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

Brussels changes tone on finance rules

Posted on 30 September 2015 by

EU commissioner Lord Hill said he had no intention of disrupting markets in pursuit of 'some theoretical perfection'©EPA

Jonathan Hill was nominated last year as a European commissioner

The EU signalled an end to six years of hitting banks and traders with tougher rules, as Brussels announced a shift towards growing capital markets and cutting red tape that hampers investment.

In a sharp change of tone from that after the 2008 financial crisis, the European Commission on Wednesday appealed for evidence of “unnecessary regulatory burdens” and “other unintended consequences” of banking and markets laws.

    The call for evidence, made by Lord Hill, European commissioner in change of financial regulation, was announced alongside details of a programme aimed at creating a capital markets union (CMU) across the EU that would make it easier for businesses to access financial markets.

    The moves are part of an EU push to improve its investment climate as the bloc tries to overcome sluggish economic growth and high unemployment.

    In addition to the CMU, the plans also include a €315bn fund aimed at long-term investment.

    The centrepiece of the CMU includes cutting the paperwork that companies encounter when issuing shares, a push to simplify the EU’s complex web of national insolvency laws and steps to revive the securitisation market.

    The EU has also pledged to look at fees and other “unjustified barriers” that make it harder for fund managers to operate across borders and to cut capital charges for insurers when they invest in infrastructure projects. Other measures seek to promote venture capital.

    “During the past five years . . . regulators at European level have concentrated on crisis management,” Jyrki Katainen, vice-president of the commission responsible for jobs and investment, told the FT.

    “Stability has come back . . . now we are in the situation where we have to use the European regulatory power to create new markets.”

    The CMU plans have been welcomed by the UK, where the City of London stands to benefit from policies aimed at making it easier for funds to operate across the common market.


    CMU push comes amid European investment crunch

    The drive comes as many businesses are struggling to find the finance they need to grow

    Read more

    Harriett Baldwin, economic secretary to the Treasury, said the measures would “strengthen financial stability and create new opportunity for financial services, which Britain is particularly well-placed to benefit from.”

    The UK has often found itself at loggerheads with Brussels, particularly when France’s Michel Barnier was the commissioner in charge of the financial services portfolio from 2010-14.

    Mr Barnier oversaw more than 40 laws aimed at toughening regulations on banks and markets, including measures to cap banker bonuses and to crackdown on short selling.

    Lord Hill, who succeeded Mr Barnier, has specific responsibility for delivering the CMU.

    He said in an interview with the FT on Wednesday that the call for evidence on regulatory problems did not signify any lack of faith in legislation adopted since the financial crisis.

    “It is not to say that the big reforms . . . the architecture we put in place [post crisis] was wrong,’’ Lord Hill said.


    A stronger capital markets union for Europe

    The euro's weakness boosted European equities

    No need to disrupt markets that work well in pursuit of theoretical perfection, writes Jonathan Hill

    Read more

    “It is to say that when you’ve done 40 major pieces of legislation in five years . . . common sense tells you that you are unlikely to have been able to work out all the consequences and interconnections. It is sensible to look at it.”

    Banks and large investors have already warned of unintended consequences from some post-crisis rules, notably that plans to boost the transparency of bond markets threaten their liquidity.

    They also fear measures to open up the market for financial research could backfire on smaller businesses.

    However, Lord Hill also said it would be a mistake for the financial services industry to see the call for evidence on regulatory problems as a free-for-all to water down post-crisis rules.

    “If people come along and simply try to re-fight old issues . . . I don’t think they’ll get very far,’’ he said.

    VW car loan securities at risk of losses

    Posted on 30 September 2015 by

    Martin Winterkorn©Bloomberg

    Martin Winterkorn with a VW Passat

    Investors in securities sold by Volkswagen may incur losses if prices of second-hand cars fall sharply due to the emissions scandal, Fitch Ratings has warned.

    Yields on the company’s asset-backed securities, which move inversely to price, have increased by around 10-15 basis points over the past week, according to market participants.

      Asset-backed securities are bond-like instruments backed by underlying loans. In this case, the securities are based on loans used for the purchase or lease of Volkswagen vehicles.

      The German company’s emissions crisis could have an impact on these complex structures — an important part of the way Volkswagen funds loans and leases to consumers and small businesses — because of the role of second-hand sales in the transaction structures.

      When people borrow money on a car, they may have the option to return the car at the end of the loan period, in lieu of a final payment. If they exercise that option, the loan is discharged and the car company’s finance arm reclaims the vehicle.

      The car company then needs to sell the car to repay investors who have funded the initial loans through securitisation transactions.

      “The risk is market prices of the vehicles turn out to be substantially lower than was anticipated,” said Andreas Wilgen, head of consumer ABS at Fitch. “But they would need to drop a lot to have a noticeable impact on ABS transactions,” he added. The rating agency suggested the impact would not be “direct and immediate”.

      Volkswagen is the largest issuer of auto ABS in Europe. Four of the company’s European ABS deals that Fitch rates are exposed to “residual value risk” — meaning investors in the securities are potentially at risk if the underlying price of the cars falls sharply.

      The majority of the company’s ABS transactions do not take on “residual value” risk and therefore do not depend on resale at maturity, but only the ability of the borrower to service his or her debt.

      Securitisation deals are made up of huge numbers of contracts, and it is unclear how many cars may be affected by the emissions scandal.

      “Everyone in securitisation is currently asking how many cars in each transaction are affected,” Mr Wilgen said. He said the contracts differed significantly across different jurisdictions and regions. In the UK, a small proportion of borrowers choose to return the car at the end of the loan period, although “expectations have now changed”.

      “Clearly people spend a lot of time and money in ABS trying to get transactions remote from the solvency of the seller. That’s a pretty critical definition of what securitisation is,” said Andrew Dennis, a portfolio manager at Aberdeen Asset Management. He added that the market movements were “not cataclysmic but not comfortable”.

      Last week it emerged that the European Central Bank is suspending purchase of Volkswagen’s ABS as part of its purchase programme.

      The company was able to issue a Spanish ABS deal last week, despite the unfolding emissions scandal. Volkswagen said it did not intend to change its “frequent issuance pattern”.

      Stamp duty receipts top pre-crisis high

      Posted on 30 September 2015 by

      The amount of stamp duty raised from British home sales has hit its highest level since the financial crisis — but is set to fall next year.

      The government raised £7.5bn from the tax in 2014/15, according to figures released on Wednesday, topping the previous record of £6.7bn in 2007/08.

        This is widely expected to be the high point for the tax take. A government reform last December has exacerbated the slowdown at the top end of the London housing market, which generates more than one pound in every five raised by stamp duty.

        The reform, which replaced the previous slab structure with a sliding scale, means that purchasers of properties below £1m pay less tax than previously — but those buying more expensive homes now pay considerably more.

        Chancellor George Osborne in last year’s Autumn Statement said the move would tackle “a badly designed tax on aspiration”.

        In response, the Office for Budget Responsibility reduced the amount it expected the government to make from the tax by £1.7bn in 2015/16 and £2bn by 2016/17 — 17 per cent of the forecast total receipts in that year.

        Britain’s property market boom pushed sales of the most expensive homes to a record level last year. Some 19,000 properties worth more than £1m were sold in 2014 — up from 15,000 the previous year and for the first time topping the 16,000 level reached in 2007.

        But house prices in London’s most expensive areas have begun to fall for the first time since the financial crisis, as the tax rise curbs demand and triggers fears that the capital’s luxury market has peaked.

        Prices in central London’s most expensive areas such as Westminster and Kensington & Chelsea fell by 4.6 per cent in the year to September, according to figures from estate agent Savills.

        Across London’s pricier districts — including outlying areas such as Richmond and Hampstead — there was a sharp difference between the performance of cheaper properties and more expensive ones. Homes worth under £1m actually increased in value by 3 per cent in the past year, while those above £2m fell by 2.6 per cent.

        Lucian Cook, head of residential research at Savills, said the tax rise was likely to continue to constrain the top end of the market.

        “Many buyers are expecting a discount on last year’s prices at least equivalent to the additional tax,” he said. “By contrast, stamp duty changes have benefited properties in lower tiers of the prime market, which have performed more strongly.

        He added that it was questionable whether the OBR’s reduced forecasts for stamp duty receipts would be met.

        “Receipts have become increasing reliant on the top end of the housing market, where activity has been most subdued post stamp duty reform,” he said. “The cut in stamp duty for the majority of the housing market has failed to stimulate any significant additional market activity.”

        Traders price Glencore bonds like junk

        Posted on 30 September 2015 by

        An illuminated logo sits on a sign outside Glencore Xstrata Plc's headquarters in Baar, Switzerland, on Thursday, Aug. 15, 2013. Glencore Xstrata, the mining company created in a $29 billion deal three months ago, said second-quarter copper output increased 22 percent after it boosted production from mines in Africa. Photographer: Gianluca Colla/Bloomberg©Bloomberg

        Traders have started to quote prices for Glencore debt in a manner normally associated with lower-quality paper, commonly known as junk bonds.

        The shift in pricing dynamics in the private over-the-counter markets this week came as shares in Glencore swung wildly as investors worry about the ability of the miner and trading house to manage its debt pile in a commodity downturn.

          The group retains an investment grade credit rating according to rating agencies and its $36bn of outstanding bonds have up to now been bought and sold on the basis of their yield, which moves inversely to price.

          But this week, dealers and investors say trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value. This form of pricing is generally used for junk bonds, which have a higher risk of default.

          Pressure on the company’s debt and equity has intensified as analysts debate the effect of falling raw materials prices and rising debt costs.

          One investment bank warned on Monday that the group’s equity might be worthless if commodity prices did not recover swiftly.

          The company said it retained “strong lines of credit and access to funding”.

          Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors.

          A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13 per cent yield on an annual basis.

          Analysts at eye of Glencore storm speak of their ‘boldest call’

          Bearish note, combined with investor concerns over China, sparked share price rout

          Read more

          Prices for longer-term debt fell even further as investors began to assess the potential recovery values for Glencore debt, most of which is unsecured.

          “Everything beyond five years is trading around or below 70 cents on the dollar,” Zoso Davies, a credit strategist at Barclays, said.

          Prices for investment grade debt are normally quoted on the basis of prospective income, either in terms of the spread over and above that available from government debt, or in terms of the yield available.

          The yield on the Bloomberg European investment grade index is 1.35 per cent.

          Trading in corporate bonds tends to be more cumbersome and infrequent than the stock market, where Glencore shares worth $20bn were traded on Tuesday.

          Investors and dealers estimated the volume of Glencore bonds changing hands on the same day to be measured in the hundreds of millions of dollars, rather than billions.

          The company said: “Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long-term relationships we have with the banks.

          “We remain focused on running efficient, low-cost and safe operations, and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future.”

          In addition to its bonds, Glencore has more than $35bn of loans outstanding.

          One investor pointed to the company’s more than 300 banking relationships, saying that the willingness of its bankers to continue extending credit lines to fund the trading business would determine the future of Glencore, and that so far, it appeared to retain their confidence.

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          Eurozone deflation stirs talk of QE boost

          Posted on 30 September 2015 by


          The eurozone has spent much of the past year trying to shake off the risk of falling into Japanese-style deflation.

          Last January, the European Central Bank announced a programme of quantitative easing, buying up to €60bn in assets per month, including government bonds, as it sought to return inflation to its target of close to 2 per cent.

            So when Eurostat, the European statistics agency, showed that inflation had slipped back into negative territory in September — with prices 0.1 per cent lower than a year earlier — it looked like the past nine months had been wasted.

            With inflation driven down primarily by lower energy costs, however, economists remain confident that the eurozone can still avoid a cycle of persistent falling prices. But the ECB may still be forced to expand QE, especially if the recent slowdown in emerging markets continues — hitting eurozone exports hard.

            “Just in the way that a small positive print is not enough to pop the champagne corks, a small negative reading does not on its own presage a broader deflationary spiral,” said Timo del Carpio, European economist at RBC Capital Markets. “The far bigger concern, in our view, still relates to weak underlying price pressures. The ECB will be increasingly wary about the downside risks to its mandate.”

            The fall in inflation — which was from 0.1 per cent in August — marks the first time in six months that the 19-nation currency bloc has experienced deflation. The driver was energy prices, which were 8.9 per cent lower than a year earlier, due in part to a slump in the oil market.

            However, core inflation, which strips out the most volatile items such as energy, stood at 0.9 per cent, the same as in August. Food, alcohol and tobacco prices were up 1.4 per cent in September, while the price of services rose 1.3 per cent, marginally higher than in August.

            Economists were generally encouraged by the resilience of core inflation, as well as by the improvement in services inflation.


            Increase in food, alcohol and tobacco prices in September

            “The acceleration in services inflation is good news because it comes amid [a] slowly normalising labour market and wage developments — labour cost is the main determinant of services inflation,” said Marco Valli, chief eurozone economist at UniCredit, a bank.

            But analysts point out that such positive news has to be balanced against an increasingly uncertain outlook.

            The fall in oil prices is expected to continue to boost domestic demand, as consumers feel that their pay cheques can go further. But the recovery is still too weak to generate the kind of sustained job creation which is needed for a broad-based acceleration in consumption.

            On Wednesday, Eurostat also said that unemployment in the currency bloc remained high at 11 per cent in August, the same level it stood at in July.

            “There is a recovery, and jobs are being created, said Guntram Wolff, director at Bruegel, a think-tank. “But it is not a satisfying recovery, and the pace of employment growth is too slow.”

            Externally, companies fear that the slowdown in emerging markets, China in particular, is threatening to reduce the pace of export growth.


            Unemployment in the currency bloc in August

            The other concern relates to the resilience of the euro, which strengthened against the dollar after the US Federal Reserve delayed its first increase in interest rates since the crisis.

            Were the Fed to press ahead with “lift-off” in October or December, this would help the ECB by weakening the single currency, which would in turn push up price pressures.

            But the central bank may feel that even this is not enough: future inflation expectations have been slipping again, and the central bank may want to raise them again before they go too low.

            For this reason, some economists believe that the ECB could step up its asset purchases. Standard & Poor’s said on Wednesday that the central bank could extend quantitative easing beyond the planned cut-off in September 2016 until mid-2018, swelling the programme to as much as €2.4tn.

            However, the ECB is likely to wait until December at least before taking any further step.

            Mario Draghi, ECB president, made it clear last week that the central bank was prepared to take further action if there was a risk of the slowdown becoming entrenched.

            “The [ECB’s] Governing Council will look to cement expectations over the continuation of its asset purchase programmes beyond their nominal end date of September 2016,” said Mr del Carpio. “However, it may not be until the December meeting — when new staff forecasts are released — that the Governing Council is prepared to make such a judgment.”

            Torrid quarter ends in broad stock rebound

            Posted on 30 September 2015 by

            A large computerised display of the British FTSE 100 index is pictured in London, on September 8, 2008. The London Stock Exchange said Monday it had been forced to halt trade after experiencing connectivity problems with some clients. "There was a connectivity issue this morning which affected some clients so we have suspended connectivity in order to bring it back in a controlled fashion," an LSE spokeswoman told AFP. At its suspension the FTSE 100 showed a gain of 3.81 percent at 5,440.20 points. AFP PHOTO/Shaun Curry (Photo credit should read SHAUN CURRY/AFP/Getty Images)©AFP

            An outbreak of bargain hunting at the end of a torrid quarter for stocks lifted nearly every FTSE 100 constituent on Wednesday, with Glencore among the best gainers.

            Shares in the Swiss-based miner and commodities trader — which have marched lower in lockstep with falling metals and oil prices — bounced back 7 per cent to 85.8p. Only J Sainsbury made a stronger gain, after the supermarket group lifted its profit guidance.

              Wednesday’s recovery cut into Glencore’s decline over September, which reached 45 per cent by the end of the previous session. Over the third quarter, the shares are down 69 per cent. The company also took the unusual step of issuing a statement saying it remains “operationally and financially robust”, which followed a flurry of doom-laden analyst commentary on the company.

              Wider mining stocks made more modest gains for the day, also limiting longer-term losses. Antofagasta was 1 per cent higher at 496p, while BHP Billiton regained 0.9 per cent to 987½p. Anglo American was up 0.8 per cent at 547.6p.

              Overall, the main London stock index rose 1.8 per cent to 6,014.39, a gain of 105 points. But it came after a decline of 10.6 per cent from the start of July to the close of the previous session, leaving it on course to record its steepest quarterly decline since 2011. Over the calendar year, the FTSE 100 is down 10 per cent.

              The international FTSE Eurofirst 300 was up 2.2 per cent at 1,365.37, after a loss of 11.5 per cent over the third quarter to Tuesday’s close.

              There were warnings that Wednesday’s respite could prove fleeting, with investors’ attention starting to turn back towards the macroeconomic picture and closely watched US jobs numbers due out at the end of the week.

              “The commodity glut and decelerating emerging markets is not going to go away any time soon,” said Mike McCudden, head of derivatives at Interactive Investor.

              “Sentiment can change at the flick of a switch these days. Equities should start to cool down as traders begin to get nervous ahead of key jobs data from the US on Friday.

              Michael Hewson, chief market analyst at CMC Markets, said: “The ‘buy the dip’ strategy, has by and large, worked extremely well since 2009. When commodity prices bottomed in 2008, the combined effects of a Chinese stimulus program and US quantitative easing saw a swift about turn in prices in a matter of months.

              “But it’s hard to see something similar happening now with oil and mining companies taking a scalpel to capex in large chunks [and] investors are having to contend with a US Federal Reserve looking to tighten policy and not loosen it.”

              Digital option not for the faint-hearted

              Posted on 30 September 2015 by

              Launch of Tesco Click and Collect - Rayners Lane Tube Station - 19/2/14©S. Saunders/Digital Nation

              Tesco was an early adopter of online sales with Click and Collect

              Digital transformation is not for a faint-hearted leadership team. Indeed, the authors of a recent study by Deloitte, the management consultancy, and MIT Sloan Management Review, the business journal, suggest that risk-taking needs to become the cultural norm for companies with digital aspirations.

              “For every Google, Amazon or Facebook taking major risks, hundreds of companies are still playing it safe,” says Phil Simon, a report contributor and business author.

                In doing so, they are simply giving digital disrupters further opportunities to outpace them. “Today, the costs of inaction almost always exceed the costs of action,” Mr Simon says.

                Textbook cases of businesses that paid the ultimate price for failing to anticipate the effects of digitisation would include Borders bookstores, Blockbuster video shops and Kodak, the photographic technology company.

                In the UK, WM Morrison supermarkets did not introduce online shopping until 2014, forcing it into a painful game of catch-up with digitally-savvy competitors such as Tesco and Waitrose.

                The pace of digital disruption is “sweeping, breathtaking and accelerating,” said Richard Fairbank, chief executive of Capital One, in a July earnings call about the US bank’s second-quarter results. “To win in the digital world, we can’t simply bolt . . . channels on to the side of our business or [transfer] analogue banking services to digital channels.” Instead, digital must become the centrepiece of the bank’s strategy.

                Some business leaders, however, seem happy to simply add digital channels to existing systems and processes. The danger with this kind of thinking, say experts, is it allows digital disrupters to maintain their technological lead. Businesses such as Uber, Airbnb and Netflix were built on — and for — the digital age and have mobile and social media technologies at their heart.

                Such newcomers do not have older systems and processes to worry about, and can focus on fine-tuning customers’ digital experiences. As a consequence, they will continue to disrupt more established and less agile competitors.

                Martin Gill, an analyst with Forrester Research, an advisory firm, says digitally focused companies need to put their organisation’s purpose and underlying business model first.

                Too often, he says, established companies find themselves hampered by existing ways of doing things.

                Philippe Trichet, digital expert director at Boston Consulting Group, the business consultancy, agrees: “Companies need to be prepared to change everything — how they think and how they breathe.” In his previous role as vice-president of customer experience at Schneider Electric, the industrial equipment company, Mr Trichet was involved in a digital transformation project that involved 30,000 employees in more than 90 countries.

                “What made a big difference for us was that we had clear goals and the effort was led from the top,” he says.

                Companies need to be prepared to change everything — how they think and how they breathe

                – Philippe Trichet, digital expert director at Boston Consulting Group

                From the chief executive down, a common vision of the benefits the management wanted to achieve was communicated to staff. Says Mr Trichet: “It was made clear that digital transformation would affect everyone, so everyone needed to be involved in delivering it.”

                The project was deemed a success, despite significant challenges, including a large legacy IT estate and the need to join up fragmented sales, marketing and customer support processes.

                The programme, says Mr Trichet, was not just about rolling out new IT projects, but about rethinking business processes to achieve greater agility, lower costs and greater customer satisfaction.

                He adds that it resulted in increased revenues from cross-selling, improved satisfaction from routing customer service online, and increased efficiency by consolidating 145 call centres into 45.

                Case studies: Some technological transformations that have gone well — and others that crashed

                Failure: BBC’s Digital Media Initiative

                Too much focus on technology, not enough on change management — that was what scuppered this initiative, according to an investigation by consultancy PwC.

                The programme, which was cancelled in May 2013 and resulted in an asset writedown of £100m, lacked an executive steering committee to assess progress against agreed measures of quality, time and cost.

                The project “focused on technology risks and issues, rather than [driving] operational change to business practices in the BBC”, said PwC.

                Success: Capital One

                According to a mid-2014 report from Capgemini Consulting, this US bank “has an unflinching focus on digital”, with about 75 per cent of its customer interactions now handled digitally.

                The bank has also been buying talent: in 2014, it acquired Adaptive Path, a San Francisco specialist in high-tech user experience design; in July it bought Monsoon, a Californian digital design company. “With its radical digital approach, Capital One is not just challenging its own wisdom, but that of the entire financial services industry,” say the authors of Capgemini’s report.

                Failure: The Co-operative Bank

                In 2013, Co-op Bank cancelled an IT transformation programme resulting in a £300m investment write-off. This became a part of Sir Christopher Kelly’s independent review into the bank’s crippling capital shortfall. The project’s problems, he wrote, included “changes to leadership, a lack of appropriate capability, poor co-ordination, over-complexity, under-developed plans in continual flux and poor budgeting.”

                Co-op Bank has since launched a £60m digital catch-up scheme that has had its own problems, according to consultancy Verdi.

                Success: John Lewis

                UK retailer John Lewis has been one of the most successful companies in the fightback against online retailers, creating a “bricks and clicks” experience. Online sales account for about 33 per cent of revenues.

                While half its customers buy in store, the rest combine experiences through hybrid services that let customers buy online but collect in store.

                Last Christmas, group sales were up 5.8 per cent year on year to £777m in the five weeks to December 27, helped by a 19 per cent rise in the value of online sales year on year.

                McKinsey warns banks on finance services

                Posted on 30 September 2015 by


                The digital revolution sweeping through the banking sector is set to wipe out almost two-thirds of earnings on some financial products as new technology companies drive down prices and erode lenders’ profit margins.

                This is one of the main predictions by the consultancy McKinsey in its global banking annual review to be published on Wednesday, portraying banks as facing “a high-stakes struggle” to defend their business model against digital disruption.

                  McKinsey said technological competition would reduce profits from non-mortgage retail lending, such as credit cards and car loans, by 60 per cent and revenues by 40 per cent over the next decade.

                  It predicted a smaller, but still significant, chunk of profits and revenues would be lost from payments processing, small and medium-sized enterprise lending, wealth management and mortgages. These would decline between 35 and 10 per cent, McKinsey said.

                  Philipp Härle, co-author of the report, said: “The most significant impact we see in price erosion, as technology companies allow delivery of financial services at a fraction of the cost, and this will mostly be transferred to the customer in lower prices.”

                  He said most technology companies were focused on picking off the most lucrative parts of banks’ relationships with their customers, leaving them as “dumb” providers of balance sheet capacity.

                  “Most of the attackers do not want to become a bank,” said Mr Härle. “They want to squeeze themselves in between the customer and the bank and skim the cream off.”

                  McKinsey said banks last year made $1.75tn of revenues from origination and sales activities, on which they earned a 22 per cent return on equity, while they made $2.1tn of revenue from balance-sheet provision at a return on equity of only 6 per cent.

                  The consultancy said the industry had two choices. “Either banks fight for the customer relationship, or they learn to live without it and become a lean provider of white-labelled balance sheet capacity,” it said.

                  While predicting upheaval in the future, McKinsey said there was no evidence that digital disruption had started to eat into banks’ market share yet. Banks’ share of global credit provision has been constant over the past 15 years.

                  chart: Global banking revenues by activity, 2014

                  Mr Härle said one factor that could slow down the erosion of banks’ market share was if regulators decided to clamp down on the disrupters by imposing similar capital and compliance rules as those faced by banks.

                  McKinsey calculated that profits from all banks reached a record of $1tn last year, helped by rapid growth in Asia and particularly in China and as US lenders rebounded from the financial crisis. The average return on equity was stable at 9.5 per cent, as cost-cutting offset falling margins in the low interest rate climate.

                  Almost two-thirds of developed market banks and a third of those in emerging markets earned a return on equity below their cost of equity and were valued below their book value.

                  “Many in the industry are waiting for an interest rate rise or some other structural lift to profits, but even if rates rise, that will be insufficient to fundamentally improve economics,” McKinsey said. “We expect margins to continue to fall through 2020, and the rate of decline may even accelerate.”

                  Sydney faces wall of Chinese money

                  Posted on 29 September 2015 by

                  an artist’s impression of the Barangaroo development in Sydney©Lend Lease

                  Harbour views: an artist’s impression of the Barangaroo development in Sydney

                  It took just three and half hours to sell the 159 waterfront apartments at the glitzy Barangaroo development on the Sydney harbour front, with almost a third of them snapped up by overseas investors.

                  Andrew Wilson, managing director of Lend Lease, Barangaroo South, says: “We received global enquiries from a range of buyers including professionals and executives, expatriates looking to return home, investors and homeowners looking to downsize for a more convenient lifestyle.”

                    The off-plan sale in October 2013 was the first stage of a A$6bn retail, office and residential development. Lend Lease is preparing for the launch of a further 750 apartments, which will provide views of Sydney’s iconic opera house and harbour bridge.

                    Interest among foreign buyers remains strong, the company reports.

                    The value of foreign investment in Australia’s residential property almost doubled to A$34bn in 2013-14, the latest year for which data has been published. And, for the first time, China became the largest source of foreign investment — leapfrogging the US — following a surge in government approvals for purchases in the property sector.

                    “There is a lot of appetite in China for Australian property, particularly in Sydney and Melbourne,” says Esther Yong, director of, an Australian Chinese language property portal that organises seminars for investors in cities across China.

                    She says that a downturn in the Chinese property market, a desire by investors to move their money out of China to diversify their investments, and growth in the number of Chinese either moving themselves or sending their children to school in Sydney and Melbourne have stoked the enthusiasm.

                    “With an uncertain environment in China, many feel it is safer to get their money out of the country,” Ms Yong adds. “We also see many buyers for property near good schools and universities.”

                    The wave of Chinese money flooding into Sydney and Melbourne in recent years has sparked a debate over the impact on the local housing market. Some say it is forcing prices up and preventing first-time buyers from gaining a foothold on the ladder. Others say it is driving a surge in building, which is lifting an otherwise faltering economy.

                    The data suggest it is local investors who are pushing up prices the most

                    – Saul Eslake

                    House prices in Australia’s two biggest cities, Sydney and Melbourne, jumped by 18.4 per cent and 11.5 per cent respectively in the 12 months to the end of July. In Sydney over the past year more than a third of homes sold for more than A$1m, according to CoreLogic RP Data, a research group.

                    “In Sydney and Melbourne, foreign buyers probably are pushing up prices somewhat, but they also appear to be adding to the supply of apartments,” says Saul Eslake, an independent economist. “The data overall suggest it is local investors pushing up prices the most.”

                    Investors account for half of home loans issued in Australia, prompting regulators to warn about the dangers of a housing bubble and to force banks to hold more capital against their mortgage book. Australian Bureau of Statistics data show that the percentage of property purchases by first-time buyers fell to 13.7 per cent in February, down from 18.5 per cent in mid-2012 and a high of 30 per cent in 2009.

                    Under existing rules, foreign purchasers can buy new properties but need regulatory approval to buy established properties. But until recently there was little scrutiny or enforcement of these laws, enabling some to buy existing homes.

                    But that is changing as the government responds to the concerns of first-time buyers. In August, Joe Hockey, Australia’s then treasurer, unveiled regulations promoting greater oversight of foreign buyers, a fee system to pay for increased checks on overseas buyers, and criminal penalties of up to A$135,000 for individual lawbreakers.

                    Australian authorities have already ordered several foreign owners — including a Chinese billionaire who bought a A$39m waterfront Sydney home — to divest themselves of properties they were alleged to have bought illegally.

                    “Foreign investors must obey the rules,” says Mr Hockey, who has given any foreign buyers who may have broken rules until the end of November to come forward or face possible criminal sanctions.

                    Michael Zhu, a real estate agent with House 18, which sells property to high-end Chinese buyers, says the new rules may scare off investors: “There are plenty of markets in the US or Europe that will welcome Chinese money.”

                    Mr Zhu says stock market jitters in China may also slow investment, but not everyone agrees. Credit Suisse predicts A$60bn of Chinese investment in Australian housing up to 2020. It says the new rules on foreign buying will only hit demand marginally and notes the recent devaluation of China’s currency could lead to a short-term spike in demand.

                    “Expectation of further renminbi weakness could bring forward demand for Aussie housing, as investors rush to get their currency out of the country before it is devalued further,” Credit Suisse reported on 12 August.

                    Buying off-plan attracts Chinese investors

                    Posted on 29 September 2015 by

                    Elizabeth Stribling

                    Elizabeth Stribling sold half the Plaza Hotel apartments to foreigners

                    Tucked away at the eastern end of so-called Billionaires’ Row in Manhattan — a stretch of glittery skyscrapers that house members of the world’s elite — is number 252 East 57th Street.

                    It boasts curved glass sides, panoramic views of Central Park, a hydrotherapy spa and a covered driveway to offer complete privacy and discretion to celebrities and diplomats on what is also known as America’s Monopoly board.

                      More than a quarter of its 93 units have been snatched up, even though the tower will not be completed for another year.

                      “The Chinese like to buy off-plan,” says Elizabeth Stribling, chairman of Stribling & Associates, which is marketing the development. “It makes them feel they’re getting the best offering.”

                      Ms Stribling should know: she sold the Plaza Hotel apartments in 2007, about half of which went to foreigners.

                      “They see America as a safe haven,” she says. “With market turbulence right now, it’s even more of a reason to diversify their portfolios.”

                      For the past decade, nomadic billionaires have poured their money into US property, particularly in Manhattan, which is seen as a liquid market that can only go up.

                      Meanwhile, New Yorkers bemoan that the Chinese are collecting condos as trophies and leaving them empty, inflating prices and making housing unaffordable for locals.

                      But as the US bounces back from 2008’s crippling housing crash, two things are apparent: China’s shopping spree has become both more voracious and more luxurious.

                      This year, the Chinese for the first time became the biggest foreign buyers of US residential property, in terms of units, dollar volume and price paid, according to a report from the National Association of Realtors, which tracks property purchases across the country.

                      In the 12 months to the end of March, Chinese buyers spent $28.6bn on residential real estate in the US, more than double that spent by Canadians, the next biggest source of foreign buying — a far cry from 2011, when the Chinese spent $7bn on US real estate, or 2000 when they spent $50m.

                      And they are spending big.

                      In recent years, China’s shopping habits have become more voracious and more luxurious

                      The Chinese bought homes that were more than three times pricier than Americans, paying on average $831,800 per property — about 70 per cent of it paid in cash — compared with $255,600 for a US buyer.

                      Amid stock market gyrations, anti-corruption campaigns and a slowing economy at home, the Chinese upper class has in the past two years been keen to park its money overseas.

                      “In the 5,000 years of China’s history, never have so many Chinese quietly moved so much money out of the country at such a fast pace,” wrote RealtyTrac in a research note last month.

                      “Nowhere is that . . . capital flight more prevalent than into the US residential real estate market, where billions are pouring into the American dream.”

                      Stephen Shapiro, vice-president of New York capital markets at Jones Lang LaSalle, says: “They aren’t necessarily being bought for occupancy. They’re using it as a bank. If you live in China, or Russia, or Venezuela and you need to get your currency out of there . . . buying real estate in New York has proven [in] every cycle as the safest investment.”

                      China underpinned New York’s re­covery because, even though local buyers pulled back, Chinese appetite for condos remained strong, with average home prices in New York exceeding 2006 peak levels. This led to a swath of new luxury developments breaking ground.

                      When the 75-storey number 175 West 57th Street was completed last year, it became the tallest residential tower in New York City. A few months later, 432 Park Avenue, another super luxury skyscraper on Billionaires’ Row, became the tallest.

                      Developers saw these high-flying projects and piled in, says Andy Gerringer, managing director of The Marketing Directors, a real estate marketing company.

                      “It’s a herd mentality,” says Mr Gerringer. “Everybody has been chasing the super-high end.”

                      But despite the doubling of land prices in the past few years, luxury has become ever more ubiquitous. With higher costs, it is harder for developers to justify new towers that do not command the highest prices.

                      More than 80 per cent of new US multifamily units — or apartment towers — built in the past two years have commanded rents in the top fifth of the market, according to CoStar, a property research group.

                      “The air is very thin up there,” says Mr Gerringer. “There are only so many people that can afford $20m apartments.”