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Weekly Recap — Metsger defends NCUA's MBL rule at NASCUS summit

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


Weekly Recap — Metsger defends NCUA's MBL rule at NASCUS summit

The weekly recap featuresnews on regulatory actions, mergers and other issues facing the credit unionspace. Send tips, ideas and chatter to ken.mccarthy@spglobal.com.

News

* Inan interview withS&P Global Market Intelligence at the National Association of State CreditUnion Supervisors' annual summit in Chicago, National Credit UnionAdministration Chairman Rick Metsger spoke about the regulator's memberbusiness lending rule, which eliminated many thresholds on commercial lendingin favor of "principle-based" regulation. Metsger said he was notsurprised that the banking industry reacted as strongly as it did to the rule."That someone would criticize a rule before they even saw it tells youthat it's an ideological position of theirs that has nothing to do with thefacts," he said. In the second part of the interview, Metsger spoke about theongoing consolidation of the industry, saying the worst-case scenario would beif only a handful of mega-credit unions ultimately survive.

*With smartphone penetration now sitting at about 80% in the U.S., credit unionsare increasingly offering mobileand other technology to remain relevant to customers. In 2010,66.3% of credit unions offered internet banking, while only 9.8% offered mobilebanking. But by 2016, 76.3% of those institutions offered banking via theinternet and 52.3% had adopted mobile. An S&P Global Market Intelligencestudy found that 99% of credit unions between $100 million and $1 billion inassets offered the three most common electronic financial services: accountbalance inquiry, the ability to view account history and internet-basedbanking. At the same time, 97% of credit unions larger than $1 billion offeredthose services, while only 68% of the smallest credit unions in the countryoffer internet-based banking.

*Also during the NASCUS summit, NCUA board member J. Mark McWatters said hehopes to have a final field ofmembership rule by the end of 2016. "It won't be perfect, butit will be progress," he said.

Regulation/legislation

*The NCUA might move some federal credit unions with less than $1 billion in assetsto an extended examinationcycle in 2017. The recommendation, which was suggested by theagency's Exam Flexibility Initiative working group and will apply towell-managed, low-risk federal credit unions, is pending approval from the NCUAboard. The group made 10 recommendations, which the board plans to considerduring its Nov. 17 open meeting as part of the agency's 2017-2018 budget. Ifthe board approves, the extended exam cycle recommendation will take effectJan. 1, 2017.

*The Consumer Financial Protection Bureau finalized that would requirefinancial institutions to limit consumer losses on stolen or lost cards,resolve reported transaction errors, and give consumers free and easy access toaccount information. The new rule also finalized new "Know Before YouOwe" disclosures that would clarify fees and other key details associatedwith a prepaid account.

*Democrats on Oct. 5 urged federal regulators to strengthen executivecompensation clawbackrules following the scandal at Wells Fargo & Co. A group of 11 Democratic membersof the House Financial Services Committee, including Ranking Member MaxineWaters, D-Calif., signed the letter, which was jointly addressed to the FederalReserve, the OCC, the FDIC, the SEC, the Federal Housing Finance Agency and theNational Credit Union Administration.

*NCUA Chairman Rick Metsger sent a letter to the CFPB saying the NCUA's paydayalternative loan rules protect consumers, and he has asked the CFPB to fullyexempt those loansfrom its final payday lending rule. Metsger said payday alternative loansoffered by federal credit unions are a safer, more affordable product thantypical payday loans. "We respectfully request the bureau exempt FCUscompletely from its final rule for loans made under and consistent with NCUA'sPALs regulation," Metsger said in his letter. "As the prudentialregulator for federal credit unions, NCUA already ensures that members receivethe type of protections the Bureau is seeking to address. The Bureau shouldtherefore defer to determinations of the FCU prudential regulator about thisproduct."

*The Credit Union National Association last week also weighed in on the CFPBsmall-dollar rule, saying it would hurt millions of Americans. CUNA urged thebureau to withdraw itsproposal or exempt credit unions as a class due to the many consumer dangers inthe proposed rule. In lieu of that, CUNA asked the bureau to consideraddressing the substantial shortcomings of the proposed rule and asked the CFPBto publish a revised proposal for public comment. "The rule is overbroadand misses the mark of enhancing consumer protections because it fails toconsider consumers' needs, particularly those of modest means with financialchallenges, and does not provide a clear and concise path to allow creditunions to meet these needs," Jim Nussle, president and CEO of CUNA, saidin a statement.

M&A

*The merger betweenMiddletown, Pa.-based Mid-Atlantic Corporate Federal Credit Union andGreensboro, N.C.-based First Carolina Corporate Credit Union closed Oct. 1. Theresulting entity is now VizoFinancial Corporate Credit Union, with approximately 1,200 membersacross North America.

*Orange, Calif.-based HealthAssociates Federal Credit Union merged into Anaheim, Calif.-based onOct. 1. Retaining the Credit Union of Southern California name, the newlycombined organization serves almost 90,000 members and has 19 branches andassets of more than $1.1 billion, according to a news release. Credit Union ofSouthern California President and CEO David Gunderson will remain president andCEO.

*Ukiah, Calif.-based Mendo LakeCredit Union and Santa Rosa, Calif.-based agreed tomerge, which willlead to a combined not-for-profit financial cooperative with assets of $423million and a membership of almost 48,000, according to a news release. Theongoing cooperative will use the Mendo Lake charter. Community First CU memberswill vote on the merger because they must choose whether to adopt the MendoLake CU charter.


Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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