a shareholding in its payments business owing to diverging views on valuation. Barclays has spent considerable time during results presentations in recent years emphasising the strength of its payments business and its strategic congruence with the wider Barclays UK business particularly. Going down the route of selling a shareholding seemed a sensible initiative to crystallise some value, potentially open up longer-term disposal prospects with a suitable partner(s), and to drive an enhanced valuation for the Group. Reuters reported in September 2023 that Barclays management expected its payments business to command a valuation of at least £2bn but sources have told the news agency that the expectation had reduced to >£1bn by the time the Information Memorandum in relation to the purported stake sale was circulated. It was reported that Brookfield Asset Management pulled out of the process in recent months. For clarity, there was no mention of the sale process at the fireside chat in which both the Barclays CEO & CFO participated at the Barclays Financial Services Conference in NY last week (please consult my separate piece published last Tuesday 10th September for a review of the key take-aways from the UK banks presenting at that conference). Potentially we’ll learn more at the stage of Barclays’ 3Q24 update on 24th October.
More reports on prospective changes at HSBC: Media reports surfaced on Monday (9th September) in relation to discussions that are said to have taken place amongst top HSBC executives in relation to a potential merger of its commercial and investment banking (GBCM) business units. It is understood that the primary motivator underpinning this possible move is cost reduction - and this news follows recent media reports in relation to the new CEO Elhderey’s focus on taking an axe to middle management layers (with cost rationalisation reportedly at the top of his agenda). A previous proposal to combine the units met with heavy internal resistance and was shelved. While it could be argued that such a decision could drive greater unity within the bank in the longer-term by virtue of a more streamlined client and product proposition (which was, effectively, the rationale offered by JPM when it effected such a combination recently), it would likely be highly disruptive in a nearer-term context - and the delivery of any expected benefits would clearly be highly dependent on a smooth integration process as well as the right leadership choices being made for the merged unit. Like in the case of any new CEO appointment certain ideas are floated publicly to see what is / isn’t workable and that’s what this appears to be, i.e., no firm decision one way or another appears to have been made yet and we will just have to wait and see. But, more broadly, Elhederey clearly isn’t ‘hanging around’. A separate press report in The Guardian on the evening of Sunday 8th September noted that HSBC UK is on a significant recruitment drive to bulk up its 400-strong wealth team as it pursues its ambition to double Wealth AUM to £100bn in the next five years (as reported on by Reuters on 23rd August).
Standard Chartered SGD750m AT1 issuance: Standard Chartered announced on Friday (13th September) that it has issued SGD750m of AT1 securities at a keen coupon of 5.30%.
Lloyds branch closures in the press: The Guardian reported on Friday evening (13th September) that Lloyds is planning to close an additional 55 bank branches, taking the total number of expected branch closures over the two-year period to end-2025 to 292. It is understood that reduced in-branch transaction volumes support the decision and the closures are not expected to lead to any incremental job losses. Sensible as Lloyds pushes to reorient its retail / business banking model to reflect a changing environment with respect to how customers bank. Indeed, from a disenfranchised customer perspective, it is also notable that Labour has pledged to open 350 shared banking hubs.
Metro Bank seeks to eke out more fees: This is Money reported on Wednesday (11th September) that Metro Bank has, since 29th August last, started to charge customers for using their debit cards in Europe - having previously permitted free-of-charge withdrawals. Customers are now charged a lofty 2.99% fee on all debit card transactions outside the UK - and cash withdrawals also incur a 2.99% fee plus a £1.50 fee per ATM transaction.
Revolut Founder & CEO sold c.$250m of equity in recent share sale: Sky News broke the story last week that Nik Storonsky, Founder & CEO of Revolut, disposed of c.$250m of his shareholding (a small fraction of his overall holding) in the $500m stake sale which was orchestrated, at a $45bn valuation, “to provide employee liquidity” last month. It will be interesting to see what the institutional equity community’s view is on equity valuation if Revolut proceeds with IPO plans in due course (in which it would need to seek monies from a wide array of prospective new investors) - I suspect that the listing venue will be one other than London.
Together Financial Services appoints Richard Rowntree as CEO: Together, a non-bank lender, announced on Thursday (12th September) that it has appointed Richard Rowntree as CEO and Executive Director to succeed Henry Moser with effect from early 2025. Rowntree joins from Paragon Bank where he was MD of the Mortgages division and he has over 30 years of experience in banking - including with BOI, RBS, Santander UK, Lloyds TSB, and Halifax. Rowntree is quite prolific in the industry and this sounds like a great appointment for Together - and one that has likely been welcomed by stakeholders given the perennial succession question. Separately, Together announced on Monday (9th September) that it priced its latest £445m RMBS transaction (weighted average cost of placed notes of 1.08% with a 95% advance rate), taking the total amount raised or refinanced this year to £2.2bn across six transactions.
Foundation Home Loans completes £550m RMBS trade: It was reported in the media on Thursday (12th September) that Foundation Home Loans, a non-bank intermediary-only lender, executed its inaugural RMBS transaction on 4th September last, which was backed by a mixed portfolio of both BTL and OO mortgages. The Class A tranche of notes priced at SONIA+84bps and the order book was reported to have sat at £925m with orders from 26 unique investors.
LendInvest refreshes funding arrangement with JPM: LendInvest announced on Tuesday 10th September that it has extended its existing £1bn funding arrangement with JPM by a further £500m to £1.5bn to support the growth of its mortgages platform proposition. This takes its overall FuM to £4.55bn. CEO Rod Lockhart noted: “This milestone transaction is a major vote of confidence in LendInvest and its market-leading origination capability and technology, and it demonstrates our continued ability to scale our strategic partnerships. This extension will significantly strengthen our already competitive buy-to-let proposition, ensuring we remain at the forefront of the industry through our innovative approach and exceptional customer service.”. LendInvest hosted a useful ‘Technology Teach-In’ in October 2022 (presentation here: https://docs.lendinvest.com/web/public-pdfs/investor-relations/tech-teach-in-22.pdf) which was highly insightful in the context of its mortgages platform.
Select (Other) Sectoral Newsflow
Still in the dark on bank taxes: I wrote on UK bank taxes in a ‘Weekend Perspectives’ note dated 8th September given widespread expectations that we would learn more last week following the banks’ meeting with the Chancellor. No more updates on the subject last week, alas. It’s certainly to the fore of investors’ minds judging by various polls that were run at the Barclays Financials Services conference in NY last week. Worth reading Vanessa Houlder’s well-written FT Lex piece from Friday afternoon though - in which she argues that higher taxes for the sector presents “an own goal”, rightly pointing out that “Risk-averse banks can put the brakes on growth - as tacitly acknowledged by Thursday’s announcement that the Bank of England has watered down plans for stricter capital rules”. One fears that a ‘quid pro quo’ for a softer (near-final) Basel 3.1 reforms implementation package could be higher bank taxes - it may just be too tempting politically. Hopefully, if there is change, it can be calibrated as a short-term measure - rather than a structural long-term hard-to-reverse measure.
Marginal changes in average mortgage pricing last week: Plenty of reports in the media last week on individual lender rate cuts in what continues to be an intensely competitive mortgage market (due to the high RoTE nature of the product - reflecting its inherent high degree of operating leverage and, more importantly, low RWA density). However, examining Rightmove’s weekly update on 11th September shows just a 2bps week-on-week downward move in average 2Y and 5Y 90% LTV fixed rate pricing to 5.47% and 4.97% respectively. Similar trends in the case of low LTV product pricing with a 2bps week-on-week reduction in average 2Y fixed at 60% LTV (to 4.28%) and no change in average 5Y fixed at 60% LTV (3.97%).
NS&I cuts rates on bonds: Interestingly, we saw National Savings & Investments, the HMT-backed savings provider, cut rates on rates across its Guaranteed Growth Bonds range by up to 35bps (in the case of 2Y and 3Y bonds) and across its Guaranteed Income Bonds range by up to 33bps (again, in the case of 2Y and 3Y bonds). What was particularly noteworthy was that NS&I commented that the changes will help balance the interest of savers, taxpayers and the financial sector. We heard from the UK banks at the Barclays conference in NY last week that deposit price pressures are abating and that churn is stabilising (interrelated). One would be forgiven for thinking that this NS&I move could be a Treasury-sponsored initiative to support margin recovery amongst the UK banks especially if other changes (like extra taxes, for example) are on the near-term horizon.
PRA and FCA publish MLAR statistics for Q2 2024: The PRA and the FCA jointly published the Mortgage Lending and Administration Return (MLAR) statistics for Q2 2024 on Tuesday 10th September. Key findings: i) the outstanding value of all residential mortgage loans grew by 0.4% q/q, a function of strong growth in advances which were +16.7% q/q; ii) the value of new mortgage commitments was +11.3% q/q to £66.9bn - which is consistent with the recent messages from UK bank executives as well as the uptick in mortgage approvals clear from recent BoE data; iii) the proportion of lending to borrowers with a high LTI increased by 2.77pps q/q to 42.5% but remains below the 43.7% level at end-2Q23; iv) the share of gross mortgage advances for BTL purposes increased by 0.7pps q/q to 9.0% (up from 8.2% at end-2Q23) despite ongoing chatter of a ‘landlord exodus’; and v) the value of outstanding mortgage balances in arrears rose by 2.9% q/q to £21.9bn (+32.0% y/y) with the proportion of total loan balances with arrears standing at 1.32% at end-2Q (up from 1.29% at end-1Q), the highest level since 2Q16. However, given declining swap rates and the consequent contraction in mortgage pricing observed over recent months, it is, in my view, a logical argument to suggest that arrears may be at peak levels or close to peaking. Loan losses remain at benign levels across the listed banks.
BoE PRA announces review of the leverage ratio requirement thresholds: The PRA announced on Tuesday that the leverage ratio requirement thresholds are under review and it is offering a modification by consent, where certain conditions are met, to disapply the relevant part of the PRA Rulebook until the review is complete.
Useful reference material published by the BoE: The BoE published a useful recap on how the central banking body works to protect and enhance financial stability in the UK within its latest Quarterly Bulletin on Tuesday 10th September. Worth a read here: https://www.bankofengland.co.uk/quarterly-bulletin/2024/2024/financial-stability-at-the-bank-of-england#:~:text=The%20Bank%20of%20England's%20financial,Opens%20in%20a%20new%20window.
Ireland Perspectives & News Snippets
Story of the Week: Banker pay caps
I’m rather selfishly plucking for banker pay caps as the story of the week in Irish Financials (in what was a relatively quiet week for newsflow it must be said) given my newsletter on this topic (and associated LinkedIn poll for which voting remains open for a few more days: https://www.linkedin.com/feed/update/urn:li:ugcPost:7239988221583978497/) of Thursday last (click below).
The Business Post reported on Saturday that a Business Post/Red C poll showed that 60% of respondents are not in favour of relaxing caps on banker bonuses for those working in institutions bailed out by the State - with a further 22% neutral or responding that they don’t know in relation to the question. Unsurprisingly, this stands in marked contrast to the results of my own poll on LinkedIn, which shows, at the time of writing, that 76% are in favour of the caps being lifted in the near-term! I’m somewhat sceptical of the results of polls posing questions along the lines of those posed by the Business Post/Red C poll. While many respond unfavourably it does not mean that people care as much nowadays and my own sense would be that if the next Government were to move quickly to repeal the caps post-General Election it is unlikely that the political damage would be enormous (i.e., ask the general public and they’ll generally say no, but that doesn’t measure the degree of emotional responsiveness to the topic) given: i) we are 16 years on from when the caps were instituted; ii) the State has fully divested of its stake in BOI and is, arguably, at the finishing line with respect to its stake in AIB; and iii) the healthy state of the public finances, despite the substantive ramp up in current spending of late (and despite some recent press reports in relation to warning shots from a corporation tax receipts sustainability standpoint).
Select Company Newsflow
BOI Updates: A few news items to flag in a BOI context from last week: 1) Following BOI’s Tender Offer in respect of its 7.5% €675m May 2020 AT1 notes of 3rd September last (and the fresh issuance of €600m of AT1 notes at a keen coupon of 6.375%, all presumably strategically timed ahead of last week’s ECB Governing Council meeting given the risk, ahead of the meeting, that the ECB could have downplayed expectations in relation to the extent of future near-term rate cuts), the company announced on 10th September that €506m (c.75%) in aggregate principal amount of the securities was validly tendered for purchase in the Offer. A satisfactory outcome for BOI in the context of its objectives I suspect. 2) The Irish Times picked up on the news last week that BOI has appointed Tadhg Clandillon as MD of its life and pensions unit, New Ireland. Clandillon will take up the role in early October and has three decades of experience in the life insurance industry. He joins from Athora Ireland where he was CEO for the past six years and, prior to that, he was CFO at Aegon Ireland, which he joined from Irish Life in 2008. 3) The Sunday Independent reported on comments made by BOI CEO Myles O’Grady at the Barclays Financial Services conference in NY last week (a live webstream was not provided to this session so we didn’t report on this last week), noting the following: i) growth in housing stock will support lending and the positive demographic trends (strong inward migration) naturally serve to expand the potential customer base; ii) O’Grady reportedly reiterated that NII is expected to be stable y/y in FY25 (as conveyed at the FY23 results presentation in February - and reconfirmed at the 1H24 presentation in July); and iii) on competition, the CEO noted that it was natural to expect ongoing new entrants to the market given its attractiveness, that BOI will compete with these new entrants while maintaining price discipline, and that its own digital adoption rates are high and that an enhanced mobile app is on the cards for 2025.
Nua Mortgages cuts mortgage rates by 20-50bps: Nua Mortgages, a newcomer lender in the Irish market backed by the Allen family, announced on Thursday morning ahead of the - then all but guaranteed - ECB rate cut that it is reducing mortgage rates by 20-50bps. As official rates pull back I expect a re-emergence of some competition in the market (beyond the three listed lenders who have been writing more than 90% of new business of late) with the non-bank lenders (e.g., Dilosk, Finance Ireland) likely to become more active again in due course - and as Bankinter and the new arrivals (e.g., Bawag, Nua, Revolut) seek to bolster their presence / enter the market in time.
Select (Other) Sectoral Newsflow
BOI and FSU call for levy to be widened in its application: Both BOI and the Financial Services Union (FSU) have reportedly lashed out in relation to the discriminatory nature of the annual (€200m) Irish bank levy, which applies to just the three listed lenders. The new Finance Minister Jack Chambers recently remarked that he is planning to continue with the levy and that it would be included in Budget 2025 on 1st October. The Business Post reported on Thursday (12th September) on the contents of a letter sent by the BOI CEO to the then Finance Minister Michael McGarth in June (following a FOI request submitted by the newspaper), which noted: “…when the levy was first introduced it applied to a range of banks in Ireland, including a number which had not received any support…In our view the levy is discriminatory. It does not apply to an objectively defined category of taxpayers, but rather targets four [includes one subsidiary of the listed lenders] named financial services institutions while excluding all others…This explicitly creates an unlevel playing field in financial services in Ireland, placing the bank at a competitive disadvantage to other companies including international lenders which are multiples the size of Bank of Ireland and with which we compete in the market”. The letter reportedly went on to suggest that the levy should be applied to all banks that hold Irish deposits, further noting that a carveout could apply for banks with a market share of deposits below a certain threshold “to ensure any future levy would not act as a barrier to new market entrants”. To be fair these seem like very reasoned proposals. However, given that the three listed lenders dominate the Irish deposit-taking market, any recalibration of the calculation of the levy payable along the lines suggested by the BOI CEO would result in just a small prize for BOI and the other listed lenders - and one would be forgiven for speculating that this may have been a carefully choreographed pre-emptive move on the part of BOI to raise its ire with a existing punitive measure (well ahead of the Budget and ahead of the Finance Minister change) in a bid to minimise the risk of other potentially punitive measures in the upcoming Budget given how strong financial performance has been across the sector (like an outright increase in the levy for lenders with total assets above a certain threshold that might exclude PTSB, for example), so, maybe this argument is really just a ‘red herring’. Separately, The Irish Times reported on Friday that the FSU is arguing for a widening of the levy to include other players, with General Secretary John O’Connell commenting: “The financial services sector is changing, and we feel it is an appropriate time to expand the levy to include other financial institutions. This would move the levy away from being seen as a punishment of the banking crash to a fund supported by the wider banking sector and used for social good”.
Central Bank of Ireland - Retail Interest Rates (July 2024): The Central Bank of Ireland (CBI) published its monthly Retail Interest Rates update for July 2024 on Wednesday 11th September. Key points: 1) The weighted average interest rate on new Irish mortgage agreements in July was 4.11% (unchanged m/m, +5bps y/y) - 39bps higher than the euro area average, meaning Ireland was 6th highest in the euro area for mortgage originations pricing (versus 8th highest in June). This has the potential of becoming ‘a sore point’ once again ahead of the Budget although it didn’t get much media attention last week it must be said. 2) The volume of new mortgage originations was +21% y/y in July to €980m (renegotiated agreements were + 14% m/m to €161m). 3) Fixed rate mortgages represented 69% of the volume of new mortgage agreements in June with standard variable rate comprising the residual 31% (the take-up of variable product has ratcheted up significantly in recent times as consumers expect official rate reductions to translate into lower pricing). 4) The interest rate on new consumer loans reduced by 57bps m/m to 7.42% in July, the lowest rate this has been since January 2024. The total volume of new consumer loans was €306m in July, up from €211m in June. However, it must be noted that the pricing on, and volume of, new consumer loans can fluctuate quite wildly on a monthly basis. 5) There was a strong surge in new NFC (non-financial corporate) borrowing in July, with €1.8bn of loan agreements struck - up from just €595m in June. The weighted average interest rate on new lending was 6.40% in July, +88bps m/m (and well above the average euro area equivalent rate of just 4.95%). Again, volumes and pricing can ‘ebb and flow’ quite significantly m/m. 6) The average rate on household overnight deposits and NFC overnight deposits (the lion’s share of Irish bank deposit books) stood at 0.13% and 0.14% respectively in July 2024, which, once again, illustrates the enormous liability margin benefits that the listed banks have enjoyed since official rates started to rise. The weighted average interest rate on new household term deposits and new NFC term deposits was 2.77% (+2bps m/m) and 3.48% (-6bps m/m) respectively in July.
Political backdrop appears increasingly stable: It’s worth quickly picking up on the results of the most recent Business Post/Red C poll on the state of the political parties ahead of the General Election (which must be held by no later than March 2025), which were reported on in the Business Post on Saturday: Fine Gael 23% (+2pps since last poll in June), Fianna Fail 18% (-1pp), Sinn Fein 18% (-2pps) - with independents and other parties commanding 41% (+1pp). This increasingly makes a re-run of the current Fine Gael / Fianna Fail-led Coalition (perhaps, minus the Green Party) the most likely outcome at the next General Election. While current Taoiseach (Prime Minister) remarked on 5th September that the coalition will go full term to March of next year I am somewhat circumspect as to whether that is the real intention (as noted in my 8th September newsletter) and, with these latest poll results, the probability of an election some time post-Budget (most likely November) must have increased. A repeat of the current Coalition government would be welcomed by investors and should mean greater prospects of political stability and direction of travel (e.g., share sales, prospective repeal of pay caps and supertax) in a banking sector context.
Global Perspectives & News Snippets
A short section given the length of the above. I’ll look at ways of recalibrating this note going forward to accommodate more global developments. Reader feedback is very welcome in this respect.
European Banking M&A in focus: Lots of media focus on the resurgence in European banking M&A following Andrea Orcel’s (Unicredit CEO) classic opportunistic move to build a c.9% shareholding in Commerzbank. While the eurozone banking sector is undeniably far too fragmented, I would be hesitant to call this out as representative of the start of a wave of consolidation. Firstly, Orcel is a unique character with lots of energy and edge and was always going to move to strategically bulk up at some point since he was anointed to the top seat at Unicredit in 2021. Secondly, while the stake-building exercise may or may not lead to an outright bid for Commerzbank in due course, if a bid does eventuate it is really still just representative of another effort at in-market consolidation given Unicredit’s ownership of HVB in Germany. Pointing to the BBVA hostile bid for Sabadell as another example of the European banking M&A train getting into gear also misses the point - Sabadell is predominantly Spanish-focused (with the exception of its - arguably non-core - UK investment, TSB) and that proposed deal is therefore also an in-market one. Synergies tend to be lower for cross-border deals and issues like trapped capital and unpredictable local regulatory regimes can be obstructive.
Australian regulator proposing phase-out of AT1 bonds: APRA (the Australian Prudential Regulation Authority) published a Discussion Paper on Tuesday 11th September entitled ‘A more effective capital framework for a crisis’, which proposes the phasing out of AT1 bonds from a regulatory capital perspective - and to, in time, replace them with other existing, more reliable forms of capital (Tier 2 and CET1). APRA’s chief concern is that international experience highlights that AT1 does not absorb losses to stabilise a bank early in stress conditions and it would be challenging to use to support resolution without complexity, contagion and litigation risk. In a previous life I expressed a - controversial view - that bank Boards and regulators don’t want to see banks approach MDA levels (or, indeed, conversion or permanent writedown trigger levels) so rights issues will be ‘in vogue’ if a bank’s capital level approaches these hurdles calling into question the practical loss absorbency nature of the AT1 instrument (which is why I always saw - save for in the case of banks in very serious difficulty (and Credit Suisse aside…) - the instrument as an attractive play).
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