Financials Unshackled Issue 21: 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 morning - and welcome to the latest edition of Financials Unshackled! This note is split into five sections: i) Calendar for the week ahead; ii) Results Recap (key synopsis of results / trading updates / etc. published in the last week); iii) UK Highlights (other key UK sectoral and company developments in the last week); iv) Irish Highlights (key Irish sectoral and company developments in the last week); and v) Other Highlights (select key developments in a Global / European context as well as critical economics / property / politics updates as appropriate).
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
Lots going on this week:
Mon 25th Nov (14:00 BST): Peterson Institute For International Economics (PIIE) Virtual Event: Lessons from the Basel Committee's assessments of individual jurisdictions (register here)
Tue 26th Nov (07:00 BST): Augmentum Fintech (AUGM) 1H24 Results (for the six months to 30th September 2024)
Tue 26th Nov (07:00 BST): The Co-operative Bank 3Q24 Trading Statement (for the three months to 30th September 2024)
Tue 26th Nov (10:00 BST): Augmentum Fintech (AUGM) 1H24 Results Analyst Call (registration details here)
Wed 27th Nov (07:00 BST): Nationwide Building Society (and Virgin Money UK) 1H24 Results (for the six months to 30th September 2024)
Wed 27th Nov (11:00 BST): Nationwide Building Society (and Virgin Money UK) 1H24 Results Webinar (contact Investor Relations here to register)
Thu 28th Nov: UK Finance Later Life Mortgage Lending - 3Q24 Update
Fri 29th Nov: Ireland General Election
Fri 29th Nov (09:30 BST): Bank of England (BoE) Money and Credit Statistics (October 2024)
Fri 29th Nov (09:30 BST): Bank of England (BoE) Effective Interest Rate Statistics (October 2024)
Fri 29th Nov (10:30 BST): Bank of England (BoE) Financial Policy Summary & Record
Fri 29th Nov (10:30 BST): Bank of England (BoE) Financial Stability Report
Fri 29th Nov (10:30 BST): Augmentum Fintech (AUGM) 1H24 Results Online Investor Presentation (registration details here)
Fri 29th Nov (11:00 BST): Central Bank of Ireland (CBI) Money and Banking Statistics (October 2024)
Results Recap
Close Brothers 1Q25 update devoid of surprises; the ‘car crash’ that is prospective motor finance-related costs remains the great unknown
Key Take-Aways: While Close Brothers Group’s (CBG) shareholders continue to endure a bloodbath with the share price on a seemingly consistent downward trend (and ongoing chatter about a prospective rights issue) it was positive to see continued strong underlying business performance when it came to update the market in relation to the 1Q25 period (for the three months to 31st October 2024) on Thursday 21st November - as well as preservation of existing FY25 guidance. However, the potential costs associated with the motor finance debacle seem likely to continue to overshadow for the time being - with CBG noting it intends to appeal the Court of Appeal judgment directly to the Supreme Court imminently. Let’s hope we get some more clarity soon. More detail below for those of you who are interested and you can read the update here.
The Banking division reported net loan growth of +0.6% q/q to £10.2bn - with continued customer demand partly offset by risk-weighted action (RWA) optimisation actions. The growth was attributable to Commercial lending - with partial offset from a modest increase in Property repayments, and Retail lending origination volumes lower q/q due to the temporary pause in new lending in the motor finance business. CBG notes that it has now, since 2nd November, resumed origination activity for a significant portion of its UK motor finance book (following contractual documentation alteration in the wake of the Hopcraft judgment). Annualised 9M24 NIM of 7.3% was strong (which was reassuring), positioning management to reiterate guidance that the 1H24 7.2% NIM print will be sustained in 2H24. Indeed, it is fair to argue, in my view, that a declining official rate backdrop ought to be conducive to NIM accretion momentum over time given CBG’s ‘borrow long, lend short’ funding strategy (and that’s before one considers any potential rebiasing towards higher-yielding asset segments). CBG also noted that it continues to make progress on the previously articulated cost management actions and is on track to deliver annualised savings of c.£20m, reaching the full run rate by end-FY25 (not surprising - and consistent with prior guidance). Finally, CBG notes that the 9M24 bad debt ratio print remained below the long-term average 1.2% ratio print, reflecting resilient underlying credit quality.
Close Brothers Asset Management (CBAM) delivered annualised net inflows of 4% in 1Q24 (which is still a decent performance despite the 8% growth in net inflows recorded in FY24) - and managed assets and total assets were both +c.£0.2bn q/q to £19.5bn and £20.6bn respectively. The statement reiterated that the sale of CBAM to Oaktree is expected to complete early in calendar year 2025.
Winterflood continued to be impacted by unfavourable market conditions, posting an operating loss of £0.7m in 1Q25. Central functions (Group) reported net expenses of £14.2m in 1Q25 and the statement notes that management continues to expect net expenses to be in line with the guidance provided in September.
Total funding of £13.0bn was stable q/q, liquidity remains flush (with an end-1Q LCR of 964%) and the CET1 capital ratio came in at 13.2% at end-1Q (+40bps q/q owing to incremental profit build and RWA density reduction). Management remains confident that the CET1 capital ratio will sit in the 14-15% range at end-FY25 (reiterating its capital-strengthening plans as previously outlined - including noting that it has completed preparations for a significant risk transfer (SRT) of assets in Motor Finance) - though this is before any potential redress or provision related to the FCA’s review of historical motor finance commission arrangements or the recent Court of Appeal judgment. It is unclear as to what level of actual capital-strengthening CBG will need to effect - and it’s worth noting that a This Is Money article on Saturday reported that analysts have suggested that Winterflood could be put on the block following the agreed CBAM sale (click here for the article). However, I don’t think we will see a piecemeal reaction from the CBG Board, who will - presumably - wait to get a more accurate picture of what the accounting estimates look like and then announce (as necessary) a further comprehensive package of additional capital-strengthening measures if necessary (which could, of course, include a sale of Winterflood (though that wouldn’t ‘move the dial’ enormously to be clear) as well as loan portfolio(s) sales, further SRTs, and, potentially, a rights issue). However, I would imagine that contingency planning is well underway as CBG may be forced to act sooner than the Board likely wishes if investor confidence continues to evaporate (with the self-perpetuating consequences that can bring).
There was, unsurprisingly, no new material information procured in relation to the prospective financial impact accruing from the FCA review and the Court of Appeal’s recent judgment - with the accounting assessment in relation to these matters remaining under review. CBG considers that it meets the relevant criteria for the Supreme Court to grant it permission to appeal the Court of Appeal’s decision directly to the Supreme Court - which it notes it intends to do “imminently” (notably, This Is Money reported on Monday last that the deadline for CBG to apply directly was Friday 22nd November, so, presumably the application has now been made). Everyone is in ‘wait and see’ mode in this respect and one hopes that the Supreme Court can decide quickly whether to grant CBG its permission to appeal.
In terms of readacross from the recent Hopcraft judgment, the statement notes that “While the potential future applicability of the judgment to other intermediated lending businesses remains unclear, we are reviewing documentation and processes and continue to collaborate with brokers and other intermediaries to update disclosures and procedures where appropriate. The group operates various distribution models across our business. In Retail, most of our Motor and Premium Finance businesses are intermediated. In Commercial and Property Finance, we operate predominantly direct through our own sales teams.”. These facts are well understood by the market anyway and it seems that Premium Finance-related potential exposures shall remain a talking point for now (notably, the FCA initiated a market study on Premium Finance in October - see here).
As a final note, the statement clarifies that CEO Adrian Sainsbury remains on medical leave of absence and that CBG intends to maintain the existing temporary cover arrangements while Sainsbury remains on leave. Indeed, it seems the management team, led by Mike Morgan, is absolutely doing as good a job as can be - but external circumstances clearly overshadow continued performance delivery and necessary strategic reorientation efforts with the market understandably fixated on what the financial implications of the motor finance debacle will ultimately be.
Santander UK 3Q24 posts strong u/l 3Q; £295m motor finance provision
Key Take-Aways: Santander UK released its Quarterly Management Statement for 3Q24 (the three months to 30th September 2024) on Wednesday, 20th November. In overall terms: a) the underlying (u/l) quarterly financial performance was stronger q/q with NIM accreting, costs reducing, and continued benign credit impairment charges; ii) net loans and deposits continued to contract modestly; iii) no further TFSME repayments in the quarter following c.£4.0bn of repayments in 1H; iv) CET1 capital ratio +20bps q/q to 15.4% despite £295m motor finance provision; and v) nothing else of particular material significance in the update. While management remains forthright in relation to its continued commitment to the UK market (referencing comments made at the Santander Group 3Q update on 29th October), investor questions will continue to hover - with this Bloomberg article (which I picked up on in my 3rd November note) of relevance in this respect. I would also add that, in the absence of a desire to significantly push up wholesale funding issuance / parental funding dependence, given its LDR, Santander UK will likely either have to start growing its UK customer deposit base and/or run down the size of its UK loan book at a faster clip (could a portfolio sale(s) be on the cards in early 2025 perhaps?) given required FY25 TFSME repayments (though, with that said, the Board may be comfortable running with a higher LDR given readily available funding). For those into the detail you can read more below and you can access the statement here.
Financial / capital / liquidity position highlights: 1) Net loans continued to trickle downwards q/q to £200.4bn (-1% q/q) - comprising of mortgages of £169.7bn (85%), and Corporate & Commercial Banking exposures of £18.0bn (9%) in the main. 2) Customer deposit volumes also continued to contract q/q in 3Q24, sitting at £185.7bn at 30th September (-2% q/q) - for a loans to deposits ratio (LDR) of 108%. 3) The end-3Q24 CET1 capital ratio printed at 15.4%, +20bbps q/q despite the £295m motor finance commission-related provision taken in the quarter (more below on this). 4) Santander UK scores quite well (and efficiently) on standard liquidity metrics with an end-3Q24 LCR of 157% and NSFR of 134% - which have reduced since end-FY23 levels given a further £4bn of TFSME repayments effected in 1H24 (with £13.0bn of TFSME outstanding at 30th September, unchanged q/q). Notably, £9.1bn of the outstanding stock of TFSME funds are due to be repaid by October 2025 - with the residual £3.9bn to be repaid between 2027 and 2031.
Financial performance highlights: 1) Banking net interest margin (NIM) continued its q/q upward trajectory, +8bps q/q (following +2bps q/q in 2Q24) to 2.17% following further active margin management (pricing actions, deposit volume management, structural hedging) - this drove net interest income (NII) up by +4% q/q to £1,096m (though 9M24 NII of £3,201m was -10% y/y owing principally to higher y/y deposit costs). The statement notes that the bank is “well positioned for expected bank rate reductions” given the size of its structural hedge (upsized by c.£9bn over 9M24 to c.£115bn, i.e., Santander UK is effectively overhedged as this c.£115bn is significantly (tactically, presumably) higher than the balance of its non-interest-earning liabilities and equity) and its c.2.4-year average duration. 2) Other operating income (OOI) was +10% q/q to £111m largely due to lower switcher fees paid to customers (though 9M24 OOI was -28% y/y, primarily due to the non-recurring Euroclear shares upward revaluation in 1H23 (meaning an elevated comparison base), as well as lower operating lease income in Consumer Finance). 3) Operating expenses (opex) were -2% q/q to £624m following simplification and automation initiatives (though 9M24 opex were +3% y/y due to inflationary impacts as well as further investment in efficiency and customer experience initiatives). 4) The impact of the above quarterly movements was a 3bps q/q reduction in the Cost/Income ratio (CIR) to 52% in 3Q24 (though the 9M24 CIR was +8pps y/y to 55%, which I would still characterise as ‘elevated’, particularly given NII augmentation in recent years in response to higher base rates). 5) Credit impairment charges remained suppressed - coming in at just £35m in 3Q24 (down from £41m in 2Q24) implying a cost of risk (CoR) of just 5bps in the quarter. While arrears have picked up a bit in the YTD they still remain at low levels. 6) A £295m provision was taken in 3Q24 related to historical motor finance commission payments. The statement notes that “This includes estimates for operational and legal costs (including litigation costs) and potential awards, based on various scenarios using a range of assumptions (such as the outcome of any Supreme Court appeal, the scope and timeframe of any redress scheme, applicable time periods, claims rates and compensatory interest rates). The outcome of the FCA’s Review and/or adverse outcomes from litigation could result in material costs. These matters mean that there are currently significant uncertainties as to the extent of any misconduct, if any, as well as the perimeter of commission models, nature, extent and timing of any remediation action if required. As such, the ultimate financial impact could be materially higher or lower than the amount provided and it is not practicable to quantify the extent of any remaining contingent liability.” - which doesn’t tell us anything new or surprising really. 7) 9M24 RoTE was 8.7%, weighed down by surplus equity and (non-recurring…) provisions.
Investec posts a strong 1H24 update; received well by the market
Investec (INVP) published 1H24 results (INVP calls them the 1H25 results but I’ll stick with 1H24 for my own consistency across names) for the six months to 30th September on Thursday 21st November. The update was well-received by the market on the day itself. I have to confess - even though I did work at Investec once upon a time - it is not a name that I have followed especially closely over the years given the slight bias of the business towards Southern Africa, a region I am not in any way expert on. However, if any fund managers / analysts / other industry participants are interested in detailed analyses of INVP’s updates going forward please email me at john.cronin@seapointinsights.com. You can access the results document here and the slide deck here.
So, I’ll save you a treatise here on the update but, suffice to say, it was indeed a strong set of numbers with adjusted operating profit +7.6% y/y (+4.4% y/y in ZAR terms) to £474.7m. Additionally, FY24 Group RoTE guidance was tightened to c.16.0% (from a 15.5% to 16.5% range per the pre-close trading statement of 20th September last) - with UK & Other expected to report FY24 RoTE of c.13.5% in line with 1H24. Notably, Group RoE guidance was upgraded to c.14.0% for FY24 (from a range of 13.0-14.0% per the pre-close trading statement of 20th September last).
A few interesting nuggets on the UK to call out: 1) UK & Other net core loans grew by 2.3% in annualised terms to £16.7bn driven by 6.9% annualised growth in the UK residential mortgage lending book, alongside a flat corporate lending portfolio within a constrained market environment. Moderate growth across the corporate loan book was offset by higher levels of repayments, particularly in the real estate lending portfolio, as well as the translation impact of USD and EUR-denominated loans. 2) The UK business continues to make progress towards migrating to IRB models. 3) UK served as a slight drag on NII momentum (Group NII was +2.0% y/y but UK & Other NII was -5.2% y/y) owing to the effects of deposit repricing. 4) UK & Other CoR of 67bps was in line with guidance - asset quality remained stable and migration to Stage 3 reduced. 5) Management has concluded that the existing £30m provision in relation to potential motor finance-related costs owing to the FCA investigation and the recent Court of Appeal judgment remains appropriate while, unsurprisingly caveating that with: “The ultimate financial impact of the Court of Appeal decision and ongoing FCA investigation into motor commission could materially vary, pending further guidance from the FCA or the outcome of the intended appeal to the UK Supreme Court”.
Europe a growth focus; is INVP gunning for an Irish banking licence?: There was little mention of Europe in the documents apart from a reference in the slide deck to INVP’s focus on increasing the runway to grow on the front-foot in Continental Europe. However, Europe did come up on the call with CEO Ruth Leas noting that INVP is continuing to focus on building scale and relevance in both the UK and Europe - and, most notably, that INVP is “working on a solution to be able to flexibly operate in Europe” and is focused on removing the obstacles that Brexit created to facilitate growth in the region. I flagged in my Business Post article of 9th November last that, while it hadn’t yet been reported in the media outside of South Africa, CEO Ruth Leas commented on 31st July that the bank is exploring the possibility of a European banking licence to support existing and new client activities in mainland Europe – with Ireland suspected to be a potentially ideal launchpad given Investec’s 25-year history in that market.
Other UK Highlights
Motor Finance remains topical
A few updates to flag on the ongoing fallout in a motor finance-related context following the recent Hopcraft judgment:
The FCA announced on Thursday morning that it is seeking feedback on proposals to extend the time firms have to respond to motor finance complaints where a non-discretionary commission arrangement was involved. Two options are: 1) until 31st May 2025, reflecting how long it may take to hear whether the Supreme Court has granted permission to appeal. The FCA plans to set out its next steps on DCA complaints in May 2025. Subject to the outcome of any Supreme Court application, the FCA would update on motor finance non-DCA commission complaints at the same time. 2) A longer extension until 4th December 2025, to align with the current rules for motor finance firms dealing with discretionary commission complaints. The FCA previously extended the time firms have to respond to motor finance complaints involving a discretionary commission arrangement (DCA). Read the FCA announcement here and the Consultation Paper (CP24/22) here. As an aside, a recent Ashurst note (dated 4th November) on preparing for review and redress programmes in Motor Finance, taking into account lessons learned from the Australian experience from 2016 is worth a read if you have the time and can be located here.
Moody’s published a detailed note on Monday last, giving some detail regarding its central case scenario estimate of £8-21bn of redress costs for UK lenders (midpoint £13.7bn) arising from the FCA review alone, applying the following key assumptions based on the amount of loans originated from 2007 to January 2021: i) 40-60% of loans underwritten included DCAs; ii) 70% of loans underwritten are claimed upon by customers (that’s high relative to precedent in other lending segments but Moody’s appears to have ‘pumped this up’ to reflect the likelihood of inadequate paperwork for older claims); iii) average term loan of 48 months with the DCA being paid throughout the term of the loan; iv) commission levels of between 1% and 3%; and v) penalty interest fee of 8%. Moody’s further estimates that, in the wake of the Court of Appeal judgment, an additional £9bn of costs could be incurred just on loans originated since 2007. Punchy numbers (£30bn at the top end, and not ‘all-encompassing’ in relation to lookback, potentially) and that’s before you take into account the not-insignificant administrative costs of dealing with all of this. Moody’s conclusions are unsurprising: “We believe any potential motor redress schemes would only have a limited negative impact on the largest banks given their high levels of capital, strong profitability and ability to adjust financial policies to absorb any potential costs. For smaller banks that are more exposed to motor lending, particularly those with a longer track record in the product, redress costs could be a more significant hit to profitability and capitalisation.”. It feels like ‘more down than up’ in terms of how the market will think about the potential financial fallout as time goes on (in the absence of any governmental financial intervention). Click here to read the report.
The Telegraph reported on Monday last that Courmacs Legal has claimed it is receiving “tens of thousands” of legal letters every day from Lloyds’ (LLOY) Black Horse motor finance business, which other lenders send electronically - with Darren Smith, MD of Courmacs Legal, reportedly noting to the newspaper that this is “clearly a tactic” to deter its lawyers from taking on new misselling cases. The same article also reported that Elizabeth Compley, COO of legal firm Slater & Gordon, noted to the newspaper that lenders are “really dragging their heels” in supplying the financial records that are needed before a motor finance customer can begin their compensation claim. Click here for the article.
Finally, click here for a sensible opinion piece penned by Oliver Shah in The Sunday Times and here for a detailed piece in The Times today on the most active claims management companies (CMCs) leading the charge in the push for customer compensation.
A busy week on the Revolut newsfront
The Business Post reported last Tuesday on how Revolut has added more than 10 million customers globally already this year and has now passed the 50 million customer mark - read it here (this article also reflects on Revolut’s progress in Ireland under the leadership of Maurice Murphy). Bloomberg reported on Wednesday that Revolut CEO Nik Storonsky hinted at Slush (a European tech conference that was held in Helsinki last Tuesday) that the business is considering making a fresh bid for a US banking licence and it sounds like the business has ambitions to roll out credit card lending in that market (click here for the article), which the FT wrote about later in the week. The FT reported on Friday that early Revolut investors sold between $300m and $500m of stock (according to the newspaper’s sources) in a recent transaction that valued Revolut at $45bn, subsequent to the August employee share sale which also valued the business at $45bn (click here for the article). The Business Post reported on Saturday that Co-Founder of Revolut Vlad Yatsenko told the newspaper that Revolut expects to double customers numbers to 100 million “within two to three years” and that “After we get to 100 million, the next target will be 500 million and that will be based on expansion in other markets such as India, Southeast Asia, and Latin America…Our mission is to become a global bank. We started with an international offering, which I think helped us in terms of mindset and now it is just a natural trajectory for us to continue to expand” (click here for the article). He also spoke about the company’s growth ambitions in Ireland. While I have regularly opined that I don’t think Revolut is going to materially encroach on the incumbent banks’ market shares in the short to medium-term (UK & Ireland specifically), I have been very clear that one would be naive not to recognise the long-term disruption threat. The scale of ambition is unparalleled and, while Revolut faces a whole spectrum of issues to work through to build customer trust et al., it has the financial resources to get there in time (with, as a case in point, the new UK CEO clearly cognisant of what needs to be done it seems). Finally, I was delighted to contribute to a piece in The Guardian yesterday on Revolut’s, arguably extravagant, customer event held in London at the weekend (click here for the article) - to be clear, Revolut is a private company and should rightly feel free to deploy its funds as it sees fit (unlike mainstream banks, which are heavily politicised no matter what their executives tell you) and events like this are huge from a publicity-generation and customer loyalty-building perspective.
Nationwide set to report 1H24 results on Wednesday - including gain on Virgin Money UK acquisition
The Mail on Sunday reported yesterday that “Nationwide will this week bank a gain of around £2 billion on its bargain £2.9 billion takeover of Virgin Money – in a boost that is likely to trigger a windfall for customers”. Although unattributed, I have an idea where that estimate came from!
I expect that this will be an interesting update and my focus is on the following:
I expect that Nationwide will report a c.£1.9 billion accounting gain on acquisition - based on my estimate for Virgin Money UK's updated tangible equity position (see table below*). That's an enormous gain and reflects the fact that Nationwide has acquired Virgin Money UK for just c.0.6 times tangible book value. While the markets were hesitant to ascribe a strong equity valuation to Virgin Money UK, Nationwide was able to offer a decent premium to the Virgin Money UK shareholders and still bank a substantial gain on what is a strategic acquisition that has the potential to deliver highly material synergies.
I expect strong reaffirmation of the material benefits that the acquisition of Virgin Money UK brings. Those are the ability to invest in and scale what is an underinvested franchise, the diversification and new lending opportunities that Virgin brings to Nationwide (particularly in a commercial lending and a fee income context), the substantial funding cost benefits that Nationwide would be expected to capture over time, and some cost efficiencies too in due course (though I don’t expect a major emphasis on the latter - for now anyway)**. I expect that Nationwide management will give some detail in terms of what the scale of ambition is over the coming years as the society seeks to invest to build further on its significantly strengthened position in a lending and deposit market - as well as a fee income - context. Indeed, I would add that the mutual status of the organisation (as well as, somewhat interrelatedly, its consistent undeniable ‘chart-topping’ customer service track record) ought to denote a significant shield in the context of market disruption efforts on the part of relative newcomers.
In terms of financial performance for the half-year and the outlook for the rest of the year, I expect that the Nationwide update will convey similar sentiments to what we learned through the 3Q bank results season - that is, sustained growth in its core lending markets with a positive outlook for mortgage volumes, continued growth in deposit volumes with lower levels of churn into higher-yielding accounts, strong credit performance, and a substantial excess capital position. However, I do expect we will learn of some mortgage flow share build (with Nationwide’s recent FTB mortgage initiatives, which I reported extensively on in September, constructive in this respect) and The Times reports today that industry sources have indicated likewise to the newspaper (click here for the article).
** Separately, it was interesting to read on Fintech Futures last week how Nationwide is migrating its on-premises IT infrastructure to a hybrid cloud platform provided by Hewlett Packard Enterprise (HPE), whichn is expected to reduce the society’s IT costs by at least 30% (click here for the article).
Snippets:
Chase UK (J.P.Morgan) is expanding into lending, rolling out its first credit card to customers. FT article on this from Tuesday last here - and, for what it’s worth, as I have written before, I expect that Chase UK will end up proving a significant disruptive force in the UK and other large Continental European markets (to begin with) in time.
Bloomberg broke the story last Monday that HSBC (HSBA) is requiring hundreds of managers to reapply for their jobs in the newly formed Corporate & Institutional banking division (click here for the article) as the fresh management team focuses intensely on cost efficiency efforts. The Telegraph also picked up on this, which you can read here - as did eFC (see here).
Metro Bank (MTRO) issued an update statement on Tuesday last following the decision of its shareholders at the AGM on 21st May not to support resolutions regarding authority and additional authority to disapply pre-emption rights. MTRO notes that it has consulted with shareholders who voted against the resolutions and understands their reasons. The Board will take the views of shareholders into account ahead of tabling resolutions at the next AGM and continues to engage with shareholders and their representative bodies on an ongoing basis.
Excellent publication jointly issued by the BoE and FCA last week on AI in UK financial services. Read it here.
Index Changes / Director Share Sales / Shareholding Changes:
Metro Bank (MTRO) was added to the FTSE 250 Index and deleted from the FTSE SmallCap Index with effect from Friday 22nd November - following the significant rebound in its share price. Positive from a stock liquidity perspective.
Metro Bank (MTRO) issued a RNS on Monday 18th November 2024 correcting a RNS that was issued the prior week that incorrectly stated that Robert Sharpe, Chairman, disposed of 29,000 shares at a price of 93.74p per share. Sharpe in fact purchased 29,000 shares at the aforesaid price per share, for a total outlay of c.£27k.
Metro Bank (MTRO) issued a further RNS on Tuesday 19th November noting that Cristina Alba Ochoa (NED) acquired 218,723 shares in the lender the previous week, for a total outlay of almost £200k: i) she acquired 155,723 MTRO shares on Thursday 14th November at a price of 89.7p per share for a total outlay of c.£140k; and ii) she acquired a further 63,000 MTRO shares on Friday 15th November at a price of 90.0p per share for a total outlay of c.£57k.
NatWest Group (NWG) published a RNS on Friday 22nd November showing that HMT’s shareholding in NWG has fallen to 10.99% following a transaction on Thursday 21st November (previously disclosed shareholding: 11.34%). I expect that Treasury will continue to take advantage of the premium valuation at which NWG trades relative to peers, which should see government fully exit its position in the bank in early 2025 - indeed, the change in the UKLA Listing Rules effected on 29th July last, which now permits listed companies to buy back up to 15% of their stock in any one year, has been (and is likely to continue to be) constructive, together with the ongoing drip-feed of stock into the market, in terms of accelerating the government’s complete exit from its position in NWG.
NatWest Group (NWG) published a RNS on Thursday 21st November noting that Capital Group has amassed a 5.01% shareholding in the bank following a transaction on Tuesday 19th November (previously disclosed shareholding: nil, i.e., <3%).
NatWest Group (NWG) issued a RNS on Monday 18th November stating that Robert Begbie (CEO, NatWest Commercial & Institutional) sold 24,000 shares in NWG on Friday 15th November at a price of 393.3p per share, for total proceeds of c.£94k.
BlackRock’s shareholding in Paragon Banking Group (PAG) rose to 5.00% following a transaction on Monday 18th November (previously disclosed shareholding: <5%).
Secure Trust Bank (STB) published a RNS on Tuesday 19th November flagging that Farringdon Capital’s shareholding in the bank reduced to 1.80% following a transaction on Friday 15th November (previously disclosed shareholding: 3.30%).
Irish Highlights
State shareholding in AIB Group falls to <20%; what next?
AIB Group (AIBG) issued a RNS on Tuesday 19th November noting that the State’s shareholding in the bank fell to 19.98% following a transaction on Friday 15th November (previously disclosed shareholding: 20.99%). I suspect consensus expectations are now strongly that we will not see another State placing of stock in AIBG until 2025 (following the FY24 results presumably) but I still think there is an outside prospect (albeit diminished) that the Minister for Finance pulls the trigger early next week given AIBG’s recent consistent share price strength. I appreciate it’s General Election week and it’s undoubtedly extremely challenging to get the attention of any Minister at the current time - but another windfall of >€500m wouldn’t be a negative piece of PR for the incumbent political parties ahead of Friday’s General Election (although I doubt that it, in and of itself, would sway too many voters in one direction or another either in all fairness). There is also the possibility that, to the extent the main incumbent political parties re-acquire power (which still looks to be the most likely outcome despite the supermarket episode), a transaction could materialise in December or in January (before the close period ahead of FY24 results). Worth keeping an eye on and I still think there is a reasonable possibility that government may choose to upsize the next placing from the standard c.5% of issued share capital territory.
Bank of Ireland Group reduces fixed mortgage rates by 50bps
Bank of Ireland Group (BIRG) issued a press release (read it here) on Tuesday last noting that it is cutting all fixed mortgage rates by 50bps with immediate effect - with 4Y fixed rate product now available from as low as 3.1%. It is not a surprise to see the bank push down rates following recent base rate reductions and downward moves effected by its competitors already - as well as the fact that a General Election is fast-approaching, perhaps (though, notably, there has been no meaningful dialogue in relation to high average mortgage rates in Ireland in the pre-election build-up - that said, it appears to the close observer that BIRG decisions can tend to be particularly ‘politically conscious’). The fact that BIRG took longer to push its rates downward could be seen to indicate that it was probably comfortable letting its ultra-high flow share slip a bit now that we are entering into a lower rate backdrop - however, the rate reductions are quite significant so this news arguably puts paid to that theory. Indeed, from an overall market perspective, I have held the view for a very long time that the banks would, with a lag effect, pass through the impact of the first few official rate reductions but I expect that passthrough will decline considerably in response to further downward official rate moves - and, while ‘the domestic narrative’ (which undoubtedly suits ‘vested interests’) is that there are strong signs of emerging competition, it’s quite frankly debatable (despite all the press reports in relation to credit unions, etc.) and there has been absolutely no statistical evidence of any meaningful dilution of the three listed players’ flow share thus far (contact me if you want data on this). So, the three domestic banks continue to have a heck of a lot of pricing power coming into 2025 it must be said (so, I hold my view - though let’s see what comes from Bankinter (and, possibly, Revolut) in 2025 though I wouldn’t be panicking just yet) but it is clear that there is ongoing significant competitive intensity between the three with that said. As an aside, BIRG also announced some deposit rate changes within the press release - but nothing of material significance from an earnings impact perspective.
Separately, in a BIRG context, Jon Ihle at The Sunday Times reported yesterday on how the UK motor finance debacle has raised serious concerns in relation to the outlook for BIRG share buybacks. I was delighted to contribute to the piece, stating (the obvious) that “It does seem quite likely that the risk of potentially material redress costs will curtail the scale of buybacks that Bank of Ireland will commit to for 2025”. Click here for the article.
Political parties’ proposals in a banking sector context
My latest piece for the Business Post reflects on what the main political parties’ manifestos have to say in a banking sector context. Nothing of significance in a Fine Gael or Fianna Fail context (save for the costings set out within the Fine Gael manifesto document which indicate that it intends to maintain the annual bank levy at €200m). I focus on Sinn Fein’s arguments that: i) the bank levy should be doubled to €400m p.a. (which I challenge on the grounds that, unless the calculation methodology were to be recalibrated yet again, it would present significant issues – not only in the context of the value of the government’s majority shareholding in PTSB but, far more importantly, given it could significantly limit PTSB’s ability to continue to effectively compete in what is already a very concentrated market; ii) the utilisation of deferred tax assets (DTAs) should be limited to 50% of the banks’ tax liability in any given year (clearly not unreasonable when benchmarked against the more draconian UK position but it’s not a straightforward proposal either given the adverse consequences it would have for PTSB - and, while introducing caps on annual or total utilisation levels could be a fix, that could give rise to issues of fairness owing to the ensuing inconsistent treatment of the individual institutions); and iii) the State should retain its shares in AIB Group (AIBG) (it is not exactly clear what intentions underpin this objective – and international investor feedback is that any such move would be highly negative for sentiment towards both AIBG and the sector more broadly). The article appeared in print in yesterday’s newspaper and should appear online later today.
Other Highlights
The European Supervisory Authorities (ESAs) published the results of the one-off ‘Fit-For-55’ climate scenario analysis on Tuesday last. The exercise is the first EU-wide climate stress test for the financial sector. The results of this exercise are not expected to feed into the setting of micro or macro-prudential capital requirements for financial institutions. The findings noted that “The banking sector records first-round credit and market losses amounting to 5.8% of total exposures in scope, equivalent to EUR 343 billion, under the baseline scenario”. Losses rise to €393bn under the first adverse scenario and €638bn under the second adverse scenario. The question now beckons as to when the ECB will start bringing these climate stress tests into its regular stress testing programmes, which appears to be some time away yet. Read the press release here, the full report here, and the FAQs here. Useful EBA summary on it here, noting that “Transition risk loses alone unlikely to threaten EU financial stability”. Frank Elderson, Vice-Chair of the ECB Supervisory Board, also spoke last week on taking account of nature - read it here.
The FT reported on Monday last that the ECB is debating whether to publish sensitive research that shows that the capital requirements for large European lenders would rise by a double-digit percentage if the same rules that are applied to large US banks were to be applied to them. This gives one a sense of the pressures that the European banking industry is exerting on the ECB given the recent Fed (and PRA) decision to materially dilute the adverse capital impacts accruing from the final Basel 3.1 reforms - as well as questions as to whether the US will now seek to go even further in the wake of the outcome of the Presidential election. Click here for the article. Also worth noting that the Basel Committee issued a press release last week reaffirming its expectations for Basel III to be implemented (click here to read it).
Interesting fireside chat between Anneli Tuominen, Member of the Supervisory Board of the ECB, and Kian Abouhossein, MD at JPM, at the inaugural European Financials Conference hosted by JPM on Friday last. Lots of interesting topics discussed including European banking M&A, EDIS, CMDI, the need for an EZ-wide securitisation framework, bank ALM frameworks, bank operational resilience, and NBFIs. Nothing particularly new but a good long read (get it here) to get you up to speed on all the prevailing concerns in an EU banking sector regulatory context (though no discussion on the specific impacts of the Basel 3.1 reforms it must be noted, with the analyst appearing to diplomatically avoid the topic!).
Claudia Buch, Chair of the Supervisory Board of the ECB, gave an Introductory Statement at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament on Monday last. Buch spoke on familiar themes including the strong capitalisation and liquidity of European banks; the risk of tail events materialising; the ongoing reform of SREP (highlighting risk aggregation and reporting in particular); and ambitions for the CMDI framework, EDIS, and CMU. Read the speech here.
Excellent piece penned by Patrick Jenkins in the FT on Monday last on “The yawning investability gap between US banks and UK peers”. Click here for the article which is well worth a read.
Oliver Wyman and Morgan Stanley’s annual wholesale banking industry outlook is always well worth a read. Click here for the summary and here for the report.
Interesting FT piece from Friday last on what banks are doing with your financial data, which you can access here.
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