Financials Unshackled Issue 22: 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 note is split into five sections: i) Calendar for the week ahead; ii) Essential Updates; iii) Other UK Highlights (other key UK sectoral and company developments in the last week); iv) Other Irish Highlights (key Irish sectoral and company developments in the last week); and v) Other Highlights (select key developments in a Global / European context).
I hope you enjoy reading it and all feedback is welcome - you can reach me directly at john.cronin@seapointinsights.com.
Calendar for the week ahead
Mon 2nd Dec: Lloyds Banking Group (LLOY) Board Governance Event (materials will be made available on the website)
Tue 3rd Dec (07:00 BST): Paragon Banking Group FY24 Results (for the three months to 30th September 2024) - there is typically an analyst / investor call held at 09:30 BST on the day
Tue 3rd Dec: Standard Chartered (STAN) Affluent & Wealth Investor Seminar
Tue 3rd & Wed 4th Dec: FT Global Banking Summit
Wed 4th Dec: UK Finance - Household Finance Review for Q3 2024
Wed 4th Dec (14:30 BST): Central Bank of Ireland (CBI) Financial Stability Review
Fri 6th Dec (11:00 BST): Central Bank of Ireland (CBI) Monthly Card Payment Statistics for October 2024
Essential Updates
BoE Financial Stability Report notes resilience of banking system and household & corporate borrowers; CCyB maintained at 2.0%
The Bank of England (BoE) published its semi-annual Financial Stability Report (FSR) on Friday 29th November. This is a key document in a UK banking sector financial condition and trends context and is well worth a read. The Record of the BoE Financial Policy Committee (FPC) meeting held on Friday 15th November was published alongside the FSR and I have pulled out some key highlights from both documents below. A link to the FSR is here and a link to the FPC meeting record is here. You can watch a replay of the press conference here.
UK CCyB rate maintained at 2.0% (also note that firm-specific O-SII buffer rates have been left unchanged): The key number that analysts look for in the FSR is whether the UK countercyclical capital buffer (CCyB) rate (or other capital buffers) is changed given that any adjustments directly impact on bank capital requirements (and, therefore, on shareholder distribution capability). No surprises here with the FPC electing to maintain the CCyB rate “at its neutral setting” of 2.0%. The report contains the usual language in relation to the FPC standing ready to vary the UK CCyB rate in either direction, which the bank stress tests will inform. Separately, the BoE announced no changes to firm-specific O-SII buffer rates on Friday (see here). Separately, the FPC Record notes that it reviewed the current thresholds for other systemically important institutions (O-SII) buffer rates and decided it would consult on a proposal to index the thresholds based on the growth in nominal GDP since the Committee last updated the thresholds in 2019. The separate O-SII buffer rates publication notes that, once the FPC confirms its final decision on the O-SII buffer rate thresholds following its consultation, the PRA will re-issue firms’ 2024 O-SII buffer rates (based on 2023 LEM data) to reflect the FPC’s updated framework. It is expected that this will take place in mid-2025 and that the buffer rates will apply from 1 January 2026.
Risk backdrop; UK banks and UK households / businesses in good shape: Global risks remain material and uncertainties have increased in an outlook context. However, the FPC’s view is that UK household and corporate borrowers are likely to remain resilient in aggregate. The FPC also concludes that the UK banking system is in a strong position to support households and businesses (capital strength, high liquidity levels, improved asset quality, earnings resilience) even if economic, financial and business conditions were to be substantially worse than expected, as demonstrated by the results of the 2024 desk-based stress test (see Chapter 6 of the FSR). The FPC goes on to note that it is important that banks and other financial firms take account of these global risks in their internal risk management and stress testing.
Some further useful select nuggets on households: The FPC notes: i) the share of households in arrears or with high debt-servicing burdens has remained relatively low (aggregate household debt to income ratio was 130% at end-2Q, having fallen every quarter since 3Q22); ii) the outlook for mortgage borrower resilience has improved in line with the domestic economic outlook - observing that while c.50% of mortgagors are likely to experience higher borrowing costs over the next three years as they refinance onto higher rates, c.25% of borrowers will see a fall in rates (the aggregate Mortgage DSR of 7.2% at end-2Q is expected to rise modestly to c.8.0% by end-2026); and iii) saving surpluses have decreased for lower-income households, and the share of renters who have fallen behind on payments has risen slightly
Some further useful select nuggets on businesses: The FPC notes: i) corporate net debt to earnings of 125% at end-2Q is well below pandemic highs of 172% and post-GFC highs of 235%; ii) risks remain among SMEs and some highly leveraged corporate borrowers, including those backed by private equity (PE) - and arrears on SME loans have risen slightly this year; and iii) many businesses that rely on market-based finance are likely to face greater challenges from higher rates as they refinance.
Refinancing challenges - in a CRE context particularly: The FPC notes that significant refinancing challenges remain for some corporate borrowers in advanced economies, particularly in a commercial real estate (CRE) context. However, the FPC observes that the results of the 2024 desk-based stress test suggest that the UK banking system would be resilient to a stress including very significant declines in Chinese and other global property prices, alongside a severe global downturn
Valuation levels concerning: The FPC continues to judge that valuations (with a particular reference to US equity prices in this context) and risk premia are vulnerable to a sharp correction, which could be amplified by vulnerabilities in market-based finance.
Conclusions of the system-wide exploratory scenario (SWES) published (you can read here) and point to remaining risks and vulnerabilities in the context of repo and corporate bond markets following LDI funds’ derisking measures which have supported increased gilt market resilience.
Intersection of PE and life insurance: The FPC also picks up on how the rapid growth of PE has been accompanied by the acquisition of insurance liabilities as a low cost funding source for lending activities - and that, while this activity is just a small share of the UK insurance sector’s balance sheet today, if this rapid growth continues it could pose a risk to UK financial stability. I would add that I think policymakers are right to keep a close eye on this as private credit, which is still just a small share of global lending activity today, starts to seek to leverage this low cost funding to muscle in on investment grade lending opportunities (particularly in an asset-backed finance and a commercial real estate context).
Climate risks: The FPC observes that there is significant uncertainty around the magnitude of future climate-related financial losses and how soon they could crystallise and that it will remain vigilant in this respect.
Bank stress testing approach updated: The FSR notes that the BoE has updated its approach to stress testing the UK banking system - moving from an annual to a biennial frequency for its main bank capital stress test. A separate document was published on Friday in relation to the change in approach which you can access here.
Nationwide delivered robust financial performance in 1H24; books £2.3bn gain on Virgin Money UK (VMUK) acquisition
Nationwide delivered a robust financial performance in 1H24 (the six months to 30th September), printing underlying profit before tax (PBT) of £959m (excluding VMUK) - according to its results documentation published on Wednesday 27th November. While this is -24% y/y, that is not unexpected owing to official rate changes over the period – which has seen Nationwide adjust its deposit pricing significantly to reflect the changed rate backdrop. Indeed, in this context, the statement notes that, on average, the interest rate on its pool of deposits was 30% higher than the market average over the period – reflecting its member ethos. Notably, net interest margin (NIM) was +4bps h/h to 1.50% (following a 20bps h/h reduction in 2H23), so, NIM has already inflected (notably, Nationwide reported mortgage completion margins of 76bps in 1H24 and the CFO Muir Mathieson confirmed on the call that completion margins are running broadly in line with that 76bps level today). Underlying operating costs were down h/h to £1.115bn (from £1.3bn in 2H23) and the credit impairment charge of just £7m in the period reflects both the benign market backdrop and the quality of the Nationwide loan portfolio. Nationwide’s CET1 capital ratio printed at 28.4% at end-1H24 - and the combined group (including VMUK) CET1 capital ratio came in at 19.6%, well above regulatory minima.
Following various initiatives in the year-to-date, Nationwide has seen its mortgage stock share rise by c.20bps since April to 12.6% and there were strong member deposit inflows of £8.3bn in the period, taking outstanding balances to £201.7bn – representing deposit market share of 9.6% (+c.10bps since April).
The standout feature of the update was the enormous £2.3bn gain on the acquisition of Virgin Money UK reported by Nationwide. This is much higher than had been expected when the deal was first announced and reflects positive fair value adjustments at acquisition as well as some tangible equity build at VMUK since the deal was first announced. VMUK traded at a material discount to book value (and an elevated implied cost of equity) for a prolonged period - with lack of scale one particular driver of this discount - and the deal therefore made much sense from its own shareholders' perspective. However, Wednesday’s update reiterated the substantial benefits associated with the transaction for Nationwide beyond the immediate financial impact - including increased scale, business diversification, and funding synergies. All things equal and looking at VMUK on a standalone basis my sense is that, on the numbers alone, the funding cost - and, in time, operating cost - synergies that Nationwide should be able to extract should drive material multiple pps VMUK RoTE enhancement (and that’s before you account for the benefits that greater scale bring - in an operating leverage context most specifically as the business grows). It’s also worth flagging that the CEO Debbie Crosbie noted on the analyst/investor call that “Our ambitions are not only to build around scale, but also delivering the benefits of mutuality to more people, including to the business banking sector for the first time”. Furthermore, Chris Rhodes, the CEO of VMUK, spoke about ambitions in an improved credit card penetration context (given the newly acquired capabilities in this lending sub-segment) as well as in a business banking growth (in time) context on the call. Nationwide is clearly a name to watch in the years ahead as it becomes a more formidable force in the UK banking landscape under the leadership of Debbie Crosbie.
You can access the Nationwide results document here, the results presentation here, the analyst/investor call transcript here - and you can access VMUK’s 1H24 accounts (for the six months to 30th September) here.
Co-op Bank published an upbeat 3Q trading statement
The Co-operative Bank (Co-op Bank) published its 3Q24 trading update for the three months to 30th September on Tuesday 26th November. It is light on detail but it struck an upbeat tone in overall terms - with a few key data points provided reinforcing that sentiment. You can read the statement in full here.
In overall terms the CEO Nick Slape expressed his pleasure in a momentum context and his delight that the Board was able to declare an interim dividend of £90m ahead of the expected completion of the sale of the bank to Coventry Building Society in 1Q25 (separate RNSs were published by both Coventry and Co-op Bank on Thursday morning noting that the acquisition by Coventry is expected to complete on 1st January*) - underpinned by “…continued profitability and successful normalisation of capital requirements”. On the data provided, we learned that net mortgage balances were +2% for 9M24 while net SME loan balances and customer deposits were up by 16% and 1% respectively over the same period - which implies a strong third quarter across all three dimensions. The statement also flagged the recent £500m 3Y covered bond issuance and the early refinancing of £200m of MREL senior - noting that both transactions attracted “very strong demand from investors” and were underpinned by Co-op Bank’s recent return to an investment grade credit rating from Moody’s.
* Both the Coventry and Co-op Bank RNSs confirmed that the acquisition will not necessitate any immediate changes to the capital structure of the bank or the combined group as a whole. The BoE has confirmed that it intends to exercise its discretion to treat the outstanding externally held eligible liabilities and Tier 2 instruments issued by the bank as eligible to meet the consolidated MREL requirements applicable to the combined group until 31st May 2027. Post completion, Coventry and Co-op Bank intend to simplify and align their capital structures over time.
BoE update shows modest growth in outstanding credit and mortgage approvals
The Bank of England (BoE) published its monthly Money and Credit Statistics (including Effective Interest Rates) for October 2024 on Friday 29th November. You can access the Money and Credit Statistics here - and some granular effective interest rate information here.
Key points from a lending volume perspective: i) net mortgage borrowing was back up again, to £3.4bn in October from £2.5bn in September (with the annual growth rate rising to +1.1% y/y from +0.9% y/y in September); ii) net mortgage approvals of 68,300 in October (up from 65,600 in September), which is the highest monthly mortgage approvals print since August 2022’s 72,200 number (notably, remortgaging approvals were also up m/m - +500 m/m to 31,400); iii) net consumer credit borrowing £1.1bn in October (+7.3% y/y), down from £1.2bn in September - with the m/m reduction driven by contraction in car dealership finance and personal loans, partly offset by some growth in credit card borrowing; iv) a strong m/m pick-up was observed in business lending with non-financial businesses borrowing a net £3.9bn in October compared with just £0.1bn in September (while the monthly data can ebb and flow a bit the trend is clear, i.e., growth is picking up - and, notably, the annual rate of growth in large business lending rose to +2.2% y/y in August from +1.5% y/y in July though SME net lending continues to shrink y/y).
Key points from a loan pricing perspective: i) the effective interest rate on new mortgage drawdowns was 4.61% in October, -15bps m/m (the lowest since May 2023 and reflective of swap rate movements); ii) the average interest rate on the outstanding stock of mortgage debt was +4bps m/m to 3.78% in the month; iii) the effective interest rate on interest-charging overdrafts was -2bps m/m to 22.94% in October; iv) the effective interest rate on new personal loans was +16bps m/m to 8.85% in October; v) the effective interest rate on interest-bearing credit cards was +4bps m/m to 21.74% in October; and vi) the average cost of new borrowing by UK non-financial businesses was +9bps m/m to 6.68% in October while the effective interest rate on new SME loans was +10bps m/m to 7.26%.
Key points from a deposit volume and pricing perspective: i) household deposits were +£20.2bn in October, the largest monthly increase observed since December 2020 (with >66% of the gross inflows allocated to sight accounts); ii) the effective interest rate paid on new time deposits was -15bps m/m to 4.16% in October and the effective rates on the outstanding stock of time and sight deposits were 3.86% and 2.11% in October respectively (-7bps and -1bp m/m respectively); iii) business deposits were -£6.3bn in October (following net inflows of £1.5bn in September); and iv) the effective rate on new time deposits from non-financial businesses was -6bps m/m to 4.30% in the month while the effective rate on stock sight deposits was +1bp m/m to 2.68% in October.
So, what does all of this data tell us?: i) the outstanding stock of credit is continuing to expand at a modest pace, supported by lower interest rate expectations and rising business confidence in future growth prospects - and growth in retail lending is outstripping business lending (a message that the bank executives have consistently conveyed) with mortgages standing out particularly (and mortgage approval numbers bode well for lending flows over the coming months); and ii) pricing trends on new lending and deposit flows appear modestly favourable from a net interest margin (NIM) expansion perspective (however, this observation does not account for legacy loan stock rolling off and structural hedge rolls).
CBI Money and Banking Statistics - October 2024
The Central Bank of Ireland (CBI) also published its monthly Money and Banking Statistics for October 2024 on Friday 29th November, which you can read here. On lending: i) net lending to households was -€136m m/m in October to €408m, taking YTD net lending flows to +€2.8bn (+2.8% y/y); and ii) non-financial corporate (NFC) net lending was -€106m m/m in October to €338m, taking YTD net lending flows to +€849m (+2.9% y/y). On deposits: i) household deposits were +€1.5bn m/m in October to €159.1bn, taking YTD net deposit inflows to +€6.3bn (+4.1% y/y) though overnight deposits have reduced by €2.3bn y/y (though hardly enough to significantly ‘move the dial’ in a sectoral deposit beta context); and ii) NFC deposits were +€4.5bn m/m in October, taking YTD net deposit inflows from to +€4.9bn (+6.0% y/y). All in all, the update points to continued modest broad-based growth in lending which is constructive in a bank loan book expansion context in a positive macro backdrop - as well as a buoyant environment for deposit volumes with continued limited rotation out of current accounts into interest-earning product, a positive trend from a bank profitability resilience perspective. The update was also covered in Bank of Ireland’s Economics Weekly publication on Friday, which you can read here.
Other UK Highlights
Shareholding Changes (incl Director Transactions)
NatWest Group (NWG) issued a RNS on Tuesday 26th November noting that Katie Murray, Group CFO, sold 533,746 shares in the lender last Monday at a price of 392.4p per share - for total proceeds of c.£2.1m. This continues the recent trend of NWG executives taking money ‘off the table’ following the surge in NWG’s share price in the YTD (+c.84%). NWG reported TNAV per share of 316p at end-3Q24 and is trading at 1.27x last reported TNAV. Consensus RoTE (based on the latest company-compiled consensus estimates published on 20th November) is for 16.0% in FY24, 15.4% in FY25, and 15.8% in FY26 - meaning an implied CoE (simplistically ignoring growth) in the c.12.5% territory.
Paragon Banking Group (PAG) issued a RNS on Friday noting that BlackRock’s shareholding in the bank reduced to <5% (previously disclosed shareholding: 5.00%) following a transaction on Thursday 28th November.
Motor Finance remains in the spotlight
Very little news last week in the context of the ongoing UK motor finance debacle, but a few items worth flagging nonetheless
The BoE’s Financial Stability Report noted, in Chapter 6, that the desk-based stress test incorporated a stressed level of misconduct costs of £25bn over the five-year stress test horizon, i.e., a crude £5bn p.a. These numbers should not be seen as estimates as to what the fallout from the UK motor finance debacle could look like as Sam Woods (BoE PRA CEO) made clear to reporters at the BoE Financial Stability Report press conference on Friday: “We did not attempt to make a point estimate on that particular issue…what we did instead was take a crude, but I think, prudent approach”, but made it clear that the BoE does not see the fallout as a threat to financial stability.
The Financial Ombudsman Service (FOS) published complaints data for the three month-period to end-September on Wednesday last - you can access the materials here. The data show that there were 73,692 new complaints in the period, +58% y/y (with an overall uphold rate of 34%). While credit cards were the most complained about product in the quarter, it was notable that motor hire purchase facility-related complaints shot up by 156% y/y (though were -26% q/q) and represented 16% of total complaints in the latest quarter. Let’s see what the Q3 2024/25 data show…
Karan Kapoor, Global Head of Regulatory and Risk Consulting at Delta Capita penned a piece in Motor Finance Online last Tuesday in relation to what motor finance firms must do next - which you can read here. Kapoor pushes firms to develop a SaaS solution to digitise “…parts of the outreach, redress, and remediation processes, firms can also create operational efficiencies and accelerate their necessary customer interactions”. Somewhat self-serving from the author’s perspective I hear you say but some useful tips for firms within the piece nonetheless.
A useful summary in relation to what’s going on in broad terms appeared on Bloomberg on Tuesday last. Nothing in it that I haven’t reported in Financials Unshackled before but a useful high-level synopsis if you want to have a read here.
Snippets
Rightmove’s latest Weekly Mortgage Tracker (see here) from Thursday 28th November shows that pricing has broadly stabilised now in the land of UK mortgages with the average 2Y fixed rate mortgage now priced at 5.09% (+1bp week-on-week; -46bps y/y) and the average 5Y fixed rate mortgage now priced at 4.86% (+1bp week-on-week; -27bps y/y). Indeed, lenders have noted that mortgage spreads have largely stabilised now following some movement in October and in the earlier part of November (see above comments re Nationwide’s mortgage completion spreads currently sitting broadly in line with the 76bps completion spread attained in 1H24).
In savings news updates, the following are noteworthy: 1) Moneyfacts’ latest UK Savings Trends Treasury Report notes that savings rates fell during the month of November - with average 1Y bond pricing down 7bps m/m to 4.24%, average 1Y fixed rate ISA pricing down 12bps m/m to 4.06%, and average returns on longer-term bonds and ISAs both down by 4bps m/m to 3.89% and 3.84% respectively. Average easy access returns are now at 2.97%. 2) NS&I announced further rate changes last week (which take effect from 20th December) which will see rates on its Income Bonds and Direct Saver products fall to 3.49% AER and 3.50% AER respectively - the second rate cut in two months after rates on these products were recently reduced to 3.75% AER. George Nixon penned an interesting piece in The Sunday Times today on the rate changes, which is worth a read - and you can access it here.
Other regulatory developments worth flagging: i) The BoE published its list of (14 O-SIIs for 2024 on Friday last (see here) - no change to the 2023 list except that Virgin Money UK Plc falls out given it has now been acquired by Nationwide; ii) The BoE published Policy Statement 19/24 (PS19/24) on the definition of an Interim Capital Regime (ICR) in the context of the Strong and Simple Framework on Friday last (you can access it here); iii) The BoE published the results of the 2024 CCP (central counterparties) Stress Test on Friday last (access it here); and iv) the PRA and FCA published a joint Consultation Paper on senior bankers’ remuneration on Tuesday last (press release here and CP16/24 here).
Sky News reported yesterday that HSBC’s (HSBA) Board has appointed headhunters to kick off the process to find a successor to Mark Tucker as Chair of the bank. Tucker has been in the role since 2017 and had been expected to leave around the time of the 2026 AGM - but executives reportedly indicated to Sky News that he could leave sooner depending on how the recruitment process goes. Tucker has been very ‘hands-on’ in his role as Chairman and it remains to be seen whether his eventual successor will take a similar approach / whether the wider Board want that level of ‘involvement’ from the next Chair. Click here for the article.
Leeds Building Society announced on Monday that it has appointed Brendan McCafferty as Chair with effect from 1st March 2025, subject to regulatory approval. He will succeed Iain Cornish following his announcement in January that he would not seek a third term as Chair. The statement notes that McCafferty is currently Chair of Nest Corporation, a position he has held since February 2022, and was previously CEO (Intermediated and Direct) at AXA Insurance UK plc and the founding CEO of Flood Re Ltd, an innovative public body venture between the government and the insurance industry - and with >30 years of experience he clearly brings much knowledge and strategic insight to the role. RNS here.
Monzo has reportedly appointed Tom Oldham (CIO of Mombak in Brazil) as Group CFO, subject to regulatory approval - he is understood to be due to join in 2025. The appointment has sparked renewed prospective IPO chatter given that Monzo has reportedly highlighted Oldham’s experience in the context of the Nubank IPO. The bank has also reportedly appointed Mark Newbery as its UK CFO (Newbery was most recently CFO and Head of Business Management, Investment Banking at Barclays).
Some press last week on Revolut following the unveiling of its product vision for 2025, which I picked up on in my ‘Financials Unshackled Issue 21’ note of 25th November - and you can read more on it in Fintech Futures here, in Marcel van Oost’s Future of Banking newsletter on LinkedIn here, and in the Business Post here. Mortgage Strategy also reflected on Revolut’s mortgage lending ambitions more specifically (its piece from Monday last is here), noting that Revolut has said that its home loan plans are part of its ambition “to shake up traditional financial service offerings…The goal is to offer a fully digital mortgage product that is the fastest on the market, aiming to issue instant approval in principle and final offer in one business day subject to asset valuation and any necessary checks” and that it will launch a mortgage service in Lithuania first - which will be followed by Ireland and France in 2025. I would also highly recommend reading Rupak Ghose’s Substack post on Revolut from Monday 25th November - read it here.
It emerged on Friday that Marc Armengol, COO of Sabadell (TSB’s owner), will succeed Robin Bulloch as CEO of TSB UK with his appointment expected to take effect in early 2025. Bulloch has decided to retire following a 45-year career in banking. Armengol formerly worked at TSB having been Strategy Director of the bank and a member of its Board since 2022. TSB’s Chairman Nick Prettejohn commented: “We’re grateful to Robin for his outstanding contribution not only to TSB but also to retail banking for more than four decades. Robin leaves TSB a successful, simpler, stronger and more customer-focused bank and we’re well positioned for the next phase of growth. He hands over the baton to Marc, who is a proven leader and knows TSB well. Marc’s appointment will allow us to build further on the progress of recent years.”. Read the press release here.
Irish Highlights
Shareholding Changes
AIB Group (AIBG) issued a RNS on Monday last noting that BlackRock’s shareholding in the bank reduced to 10.48% (previously disclosed shareholding: 10.60%) following a transaction on Thursday 21st November.
Bank of Ireland Group (BIRG) issued a RNS on Monday last noting that BlackRock’s shareholding in the bank reduced to 6.90% (previously disclosed shareholding: 7.51%) following a transaction on Friday 22nd November.
S&P Global Ratings upgrades AIBG and BIRG Outlooks to Positive
S&P Global Ratings published an update on AIB Group (AIBG) and Bank of Ireland Group (BIRG) on Monday last, in which it upgraded the Outlook for both banks to Positive (from Stable) and affirmed its existing ratings. S&P noted that its positive outlook “…reflects our view that after recording strong profitability over the past quarters, AIB and BOI should continue to post solid risk-adjusted returns over the next couple of years, despite declining interest rates”. S&P also notes that it anticipates “…that sound risk management, together with stronger and more efficient franchises thanks to improving digital capabilities, could help close the gap with higher rated peers”, that it expects AIBG and BIRG to maintain good asset quality (with CoRs expected to remain in the TTC range of 20-30bps) and to manage other risks, and that capitalisation is expected to remain strong. I broadly concur with the S&P assessment in an outlook context - with one caveat being that we will have to see what pain BIRG must take in a motor finance provisioning context (though, running some numbers here, what’s really at risk is the size of shareholder distributions rather than a capital shortfall concern - explaining why S&P likely hasn’t focused on this in a credit ratings context). I would also add that there is a meaningful risk that the scale of investment in a digital and operating architecture context may need to / ought to inflate too, exerting some added cost pressures (though see further reports below in a costs context).
AIB Group Updates - SRT, pay deal, sustainability investment
Joe Brennan at The Irish Times reported early last Monday that AIB Group (AIBG) has completed its inaugural synthetic risk transfer (SRT) transaction on a portfolio of €1bn of corporate loans, according to a bank spokesperson - with the estimated tailwind to the CET1 capital ratio accruing from the deal in the region of c.20bps (you can read Brennan’s piece here). It is positive to see AIBG successfully complete its first such transaction, which is supportive in a continued strong shareholder distributions context. This is likely to be the first of many transactions (with some mortgage portfolios likely to be in focus too given the onerously high risk weights attached to certain mortgage portfolios in the case of AIBG). Indeed, AIBG informed the market at the stage of its 3Q24 trading update on 5th November that a SRT trade was nearing completion with an expected c.20bps of CET1 capital ratio benefit and that this (then impending) transaction was likely to just be the first of a multi-year programme with AIBG likely to be more ambitious in terms of structuring and sizing going forward.
Separately, multiple media reports on Friday last noted that AIBG has agreed to a 4% pay increase for staff in 2025, with all staff set to receive a minimum salary increase of €2,000 (which will see the minimum salary for ROI-based employees rise to €30k p.a.) following an agreement struck with the Financial Services Union (FSU). The FSU has agreed to withdraw a claim for the restoration of the 35-hour working week (the standard working week was increased by 2 hours per week to 37 hours in the wake of the GFC) as part of the agreement. While this pay increase is well ahead of where CPI is trending (+0.7% y/y in the 12 months to end-October 2024 per CSO data; albeit +2.3% y/y excl. energy and unprocessed food) it seems that it was inevitable that AIBG management would have to do something in this region given: i) the last 3Y pay deal which saw staff receive a 10% pay increase in total fell short of inflation levels; ii) the FSU cleverly had a strong enough ‘tool in its kit’ from a negotiation perspective given its prior demand for the working week to be shortened by 5.4%; and iii) record bank profitability. You can read more about it here in The Irish Times, here in the Irish Independent, and here in the Business Post. Great timing too on General Election day!
Finally, AIBG issued a press release on Monday last - to coincide with its Annual Sustainability Conference which was held on the same day - noting that it will plough €20m of investment into new sustainability education and research. A worthwhile initiative, which you can read about here.
Snippets
Interesting piece on the Irish banks penned by S&P Global Market Intelligence on Wednesday last ahead of the General Election which you can read here. I was delighted to contribute to the piece and it focuses on what the various parties contemplate from a banking sector perspective during the course of the next government. This is a topic I also wrote on in the Business Post on 25th November, which you can access here. Now that it looks very likely that Fine Gael and Fianna Fail are set to form a coalition government (with some smaller parties perhaps) once again (though, given the complexity of the proportional representation system and the vote transfer count process we won’t have an affirmative result for some time yet) investors are likely to be relatively relaxed in terms of Irish banking sector stability.
Various press reports over recent days have picked up on the news that PTSB customers experienced delays in sending and receiving payments on Friday due to a technical issue. The app was also out of action following a system upgrade. Pretty frustrating for customers with some not receiving their salaries on what was Black Friday. You can read about it here in the Business Post and here in the Irish Independent. While I’m no tech expert it seems outages like these are far too common in the industry and raise the question as to whether system investments are adequate. As an aside, Sharon Donnery (Deputy Governor of the Central Bank of Ireland (CBI)) spoke on Thursday at the Fintech Ireland Summit 2024 on how technology is a source of good in the financial system (transcript of the speech here).
The Sunday Times reported today that Revolut has poached Stephen McCormick of Avant Money (Bankinter) ahead of its launch of a mortgage proposition in Ireland in 2025. McCormick is understood to be a key hire given his unique expertise in mortgage product design and brand development. The same article also notes that Revolut will initially offer mortgages on a limited direct-to-borrower basis via its app before following up with a large-scale rollout through brokers. Read the article here.
The Irish Times reported on Wednesday last that First Citizen, the non-bank lender specialised in car finance, agri-finance and commercial retail lending, reported a €11.7m loss in 2023. The business reportedly “experienced slower growth, with flatter lending volumes across each of its portfolios” and noted that it has been very challenging to compete given its funding model - with the ultra-low cost advantage enjoyed by those banks who have the vast privilege of a banking licence allowing them maintain asset yields at levels that squeeze players like First Citizen. You can read the article here.
The Business Post reports today that Ebury (in which Santander owns a 50.1% shareholding) has opened a new Dublin office targeting underserved SMEs and will offer a range of services including unsecured lending, payments, collections, and FX risk management. Phil Monkhouse, Ebury’s Country Manager for UK & Ireland, told the newspaper that the company is planning to treble its existing business in Ireland over the coming years. Read the article here.
Other Highlights
Snippets
Elizabeth McCaul, ECB Supervisory Board Member, spoke on Tuesday last on the achievements and future challenges of the SSM. McCaul zones in on risks associated with NBFIs and geopolitical concerns in particular - noting now that some NBFI firms appear systemic (“…some of the individual players have grown to such a scale and have reached such a level of interconnectedness that they now exhibit systemic characteristics, making their stability integral to the health of the broader financial system”). That tends to be what happens when regulators consciously choose to ignore the fact that truckloads of lending comes off bank balance sheets over a multi-year period and enters into unregulated territory. You can read the speech here.
More on the (unchecked) NBFI growth in the ECB Blog on Thursday, which you can read here. The post describes the pillars of a macroprudential approach for the so-called non-bank financial sector and explains the need to further develop the policy framework in this context.
Bloomberg reported on Monday last that ECB Governing Council member Mario Centeno has said any US push to cast aside the Basel 3.1 reforms would “misfire” and that “Europe should implement Basel III, unless they are counterproductive”. Read the article here.
The EBA reported last Wednesday that EU banks continue to meet their MREL requirements - and that out of a sample of 339 banks surveyed, just 21 are still in their transition period. See the release here. The EBA also published its latest Risk Assessment Report (RAR) on Friday last, which you can access here.
The BCBS published a range of practices report on implementing a positive neutral countercyclical capital buffer (CCyB) on Thursday last, which you can read here.
The BIS published details surrounding the assessment methodology and the additional loss absorbency requirement in a G-SIBs context on Tuesday last. You can read the press release here and the report here.
Good FT Lex piece on European versus US bank valuations from Wednesday last here - arguing that consolidation in Europe would help bridge the gap.
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