July 2020 – Chris Mallin Macro Perspectives

“2Q20 message from the money sector – the UK”

Part 2 – a similar message to the euro area

The key chart

**What uncertainty looks like – putting 2020 money holding trends into context**
Source: Bank of England; CMMP analysis

The key message

The 2Q20 message from the UK money sector is very similar to the corresponding euro area version.

Headline data points suggest little change to the existing narrative. Households (HHs) and corporates (NFCs) continue to increase their money holdings, with rolling 3m inflows for the past four months since March exceeding the total inflows recorded for the whole of 2019. High levels of uncertainty still prevail. Above trend NFC borrowing and a recovery in HH mortgage demand offset the weakest YoY trends in consumer credit (-3.6% YoY) since 1994.

Again, analysis of monthly flows presents a more nuanced picture. Flows into sterling money holdings peaked back in March 2020, but remain more than double 2019 average monthly flows. The message for UK consumption is “less negative” – HHs repaid only £86m compared with a record £7bn in April. For context, this compares with average new monthly consumer borrowing of over £1bn per month in 2019. NFCs remain active borrowers from banks and financial markets, with June’s £11bn of borrowing driven mainly by capital market issuance. Bank lending to NFCs saw divergent trends. Large corporates repaid record amounts, but SMEs borrowed an additional £10bn. The annual growth rate in SME lending hit an all-time high, reflecting the impact of government support schemes.

In short, uncertainty in the UK has also peaked but remains very elevated, still.

Six charts that matter

**HHs and NFCs continue to increase their sterling money holdings strongly**
Source: Bank of England; CMMP analysis

In-line with developments in the euro area (EA), the headlines from the Bank of England’s money supply data for June 2020 also suggest little change to the on-going “message from the money sector” narrative.

The UK’s headline money series (M4ex) grew 11.9% YoY compared with the monthly average of 2.9% in 2019. HH money holdings (64% total) increased 7.5%, NFC money holdings (23% total) increased by 23.2% (YoY), and the volatile but smaller non-intermediating financing company (NIOFC) holdings (15% of total) increased by 17.7%.

The key chart above places these trends into context. Money holdings increased by £82bn in total during 2019, at an average of just under £7bn per month. The rolling 3m sums of money holdings for the past four months – March ($86bn), April (£113bn), May (£159bn) and June (£109bn) – all exceed the 2019 annual increase. This is what uncertainty looks like!

**“Euro area trends on steroids” – above trend NFC credit and resilient HH mortgage demand offset weakness in HH consumer credit**
Source: Bank of England; CMMP analysis

Looking at the counterparts to money holdings, again the story is similar to the EA version but with more exaggerated trends. NFC lending grew 9.2% YoY, down from 11.2% in May, but above trend. Mortgage demand grew 3.0% YoY, resilient but slightly below the 2019 average growth of 3.3%. However, HH consumer credit fell by -3.6% YoY, the weakest growth rate recorded since this series began in 1994. No real surprises here (at least in terms of trends).

**Have uncertainty levels peaked, and if so, when? Monthly flows of sterling money holdings**
Source: Bank of England; CMMP analysis

Continuing the parallels with the EA message, the monthly flow data presents a more nuanced picture than the headline data suggests. Monthly flows into sterling money holdings peaked at £67bn in March, almost 10x the 2019 monthly average flow. They fell back to £16bn in June, but this is still 2.3x the 2019 average monthly flow. The more volatile NIOFC flows peaked in March, but HH and NFC monthly flows did not peak until May (both at £26bn before falling to £12bn and £8bn in June respectively). Note that these large inflows are occurring despite negative real returns. The effective interest rates on new HH time (0.73%) and sight (0.26%) hit new lows having fallen 31bp and 20bp since February 2020 respectively. The effective interest rates on NFC time (0.17%) and sight (0.13%) also fell 10bp in June 2020.

**HH lending recovers in June after 2 months of large repayments**
Source: Bank of England; CMMP analysis

After 2 months of large repayments (£7bn April, £3bn May), HH borrowing increased by almost £2bn in June. As can be seen from the chart above, the recovery in mortgage borrowing was the driver here. Looking ahead, mortgage approvals for house purchase also increased to 40,000 in June, up from the record low of 9,300 in May. However, June’s approvals were still well below February’s pre-Covid level of 73,700.

HHs repaid only £86m of consumer credit in June compared with £4bn, £7bn and £5bn monthly repayments in March, April and May respectively. Positive, or less negative, news for the UK economy, but note that this small repayment contrasts with an average of £1.1bn in new consumer borrowing per month in the 18 months to February 2020 (Bank of England, June 2020).

**Divergent trends in NFC borrowing – large corporates vs SMEs**
Source: Bank of England; CMMP analysis

NFC lending saw divergent large NFC and SME trends. Large NFCs repaid a record £16.7bn in June, following a £13bn repayment in May. Approximately half of these repayments came from public administration and defence. The YoY growth rate for large NFC lending fell to 4.8% (dotted red line above) from 15.5% YoY in April. In “Credit where credit’s due“, I highlighted the important increase in SME borrowing in May (£18bn). In June, SMEs borrowed an additional £10bn well above the previous largest monthly SME borrowing of £0.6bn in September 2016. The YoY growth rate in SME lending hit a new high of 17.7% reflecting, in part, loans arranged through the government support schemes (eg, Bounce Back Loan Scheme).

**June’s NFC financing driven by capital market issuance – bonds and equity**
Source: Bank of England; CMMP analysis

NFCs borrowed almost £11bn from banks and financial markets in June. This was below the £32bn and £16bn borrowed in March and April respectively, but similar to May’s borrowing level. June’s borrowing was driven by capital market issuance – £7bn in bond issuance and almost £4bn raised in equity.

Please note that the summary comments and graphs above are extracts from more detailed analysis that is available separately

“2Q20 message from the money sector”

Part 1 – the euro area narrative

The key chart

**Headline figures mask a more nuanced message from the monthly flow data**
Source: ECB; CMMP analysis

The key message

The “2Q20 message from the money sector” is simple: uncertainty in the euro area has peaked but remains elevated still.

Demand for overnight deposits remains the key driver of M3 growth
Above-trend NFC credit demand and resilient HH mortgage demand is offsetting weakness in consumer credit
Monthly flows into overnight deposits (and uncertainty) peaked in March at 5x 2019 average flows but remain 1.3x 2019 average flows
HHs have stopped paying down consumer credit and mortgage demand has remained resilient throughout the pandemic
The NFC “dash for cash” has also peaked and the monthly flow of corporate borrowing fell below the 2019 average in June
Despite negative real rates, almost €10trillion continues to sit in cash and overnight deposits
The key question – how much of this is “forced” versus “precautionary” savings – remains unanswered for now.

Six charts that matter

The headlines from the ECB’s money supply data for June 2020 suggest little change to the “message from the money sector” narrative (see key chart above). Growth in broad money (M3) rose to 9.2% YoY from 8.9% in May, the fastest rate of growth since July 2008. Narrow money (M1) grew 12.6% YoY from 12.5% in May and overnight deposits grew 13.1% YoY from 13.0% in May. M1 and overnight deposits contributed 8.5ppt and 7.6ppt to the overall M3 growth of 9.2% respectively. In short, households (HHs) and corporates (NFCs) continue to demonstrate a high preference for liquid assets despite negative real returns, which reflects high levels of uncertainty. No surprises here.

**HH and NFC loans as a counterpart to M3 (% YoY)**
Source: ECB; CMMP analysis

Looking at the counterparts to broad money, credit to the private sector contributed 5.1ppt to M3 growth down from 5.3ppt in May. HH lending stood at 3.0% YoY, flat on the month, while growth in NFC lending fell to 7.1% YoY from 7.3% in May. As before, above-trend NFC credit and resilient HH mortgage demand (4.1% YoY) offset the lack of growth in consumer credit (flat, YoY)

**Monthly flows of overnight deposits**
Source: ECB; CMMP analysis

Behind the headlines, the monthly flow data presents a more nuanced picture. Monthly flows into overnight deposits peaked at €250bn in March (5x the 2019 average flow) and have fallen back to €63bn in June (1.3x the 2019 average flow).

**HH “uncertainty” peaked one month before NFC “uncertainty” – but both remain elevated**
Source: ECB; CMMP analysis

HH deposit flow peaked at €80bn in April and has fallen to €50bn in June. NFC deposit flow peaked a month later in May at €112bn and has fallen back even faster to €42bn. In both cases, however, the latest monthly flow is still 1.2x the respective 2019 averages.

**HH no longer paying down consumer credit**
Source: ECB; CMMP analysis

After three months of negative flows, EA HHs have stopped paying down credit for consumption. They borrowed €1bn in June after negative flows of €-12bn, €-14bn and €-2bn in March, April and May respectively.

**Mortgage demand remains resilient**
Source: ECB; CMMP analysis

HHs also borrowed €10bn in June to purchase houses, down from €20bn in May. The smoothed 3m MVA of monthly mortgage flows has been trending between €10bn and €20bn for a sustained period reflecting resilient demand since mid-2017.

**Passed the peak “dash for cash”**
Source: ECB; CMMP analysis

The “dash for cash” from NFCs appears to have peaked at €121bn flow in March 2020. Since then, the monthly flow has declined to €72bn (April) and €50bn (May) to €8bn (June), below the 2019 average monthly flow of €11bn.

Please note that the summary comments and graphs above are extracts from more detailed analysis that is available separately.

“Digitalisation coming ready or not”

Are UK building societies positioned to take advantage?

LT challenges – the key chart

**UK households save too little and borrow too much**
Source: ONS; ECB; CMMP analysis

The key message

The digitalisation of UK mortgage and savings is accelerating but structural and cyclical dynamics are challenging the strategies and profitability levels of building societies and compromising their ability to respond to the associated opportunities and challenges.

Summary of segmentation analysis

Building societies play an important role in UK financial services, helping their 25mn members to finance the purchase/building of their homes and to save.

The 43 societies currently account for 23% of outstanding UK mortgages (£337bn) and 18% of total HH savings (£297bn). The five largest account for c.90% of assets, members and industry profits. The balance sheet, members and annual profits of Nationwide, the UK’s largest building society, exceed the equivalent numbers for the rest of the industry combined.

CMMP analysis segments the industry by balance sheet, membership, infrastructure, P&L and geographic location and identifies four distinct tiers of building society.

It highlights how “the value” of members and branches and profitability drivers vary significantly across, and within, the four tiers and identifies those societies who enjoy neither the economies of scale of the Tier 1 societies nor the superior profitability (and income generation) of the smaller Tier 4 societies.

The Chairman of one society suggested recently, that many peers would be tempted to simply “trade through” the current crisis (supported by adequate capital) but that “they shouldn’t”. CMMP analysis not only supports this view but also provides a foundation for formulating the necessary strategic responses.

Please note that the summary comments above and the charts below are extracts from more detailed analysis that is available separately.

Key charts and slides

**Five building societies dominate the market and Nationwide, the largest, has more assets, shares, members and generates more profits than the rest of the industry combined**
Source: BSA, CMMP analysis

Challenges are reflected in divergent growth trends for assets and profits since 2015 (% CAGR)
Source: BSA; CMMP analysis

**Even the more profitable societies are experiencing challenges to their profitability levels**
Source: BSA; CMMP analysis

**Larger building societies enjoy economies of scale (Tier 1 blue, Tier 2 red, Tier 3 green)**
Source: BSA, CMMP analysis

**Smaller building societies’ profitability levels reflect superior income generation (Tier 4 grey)**
Source: BSA; CMMP analysis

**Membership numbers and contribution vary across and within the four tiers**
Source: BSA; CMMP analysis

**Branch numbers and efficiency levels also vary across and within the four tiers**
Source: BSA; CMMP analysis

**How sacred are the industry’s sacred cows in a digitalised world?**
Source: BSA; CMMP analysis

“Credit where credit’s due”

A positive SME message from the UK money sector

The key chart

**Positive news from the money sector – SMEs able to borrow a record £18bn in May**
Source: Bank of England; CMMP analysis

A snapshot on SME lending in the UK

In recent posts, I highlighted the widening financing gap between large corporates and SMEs in the UK and concerns that SMEs in the euro area were expecting the availability of external funding to deteriorate sharply.

**“This time it’s different” – monthly change in SME loans since 2011 (£mn)**
Source: Bank of England; CMMP analysis

This week’s “Money and Credit” release from the Bank of England brings some welcome, positive relief to this negative narrative. SMEs in the UK borrowed an extra £18bn from banks in May 2020. To put this into context, the previous largest increase in SME net borrowing was £589mn in September 2016. The Bank of England noted that this increase (11.8% YoY) “reflects businesses drawing down loans arranged through the government supported schemes such as the Bounce Back Loan Scheme”.

**What a difference a month makes – YoY growth rates in NFC lending since May 2017**
Source: Bank of England; CMMP analysis

These schemes helped reduce the effective interest rate on new loans to 0.98%, which is the lowest rate paid by SMEs since 2016 and compares very favourably with the 3.44% charged on new loans in February 2020.

**The “effective” rate on new loans has fallen to a new low of 0.98%**
Source: Bank of England; CMMP analysis

SMEs play a vital role in the UK economy. They account for 50% of total revenues generated by UK business and employ 44% of the UK’s workforce (McKinsey, June 2020). Up until this month, there were obvious concerns that limited access to funding and its relatively high cost were adding to the pressure of sharp revenue declines.

The large scale and lower cost of SME funding indicated in this week’s data release is a welcome, positive change in the message from the UK money sector.

Please note that these summary comments are extracts from more detailed analysis that is available separately

“Forced vs Precautionary”

May’s message from the UK money sector – risks from the HH sector

The key chart

**The post COVID 19 outlook may be determined by the extent to which the dramatic increase in HH savings is forced or precautionary – financial sector balances provide important context here (£mn)**
Source: Bank of England; CMMP analysis

Summary of CMMP analysis

Households (HHs) play a dominant role in the UK economy – their consumption accounts for 63p in every pound of GDP and their borrowing accounts for 76p in every pound lent.

In this context, heightened uncertainty, debt repayments and a marked increase in savings represent clear and rising risks to the economy and to bank sector profitability.

The £26bn record increase in HH deposits in May (6x the 10-year average monthly flow) reflects extreme uncertainty. HHs are repaying loans, notably consumer credit which has fallen -25% (annualised) over the past three months and -3% YoY (the weakest rate since 1994).

Pre-COVID 19, HHs funded consumption by dramatically reducing savings…

…during COVID 19, the savings ratio jumped sharply from an 11-year low of 5.2% in 3Q19 to 8.6% in 1Q20 (in-line with its LT average)…

…Post-COVID 19, the key question is the extent to which these savings are “forced” (constraints on spending during lockdown) or “precautionary” (response to actual or possible unemployment) in the UK and in the euro area.

Financial sector balances provide important historic context here given that the UK economy was characterised by large and persistent sector imbalances previously. Increasing deposits and/or reducing loan liabilities are likely to be part of a structural shift towards higher levels of HH net lending/financial surpluses.

Financial flows may remain volatile but a sharp reversal with savings moving rapidly back into either consumption or investment appears unlikely given the UK’s starting position.

Look instead for further fiscal stimulus (eg, a temporary cut in VAT).

Please note that the summary comments above and the graphs below are extracts from more detailed analysis that is available separately.

Month: July 2020

“2Q20 message from the money sector – the UK”

The key chart

The key message

Six charts that matter

“2Q20 message from the money sector”

The key chart

The key message

Six charts that matter

“Digitalisation coming ready or not”

LT challenges – the key chart

The key message

Summary of segmentation analysis

Key charts and slides

“Credit where credit’s due”

The key chart

A snapshot on SME lending in the UK

“Forced vs Precautionary”

The key chart

Summary of CMMP analysis

Six key charts