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Sunday Roast – UK Banks Update

11 December 2020 by jbchevrel

Today UK domestic banks’ HoldCo CDS were in catch-up mode with rising Brexit risk premium. Senior contracts were wider by roughly +8bp and subordinated contracts by about +16bp. As we can see on that chart of RBS HC SUB, these were very close to tight of the recent [and post-GFC] range, making these look more vulnerable to a pull-back than the pound [and £ STIR] already at the lows. Brussels told EU leaders that No-Trade-Deal-Post-Brexit appears to be the most likely outcome of trade talks with the UK. A similar message has been conveyed by Boris Johnson, he adds in the video that an Australia-style solution [trading with the EU on WTO terms] is now more likely than the Canada-style solution. UK bank shares were also under pressure, with Lloyds, NatWest and Barclays all down more than 3%. Beyond the downward pressure in the British Pound, the FX market is telling us that this weekend is likely to be a big mover. If the FX options market is right [1-week implied above 20% on both £$ and €£] spectacular moves are on cards. In parallel, the UK banking regulator has given banks the green light to resume their dividend payments, nine months after it asked them to suspend payouts and preserve capital. The PRA said its latest test of banks’ capital positions had found they were resilient to “a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations.” However, the PRA did put in place guidelines for how much the banks should be paying out. The UK’s approach is slightly in contrast with the ECB’s, as the ECB is leaning towards extending their dividend ban well into 2021 [with some exceptions for the strongest lenders].