UK lenders pass Bank of England stress tests

UK lenders passed the stress testing by the Bank of England, US largest banks kicked off second-quarter earnings season, and challenger bank Monzo considers merging with its Nordic peer Lunar

Hi!

Welcome to the very first issue of the “Banking Bulletin” newsletter, which is my attempt to learn more about the European banking industry. Here is what happened last week:

• UK lenders passed the stress tests by the Bank of England,

• US largest banks kicked off second-quarter earnings season, and

• Challenger bank Monzo considers merging with its Nordic peer Lunar

Thanks for reading and have a great week!

Jevgenijs

p.s. have feedback? message me on Twitter

UK Lenders Pass Stress Tests

The stress testing conducted by the Bank of England on the largest UK lenders, including NatWest, Barclays, HSBC, Lloyds, Standard Chartered, Santander UK, Nationwide building society, and Virgin Money UK, concluded that the banks have sufficient capital to withstand a more severe economic crisis than the one experienced in 2008. The stress scenario involved a deep recession, with GDP contracting by 5%, unemployment doubling to 8.5%, and a housing crash where prices fall by a third. The banks were also tested for their ability to handle increased energy prices leading to peak inflation levels of about 17%.

Image source: Bank of England

The stress testing concluded that the aggregate CET1 capital and Tier 1 leverage ratios of the UK banking sector will remain comfortably above the hurdle rates, indicating that the banks have sufficient capital to meet regulatory requirements and continue providing credit to creditworthy customers even in the face of severe adverse shocks. BoE also notes that the testing was conducted based on June 2022 data, while major UK banks' capital ratios have further improved, with the aggregate CET1 capital ratio reaching 14.6% in the first quarter of 2023.

Last month the Federal Reserve concluded its annual stress testing exercise, concluding that the 23 largest US banks included in the test have ample capital to absorb over $540 billion in losses and continue lending to households and businesses. Under the test scenario, the aggregate CET1 capital ratio of the banks would fall from 12.4% in the fourth quarter of 2022 to its minimum of 10.1%. This year’s test includes a global recession with a 40% decline in commercial real estate prices, a 38% decline in house prices, and unemployment increasing to 10%.

The European Central Bank is stress-testing a total of 99 banks this year, including 57 of the euro area’s largest banks, which cover 75% of the area’s banking assets, and 42 medium-sized banks that are not tested on a regular basis due to their size. The results of the stress tests will be published by the end of July 2023.

✔️ Stress testing the UK banking system: 2022/23 results
✔️ UK lenders pass stress tests as Bank of England warns of more mortgage pain
✔️ Federal Reserve Board releases results of annual bank stress test
✔️ ECB to stress test 99 euro area banks in 2023

US Largest Banks Kicked Off Second Quarter Earnings Season

U.S. banks, including JPMorgan Chase, Wells Fargo, and Citigroup, kicked off the second-quarter earnings season on Friday by reporting profit growth and praising a resilient economy. J.P. Morgan reported a 67% YoY increase in net income, with the return on common equity surging to 20%. Wells Fargo reported a 57% YoY increase in net income, and a return on common equity of 13.7%, up from 8.7% a year ago. The banks benefited from higher interest rates and robust consumer spending and borrowing, despite concerns about a slowing economy.

Image source: J.P. Morgan

While the overall outlook remains positive, executives caution about uncertainties in the future. Loan defaults increased slightly, but remained historically low, and the banks set aside money for potential future defaults, particularly in commercial real estate. The investment banking and trading divisions saw mixed results, with some decline in fees and trading activity. Overall, the earnings results for big banks suggest a “soft landing” and provide optimism for the future, although caution remains regarding the economic outlook.

✔️ U.S. banks point to resilient but slowing economy
✔️ JPMorgan’s Best Quarter Ever Shows Big Banks Are in Rate Sweet Spot
✔️ Big-Bank Earnings Show Signs of Soft Landing

UK Digital Bank Monzo Considers Merging with Nordic Peer Lunar

UK digital bank Monzo is considering a potential merger with Nordic competitor Lunar, as part of its expansion plans in Europe, according to Bloomberg. Lunar, which last raised funds in 2022 at a valuation of approximately $2.2 billion, serves approximately 650,000 customers in Denmark, Sweden, and Norway, and, similarly to Monzo, operates as a fully digital bank without physical branches. Monzo has engaged in preliminary discussions with the Danish company regarding the structure of a possible deal, according to Bloomberg. Both Monzo and Lunar declined to comment on the rumor.

Image source: Monzo

Monzo, founded in 2015, has over 7.5 million customers and has been able to increase revenue and narrow losses by expanding into lending and business customer segment. In the fiscal year ending in February 2023, the company’s revenue more than doubled to £355.6 million pounds. This increase was primarily driven by a rebound in customer spending following the cancellation of pandemic-related lockdowns and the expansion of product offerings. The company reported a net loss of £116.3 million, compared to £119 million in the previous fiscal year, and expects to reach profitability this year.

✔️ British digital bank Monzo in talks to buy Nordic lender Lunar
✔️ UK Digital Bank Monzo Weighs Deal for Nordic Rival Lunar
✔️ Britain's Monzo narrows annual loss, IPO 'some ways down the road'

🇩🇪 Commerzbank CEO Manfred Knof Is Set to Promise Higher Payouts, Profits
Commerzbank's CEO is expected to announce higher profitability goals as part of the bank's new financial targets. Knof aims for a return on tangible equity of over 10%, compared to the previously pledged 7.3% for next year.

🇸🇪 Swedish Real Estate Woes Pile Rating Pressure on Handelsbanken
Moody's Investors Service has lowered the credit rating outlook of Svenska Handelsbanken AB, Sweden's third-largest bank, to negative from stable due to its significant exposure to the country's struggling real estate sector.

🇪🇺 ECB backs draft EU rules for winding down smaller banks
ECB expressed support for the proposed new regulation regarding the winding down of smaller banks in the event of their failure. However, the ECB believes that the rules should be more ambitious and apply uniformly across the bloc.

🇬🇧 UK banks urged to ‘accelerate’ savings rates by financial regulator
The UK's Financial Conduct Authority has urged major high-street banks to expedite increasing savings rates for consumers. The call comes after claims that banks were profiteering from high borrowing rates while keeping savings rates low.

🇪🇸 Santander expanding investment bank in US and UK
Santander, Spain's largest bank, is intensifying its investment banking operations by hiring at least 50 bankers, primarily in the United States, as part of its goal to become a prominent player in the investment banking industry.

🇬🇧 Bank of London hires 300 staff as it applies for EU banking licence
The Bank of London has applied for a banking license from the European Union and plans to hire 300 staff as part of its expansion into Europe. The bank will establish a base in Luxembourg and plans to invest €200 million over the next five years.

🇪🇸 Spanish banks perform better in EU stress test than in 2021
Spanish banks, including Santander and BBVA, have reportedly performed better in the European stress tests compared to two years ago, according to provisional data cited by news website El Confidencial.

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Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.

Cover image source: Barclays