Financials Unshackled: Weekly Banking Update (UK / Irish / Global Banking Developments) - Issue 34
Key UK / Irish / Global Banking Developments from the last week
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
Welcome to the latest issue
Welcome to Financials Unshackled Issue 34. I have been under the weather with man flu since mid-week and am running behind on everything. All the same, there is a lot of material covered within this note as usual, but, with two exceptions, i.e., I set out a very high-level synopsis only of both the Barclays’ (BARC) FY24 Results and Progress Update and the NatWest Group (NWG) FY24 Results. I will flesh out my thoughts on both in much more detail in a separate note next week (assuming a full recovery…) - and that note will also cover Lloyds’ (LLOY) FY24 results, which are due to be published on Thursday. As usual, please email me at john.cronin@seapointinsights.com if you have any feedback, which is always welcome.
P.S. My son picked the image for this note in case you’re wondering :-)
Calendar for the week ahead
Wed 19th Feb (04:00 BST): HSBC (HSBA) FY24 Results
Thu 20th Feb (07:00 BST): Lloyds (LLOY) FY24 Results
Fri 14th Feb (04:15 BST): Standard Chartered (STAN) FY24 Results
UK Updates
Sector Snippets:
Recent mortgage and deposit pricing moves appear conducive to mortgage margin and liability margin expansion in the months ahead with various media reports highlighting swift moves by a large cohort of lenders to effect deposit rate reductions in the aftermath of the BoE’s recent decision to cut official rates by a further 25bps while mortgage rates have been much slower to adjust. I have been making the point for many months now that lenders will pass through a high percentage of the reduction in base rates to bank deposit customers to offset gross interest income depletion - structural hedge income aside - in response to declining base rates, and, more importantly, because it is unlikely to elicit a response from Treasury and/or the FCA given present day political dynamics (though, admittedly, it seems I confused myself when making that point in my recent Santander UK write-up, which has now been corrected online). Good FT piece on Wednesday last on the recent savings rate moves here.
Andrew Bailey, BoE Governor, delivered a lengthy measured speech on Tuesday last here, which focused on how risks in financial markets are likely being underestimated owing to the rapid growth in NBFI-driven lending. He also spoke about the dangers of reversing gear on post-GFC regulatory reforms, emphasising the importance of financial stability.
Bloomberg reported on Thursday here that Business Secretary Jonathan Reynolds has indicated that some of the UK’s financial regulators could be scrapped or merged as part of the regulatory loosening push. However, it appears doubtful - to me at least - that Labour will seek to re-merge the FCA and the PRA. Anyone remember the lambasting Liz Truss received for proposing an integration of the FCA, the PRA, and the PSR back in 2022 (see article on that proposal here in The Guardian if you want a refresh)?
Jill Treanor at The Sunday Times penned a detailed piece here on whether the FCA CEO Nikhil Rathi will be offered a second term when his contract expires at then end of September. Rathi has been under a lot of pressure in recent times and one has to admire him for continuing to stick to his views (while showing measure and balance in face of the changing mood music).
The Standard reported late last week here that the Economic Secretary to the Treasury has written to the FCA setting out the government’s support for the regulator’s proposal to review mortgage rules. Funny that…
The Business Post reported on Monday last here that the House of Commons Treasury Committee has written to nine UK-based banks and building societies (including AIB UK, BOI UK, Nationwide, and NatWest) seeking information on the number of instances and amount of time customers have suffered IT failures or been prevented from accessing services. This follows the recent multi-day outage at Barclays (BARC).
Chancellor Rachel Reeves was set to meet with the chiefs of Britain’s largest banks on Wednesday last with a useful report in the FT here and in CityAM here on what was set to feature on the industry’s agenda (SMCR, bank taxes, regulation loosening et al.). No news reports on what was discussed have emerged as of yet.
A timely publication on how challenger banks support sustainable growth, opportunity, and resilience across Britain and how government and regulators can enable them to do more was published by Innovate Finance in conjunction with Hogan Lovells last week - and it can be accessed here. It’s also worth reading a report published by EY UK on Tuesday last on how to navigate the growth agenda of UK financial services regulation here.
Company Snippets:
Barclays (BARC) reported 4Q24 and FY24 results on Thursday along with a strategic progress update. 4Q net income of £965m was slightly behind consensus (based on company-compiled consensus data as at 31st January) for £989m, albeit that incorporated a £90m motor finance provision. Within this: 4Q revenues were 3.7% ahead of consensus, operating costs (incl. litigation & conduct charges) were 4.0% higher than consensus, credit impairment charges were marginally above consensus, and the tax charge was significantly higher than consensus. So, a bit of a mixed bag relative to expectations - and that, coupled with a reaffirmation of the FY26 targets (which was not unexpected) and the buyback, wasn’t enough to sustain the share price on the day (BARC’s stock price performed very strongly coming into the update). Still though, the story remains intact and investors continue to demand a materially higher required return on equity (relative to UK domestic peers) for investing in the stock. That’s my preliminary ‘quick take’ and, as noted above, I will do a much more detailed write-up in the coming days (flu recovery permitting).
Close Brothers Group (CBG) issued a RNS on Wednesday 12th February here noting that it anticipates that it will recognise a provision in the 1H25 financial statements in relation to motor commissions of up to £165m, (CBG is due to report 1H25 results for the six months to 31st January on 18th March), which would be expected to reduce the end-December CET1 capital ratio, on a pro-forma basis, by up to c.150bps to 12.0%. Taking into account the provision and the benefit from management actions, CBG expects the CET1 capital ratio to be c.13% by end-FY25. The estimated provision includes estimates for certain potential operational and legal costs, as well as estimates for potential remediation for affected customers. The RNS also noted that adjusted operating profit is expected to be c.£75m in 1H25. CBG’s share price weas choppy in the aftermath of the RNS - the reality is there are a very wide range of potential outcomes with respect to what the overall cost of the motor finance debacle will be - and the impending Supreme Court hearings (scheduled for 1st-3rd April) are clearly critical in this respect.
The FT reported on Friday here that HSBC (HSBA) is set to report c.$1.5bn in annualised operating cost savings arising from the CEO’s restructuring efforts when it reports its results on Wednesday 19th February.
NatWest Group (NWG) reported 4Q24 and FY24 results on Friday. 4Q net income from continuing operations of £1,259m was ahead of consensus (based on company-compiled consensus data as at 21st January) for £965m, with a beat on all line items (incl. NII and OOI) with the exception of operating costs. NWG is guiding 15-16% RoTE for FY25 (pre-results consensus was already at 15.7%) and now targets a FY27 RoTE of >15% (prior medium-term guidance was for a FY26 RoTE of >13%, but the market was way ahead of that anyway). As I noted above on BARC, I will do a much more detailed write-up in the coming days (flu recovery permitting).
In another piece of NatWest Group (NWG)-related news last week, Sky News reported on Thursday evening here that Nigel Farage, the leader of Reform UK, is understood to be exploring the potential launch of private criminal proceedings against NWG over the debanking scandal.
The FT reported on Thursday here that Santander Group engaged in early-stage discussions on a potential sale of its UK retail business with NatWest Group (NWG) last year - with sources noting to the newspaper that “interest remains from both parties in a potential deal”. It has previously been reported by Reuters that Santander engaged in talks with Barclays (BARC) last year too. Unsurprisingly a Santander Group spokesperson told Reuters (in the aftermath of the FT report it appears) that “Santander UK is not for sale” - see Reuters report here. Will they, won’t they? - we’re all getting bored of it now. I penned a detailed write-up on Santander UK on 29th January last which you can access here.
Shareholding Changes:
NatWest Group (NWG) announced on Thursday 13th February that Treasury’s shareholding in NWG fell to 6.98% (previously disclosed shareholding: 7.98%) following a transaction on that same day.
Secure Trust Bank (STB) announced on Friday 14th February that Invesco’s shareholding in STB fell to 4.36% (previously disclosed shareholding: 9.67%) following a transaction on Wednesday 12th February.
Irish Updates
Sector Snippets:
Goodbody Research (AIBG) published its FY24 results previews for the Irish banks last week, which were covered here in some detail in the Business Post. Two specific points I want to flag are:
Goodbody is projecting total distributions of €1,988m for AIB Group (AIBG) split between a cash dividend of €888m and buybacks of €1.1bn, equating to a payout ratio of 98% for FY24 (interestingly, Goodbody is modelling a rise in the payout ratio to 105% for FY25 and FY26). Normally one might conclude that AIBG is primed for a beat here versus its house broker’s expectations and we could see a payout ratio north of 100% for FY24, which would, all else being equal, likely be very well received by investors on the day (breaking the 100% barrier is significant here). However, given: i) the consensus domestic view is very clearly that the State’s residual shareholding will be offloaded via the trading plan and buybacks (without any need for another placing, even though one last placing could expedite the exit), which makes sense; and ii) the State has surely accepted that it is not going to retrieve the full value of its investment in AIBG of €20.8bn (though it will get very close) and will be in the black when one considers its investments in the three listed banks (AIBG, BIRG, PTSB) as a collective - the question beckons as to whether the AIBG Board needs to go further than a 98% payout ratio at this juncture as there is not the same pressing need to give more oomph to the share price as there may have been in recent quarters and years (if anything management might want some ‘heat’ to evaporate before any prospective incentive packages are agreed following the State’s full exit - albeit the valuation multiples at which AIBG trades have not been demanding in recent years when compared with peer banks with that said). The reality is that the decision on where the overall payout ratio ends up is strategic (the Board isn’t going to take the number that the spreadsheet spits out to state the obvious) so, maybe holding off on going over 100% for now and saving a >100% payout ratio for later (perhaps when there are some management incentives in the mix?) could be the preferred strategy. Just something to be thinking about.
Goodbody continues to model total motor finance provisions for Bank of Ireland Group (BIRG) of €120m but instead of splitting the €120m between FY25 and FY26, it frontloads the entire provision into its FY24 estimates. It seems sensible to think about a provision hit in FY24. While there are an enormous range of possible outcomes (see CBG commentary in UK Companies section above), Goodbody says its €120m estimate was derived from the £450m Lloyds (LLOY) provision and the £295m Santander UK provision, overlaying BIRG’s market share. A sensible approach undoubtedly but the reality is that the latest published consensus view is that the overall cost for LLOY, for example, will be materially higher with its latest company-compiled consensus document of 24th January noting that: “In Q4 24 / FY 2024, 7 of 18 analysts include a Motor provision. These 7 analysts model an incremental provision of c.£550m on average, compared to a c.£200m average in consensus”. To be clear, that’s all on top of the existing £450m provision. Furthermore, subsequent to this LLOY consensus update, we have had the provision update last week from CBG (discussed above) and the readacross from this is that LLOY would need to take a substantially greater incremental provision than the current incremental provision implied by the latest consensus update. So, you can see how overseas analysts are getting to a number of circa 4x the Goodbody estimate when it comes to BIRG’s motor finance provisioning (see here). Still though it seems BIRG management might be keen to keep the provision contained in the FY24 accounts and hope that the Supreme Court hearings ‘go the right way’ (with scope to top up the provision later if necessary, hinging it on the Supreme Court hearing rather than get ahead of it within the FY24 update) given how poorly its share price has performed of late versus AIBG in particular - indeed, this could potentially particularly be the case if BIRG management expects that the net impact of the upcoming FY24 results update (ex-motor finance provisions) is expected to give the share price a jolt.
The Central Bank of Ireland (CBI) published its monthly Retail Interest Rates update for December 2024 on Wednesday 12th February. Click here to read the release (and to get links to all the data). All in all, the data point to pretty favourable lending volume and pricing conditions for the banks once again - with a marginal unsurprising reduction in household term deposit costs and some business deposit inflows observed following net outflows the previous month. Key points:
The weighted average interest rate on new Irish mortgage agreements at end-December was 3.80% (-17bps m/m, -39bps y/y) - and average rates are now 45bps higher than the euro area average (down significantly from 54bps higher at end-November, though still up from just 40bps higher at end-August), with the significant m/m change pushing Ireland to 7th highest in the euro area for mortgage originations pricing (from 6th at end-November). I have recently expressed my strong view to the effect that Irish banks will seek to recoup some loan spread in a mortgages context as official rates continue their descent - and that remains my opinion irrespective of one months’ data (which does not spring any surprises given known rate changes). So, I expect the gap to the euro area average will widen (competitive forces are still constrained) and I expect the Irish banks to climb back up the charts over the coming months - though, as previously noted, not right back up to the top or 2nd position with that said (as it could generate political heat, especially once the government has fully divested of its shareholding in AIB Group (AIBG)).
The volume of new mortgage originations was +19% y/y in December to €1.2bn, following +13% y/y growth in November and +28% y/y growth in October (renegotiated agreements were +€109m m/m to €256m in December - back in m/m expansion mode, following a decline in November). Outstanding mortgage stock stood at €86.0bn at end-December, +2.2% y/y.
Fixed rate mortgages represented 75% of the volume of new mortgage agreements in December (up from 70% in November) with standard variable rate agreements comprising the residual 25%.
The interest rate on new consumer loans reduced by 30bps y/y (-13bps m/m) to 7.68% in December. The total volume of new consumer loans was €151m in December, down from €187m in November - and +9.1% y/y. However, it must be noted that the pricing on, and volume of, new consumer loans can fluctuate quite wildly on a monthly basis. Outstanding consumer loan stock stood at €18.0bn at end-December, +2.9% y/y.
New NFC (non-financial corporate) borrowing in December fell back to €1.07bn (from €1.19bn in November, though originally reported at €935m in November) - but the data is notoriously choppy m/m and this followed a substantial print of €2.4bn in September, which was +124% y/y, for example. The weighted average interest rate on new lending was -18bps y/y / +38bps m/m to 5.51% in December (which was a tidy 127bps ahead of the average euro area equivalent rate of 4.24%). Outstanding NFC loan stock stood at €58.2bn at end-December, +0.2% y/y.
The average rate on household overnight deposits was -1bp m/m to 0.13% in December 2024 while the average rate on NFC overnight deposits was flat m/m at 0.11%. The majority of listed Irish banks’ customer funding sits in current accounts and other overnight product so this data, once again, illustrates the enormous liability margin benefits that the listed banks have enjoyed since official rates started to rise. The weighted average interest rate on new household agreed maturity deposits and new NFC term deposits was -15bps m/m to 2.45% (-28bps y/y) and -19bps m/m to 2.32% (-137bps y/y) respectively in December. The corresponding average euro area rates were 2.45% for new household agreed maturity deposits and 2.80% for new NFC agreed maturity deposits.
The total stock of deposits stood at €234.3bn at end-December (household €161.3bn (-€0.2bn m/m), NFC €73.0bn (+€3.1bn m/m)), +1.2% m/m and +3.3% y/y.
Company Snippets:
Bank of Ireland Group (BIRG) issued a press release on Friday here noting that it is reducing the interest rate on its 12M and 18M fixed term deposits by 25bps with effect from Tuesday 18th February, which will take the annual equivalent rate (AER) on these products down to 2.00% and 2.48% respectively. The move continues the recent trend of term product rate reductions in the Irish market, which I have previously written one should expect to continue. Notably, BIRG’s 12M fixed term deposit rate will be the lowest such rate prevailing in the market after the above changes are effected and I suspect the reduction is a prelude to both PTSB (likely first given 12M term product pricing levels) and AIB Group (AIBG) cutting their 12M term deposit rates. Indeed, continued downward deposit rate moves are unsurprising for three reasons: i) to state the obvious, official rates have been falling; ii) flow to term has reduced; and iii) Avant Money (Bankinter) is set to launch deposit product in the Irish market in the coming months, and, given that Avant will likely need to offer attractive rates relative to competitors in a bid to win custom, it makes sense for the domestic players to shoehorn their rates down to as low a level as reasonably possible before that happens for two reasons: a) it will be harder to push rates down further once Avant has launched a presumably more competitive rate (whatever way the product might be structured / packaged); and b) far more importantly, to the extent that the gap between term and overnight rates were to remain as high as it is today at the stage of Avant’s term product launch, then there would be a higher risk of a re-acceleration in flow out of overnight product into term. With all of that said, we still don’t know where Avant is going to price its deposit products (all they have said is that they won’t “overpay”) and eyeing up prospective flow from the domestic banks’ overnight deposits is likely to be part of the playbook - indeed, a more rewarding easy access savings product is just what the Irish consumer needs and that’s where there could well be some deposit margin pressure for the listed lenders in time, i.e., surely currently ultra-low-priced easy access savings product will be a key point of attack for Avant.
Bank of Ireland Group (BIRG) issued a press release on Monday last here noting that it has appointed Billy O’Connell as Chief Strategy Officer, joining the Group Executive Committee. O’Connell built significant senior leadership experience across the full financial services ecosystem during 30 years’ with Accenture and he sounds like a strong fit for this important seat - indeed, I suspect the new Chairman has been highly influential in the context of strategic hiring decisions like this one and I bet that BIRG shareholders will be counting their blessings three years from now that the Chair & Governor seat was filled by someone with the requisite experience to help drive the transformation effort forward as best they can given medium to longer-term industry-wide disruption risks rather than a local ‘political’ hire, for example.
My latest article for Business Post was published on Monday last here, focusing on how Bankinter’s presence might evolve in Ireland over a multi-year period, concluding that the bank will likely become a significant additional force over time - albeit its growing presence is likely to build in a very gradual manner over 2025/26. The article also reflects on how Bankinter developed its presence in Portugal as well as how the bank’s diversification strategy is both product-focused and geographic-focused - and it considers what could be on the agenda in an Irish market context over the coming years. Happy to share my perspectives in detail following the legwork I put in to prepare this article - just email me at john.cronin@seapointinsights.com if you’re interested.
It was widely reported in the media last week that Dilosk (ICS Mortgages), the Irish non-bank lender, saw its net interest income (NII) reduce by c.75% y/y in FY23 to €4.37m, according to recently filed accounts. This serves as a reminder of the challenges that non-bank lenders suffered as official rates climbed - as their funding costs ballooned while the mainstream lenders continued to enjoy low-cost deposits. Dilosk reportedly generated PBT of €3.4m in FY23.
Ian Guider writes in the Business Post here on how government ministers have said little about their intentions for the State’s shareholding in PTSB, which the article headline notes is “yet to break the great duopoly in Irish banking”. While management is cracking on with cost rationalisation, there is a long way to go to get returns into double-digit territory. PTSB ought to capture capital relief benefits (excess capital crystallisation, RoTE enhancement) to the extent that the Central Bank of Ireland’s review of its IRB mortgage risk models results in lower risk weights - management has guided that 2025 is the year; let’s wait and see on that front and maybe SRTs are an option if it takes too long (though those need regulatory approval too).
Shareholding Changes:
AIB Group (AIBG) issued a RNS on Friday 14th February noting that BlackRock’s shareholding in AIBG increased to 11.88% (previously disclosed shareholding: 10.87%) following a transaction on Thursday 13th February.
Bank of Ireland Group (BIRG) issued a RNS on Monday 10th February noting that UBS Asset Management has accumulated a shareholding of 3.03% in BIRG (previously disclosed shareholding: N/A) following a transaction on Thursday 6th February.
Bank of Ireland Group (BIRG) issued a RNS on Friday 14th February noting that BlackRock’s shareholding in BIRG fell to 5.92% (previously disclosed shareholding: 6.00%, earlier in the week - up from 5.99%) following a transaction on Thursday 13th February.
Global (incl. European) Updates
Snippets:
The Business Post reports today here on how European and US banks are back “in vogue” after years in the doldrums post-GFC. The article takes soundings from a number of industry participants.
Bloomberg reported on Thursday here on Commerzbank’s latest strategy update (as it seeks to fend off Unicredit’s overtures), which point to targeted RWA reductions to the tune of c.€13bn arising from significant risk transfers (SRTs) over the coming years.
Bloomberg reported on Tuesday last here that JPMorgan COO Jenn Piepszak noted at a BoA conference that trading revenue and investment banking fees could rise by >10% y/y in 1Q25. Piepszak reportedly noted that trading revenue could grow in the “low double digits” y/y while investment banking fees may rise by a “mid-teens” percentage. Within Investment Banking, debt issuance has reportedly remained “very good” (positive readacross for BARC), “a real resurgence” is expected in IPOs, and M&A revenues will “take some time” to materialise but the outlook is positive.
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