RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Archive | November, 2016

Vickers rejects banks’ ringfencing fears

Posted on 30 June 2015 by

Sir John Vickers, chair of the independent commission on banking©Bloomberg

Sir John Vickers, chair of the independent commission on banking

The founding father of UK’s bank ringfencing has dismissed the idea that by pushing retail banking units into standalone entities they could “go wandering off” and disregard parent groups’ strategy.

Some senior bankers have attacked new rules that force the biggest lenders to hive off their consumer lending operations into separately governed and funded structures, arguing that they will lose control of a key part of their business.

    Sir John Vickers, who chaired the independent commission on banking that recommended the ringfencing rule four years ago, told a House of Lords committee on Tuesday he was “very content” with how the reform had been put into law.

    In response to criticism from the likes of HSBC, which is weighing a disposal of its UK retail banking arm in response to the ringfencing rule, Sir John said: “It is quite false to imagine that a ringfenced bank can just go wandering off on its own.”

    He pointed out that his report had defined “broad principles” of independent governance for the ringfenced entities and left the detail to be implemented by regulators at the Bank of England, as they are now doing.

    However, he said “there may well be some occasions when the obligations of ringfencing are in tension with group policy and it is then that you must have adequate independence of composition, of remuneration, et cetera of those who are responsible for the decisions by the ringfenced bank, so that the integrity of the ringfenced entity is protected”.

    But he added: “That is not to cut across coherent group policies and such like.”

    When one of the committee members asked if he was trying to have his cake and eat it, Sir John said the BoE’s Prudential Regulation Authority was “baking that particular cake” but added that it was doing so with “common sense”.

    The rule is designed to protect taxpayers from ever having to bail out a bank again by ensuring that vital services, such as retail deposits or payment system operations, are kept separate from risks elsewhere in the financial sector.

    HSBC is moving 1,000 staff from London to Birmingham in preparation for basing its ringfenced unit in the city. It has raised concerns that it will be unable to exercise control over its ringfenced entity with its separate board and independent directors.

    Santander unveils plans for ringfenced UK business

    Lender will split into a retail and a corporate bank by September

    Continue reading

    “We’re not an asset management firm,” Stuart Gulliver, HSBC chief executive, said in May, while flagging a potential revival of the Midland brand for the ringfenced entity. “What would be uncomfortable is if we were a majority shareholder in a bank where we have no control over capital or management decisions.”

    Jonathan Symonds, chairman of HSBC’s UK operation, told the committee that implementing the ringfence was one of his board’s five key objectives. But he said that it would cost £1.5bn to implement, excluding time spent by existing staff on the project, which was “taking up a very substantial proportion of our activities”.

    Mr Symonds said he was “not totally convinced” of the value of the rule, especially as the bank was having to hold more capital, which made it much less likely to need a government bailout.

    George Culmer, finance director of Lloyds Banking Group, said he welcomed the ringfencing law. But he pointed out that unlike HSBC Lloyds hoped to have 97 per cent of its assets inside the ringfence.

    Mr Culmer said the ringfence would cost hundreds of millions of pounds to implement and have a running cost in the tens of millions of pounds.

    He said the bank had sought a waiver to avoid having separate boards of directors for the two entities, given that their assets would be almost entirely the same. He warned that without this waiver Lloyds may need to reconsider whether to keep any of the activities outside the ringfence, such as complex derivatives or debt capital markets.

    Some mergers are more equal than others

    Posted on 30 June 2015 by

    epa02438754 People walk past Willis Tower, formerly the Sears Tower, and the tallest building in North America, as it stands as one of the most recognizable features of the skyline in Chicago, Illinois, USA, on 09 November 2010. A picture of the famous building has recently shown up on an al-Qaeda online magazine. Law enforcement officials in the Chicago area are looking for any homegrown link to the terrorist organization after mail bombs were addressed to two Chicago locations. EPA/TANNEN MAURY©EPA

    Joe Plumeri might be spinning in his grave . . . if he weren’t alive and well and writing self-help books. Observers doubt that benefits consultant Towers Watson could have executed what looks like a reverse takeover of Willis had the New Jersey-born financier still been running the insurance broker. Insurance salesmen are a hard-boiled lot: clients include mid-cap company owners as keen to pay premiums as they are to contract verrucae. Benefits consultants are, in contrast, at the spoddy end of financial services, particularly where their activities shade into investment advice and actuarial work.

    What evidence is there that the $18bn merger is a revenge of the nerds? The positioning of Towers boss John Haley as chief executive of the combo is Exhibit A. Willis boss Dominic Casserley would be his deputy. That means if push comes to shove, Casserley would be cassoulet, or at least toast.

      Exhibit B is the fact that Willis shareholders will get just over half the shares in the combo. Willis’s equity was valued at $8.1bn before markets opened in the US, where both are listed, while Towers’ stock was worth $9.6bn. You could label half the difference as a takeover premium if you’re one of those miserabilists who refuses to believe in mergers of equals or fairies.

      Cost synergies of $100m are forecast. That should spook administrators, but not profit-getters. Both companies have big offices in London, where Willis’s unofficial headquarters are next door to Lloyd’s. But there is little operational overlap. Savings would include a lower tax bill once Towers reversed its US tax registration into Willis’s Irish domicile.

      The growth story includes Willis folk cross-selling Towers’ US-inspired healthcare exchange, assuming the rest of the world opts for a healthcare system as dysfunctional as that of the US. The defensive context is that Wowsers — or, as we should properly call it, Willis Towers Watson — should be better placed to compete with Marsh and Aon, brokers that already have employee benefits arms.

      Fund managers resent being hired and fired at the behest of Towers’ powerful investment advisers. But modest scope for restructuring means these arbiters should sail on unperturbed. Stock pickers are thus exposed to a traumatic denial of Schadenfreude, or Schadenfreudeabwesenheit, as a Viennese psychoanalyst would call it.

      Deutsche rejects claim Jain lobbied for traders’ €130m bonus

      Posted on 30 June 2015 by

      Anshu Jain, outgoing co-CEO of Deutsche Bank©AFP

      Anshu Jain, outgoing co-CEO of Deutsche Bank

      Deutsche Bank’s outgoing co-head, Anshu Jain, was embroiled in a furious row on Tuesday with German financial regulators over a bonus worth millions of euros that was paid to a former star trader.

      BaFin, the watchdog, accused Mr Jain, who has just stepped down as Deutsche’s co-chief executive, of personally lobbying for the bonus for Christian Bittar, who is now part of a criminal investigation into alleged benchmark-rigging.

        A BaFin report said senior management at Deutsche had a “remarkable” relationship with Mr Bittar. It said Mr Jain pressed for a joint bonus as high as €130m for him and another trader, telling the bank’s chairman at the time that they were “good guys, the best on the Street”.

        Deutsche denied the allegations on Tuesday night, saying that Mr Jain’s comments were taken out of context. It said that Mr Bittar was contractually entitled to an even higher bonus and had in fact deferred half of it.

        BaFin’s disclosure is made in a report written by the watchdog in the wake of the Libor scandal. Deutsche is one of a number of banks that have paid more than $9bn in fines to settle claims that they rigged Libor, a benchmark that underpins around $350tn of debt worldwide. Deutsche paid a record $2.5bn in penalties over Libor in April.

        Mr Jain ordered an internal probe to see whether the high profits generated by Mr Bittar and the money-markets desk were genuine, but it was superficial, BaFin found. The reason it was ordered was that “so much money had never been earned before”, the BaFin report said, quoting a Deutsche manager.

        Mr Bittar, who left the bank in 2011 and is based in Singapore, is under investigation by the UK’s Serious Fraud Office as part of its criminal probe into the rigging of Euribor, the Brussels equivalent of Libor. No charges have been filed against Mr Bittar, who denies all wrongdoing.

        The bank rejected the allegations that Mr Bittar and Mr Jain had a close relationship, and that the internal review was insufficient. People familiar with the situation said Mr Bittar moved to Singapore for family reasons.

        The bank also denied that Mr Jain had lobbied for a higher bonus for Mr Bittar. “No one needed to lobby for those involved to be paid a bonus because they had contracts which entitled them to a percentage of the profits they generated,” it said. “Rather, the traders involved agreed to defer half of their entitlement given the circumstances of the financial crisis.”

        Deutsche said these types of contracts were not uncommon in the market at the time but it no longer has them. Mr Bittar’s lawyer declined to ­comment.

        The allegation of a close relationship between him and his superiors is another blow to Deutsche’s senior management, which in recent months has been hit by the Libor fine, a stinging protest vote from investors at its annual strategy meeting, and the departure of Mr Jain and his co-head, Jürgen Fitschen — who is currently on trial in Germany with four other bank officials on fraud charges.

        “The culture of the bank, dating back to pre-crisis era, needs to be changed,” said a top 20 shareholder in Deutsche. “It needs to rebuild relations with regulators.”

        Felix Hufeld, president of BaFin, said on Tuesday: “It is not enough to have a good strategy. It’s a mass of measures that some banks master better than others. Deutsche Bank has some catching up to do.”

        Mr Jain and Mr Fitschen step down on Tuesday, leaving behind a litany of legacy conduct issues for their successor, John Cryan, to deal with.

        The German prosecutor confirmed this week that it had launched a criminal investigation off the back of BaFin’s findings, detailed by the Financial Times last week, that Deutsche’s senior management had allegedly acted negligently over the rate-rigging scandal.

        In depth

        Libor scandal

        Analysis BIG PAGE Libor pfeatures

        Regulators across the globe probe alleged manipulation by US and European banks of the London interbank offered rate and other key benchmark lending rates
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        BaFin’s report included an allegation — strongly denied by Mr Jain — that he may have knowingly misled the German central bank.

        Deutsche has until next week to respond formally to BaFin, which will then consider whether supervisory measures should be imposed.

        The regulator said: “Attention is drawn to the coincidence in terms of time between sending Christian Bittar to Singapore at the beginning of 2010 and the first inquiries from regulators on 13th January 2010 and 5th February 2010,” detailed the BaFin report, which has not been made publicly available but which has been seen by the FT.

        Deutsche has already said that it disputes key parts of the BaFin report.

        Mr Bittar was one of three traders embroiled in either the Libor or foreign exchange rigging scandals who won the right on Friday through a court decision to challenge the UK regulator’s findings against banks because the watchdog may have improperly identified the traders in the process.

        If the Financial Conduct Authority identifies individuals in its published notices, it is meant to give them a chance to make their case before publication and, crucially, give them access to documents and evidence it relies on.

        Davis ready to make contrarian coal bet

        Posted on 30 June 2015 by

        Mick Davis©Charlie Bibby/FT

        Former Xstrata CEO Mick Davis

        Mick Davis, former chief executive of Xstrata, knows coal.

        By the time Xstrata was sold to Glencore in 2013, Mr Davis had turned the miner into the world’s largest exporter of thermal coal, the type used in power stations. Coal lay behind Xstrata’s decade-long record as a corporate success story, riding the commodities boom.

          So it is no surprise that Mr Davis could make coal his first deal for X2, the private company he has established with the aim of creating a mid-tier mining group. Having secured equity commitments of up to $5.6bn from investors, X2 is talking to Rio Tinto, the miner with listings in London and Sydney, about acquiring its Australian coal assets in New South Wales.

          No deal has been finalised and X2 and Rio both declined to comment, but Mr Davis appears ready to take a contrarian bet on coal.

          The commodity has been suffering from a supply glut for years. The price of thermal coal has halved since 2011, and opposition to fossil fuels’ role in contributing to climate-changing carbon dioxide emissions is growing.

          But Mr Davis is probably focused on the opportunity to buy coal assets at a low point in the commodities cycle. “It would make sense for this to be the first foray for X2, especially given that a private equity fund should be able to take a long-term view on a commodity that is out of favour,” said analysts at Investec.

          Analysts at several firms value Rio’s Australian thermal coal assets at between $900m and $2bn, and there is a plausible long-term rationale for buying them.

          Although Japan is no longer the largest importer of thermal coal, its utilities are prepared to pay a premium to the market price to lock in reliable, high quality supplies. Many Japanese power stations are configured to burn only high-grade Australian coal.

          If Mr Davis is successful in concluding a deal with Rio, marketing rights for the Australian coal would be handed to Noble Group, Asia’s biggest commodity trader by sales. Noble was an anchor investor in X2, pledging $500m alongside private equity group TPG.

          It is almost two years since X2 announced its ambitions, and Mr Davis has been proved right in not rushing into a deal, given commodity prices have continued to decline.

          The problem for X2 remains finding an appropriate seller. Miners have generally been disposing of assets that Mr Davis would not want, or asking too high a price for those he may be interested in.

          Rio is no different. Sam Walsh, Rio’s chief executive, is wary of being excoriated by investors in years to come for having sold assets on the cheap.

          Mr Davis is not ruling out deals involving commodities beyond coal. Along with “bulks”, such as coal, he is expected to try to acquire mines producing industrial metals such as copper, manganese, nickel and zinc. Demand for these metals is more predictable than for precious ones such as gold.

          Given that a portfolio of businesses is X2’s aim, Mr Davis talked to BHP Billiton about a deal for its many unwanted assets.

          But BHP instead chose to offload its non-core businesses through the creation of a new public company, South32. It has had a difficult start, with its shares down 13 per cent since the stock started trading in May.

          Mr Davis could target a takeover of South32, which has some coal assets, or another listed company, although that would probably mean paying a premium to its share price. He has also been in talks with Anglo American, another miner selling a portfolio of unwanted coal, copper and platinum assets.

          The main competition for Rio’s thermal coal assets could come from Glencore.

          Peter Freyberg, Glencore’s head of coal, said this month it was ready to buy “bolt-on” coal assets.

          Now the world’s biggest exporter of thermal coal, Glencore’s Australian operations are next door to Rio’s. Privately, some Glencore executives see themselves as natural owners of Rio’s thermal coal assets.

          Cost savings are rare in mining deals but most likely when assets are close to each other, and analysts at Credit Suisse last year estimated potential for annual synergies of $500m from combining the Rio and Glencore operations in New South Wales.

          Paul Gait, analyst at Bernstein, says: “Glencore would get marketing and operational synergies, the price tag is not prohibitive and they already acquired Clermont [another Australian coal mine] from Rio. Against this X2 has the cash, a better balance sheet and no antitrust concerns to worry about.”

          Deutsche Bank: Cryan’s clean-up job

          Posted on 30 June 2015 by

          Deutsche Bank in Frankfurt©Bloomberg

          Deutsche Bank’s “passion to perform” advertising slogan — translated tortuously from the original German — was never totally convincing. But now critics have started twisting it into a “passion to underperform”.

            Little wonder. Germany’s biggest bank is facing its deepest crisis of confidence in a generation. In April, Deutsche paid a record $2.5bn fine to US and UK regulators for its involvement in the Libor rate-rigging scandal. A few days later its new five-year strategy fell flat with investors. In May came a rebellion from shareholders at its annual meeting. And in June, its co-chief executives, Anshu Jain and Jürgen Fitschen, said they would step down. Deutsche Bank’s share price has stagnated over the past year, undershooting the rise of Germany’s Dax index by more than half.

            It is a remarkable reversal of fortunes. Until a couple of years ago Deutsche Bank seemed to have emerged from the global financial crisis in better shape than many rivals, thanks to shrewd management, luck and a benign regulatory environment in its home market.

            Now that tailwind has changed direction. Late last week, it emerged that the one body Deutsche could often count on for support has turned hostile. On Friday the Financial Times revealed details of a scathing report from BaFin, Germany’s financial watchdog, into Deutsche’s involvement in the the industry-wide Libor scandal. The assessment, seen by the FT, paints a damning picture of the bank’s failings and raises serious questions about its management and governance.

            Other banks have already been hit by the Libor scandal, many paying big fines and some, such as Barclays, even losing top managers. But BaFin’s criticism of a bank long synonymous with German economic prowess could not come at a worse time. For John Cryan, who succeeds Mr Jain as co-chief executive on Wednesday and will take sole charge when Mr Fitschen (who has been caught up in a German fraud trial) steps down next May, this fresh reputational blow compounds a number of operational problems facing the bank.


            Greek default, Deutsche Bank and Credit Suisse

            FT podcast

            Martin Arnold and guests discuss the potential impact of a Greek default , the German regulator’s scathing report on Deutsche Bank’s involvement in the libor scandal, and what Tidjane Thiam’s arrival as chief executive means for Credit Suisse.

            To an extent, it is the kind of challenge that this 54-year-old Briton is used to. Mr Cryan became chief financial officer of UBS near the height of the financial crisis in 2008 and spent the next three years battling to prevent Switzerland’s largest bank from collapsing. By the time he left in 2011, UBS was on its way back to financial health, and Mr Cryan had won numerous admirers.

            “UBS was lucky to have him as CFO during that very difficult time in 2008,” says a former colleague. A close friend says: “He has an enormous brain.”

            Deutsche’s beaten-down share price jumped on his appointment, suggesting that investors are optimistic. On Wednesday, he will give the first glimpse of his priorities when he sends a memo to staff outlining his early thoughts.

            “The most important thing Mr Cryan has to do is win back trust,” says Helmut Hipper, a portfolio manager at Union Investment in Frankfurt. Many investors cut their holdings of Deutsche stock in April, unconvinced by the bank’s planned new strategy and its promised
            €3.5bn of cost cuts. “He has to make it attractive to invest in the bank again.”

            Awkward questions

            BaFin’s hard-hitting report raises a number of questions for Mr Cryan. Chief among them: why did it take nearly four weeks between the bank receiving the report and Mr Jain announcing his departure? Frauke Menke, head of banking supervision at the German watchdog and the report’s author, makes it clear how little she thinks of Mr Jain, who built up Deutsche’s investment bank over a decade and was running it at the time of the alleged Libor rate-rigging.

            “I consider the failures with which Mr Jain is charged to be serious. They display inappropriate management and organisation of the business,” Ms Menke wrote. “He must be charged with the fact there was an environment . . . which favoured behaviour involving the exploitation of conflicts of interest.”

            The bank and Mr Jain reject several of the report’s findings and insiders deny that it was the cause of his exit — even if many outside observers think otherwise. As the head of a big European fund manager says: “It looks very bad for Anshu — until now it looked as if he had gone of his own accord.”

            But there are also questions for the new guard. Why did Deutsche’s supervisory board decide to give Mr Jain new responsibilities in a management shuffle in May, more than a week after it received the regulator’s findings but before the bank had responded? Veteran investment banker Paul Achleitner chairs the supervisory board and Mr Cryan sat on it for two years.

            A senior lawyer says the list of people in German regulators’ line of fire could include Mr Achleitner, who some think failed to take sufficiently swift or serious action once he learnt of the Libor manipulation. “Achleitner is somewhat exposed on this,” says the lawyer. Deutsche dismisses the suggestion and a senior executive describes the chairman as a “tremendous asset”.

            Even if there are no more top-level casualties, investors say Mr Cryan may need to instigate a management clear-out to remove the taint of the Libor scandal and signal an intent to clean up the bank’s culture.

            “The only way John Cryan can succeed is by starting with a deep clean, potentially raising capital and bringing some top new guys in,” says Davide Serra, an investor in Deutsche’s debt through his Algebris fund. “The group will be fine. It has a unique base of German and European clients that it can service around the world. But what is obvious to me is that it needs an overhaul to change the culture to a commercial bank. It should be the JPMorgan of Europe, not the Goldman Sachs.”

            Several members of Deutsche’s executive committee — one notch below the main management board — are named in a critical light in the BaFin report, including Stephan Leithner, its European chief executive; Michele Faissola, head of asset and wealth management; and Alan Cloete, the outgoing co-chief executive of Asia.

            Frankfurt prosecutors are examining the role played by individuals connected with Deutsche’s involvement in the rate-rigging scandal — the first step in a procedure that could lead to criminal charges.


            But BaFin’s report does not conclude that the management board or the executive committee directly knew of or ordered Libor rigging by the bank’s traders, nine of whom are named in the report. The bank disputes several of BaFin’s findings, including that Mr Jain may have deliberately misled the Bundesbank. The bank also says it has fired or disciplined about 30 people involved in the wrongdoing, tightened up its control and audit functions and created a “benchmark and index control group” — independent of the trading floor — to oversee rate submissions.

            Regulatory shock

            The checks and controls were a long time coming. T+hough many banks have been found wanting in their conduct and compliance, Deutsche’s lambasting at the hands of international regulators has been a shock to the system.

            For years, the bank had benefited from a benign treatment by domestic policy makers: as the country’s only bank with a profile to match the country’s economic importance, it has sometimes been a useful government ally.

            BaFin has often been supportive rather than confrontational. “The Germans have always been very lenient on the prudential side of regulation,” says a senior regulator from a rival authority. Compared with US and UK watchdogs, BaFin has been seen as toothless.

            That leniency was evident in the run-up to the crisis and beyond. Deutsche has long operated with one of the weakest capital ratios of global peers. The bank has a reputation for aggressive risk assessment, which has helped lower its regulatory capital requirements. That different approach often gave it a competitive edge on pricing.


            In 2012, regulators in the US probed whistleblower allegations that the bank had hidden up to $12bn of derivatives losses by failing to mark down the value of assets in its books in line with the slump in markets. Had it been forced to take the markdowns, critics say, the bank’s capital position would have been untenable, forcing it into a state bailout. BaFin, which had signed off on the bank’s treatment of the assets, took no further action. Yet Deutsche ended up paying $55m to the US Securities and Exchange Commission this May to resolve the allegations without admitting wrongdoing.

            But if BaFin’s latest report on Deutsche’s wrongdoing over Libor is a guide, the German regulator is shedding its old reputation for softness. Since responsibility for the safety and soundness of eurozone banks passed last year to the European Central Bank, BaFin’s role has been reduced to that of a conduct regulator, prompting some bankers to talk of competitive tension between the two.

            As a European policy maker quips: “In conduct matters, there is a Lutheran mindset that dictates there must be punishment.”

            Still universal, but smaller

            In addition to an increasingly hostile regulatory environment, Mr Cryan has some deep strategic questions to resolve. In April, when Deutsche unveiled its strategy, it promised more details within 90 days.

            Shareholders were disappointed by the lack of detail in April — one big investor described it as “the worst” strategy presentation he had experienced — but the second deadline gives Mr Cryan some scope to adapt the plan.


            The essence of that strategy is that Deutsche will continue to be a universal, globally active bank. It will still operate in the four areas that it did before: investment banking, asset and wealth management, transaction banking and retail banking. It will also slim down.

            On the retail side, it will sell Postbank, the post office bank it bought in stages from 2008. The investment bank, which has borne the brunt of post-crisis regulation, will cut its risk-weighted assets almost in half to €150bn. Across all its operations, Deutsche aims to cut its cost base by €3.5bn, or 15 per cent. Most analysts do not expect Mr Cryan to depart from these broad outlines, at least in the short run. As he cut costs, he will also need to signal a clear strategic direction and restore bruised staff morale.

            Unhelpfully, for Mr Cryan, the cloud of regulatory intervention remains. Apart from the Libor scandal, Deutsche is also facing investigations into allegations of rigging foreign exchange markets, manipulating precious metals prices and breaching US sanctions. Having to face an aggressive German regulator on top of his other challenges is the last thing Mr Cryan needs.

            European shake-up: Rivals face similar task in rebuilding brands


            Within hours of Tidjane Thiam starting as chief executive of Credit Suisse last week, a colleague joked that he should place a bet with Europe’s two other new bank bosses — at Deutsche Bank and Standard Chartered — on whose share price would do best.

            There are striking parallels between the three new faces in European banking. They are all outsiders. Mr Thiam joined from the UK insurer Prudential, while John Cryan arrived at Deutsche after a spell at the Singapore investment fund Temasek and Bill Winters came to StanChart from running his credit fund Renshaw Bay.

            The three banks came through the financial crisis in reasonably good shape compared with their rivals. But they have recently flagged and need a strategic rethink. A heavy dose of cost-cutting, a shift towards higher return activities and a drive to improve relations with regulators are expected to feature in the plans of all three men.

            Investors say Mr Cryan has the toughest job of the trio. He was already on Deutsche’s supervisory board when it signed off on the five-year strategy, outlined in April, so he is unlikely to change much.

            But it has to deal with tough competition from Goldman Sachs and JPMorgan, which are benefiting from a recovering US market. Mr Cryan, like the arrivals at Credit Suisse and StanChart, also faces concerns about his bank’s capital levels. Analysts are already speculating about who will be the first to announce a rights issue. But some investors worry that Mr Cryan lacks the leadership qualities of Mr Thiam or Mr Winters.

            “Running Deutsche Bank is one of the hardest jobs in European investment banking,” says a top 20 shareholder. “We think John will be able to rebuild relationships with regulators. But there is a residual question whether at a managerial and charismatic level he can exhibit the leadership we think Deutsche needs to achieve its targets.”

            Greeks pitch IMF into uncharted territory

            Posted on 30 June 2015 by

            IMF Go Home" on corrugated metal fencing outside the University of Athens in Athens, Greece

            An anti-IMF sign outside the University of Athens

            Greece was on Tuesday set to become the first advanced economy to miss a payment to the International Monetary Fund in its 71-year history — a move that could unwind decades of precedent and have consequences for the fund’s future rescues.

            Under IMF rules Greece’s failure to make a required €1.6bn payment by the close of business in Washington on Tuesday will have immediate repercussions: Athens will no longer be able to access IMF financing until it clears the debt. It also sets off a series of notifications and procedures that could eventually culminate in Greece losing its voting rights in the fund or even being kicked out.

              But the bigger consequences lie in the symbolism of a country — which in recent weeks has taken to calling the IMF “a criminal syndicate” — thumbing its nose at an institution that since its creation at Bretton Woods has acted as a lender of last resort to troubled economies.

              “The IMF has come out looking like it got caught in the midst of a game of political football where it was supposed to be the referee and it was not in control of the game,” said Eswar Prasad, a former IMF official now at Cornell University.

              The IMF has only ever been defaulted on by smaller, developing members. The last time it happened was in 2001 when Robert Mugabe’s Zimbabwe, which still has more than $110m in back debts, opted not to pay the fund. Greece’s €1.6bn is also the largest ever missed payment by an IMF member.

              There is further symbolism in the fact that Greece, which joined the IMF in 1945 and was among its founding members, is both European and far richer than many of the 188 countries that now belong to the fund.

              As such, Mr Prasad said, it serves as a reminder that the IMF has in recent years returned to what was a familiar position in the 1970s and 1980s. At that time, its major work lay in bailing out developed nations rather than the emerging economies it set out to rescue in the 1990s and 2000s.

              The missed payment comes at an awkward time for the IMF. Like its sister institution in Washington, the World Bank, the fund is fighting to retain its international relevance as emerging powers such as China set about creating rival institutions.

              FT Explainers

              The Greek Crisis

              Greece debt crisis

              Why is the euro resilient?

              ‘Grexit’ will not necessarily undermine the single currency project

              Greece’s IMF payment: When is a default not a default?

              Ten things to know as the clock ticks towards potential default

              What happens if Greece leaves the euro
              Failure of bailout talks raises fears but would Grexit be so bad?

              Douglas Rediker, who until 2012 served as the US representative on the IMF’s board, doubted whether the fund’s reputation would take a huge hit as a result of any missed payment by Greece.

              “I do not think a non-payment to the IMF is going to undermine the IMF’s stature as the leading macroeconomic policy adviser in the world,” he said.

              But, he added, “it is an unwelcome shock that is in no one’s interest”.

              The missed payment could also carry practical consequences for future bailouts.

              The IMF has long been the most senior creditor in any negotiation and its terms inviolable as a result. But there was now the possibility, Mr Rediker said, that small payments to the few Greek private creditors left could be made at a time when it is in arrears to the IMF, something that previously would been considered unthinkable.

              It also opens the door to a discussion of how Greece will repay its debts to the IMF that was also considered unimaginable just weeks ago.


              Greece defaults on its IMF debt

              Generic podcast

              Greece has become be the first developed country to go into “arrears” with the IMF. Martin Arnold, FT banking editor, discusses what the default means for the global banking system with Ferdinando Giugliano, Emma Dunkley and Laura Noonan.

              While IMF officials have insisted repeatedly in recent months that the IMF could never reschedule any Greek repayments as a matter of policy, the fund’s rules do contain a provision that Athens could explore. Under article five of the IMF’s articles of agreement the fund’s board can vote to give members more time to repay the fund if it is facing “exceptional hardship”.

              That said, the IMF has not allowed any member to delay payments since 1982, when it did just this for Guyana and Nicaragua. The “exceptional hardship” provision, which requires the approval of more than 70 per cent of the board’s votes, has also never been used before.

              The question for the IMF now is just how exceptional the Greek situation really is.

              Towers Watson Willis deal points up woes

              Posted on 30 June 2015 by

              The Willis Tower (C), formerly known as the Sears Tower, dominates the southern end of the downtown skyline on March 4, 2015 in Chicago, Illinois. The building, completed in 1973, was the world's tallest for more than two decades. It is reported to be up for sale with an asking price of $1.5 billion. (Photo by Scott Olson/Getty Images)©Getty

              Joe Plumeri, the former Willis chief executive who led the insurance broker’s New York flotation in 2001, is variously described as colourful, forcible and irrepressible — not most peoples’ idea of a deputy chief executive.

              But, under a deal struck with consultancy group Towers Watson, his successor — Dominic Casserley, the suave British management consultant who took over at Willis in 2013 — will become just that: second in command to Towers’ John Haley as CEO.

                His role in the combined company signals just how tough it has become to broker contracts between companies and insurers, and make money in a notoriously cyclical market.

                It also highlights the expanding role of consultants in advising employers and staff, at a time when individuals are being made to bear more responsibility for securing healthcare and employee benefits.

                Tellingly, Willis’ shares have barely moved in the past year while Towers’ shares are up 21 per cent, valuing the company at 22.5 times 2015 earnings.

                Willis, which is in an uncomfortable third place behind fellow insurance brokers Marsh & McLennan and Aon Benfield, has struggled to grow its share of the market of top tier corporate clients. A majority of its customers remain mid-market businesses.

                For the 187-year old company, which started out as a marine hull broker in London’s seaport, Tuesday’s deal with Towers Watson is another route to market. Towers, itself formed from a merger five years ago, advises the world’s biggest companies on issues ranging from pensions, risk, investment and employee benefits to board remuneration and recruitment. In turn, Towers’ Mr Haley hopes to use Willis’ operations in Europe and Asia to turn itself into a more geographically diverse business.

                Both chief executives have their eyes on the opportunities they see in Towers’ OneExchange — the private healthcare exchange offering multiple policies to employees and retirees.

                Healthcare exchanges have been growing rapidly in the US. In 2015, the number of people enrolled in private health insurance exchanges doubled to 6.1m compared with a year earlier, according to Accenture — continuing 100 per cent annual growth rate recorded since 2013. Accenture estimates that 40m people will obtain their cover through this route by 2018.

                Towers Watson Willis, as the combined entity will be known, said on Tuesday that its exchange had more than 1m users — and its goal was a 25 per cent share of the total market.

                In a recent note on Towers Watson, Marc Macron, an analyst at RW Baird, said the company was increasingly seen as “the highest quality provider in the space” by employers, having saved them an average of $1,400 per employee in the first year of enrolment.

                In three years’ time, the introduction of a so-called “Cadillac tax” in the US, as part of the part of the “ObamaCare” reforms, is expected to prompt more companies to move their employees on to these insurance exchanges.

                Josh Weisbrod, a partner in Bain’s healthcare practice in New York, said: “There’s been a steady trend of employees bearing a greater portion of their healthcare costs over the past few years, as employers have re-examined their role in health benefits.”

                Tuesday’s deal has been under discussion for some time. Mr Casserley said that by May, the parties were ready to finalise the terms: a merger of equals based on the market capitalisation of both groups.

                Combined, the business will have nearly 40,000 staff in 120 countries, earning about $8bn in revenues and $1.7bn in earnings before interest, tax, depreciation and amortisation. Its market capitalisation will be about $18bn.

                Revenue synergies have not been disclosed but Mr Haley and Mr Casserley have identified up to $125m in cost synergies over the next three years.

                Willis’ shareholders will get 50.1 per cent of the company. But Towers’ shareholders will get 2.649 shares in Willis, plus a $4.87 dividend — rather less than Towers’ opening share price of close to $138 on Tuesday.

                Industry analysts at The Insurance Insider said: “The all stock tie-up has triggered a mixed response from investors, as it looks set to be materially dilutive to shareholders in Towers Watson and accretive to Willis”.

                Eamonn Flanagan, insurance analyst at Shore Capital, said: “Willis appears to be struggling to deliver on its own costs savings plans without damaging its own franchise and is losing key personnel. Towers Watson appears to be highly rated at 22.5 times 2015 forecast earnings on the basis of its healthcare exchanges where we await real revenue delivery”.

                Both sides clearly have a lot to prove.

                Protect asset managers from doom-mongers

                Posted on 30 June 2015 by

                Bond Certificates©Dreamstime

                Do asset managers pose a growing systemic risk to the economy? This month the Reserve Bank of Australia and the Basel committee on banking supervision joined a growing list of regulators who think so.

                Among the scenarios the authorities worry about is a bank-style run in which investors, fearful that redemptions by others will cause the value of their funds to fall, rush to pull their money out ahead of the crowd. That, the argument goes, would damage those on the other side of the trade, and cause large price swings in financial markets.

                  The Financial Stability Board, set up by the Group of 20 leading nations to help oversee the financial system, is among the international bodies to propose labelling the largest asset managers global systemically important financial institutions, which would lumber them with stringent regulations and capital requirements hitherto visited only on the biggest insurers and banks.

                  But the risks are overstated. True, mutual funds own a hefty 20-30 per cent of corporate bonds traded on global markets, and investors can pull out at short notice. It would be hard to find buyers for a big portion all at once. But the likelihood of a fire sale is lower than armchair thinkers seem to believe.

                  Mutual funds investors have never been especially flighty, even in times of market stress. Our recent study with the Oliver Wyman consultancy shows that bond mutual funds experienced outflows of just 5 per cent after the 1994 bond rout — which was the worst period for redemptions in the past 35 years.

                  Things were no worse after 1987, the Asian crisis, the technology meltdown at the turn of the millennium, or even in the most recent crisis. Since bond mutual funds in Europe and the US on average have cash holdings of between 4 and 7 per cent of total assets, the likelihood of unmanageable outflows seems slim. The industry, it seems, is already managing the risk of a dislocation that is within the range of historical precedent.

                  Still, there is no doubt that quantitative easing and financial reform have shifted liquidity risk from banks to investors, and regulators might wish to do more than simply take comfort in the past 35 years worth of benign experience. Here, then, is a better idea: instead of applying restrictive rules that will indiscriminately inflict pain on mutual funds without doing much to make the financial system less fragile, regulators should use stress tests of the largest funds to calibrate their response.

                  Predictive models could help quantify the risk, taking into account the differences between investors. Mutual funds held in retirement savings plans have been far stickier than other investors, and yet some regulators have assumed the opposite.

                  Bouts of illiquidity are inevitable, so funds and regulators should prepare for them. How, for example, should the cost of meeting redemption requests be allocated between investors? Under what circumstances should it be permissible to bar redemptions? Such questions are best considered before a crisis, when answers will be needed urgently.

                  In contrast, labelling the largest fund managers “systemic” does not seem to capture many of the risks policy makers fear. The International Monetary Fund, for example, says it is worried about the disruption that asset managers might wreak in emerging markets. Yet only one of the 10 largest emerging market debt mutual fund managers would be captured by the proposed rules.

                  Market structure reforms could also help. Moving more business on to central clearing houses could reduce channels of contagion — so long as the clearing houses are resilient. The benefits of electronic trading networks, which normally seize up in panics, are overstated.

                  The corporate bond market and mutual funds were a source of enormous strength throughout the crisis to fund companies. We should tread carefully. Stress testing is probably the best place to start.

                  The writer is a managing director at Morgan Stanley. Betsy Graseck, also at Morgan Stanley, contributed to this article

                  ECB set to raise the heat on Greek banks

                  Posted on 30 June 2015 by

                  epa04820968 People wait in a queue to withdraw money from an ATM outside a branch of Greece's Alpha Bank in Athens, Greece, 27 June 2015. Greek Prime Minister Alexis Tsipras called for a referendum on the Greek debt deal on 05 July, during a televised speech late night on 27 June on Greek state TV. EPA/ALEXANDROS VLACHOS©EPA

                  People queue to withdraw money from an ATM outside a branch of Greece’s Alpha Bank in Athens on Saturday

                  When the eurozone’s central bankers meet in Frankfurt on Wednesday, they could make a decision which some officials fear could push one or more of Greece’s largest banks over the edge.

                  The European Central Bank’s governing council is poised to impose tougher haircuts on the collateral Greek lenders place in exchange for the emergency loans. If the haircuts are tough enough, it could leave banks struggling to access vital funding.

                    The ECB on Sunday imposed an €89bn ceiling for so-called emergency liquidity assistance, effectively putting the Greek banking system into hibernation. If, to reflect the increased risk of default, the ECB now applied bigger discounts to the Greek government bonds and government-backed assets which lenders use as collateral, that could leave banks struggling to roll over those emergency overnight loans.

                    Doubts abound in Frankfurt and Brussels about whether all of Greece’s four biggest banks can survive the week. Even with bank branches closed until next Tuesday and ATM withdrawals limited to €60, officials fear some of the country’s lenders are so weak that they will struggle to honour their customers until Sunday’s referendum, when Greeks will decide whether to accept the terms offered by international creditors.

                    The Syriza-led government’s confirmation that it will not pay the €1.5bn it owes to the International Monetary Fund on Tuesday and the expectation that Athens will fall out of its bailout programme at midnight has put the ECB in a delicate position.

                    The ECB’s senior officials have now openly acknowledged the possibility of a Greek exit from the currency union. Benoît Cœuré, a member of the ECB’s executive board, told French newspaper Les Echos in an interview published on Tuesday: “A Greek exit from the eurozone, so far a theoretical issue, can unfortunately not be excluded any more.”

                    The ECB is the guardian of the eurozone’s financial stability and is ultimately responsible for the supervision of Greece’s four largest banks.

                    But some on its policy-making governing council feel that Athens’ exit from a programme — notwithstanding its 11th-hour request for an extension and third bailout — leaves the ECB with little choice but to take actions that would, in effect, cut the Bank of Greece’s emergency support to Greek lenders.

                    Some eurozone officials fear that the position at Greece’s biggest lenders is so tight the ECB could be in danger of pushing some weaker banks over the edge if tougher haircuts are imposed.

                    There is also concern a move would effectively harden the ECB’s existing ELA cap of €89bn by leaving Greek banks with little collateral left to use for emergency loans. “This is a dangerous game unless you have perfect information, and it is far from perfect,” said one official following the situation.

                    To avoid a situation where the haircuts are so severe that banks are pushed into bankruptcy, the ECB could invoke a so-called “proportionality principle”, where European Institutions must take into account the ultimate outcomes of any policy decision they make. In this case, that would imply that the ECB would be unable under EU law to impose haircuts which could lead the Greek banking sector to collapse. Instead, the haircuts could be much smaller than market prices imply.

                    In depth

                    Greece debt crisis

                    Greece debt crisis

                    The Syriza government is facing resistance to its plans to tackle the country’s massive debt burden

                    Read more

                    “If you raise haircuts to reflect that Greece is a country in default, then you will push Greek banks over the edge,” said Huw Pill, economist at Goldman Sachs and a former central bank official. “But the ECB will be reluctant to take that step. In practice, the ECB has been quite pragmatic in the past. And where there’s a will, there’s a way.”

                    While there was broad support on the governing council for imposing the €89bn ceiling on ELA, there are splits on what to do next.

                    One camp, which includes the heads of the German and Dutch central banks, wants the ECB to pull ELA altogether straight away.

                    The ECB refused to grant ELA to Cypriot banks without an EU and International Monetary Fund programme in 2013, but the council could justify a decision to continue to provide emergency loans in the case of Greece because of the possibility of a ‘Yes’ vote in Sunday’s referendum.


                    Greece defaults on its IMF debt

                    Generic podcast

                    Greece has become be the first developed country to go into “arrears” with the IMF. Martin Arnold, FT banking editor, discusses what the default means for the global banking system with Ferdinando Giugliano, Emma Dunkley and Laura Noonan.

                    Pulling ELA completely would lead to the collapse of Greece’s banking system and the ECB’s hawks will almost certainly not get their way before this weekend’s vote, when a win for the ‘No’ camp would pile pressure on ECB to use such a nuclear option.

                    Since January banks have endured the most rapid deposit run in Greek history, a €30bn outflow that has left the sector reliant on ELA.

                    Relatively stronger banks in Greece — including the National Bank of Greece — are supporting the sector through some interbank loans, according to people familiar with the situation. Greek officials are also considering whether to further restrict bank withdrawals and transactions.

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                    Sabadell’s TSB takeover gets UK go-ahead

                    Posted on 30 June 2015 by

                    A branch of TSB©Bloomberg

                    TSB’s takeover by Banco Sabadell’s has been given the regulatory seal of approval, paving the way for the UK challenger to break into the small business banking market.

                    The UK’s city watchdogs approved the £1.7bn takeover on Tuesday, nearly four months after Spain’s fifth-largest lender originally struck the deal to acquire TSB.

                      The move will bolster TSB as a so-called challenger to the largest high-street banks, while providing a route for Sabadell into the UK retail banking sector, in a sign that further consolidation is on the cards.

                      Harriet Baldwin, the city minister, said the acquisition is “a vote of confidence in Britain’s economy and the stronger and safer banking system that we’ve built since 2010”.

                      Sabadell will pay 340p a share in cash, up from the 260p price at which the challenger floated in June last year.

                      The takeover is part of Sabadell’s strategic plan to “internationalise” in attempt to diversify away from Spain. Following the acquisition, some 22 per cent of the bank’s assets will be held outside Spain, compared with 5 per cent at present.

                      Josep Oliu, Sabadell chairman, said: “This is a milestone that enables us to enter a market with vast opportunities.”

                      Sabadell’s focus on small business lending in Spain will help TSB to launch into the equivalent UK sector. Ms Baldwin added: “We particularly welcome Sabadell’s focus on growing lending to smaller businesses and strengthening TSB’s position as a strong and effective challenger in the UK banking sector.”

                      Paul Pester, chief executive of TSB, said the “extra firepower” and “fresh perspective” will help the bank grow faster and provide a more viable challenger to the UK’s “big five”.

                      TSB unveiled a sweeping board reshuffle followed the sign off from the Prudential Regulation Authority and Financial Conduct Authority.

                      Philip Augar, Norval Bryson and Mark Fisher will step down as non-executive directors of TSB, while Miguel Montes and Tomás Varela, who occupy senior management roles at Sabadell, join the board.

                      Lloyds Banking Group was forced to carve out 631 branches to form TSB as a standalone “challenger” as a condition of EU law for receiving state aid during the financial crisis.

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                      The regulatory clearance means Lloyds has effectively completed the sale of its remaining 40 per cent stake in TSB, amounting to £680m.

                      Under the terms of the deal, Lloyds must pay £450m to migrate TSB’s technology systems. Sabadell said it expects that the contribution will be more than sufficient to meet the costs of the IT migration on to Sabadell’s platform.