Financials Unshackled Issue 23: 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) 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.

Photo by Toa Heftiba on Unsplash

Calendar for the week ahead

Mon 9th Dec (07:00 & 09:00 BST): LendInvest (LINV) 1H24 Results (for the six months to 30th September 2024) at 07:00 BST - followed by a results call / webcast at 09:00 BST

Mon 9th Dec: UK Finance - Mortgage Market Forecasts: 2025-2026

Tue 10th Dec (09:30 BST): BoE 3Q24 Mortgage Lenders & Administrators Return (MLAR) Statistics

Tue 10th Dec (15:00 BST): Barclays (BARC) Private Banking & Wealth Management (PBWM) Deep Dive Meeting / Webinar

Wed 11th Dec (07:00 BST): S&U (SUS) 3Q24 Trading Update (for the three months to 31st October)

Wed 11th Dec (11:00 BST): Central Bank of Ireland (CBI) Retail Interest Rates - Oct 2024

Thu 12th Dec: UK Finance - 3Q24 Business Finance Review

Thu 12th Dec (13:15 BST): Result of ECB Governing Council Monetary Policy Meeting - followed by a press conference

Essential Updates

Some key take-aways from the FT Global Banking Summit

I virtually attended last week’s FT Global Banking Summit, which was held over two-days (Tue 3rd & Wed 4th December). I have access to the recordings until early March so if you want a perspective on any of the sessions please get in touch. Key highlights for me in a UK banks context specifically were:

• Barclays’ (BARC) CEO Venkat’s comments that he wants to be “useful…for some time to come” in a question around succession planning - as well as his continued supportive commentary on what the Labour government is trying to achieve from a growth perspective (noting that the 30th October Budget was effectively well-received by investors). In other BARC-related news last week, it was interesting to learn that: i) Citi is set to become exclusive issuer of all American Airlines’ credit cards, pushing BARC out of the three-way deal - with Citi to acquire the BARC American Airlines co-branded card portfolio and begin transitioning card members to the Citi portfolio in 2026, according to an American Airlines press release which you can read here; and ii) Federal Reserve data late last week show that US outstanding consumer credit stock was +$19.2bn in October, marking the largest monthly increase in more than 2 years - which is supportive in the context of BARC’s US cards balance growth.

• Lloyds Banking Group’s (LLOY) CEO Charlie Nunn noted that the UK faces an “investability problem” (commenting that “Investors are telling us they’re really concerned about the uncertainty”) in the wake of the landmark Court of Appeal ruling in the Hopcraft case in October (useful FAQ note prepared by Close Brothers Group (CBG) on the case is accessible here), which he remarked “is at odds with the last 30 years of regulation”. It is difficult not to have sympathy with the views of Nunn and his peers at other affected UK lenders and it was welcome to see that the FCA issued a letter to the Supreme Court on Monday last seeking to expedite an appeal hearing (you can access the FCA letter here). In other LLOY-related news last week, it was interesting to read a Bloomberg report on Tuesday noting that the lender is planning a c.£1bn SRT deal in relation to (mostly performing) UK restructured mortgages (read the article here).

• NatWest Group (NWG) CEO Paul Thwaite noted that Treasury (HMT) is likely to exit from the share register in 2025, “maybe as early as the first half of the year”. These are not surprising comments given that the State’s shareholding in NWG had fallen to <11% by 21st November. Given the revised higher limit on directed buybacks following the changes to the Listing Rules on 29th July last, I expect that the remaining shareholding will be disposed of through a combination of the ongoing drip-feeding of stock to the market and one final directed buyback - and I expect that Treasury will be off the register before the end of 1Q25. Thwaite noted that he thinks this “will be a symbolic moment for the sector”. He also confirmed that NWG’s Board remains open to options with respect to excess capital deployment - with “inorganic tuck-ins” of interest where such “financially compelling” and “strategically congruent” opportunities arise.

• It was also interesting to listen to the BBVA CEO Onur Genc comment that he is “neutral” in the context of whether BBVA would choose to retain TSB in the event that the bank’s hostile bid for TSB’s owner Sabadell gets across the line: “We have to see once we complete the deal”. So, either BBVA’s thinking hasn’t moved on over the last few months or he is playing his cards close to his chest. Maybe it’s a bit of both.

Strong FY24 results update from Paragon Banking Group

Paragon Banking Group (PAG) published full year results for the 12 months to 30th September (FY24) on Tuesday 3rd December. The numbers were well-received by the market - with positive readacross for PAG’s key peer, OSB Group (OSB) too. Both are names I have been following closely for many years and the key highlights for me in the PAG update were:

• Strong u/l PBT growth; remarkable >20% RoTE: PAG reported underlying (u/l) Profit before Tax (PBT) and fair value (FV) movements of £292.7m, +5.4% y/y - and an u/l RoTE of 20.3% (based on u/l PAT of £214.8m and a TNAV number that strips out FV adjustments), which was consistent with the FY23 outturn (20.2%). This was a function of net interest margin (NIM) enhancement (+7bps y/y to 316bps) and further improved efficiency (Cost/Income ratio (CIR) -0.5pps y/y to 36.1%), partially offset by a slight uptick in ECL charges (Cost of risk (CoR) +4bps y/y to 16bps).

• Strong loan growth pipeline: New lending of £2.73bn in FY24 was in line with guidance (with net loans +5.6% y/y to £15.7bn) and, while 2H new lending was significantly up h/h (“accelerating momentum throughout the year”), the commentary in relation to year-end pipelines was particularly encouraging (BTL pipeline +48% y/y to £0.88bn, Development Finance pipeline +31% y/y to £0.20bn), underpinning guidance for BTL new lending of £1.6-1.8bn and Commercial new lending of £1.2-1.4bn for FY25.

• Capital strength and positive update re Basel 3.1 impacts; additional £50m buyback announced: The end-FY24 CET1 capital ratio printed at 14.2% reflecting strong profitability and significant capital returns. PAG is now guiding that the expected impact of the near-final Basel 3.1 rules will be a 104bps hit to capital, down from an estimated 210bps hit following the publication of the original BoE Consultation Paper. On IRB, PAG notes that it continues to engage with the PRA on modelling requirements (its mortgages and development finance IRB models continue to be refined) - and there was some encouraging commentary in the results statement with PAG calling out “a far greater level of engagement with the PRA’s specialist teams than had been the case in the recent past”. PAG announced a final dividend of 27.2p per share (consistent with its c.40% payout policy) and an additional £50m buyback programme.

• Motor finance exposures not of great concern: PAG also put paid to any significant concerns in relation to motor finance issues arising from the FCA review and/or the Hopcraft judgment - noting that it has been active in the market since 2014 and paid out just £48.8m of commissions between 2014 and end-FY24 to support loan originations (o/w £9.0m was paid to broker-dealers).

• Guidance upbeat: New lending covered above and all other FY25 guidance appeared to be well-received by the market. PAG is guiding: i) NIM in the c.3% territory (and I would add that, as official rates decline, this will be somewhat positive for specialist higher-yielding lenders like PAG who do not have current account franchises); ii) operating costs of c.£185m (up just marginally from the £179.2m outturn in FY24, which highlights PAG’s inherent operating leverage following heavy investment to support the extraction of cost efficiencies); and iii) u/l RoTE in the middle of the 15-20% range, which seems a bit conservative (though this is based on a recalibrated RoTE computation methodology that will no longer strip out FV adjustments from TNAV).

All in all, management just consistently delivers: In overall terms, PAG is a very well-managed business: i) operating in an attractive segment of the BTL market, i.e., lending to specialist professional landlords (with PAG noting, again, that its data indicates that the market “remains fundamentally robust” in spite of regular negative press reports on the broader BTL market); ii) continuing to diversify its revenue streams into higher-yielding lending sub-segments (i.e., niche development finance particularly); iii) likely to benefit from strong passthrough of lower official rates in the context of its deposit and broader funding base over time (and with just £0.75bn of outstanding TFSME funding stock now); iv) benefiting from structurally low arrears; v) continuing to commit to shareholder returns and capital optimisation; and vi) focused on the pursuit of IRB accreditation, which will position the bank advantageously relative to its peers in its chosen lending segments if it does come. PAG trades at just over 1.3x last reported TNAV for reported u/l RoTEs of >20% (despite the bank carrying an excess capital position), which implies a required return on equity (simplistically ignoring growth) of c.15% - which is well ahead of the implied CoE levels of larger peer UK banks’ (though below OSB’s).

You can access the results document here, the slide deck here, and you can watch a replay of the results call / webinar here (with a transcript likely to be made available on the company website in the coming days).

Central Bank of Ireland reconfirms CCyB at 1.5%; no changes to O-SII buffers

The Central Bank of Ireland (CBI) published its Financial Stability Review 2024:II on Wednesday 4th December. The report contains positive soundings in relation to the economy (with Modified Domestic Demand (MDD) growth in 2024 and 2025 expected to be stronger than at the stage of the last review in June, for example), notes that Irish commercial real estate (CRE) pricing is showing some signs of stabilisation, and acknowledges the risks to the fiscal finances (and households and businesses) owing to a significant dependence on international investment and MNCs.

In a banking sector context, the CBI observes that domestic bank profitability has likely reached its cyclical peak but that the sector is resilient and well placed to withstand any softening in profits - views that I strongly concur with.

In terms of bank capital requirements, the bottom line is that there is no change - with the countercyclical capital buffer (CCyB) rate remaining at 1.5% while there is no change to the existing Other Systemically Important Institution (O-SII) policy stance (as a reminder, PTSB’s O-SII buffer is due to take effect from 1st January 2025 - but the bank is already sufficiently capitalised with this change in view). On the CCyB specifically, it is worth noting the CBI’s remarks to the effect that it “…judges that the current CCyB rate remains appropriate, based on the assessment of the macro-financial environment…” but that “…a rationale for releasing the CCyB rate is also not evident, in particular given the strong position of the banking sector”. On the individual institution O-SII rates, it is worth noting that the CBI observes that “The underlying systemic importance of these institutions, taking account of their size, EBA score and domestic market activities, has not changed to the extent that would warrant a recalibration of the O-SII buffer rates”. None of this comes as any great surprise - and it reaffirms that capital requirements remain stable in an Irish banking sector context.

You can access the main document here, a high-level summary here and the summary video transcript here, the press release here, the Governor’s opening remarks here, and the slide deck here.

Other UK Highlights

Shareholding Changes & Director Dealings

Augmentum Fintech (AUGM) issued a RNS on Monday 2nd December noting that its Non-Executive Chairman William Reeve purchased 100,000 shares in AUGM at a price of 98.8p per share on Monday 2nd December - for a total outlay of c.£99k. AUGM issued another RNS on that same day noting that NED William Russell purchased 30,000 shares in AUGM at a price of 98.8p per share on Monday 2nd December - for a total outlay of c.£30k.

Metro Bank (MTRO) issued a RNS on Friday 6th December noting that NED Nicholas Winsor acquired 100,000 shares in the bank at a price of 97.87p per share on Wednesday 4th December - for a total outlay of c.£98k.

Paragon Banking Group (PAG) issued a RNS on Tuesday 3rd December noting that BlackRock’s shareholding in the bank had increased again to 5.09% (previously disclosed shareholding: <5%) following a transaction on Friday 29th November. This was followed by a further RNS on Wednesday 4th December noting that BlackRock’s shareholding in PAG dipped below 5% once again following a transaction on Tuesday 3rd December.

Paragon Banking Group (PAG) issued a RNS on Friday 6th December noting that Hugo Tudor, NED, sold 5,000 shares in the lender at a price of 802.8p per share on Friday 6th December - for gross proceeds of c.£40k.

Secure Trust Bank (STB) published a RNS on Monday 2nd December noting that Mary Hartley, PCA to MD of Savings & Vehicle Finance Julian Hartley, acquired 6,520 shares in STB at a price of 381.4p per share on Friday 29th November - for a total outlay of c.£25k.

Standard Chartered (STAN) issued a RNS on Friday 6th December noting that Norges’ shareholding in the bank reduced to 2.996% (previously disclosed shareholding: 3.05%) following a transaction on Thursday 5th December.

Vanquis Banking Group (VANQ) issued a RNS on Wednesday 4th December noting that Norges’ shareholding in the bank increased to 3.82% (previously disclosed shareholding: 3.71%) following a transaction on Tuesday 3rd December.

Snippets

• Mortgage rates stable: Rightmove issued an update on where mortgage rates are tracking on Saturday 7th December, which shows that average rates for 2Y and 5Y fixed mortgages have been broadly stable week-on-week - now sitting at 5.08% for 2Y product and 4.85% for 5Y product (you can read the Rightmove note here).

• House prices on the up: Both Nationwide and Halifax published their latest House Price Indices for November 2024 last week. The Nationwide data (access it here) showed that UK house prices were +1.2% m/m (+3.7% y/y) in November to an average price of £268,144. The Halifax update (access it here) showed that UK house prices were +1.3% m/m (+4.8% y/y) to an average price of £298,083. This data, together with recent mortgage approvals data, are positive for UK credit institutions’ lending volumes and collateral values.

• UK Finance published its 3Q24 Household Finance Review last week. We have had data from the BoE since then on how mortgage and consumer lending / arrears are tracking in 4Q to date (see Financials Unshackled Issue 22 here for a discussion on this) but it’s a useful 10-minute read to get you up to speed on the big picture and it can be accessed here.

• Jakob Lichwa at TwentyFour AM penned a piece on Friday seeking to offer some perspective on the scale of the problem in a UK motor finance context - from a broader systemic standpoint. He notes that current broker estimates for total losses of c.£6bn for the major banks “…wouldn’t be an issue for the sector as a whole” in TwentyFour AM’s view (that’s an indisputable conclusion in my view - save to say that we don’t yet know what the hit will be and estimates vary wildly depending on what assumptions one employs) - and that the uncertainty is arguably more damaging than the ultimate outcome. You can read his note here.

• The Times is reporting today on the final hearing in a judicial review of the FCA’s handling of compensation for victims of the misselling of interest rate swaps to SMEs, which is due to begin on Tuesday. Read it here.

• The ever-colourful former Barclays (BARC) CEO Bob Diamond was sharing his view that the political system damaged the heath of the UK banking system at the FT Global Banking Summit last week. Diamond noted that “In the UK and in Europe, it was biblical justice: ‘Let’s get those f-----s. Let’s get those banks. Let’s really hurt them…It was very different in the US than it was in the UK and Europe, and the US economy has been a beneficiary”.

• More leadership changes at HSBC (HSBA) last week with news that: i) Annabel Spring, Head of Global Private Banking and Wealth, is leaving at the end of 2024 - and her role will be split between Gabriel Castello (who has been appointed Interim CEO of Global Private Banking) and Lavanya Chari, Head of Wealth and Premier Solutions; and ii) Lisa McGeough has been promoted to US CEO. Further changes are expected to be announced in short order. CEO Georges Elhederey has characterised the reorganisation process as “measured, thoughtful and fair”. It goes without saying that it’s unlikely that everyone will view it that way but it’s good to see he is getting on with a job that can never please everyone at pace.

• Lloyds Banking Group (LLOY) held a Board Governance Event on Monday last - you can watch a webcast replay by registering on the Investor Relations section of the website here.

• OSB Group (OSB) issued a RNS on Friday afternoon noting that it has priced its 26th securitisation (PMF 2024-2 plc, consisting of c.£1.25bn of BTL mortgages). The transaction is expected to complete on or around 12th December and OSB has also agreed to sell its residual interest in the deal. The transaction will therefore see the loans derecognised from the Balance Sheet. The RNS notes that the expected pro forma impact of the transaction (on the basis of the CET1 capital position as of 30th June) would be a c.60bps increase in the CET1 capital ratio (to c.16.8%).

• Standard Chartered (STAN) held an Affluent Investor Seminar on Tuesday last. You can access the slide deck here, read the transcript here, or listen back to the webcast here. STAN is targeting $200bn of net new money and double-digit income CAGR in Wealth Solutions over the next five years so it’s worth checking out.

• The Revolut CEO Nik Storonsky’s comments to the effect that he has a preference for listing Revolut in the US over the UK were widely reported in the media early last week - with Storonsky reportedly stating: “I just don’t understand how the product which is being provided by the UK can compete with the product provided by the US”, noting that the UK market is less liquid and more costly given the 0.5% stamp duty applied to share transfers (as an aside it’s even worse in Ireland - with the stamp duty rate of 1.0% applying to share transfers!). These comments should serve as - yet another - wake-up call to politicians but, alas, these kind of remarks have a habit of falling on deaf ears - despite the exodus of listed companies from London. Storonsky reportedly went on to note that “If I get better product from the UK, I’ll list in the UK, but so far if you just compare these products, one is far ahead than the other”. It is hard to disagree. It was predictable that Storonsky would be out making these comments at some point and the observations will add to the building pressure on the ‘pro-growth’ Labour government to do something about it - but it was clearly a missed opportunity in the recent Budget. Separately, Revolut continues to judiciously beef up its Board with selective hires - appointing Fiona Fry (ex-KPMG retail banking governance and culture-focused Partner) and Vanquis Banking Group Chair / Rothschild Director Peter Estlin (who was also formerly Lord Mayor of the City of London).

• Zopa issued a press release on Friday 6th December confirming that it has raised £68m in an equity funding round led by A.P. Moeller Holding and existing investors (read it here). The funding will be used to drive further growth as the bank prepares to launch its flagship current account in 2025 as well as “a pioneering GenAI proposition that reinvents how people interact with their money”. No mention of IPO aspirations in the press release but the CEO Jaidev Janardana has not been shy about conveying his ambitions in this respect over the years.

Other Irish Highlights

Shareholding Changes

AIB Group (AIBG) issued a RNS on Thursday 5th December noting that BlackRock’s shareholding in the bank increased to 10.60% (previously disclosed shareholding: 10.48%) following a transaction on Wednesday 4th December.

Snippets

• The Banking & Payments Federation Ireland (BPFI) published mortgage approvals data for October 2024 on Monday 2nd December. The value of mortgage approvals was +11.6% m/m and +22.1% y/y (+8.6% m/m and +13.0% y/y in volume terms), which bodes well for further growth in the banks’ mortgage lending books. Interestingly, first time buyers (FTBs) accounted for 62.7% of the value of mortgages approved in the month - with mover purchasers accounting for 24.8%. You can view the report here.

• The Central Bank of Ireland (CBI) published a credit card update on Friday 6th December, noting its findings in its Thematic Review on Customer Supports for Credit Card Lending to the effect that over 400,000 of the c.1.3 million credit card accounts in Ireland are subject to an APR above 23% (new credit card accounts cannot have an APR of 23%+ according to legislation introduced in 2022). The update also flags poor handling of customer complaints, issues in how credit cards are marketed to customers, and limited supports for customers in financial difficulty. On the back of its findings the CBI issued a Dear CEO letter to the five relevant lenders which notes that it is requiring firms to make customers who are on high historical APRs aware of this fact, to notify them that lower rate products are available, etc. The letter also picks up on disclosure-related improvements that are needed. Some support in a consumer context from the CBI - but, for what it’s worth, in overall terms, I would not anticipate any material impact from an earnings or capital perspective for the listed banks stemming from the fresh requirements. Read the CBI press release here and the Dear CEO letter here.

• The Central Bank of Ireland (CBI) published its Market Based Finance Monitor 2024 last week, which notes that vulnerabilities in the Market Based Finance (MBF) sector may lead to the amplification of systemic risk. Nothing particularly surprising in the findings more broadly based on my skim. Read it here.

• AIB Group (AIBG) announced on Tuesday 3rd December that it has repurchased the majority of its outstanding 2035 Tier 2 notes at a discount to par. See the RNS here.

• Both the Business Post and The Sunday Times picked up on Autonomous analysts’ characterisation of Bank of Ireland Group (BIRG) management’s guidance as “messy messaging” as one of the reasons underpinning its relative share price underperformance. It doesn’t surprise me to see someone overseas call this out. Indeed, I recall my amusement last February at the emphasis that BIRG management placed on the adverse deposit mix shift experienced in Ireland in 2H23, which seemed a complete ‘red herring’ in a bid to reset expectations / highlight flow to term for whatever reason…and, lo and behold, we then got an upgrade to net interest income (NII) guidance at the stage of the 1Q trading update in April and then again at the stage of the half-year results in July. Indeed, one would be wise to analyse Irish bank management teams’ guidance more broadly in my experience.

• Interesting piece on Monzo’s hiring intentions in the Irish market with readacross for what the scope of its operations in the country will be featured in The Currency on Friday - read it here.

Other Highlights

SRTs in focus

A few interesting articles on synthetic risk transfers (SRTs) featured in the media last week. An article on Bloomberg on Thursday 5th December noted that the ECB is seeking to accelerate its approval process for these transactions - with new proposals to permit banks to submit information for their SRT deals to the ECB just two weeks ahead of deal completion, from the current minimum three-month requirement. Any such change would undoubtedly be welcomed by the industry as it would significantly speed up transaction activity. Read the article here.

A further article on Bloomberg on Friday noted that the ECB is seeking clarity on SRT buyers’ leverage - an understandable concern given the risk of mounting NBFI-related exposures amongst regulated banks (and the well-documented challenges there have been in assessing the regulated banks’ lending exposure to NBFIs more broadly) - you can read the article here. Finally, William Cohan penned a piece in the FT on Saturday which is a good read for anyone who wishes to familiarise themselves with the basics in relation to these transactions - you can read it here.

Snippets

• Moody’s upgraded its global outlook for banks from Negative to Stable in a report published on Wednesday 4th December. While Moody’s notes that banks’ profitability will weaken in most cases owing to lower official rates, it notes that: i) stabilising economic growth and monetary easing will support a stable operating environment; ii) interest rate cuts and economic growth will be constructive in an asset quality context; iii) capital will be stable despite the implementation of final Basel 3.1 rules; iv) funding and liquidity will remain mostly robust; and v) governments’ willingness to provide support will remain unchanged. Access the report here.

• Jeremy Warner at The Telegraph wrote last week about the possibility of Big Tech encroachment in a financial services context. Nothing particularly enlightening in the piece but an easy read if you want to familiarise yourself in high-level terms and you can read the article here. It’s a topic I have thought deeply about over the years and I’ll share some detailed perspectives on it in 2025.

• Patrick Motagner, Member of the ECB Supervisory Board, spoke on Thursday on the preparedness and competitiveness of the EU’s banking system and on how the regulatory and supervisory framework can foster conditions that help to balance growth and resilience. It is essentially a short synopsis of the work that the ECB is doing “to keep banks safe and sound”. There is nothing new in it and you can read it here if you want to get up to speed on the ECB’s work in this respect.

• Dominique Laboureix, Chair of the Single Resolution Board (SRB), spoke last Wednesday on the SRB’s work programme for 2025. A revamp of how the SRB assesses banks’ readiness for resolution is on the agenda and on-site inspections will start in January in support of this objective. Additionally, the SRB intends to streamline its resolution plans next year - and it will also work on a digital transformation strategy to make the organisation more efficient. You can read his speech here.

• Some useful reference material on collateralised loan obligations (CLOs) from PineBridge Investments last week - a very useful source to familiarise yourself with the basics (access it here) and a recent primer on the topic penned by PineBridge is also worth a read (access it here).

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