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

Investors look toward BoE for rate action

Posted on 31 July 2016 by

Pedestrians walk past the Bank of England (BOE) in the City of London, U.K., on Thursday, July 14, 2016. The Bank of England left its key interest rate at a record low and signaled it’s readying stimulus for August as the economy reels from Britain’s decision to quit the European Union. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

Here are the key questions we are asking at FT Markets for the coming week.

What kind of easing can we expect from the Bank of England?

    UK monetary policy is expected to get looser after the Brexit vote easing. So how much room does the BoE actually have to act? A cut in the current 0.5 per cent base rate to at least 0.25 per cent, and a resumption of quantitative easing are favoured by many economists and also the gilts market with 10-year yields at a record low of 0.7 per cent.

    A base rate cut to zero may be a step too far as it likely sucks short-dated gilt yields below zero and hits banks, already at risk from a deeper economic downturn. Then there is the pound. Down some 12 per cent post-Brexit vote, the weaker currency has helped soften the blow, bolstering share prices for UK companies with significant foreign revenues.

    Plenty for the BoE to think over and the lack of economic data quantifying the hit from the Brexit vote also doesn’t make life easy for policy officials at this juncture. No matter the strong market expectation of an easing this week, there may be something to be said for the BoE waiting a little longer before pulling the trigger.

    Will oil break below $40 a barrel?

    Black gold has quickly lost its lustre as investors fret anew about a supply glut. The price slide is also exerting pressure on shares and debt prices across the energy sector. The S&P energy sector slipped some 4 per cent in July as the broad market rallied over 3 per cent.

    In early June, oil was at its high for 2016 above $50 a barrel. The subsequent 20 per cent decline for Brent and WTI has pulled crude back into a bear market and only intensifies pressure on oil companies and Opec producers. A sustained drop below $40 a barrel would signal the two-year price slide has yet to end and that perhaps even a new low for 2016 beckons.

    Where next for global equities?

    June was a good month for equity investors with the FTSE All World and leading benchmarks enjoying their best performance since the big rebound of March. So can the market build on its gains and push for a stronger third quarter performance? Beyond the ever present safety net provided by central banks and slumbering bond yields, at some stage the market must decide whether better earnings expectations for the second half of the year are realistic. At the margin, the tone of upcoming data may well continue favouring the US over Europe in terms of equity exposure.

    Does the yen rally gather pace?

    Reluctance on the part of the Bank of Japan to meet the market’s easing expectations last week fired up the yen. The currency strengthened against the US dollar towards ¥102 after opening the week above ¥106. Further easing remains on the table for September, however such a prospect may not halt renewed strength in the yen, say analysts. Further yen appreciation complicates BoJ policy objectives and most likely weighs on share prices of exporters.

    Simon Derrick, at BNY Mellon, makes the point that US dollar has fallen from ¥125 to ¥100 on five occasions during the past quarter century. On two of those occasions the dollar subsequently traded to at least ¥80. “History therefore indicates that ¥100 really is the “line in the sand” that needs to be defended. The question now is what the authorities are going to do to defend it.’’

    Will the market find €5bn of fresh capital for Monte Paschi?

    The board of Monte dei Paschi di Siena has approved a €5bn recapitalisation plan conditionally guaranteed by a pool of investment banks led by JPMorgan after European stress tests exposed the extent of capital shortfall at the struggling Italian lender.

    The bank must first move €50bn of gross non-performing loans into a special-purpose vehicle to be securitised for sale. Together the two-pronged approach should be enough to put the problems to rest and, if successful, should buttress faith in the Italian financial system.

    Yet the bank must go back to shareholders who have already stumped up cash three times in the past six years. Even senior bankers admit it is a risky proposition to ask them to reach deeper into their pockets, and investors will be effectively buying a bank on a valuation which hardly screams value.

    If they don’t turn up in sufficient numbers, however, the endgame which the Italian authorities have been trying to avoid may result: a swap of debt, some of it held by retail investors, for equity.

    Familiar faces struggle in EU stress tests

    Posted on 31 July 2016 by

    A man walks on January 25, 2013 past the headquarters of the Banca Monte dei Paschi di Siena (MPS), the world's oldest bank to adopt a government aid plan amid revelations of a derivatives scandal. A media report on January 22 that said BMPS would book a 220 million euro ($293 million) loss on a three-year-old derivative contract was a heavy blow for the floundering bank, which is concluding a deal with the government for 3.9 billion euros in state aid. AFP PHOTO / FABIO MUZZI©AFP

    Monte dei Paschi di Siena is Italy’s problem bank – it would be insolvent under the EBA’s adverse scenario

      For those poring over the results of the EU’s bank stress tests on Friday night, there was a strong sense of déjà vu.

      Italy, the problem country in the 2014 tests, once again topped the dishonours list, this time because of the standout failure of Monte dei Paschi, which announced a €5bn rescue plan immediately before the test results came out.

      Ireland’s battled-hardened banks found themselves in the line of fire again, much to the chagrin of Irish bankers.

      German banks, which have been forced to defend their capital adequacy time and again, accounted for four of the ten banks deemed the worst affected by another crisis.

      And two of the UK’s biggest banks, Barclays and Royal Bank of Scotland, languished near the bottom of the rankings for capital strength.

      For investors, though, the real question is whether Europe’s banking black spots persist, or whether they have all improved so much that even today’s weakest are now safe.


      ● 2016 state (from 2014 stress test): Transitional CET1 ratio of 6.14 per cent v 8.42 per cent average

      ● 2018 state (from 2016 stress test): Fully loaded CET1 ratio of 7.62 per cent v 9.2 per cent average

      Monte dei Paschi was the only bank to suffer losses exceeding its entire capital base under the ‘adverse’ scenario in the test. It was judged to have a negative common equity tier one ratio, of -2.44 per cent, at the end of 2018, on a fully loaded basis — the measure of stress that analysts are most interested in.

      Not that other Italian banks were a beacon of high capitalisation. UniCredit’s end point capital ratio of 7.10 per cent was the sixth worst of the 51 banks that the EBA tested, while UBI Banca’s 8.85 per cent and Banco Popolare’s 9.0 per cent were below the system-wide average of 9.2 per cent. Only Intesa Sanpaolo beat the average, with a CET1 ratio of 10.21 per cent.

      Still, Italy feels hard-done by. “Stress tests have attracted an enormous attention (especially in Italy), which is not fully justified,” wrote Lorenzo Codogno, an economist in Milan who used to work for the Italian treasury. “There is still an outsized media and financial market attention on pass/fail outcomes.”

      Carmelo Barbagallo, the Bank of Italy’s head of supervision was also quick to spring to his institutions’ defence. “Italian banks have shown, on the whole, good resilience, even assuming very adverse economic and financial conditions,” he told the Financial Times.

      Stress test chart


      ● 2016 state: Transitional CET1 ratio of 9.12 per cent v 8.42 per cent average

      ● 2018 state: Fully loaded CET1 ratio of 9.44 per cent v 9.2 per cent average

      Germany’s Deutsche Bank had been a cause for concern among some investors heading into the stress tests, but it fared better than domestic rival Commerzbank and European rival Barclays.

      In a statement on Friday night, Deutsche pointed out that its stressed CET1 ratio was also higher than the bank’s result in the 2014 stress test (as was the case for 44 of the 51 banks tested). In Deutsche’s case, this feat was more impressive because a new risk factor, on conduct/litigation, wiped 220 basis points off its CET1 ratio.

      However, Commerzbank and three smaller German banks featured on the list of the ten banks with the worst capital deterioration over a three-year period. Deutsche came in at number 12.

      Still, Gunter Dunkel, head of the Association of German Public Sector Banks, said that the tests showed “that the German banks are clearly stress resistant”. Stuart Lewis, Deutsche Bank’s chief risk officer, told the Frankfurter Allgemeine Sonntagzeitung newspaper that concern for the bank was “unfounded”. and there was no prospect of a capital raise.


      ● 2016 state: Transitional CET1 ratio of 7.63 per cent v 8.42 per cent average

      ● 2018 state: Fully loaded CET1 ratio of 8.51 per cent v 9.2 per cent average

      Royal Bank of Scotland was the biggest UK loser in the stress tests, losing 745 basis points from its CET1 capital ratio under the adverse scenario, the third worst drop among the banks tested.

      Ewen Stevenson, RBS finance director, claimed that the results showed the bank’s “continued progress towards transforming the balance sheet to being safe and sustainable”. But analysts had a different take. Bernstein’s Chirantan Barua said: “For RBS, this puts to bed any dividend hopes for the bank till at least the end of next year.”

      Mr Barua also described Barclays’ capital position as “precarious” in light of the results, which found the bank had the seventh weakest capital ratio based on future regulations, and the fifth weakest capital ratio based on current rules. Barclays pointed out that the stress test “does not take into account subsequent or future business strategies and management actions”.


      ● 2016 state: Transitional CET1 ratio of 7.05 per cent v 8.42 per cent average

      ● 2018 state: Fully loaded CET1 ratio of 5.21 per cent v 9.2 per cent average

      Six years after their landmark bailout, Allied Irish Banks and Bank of Ireland are under pressure again. AIB had the second worst stress test result of the EU banks, with its CET1 ratio falling to 4.3 per cent if measured under future rules. That’s below the 5.5 per cent minimum supervisors typically set, complicating the Irish government’s hopes of selling the bank over the coming years.

      Bank of Ireland lost 513 bps of its fully loaded CET1 ratio, leaving it with a ratio of 6.15 per cent.

      Bankers in Dublin describe the tests as unfair, and say they penalise Irish banks for new regulatory treatments that do not come into force until 2022, relating to state support.

      They also point out that AIB has repaid €3.5bn of state capital since December, something the bank would not have been allowed to do if its capitalisation was unsound. And they say both will benefit from a recovering Irish economy.

      Marcus Evans, a partner at KPMG’s Frankfurt office, said the stress tests’ methodology did penalise banks which had suffered big losses in the past. “Benchmarks (for losses) are derived from historical time series and if a crisis is included in that time series, there is an impact,” he said.

      Italy’s banks not yet at turning point


      Matteo Renzi, Italy’s prime minister, led Italian officials in proclaiming the bank stress tests a success for the country, despite the catastrophic failure of Monte dei Paschi di Siena, writes Rachel Sanderson.

      After six months in which shares in Italian banks have more than halved on concerns about Italy’s €360bn of problematic loans, the satisfactory outcome for the other four of Italy’s five lenders under examination was taken as opportunity to celebrate.

      Mr Renzi, whose handling of the banking crisis is expected to have political consequences for a constitutional referendum due in the autumn, said in an interview with newspaper La Repubblica that retail investors in Italy’s banks had nothing to fear.

      A senior official at the Bank of Italy told the Financial Times that markets should focus on Monte dei Paschi di Siena’s restructuring plan and not on the bank’s catastrophic failure of the EU stress tests.

      It had the worst result of all 51 banks tested by the EBA. MPS’s capital deterioration in the stress scenario, of 1,451 basis points, was more than four times worse than the 340 basis points average.

      “What matters most, is that the bank could be, according to the plan, in a condition to restore its profitability and therefore increase the financial support to the Italian economy,” said Bank of Italy’s head of supervision Carmelo Barbagallo.

      He also rejected suggestions that the failure of Monte dei Paschi, which also emerged the worst loser from the 2014 stress tests, suggested a failure of supervision on the part of the Italian bank supervisor.

      Monte dei Paschi’s rescue plan includes a €5bn recapitalisation, conditionally backed by a group of investment banks, as well as the securitisation of €50bn of gross non-performing loans.

      Shares in MPS rose more than 6 per cent on Friday as the embattled bank neared a solution to the chronic woes which have already triggered two bailouts and €8bn of capital raising.

      Lorenzo Codogno, founder and chief economist of LC Macro Advisors, said the deal for Monte Paschi was “a step in the right direction” but not yet a “turning point” for Italy’s banking system given the extent of the bad loans piled throughout the country’s banks.

      ‘Welcome to the Poisoned Chalice’, by James K Galbraith

      Posted on 31 July 2016 by

      Frontpages of newspapers bear pictures of Syriza leader Alexis Tsipras a day after the Greek general election in Athens on September 21, 2015. The EU congratulated Tsipras on his left-wing party's re-election victory and said Greece has "no time to lose" in implementing the reforms agreed as part of its international bailout. Syriza won 35.5 percent of the vote against 28 percent for conservative New Democracy and is likely to again form a coalition government with the nationalist Independent Greeks (ANEL) party. AFP PHOTO / LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)©AFP

      It is just over a year since the referendum that nearly took Greece out of the euro, when voters rejected the austerity required of them to secure a new bailout. It was the culmination of a tempestuous six months. Syriza’s election victory in January had ushered in the EU’s first government of the radical left, but it was followed by months of deadlock with creditors, a run on the banks and the imposition of capital controls as a crucial payment deadline approached without agreement.

      Then came capitulation. Faced with the immediate prospect of Greece’s bankruptcy, Prime Minister Alexis Tsipras ignored the referendum result and ceded to most of the creditors’ demands — overcoming the resulting split in his party by calling and winning snap elections.

        James Galbraith, an economics professor at the University of Texas, watched this drama close up. As a friend of Yanis Varoufakis, Syriza’s unorthodox finance minister at that time, he offered informal advice. He also led secret work on a plan B:
        contingency measures for a forced exit from the euro.

        This book, a collection of opinion articles and memos written in the heat of the moment, serves as a running commentary on the crisis. Its gives Syriza’s take on a story often seen in the anglophone press through the eyes of Brussels officials (Galbraith notes his hope that Financial Times editors “fry in hell” for this failing).

        It charts the euphoria of the election, when Mr Varoufakis was mobbed by admirers; the sense of possibility that a stable government of the left might “spark a larger discussion of austerity’s failure and inspire a continent-wide search for better solutions”; frustration at creditors’ intrusive and inflexible demands (from the size of the primary surplus to the sell-by date of milk); bitterness at eventual submission to “technocratic dictatorship”, and rejection of a “gridlocked, reactionary, petty and vicious” Europe.

        Always a forceful critic of economic orthodoxy, Galbraith is even more savage in his indictment of the political calculations that shaped the creditors’ position. While it was always clear Greece could not pay its debts, there was no restructuring in 2010 because European powers did not want to force their fragile banks to realise losses. Instead, they imposed austerity on a scale that drove Athens deeper into debt.

        Galbraith’s judgments are now fairly widely accepted. It is less clear whether Syriza’s own policies, or its confrontational negotiating tactics — described here as “stating raw truths in rooms full of self-serving illusions” — were ever going to achieve results.

        It is also unclear whether Syriza had any real alternative to capitulation.
        Plan B was, of necessity, something of an academic exercise — any hint that Greece was planning to leave the euro could have triggered panic so Galbraith could make only the most discreet inquiries about practicalities. Yet the memorandum he drew up gives a sense of the enormous risks Syriza would have run if it had acted on the referendum result and defied Germany’s ultimatum.

        He assumed a state of emergency would be declared, as well as nationalisation of the banks and the creation of a parallel currency to help the economy function until new drachma were available. There would have been a need to impose capital controls and new taxes, to assure fuel supplies and reassure tourists. And there was a “daunting” potential for hoarding, profiteering and crime.


        Galbraith now believes he overstated the difficulties, and that abandoning the euro is a real option. But it is no surprise that Mr Tsipras pulled back from the brink. A year on, he is still in power; Greece is still mired in debt and all concerned are still playing for time, with decisions on debt relief deferred until after the next German elections.

        Yet Syriza’s failure has affected other leftwing parties. Podemos, another advocate of anti-austerity policies within the euro, has lost support in Spain. Many Labour supporters in the UK voted for Brexit. Those who blame Brussels for economic malaise are growing more likely to look to the far right. For Galbraith, the treatment of Greece is a symbol of what Europe has become — and why it is at increasing risk of fracture.

        The reviewer is an FT leader writer

        Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe by James K Galbraith (Yale University Press, £18.99/ $26)

        Goldman Sachs faces more MP questions

        Posted on 31 July 2016 by

        Pedestrians walk past a BHS store in London, Britain July 25, 2016. REUTERS/Neil Hall©Reuters

        Goldman Sachs has been asked to give details of any paid work it has done for Tina Green, as MPs continue to question the bank’s involvement in her husband’s decision to sell BHS for £1, a year before the failure of the high street chain.

        A parliamentary investigation last week upbraided Goldman for lending a “lustre” of credibility to the “otherwise questionable” transaction that saw BHS pass from billionaire retailer Sir Philip Green to a thinly-capitalised investment vehicle led by a former bankrupt.

          Goldman has said it often carries out unpaid work for longstanding clients. The bank listed 25 unpaid assignments it undertook for Sir Philip over the past 12 years in a document that MPs have agreed to keep confidential.

          But the new demand sent last week to Michael Sherwood, Goldman’s European co-head, suggests that MPs want further clarification of the bank’s relationship with the retail tycoon.

          “Your letter describes a longstanding relationship but one that did not, by investment banking standards, generate significant fees,” wrote Richard Fuller in a letter seen by the Financial Times, adding that this “raises questions about why Goldman would do this over such an extended period”.

          Mr Fuller, a member of the business select committee that oversaw the parliamentary inquiry, added that BHS “was not an isolated example” of Goldman Sachs acting in an informal manner which “has the potential to lead to misunderstanding”.

          He asked the bank to list any work it had done for Lady Green and for the family’s offshore businesses, and to explain why it was willing to provide “varied and frequent advice . . . for no compensation” over more than a decade.

          He also asked Goldman to confirm whether its earlier letter had listed all paid work that the bank had done for Sir Philip and his companies.

          Goldman, which declined to comment, has yet to reply to Mr Fuller’s letter, but a person familiar with its position said that the bank had nothing to add, as its previous disclosures to MPs were full and accurate.

          Sir Philip sold BHS to an investment vehicle led by Dominic Chappell, a former bankrupt with no retail experience, in March 2015.

          The demise of BHS barely a year later has cost 11,000 jobs and left behind unfunded pension liabilities of £571m, triggering an official rescue that will force thousands of pensioners to accept deep cuts to their retirement incomes. MPs have branded the affair “the unacceptable face of capitalism”.

          A spokesperson for Sir Philip and Lady Green, and the Pensions Regulator all declined to comment.

          In their report last week, MPs said that Sir Philip and his Arcadia Group, rather than Goldman, were responsible for selling BHS to the “manifestly unsuitable” Mr Chappell. Arcadia had brushed over concerns that Goldman bankers expressed about the deal, MPs found, and should not have relied on unpaid advice.

          But MPs said that Goldman had lent credibility to the transaction.

          “They enabled their prestigious name to be cited as that of ‘gatekeeper’,” the report said, adding that the bank “did not seek to disabuse” the parties to the deal of their confused understanding of Goldman’s involvement.

          Last week, libel lawyers acting for Sir Philip demanded an apology from Frank Field, chair of the work and pensions select committee that co-authored the BHS report, over alleged defamatory remarks.

          Over the weekend, Sir Philip stepped up his criticism of Mr Field, saying that the MP’s recent comments to reporters were “a step too far, even by your own disgraceful standards”.

          “Even before the parliamentary inquiry started hearing from witnesses, you turned it into little more than a kangaroo court, with your constant press campaign barracking and insulting me and my family and your announcement from day one that the predetermined result of the inquiry was that I either sign a large cheque or lose my knighthood,” Sir Philip wrote in a letter sent on Saturday.

          “Your repeated attempts to lead the public into thinking that it is simply a matter of me writing a cheque are utterly disingenuous,” Sir Philip added. “The Pensions Regulator has its own processes that we are obliged to follow.”

          Mr Field could not be reached for comment.

          Sir Philip and Arcadia are understood to be locked in continuing talks with the Pensions Regulator about a deal that would see the retail magnate hand over a portion of his personal fortune to shore up the BHS pension scheme.

          Give certainty to EU nationals in Britain

          Posted on 31 July 2016 by

          Philip Hammond, U.K. chancellor of the exchequer, leaves 11 Downing Street in London, U.K., on Friday, July 15, 2016. Theresa May will visit Edinburgh on Friday, her first foray outside of London since becoming U.K. prime minister, to deliver in person a pledge to govern in the interests of all Scots and damp their call for independence following the Brexit vote. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

          Chancellor Philip Hammond is pressing for quick agreement between Britain and the EU

          Britain’s decision to leave the EU has brought uncertainty to many people in the UK. Few are as seriously affected as the 2.9m EU nationals currently residing in the country. As long as the UK remains a member of the bloc, these European citizens can continue living and working on British soil. Once Brexit has formally taken place, it is far less clear what their status will be.

          Shortly before becoming prime minister, Theresa May indicated her approach to this issue. She said EU nationals currently living in the UK could eventually be granted a permanent right to remain. But this week in Poland she insisted that this would only happen if EU governments simultaneously provide the same guarantees for the 1.2m British expatriates living on the continent.

            Mrs May has been accused of using these EU citizens as a “bargaining chip” in future talks. But Philip Hammond, the chancellor, has since reinforced her view. He has said Britain and the EU should try to come to a quick agreement — before formal divorce proceedings are triggered — on the rights of Britons and other EU citizens currently making use of free movement rules. As yet, there is no sign that any such agreement can be swiftly concluded.

            Mrs May would be wiser to take a different approach. At the appropriate moment, she should declare unilaterally that all EU citizens residing in the UK before June 23, the day of the referendum, will have a permanent right to remain in Britain. This ought not to cause any difficulty with the Brexiters in her cabinet. The Leave campaign’s official position before the plebiscite was that Brexit should bring “no change for EU citizens already lawfully resident in the UK”.

            There are sound reasons for such a move. First, it is the humane thing to do. Millions of Europeans have come to the UK in good faith, buying houses, taking up employment and putting their children in schools. It is right to end the uncertainty for them and their families, especially given signs of heightened xenophobia following the referendum decision.

            Second, it would provide reassurance for UK employers who are uncertain how long they can legally keep hold of their European staff. In recent weeks, leading figures in the National Health Service and in higher education have called on the government to clarify their residency rights as quickly as possible, warning that Britain’s hospitals and universities rely heavily on EU workers. The same concerns affect business. EU nationals account for 31 per cent of workers in food manufacturing, for example, and 21 per cent in hotels and other accommodation.

            Third, Mrs May’s concern about the actions EU governments could take against British expatriates looks overdone. In the aftermath of Brexit, a country like Spain, which hosts hundreds of thousands of UK expats, would run the risk of swift retaliation against the tens of thousands of Spanish nationals living in Britain if they were to change residency rights for Brits in Andalusia.

            On her first day at Number 10, Mrs May talked about wanting to heal the social divisions that have been exposed in Britain by the referendum result. Part of this mission should involve ending the uncertainty hanging over Europeans living in Britain. Many EU residents who have lived in the UK for more than five years have the right already to apply for residency, just like any immigrant. Granting the remainder a permanent right to remain would not only be an act of decency. It would also send a timely message of goodwill towards the EU before the difficult negotiations ahead.

            Banks seek clarification on ringfencing

            Posted on 31 July 2016 by


            Banks have warned regulators that Britain’s exit from the EU could undermine work they are doing to hive off their retail banking operations from more risky investment banking activities.

            Executives at several banks, including Royal Bank of Scotland and Lloyds Banking Group, have asked regulators at the Bank of England for clarification on the potential fallout from Brexit for their ringfencing plans.

              Both the Treasury and the BoE’s Prudential Regulation Authority — under its new chief Sam Woods — have rejected any delay in the deadline for ringfencing from the end of 2018. But one official admitted that the banks were raising a genuine concern. Another official said it was too early to give any guidance.

              The banks’ worry stems from the fact that the UK ringfencing law allows deposits, assets and entities from other European Economic Area (EEA) countries to be included inside a bank’s ringfenced entity. 

              If the UK leaves the trading bloc then banks fear it may trigger a change in the law to prevent EEA operations from being included inside the ringfence, forcing the new structures to be unwound and reassembled. 

              Executives at several of the banks warned that this would be very costly and time-consuming for them and disruptive for any clients that have to move. One executive said banks may prefer to sell the assets rather than attempt to move them. 

              Another banker said the timetables of ringfencing and Brexit were not aligned, which meant the banks may need to have their new sliced-up structures in place before the UK negotiations to leave the EU are finalised. 

              Any guidance for the banks is expected to be drawn up after consultation between the PRA and the Treasury, which is responsible for overseeing the impact of Brexit on the financial sector.

              Under reforms first proposed by Sir John Vickers five years ago in response to the financial crisis, banks with more than £25bn of UK deposits must carve out their core retail banking operations into an entity separated from the rest of their activities.

              It is the biggest structural reform ever imposed on UK banks and it is already forecast to cost the industry billions of pounds to hit the deadline of January 2019. Barclays said on Friday it aimed to complete the creation of its ringfenced unit over the Easter weekend of 2018. 

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

              Some banks, such as Lloyds and RBS, have opted to include as much as possible inside the ringfence, which means they could be most affected by Brexit. Others, such as Barclays, HSBC and Santander, do not seem as worried by the issue because their EEA activities are mostly held outside the ringfence.

              RBS plans to include Ulster Bank, its Irish operation, inside its ringfence along with many of its smaller operations in other EEA countries, such as the Netherlands, France, Spain, Germany and Sweden.

              Lloyds has a Dutch mortgage branch with about £8bn of loans and a German online bank that has about £12bn of customer deposits, both of which it plans to keep inside its ringfence. Lloyds aims to have 95 per cent of its total assets inside the ringfence.

              Lloyds, RBS, Barclays, HSBC, the PRA and the Treasury declined to comment.

              Asset managers thwart governance moves

              Posted on 31 July 2016 by

              Swiss Banks Ahead Of Swiss-U.S. Banking Agreement...A logo sits on a sign in front of the Pictet & Cie headquarters in Geneva, in Geneva, Switzerland, on Wednesday, June 5, 2013. Members of the Swiss parliament's upper house's economic committee have been debating a law which, if passed, could authorize Swiss banks to cooperate with U.S. authorities. Photographer: Valentin Flauraud/Bloomberg©Bloomberg

              Pictet says its pooled vehicles abide by the rule of managing assets on behalf of a pool of clients collectively

              Asset managers are resisting attempts to improve standards at listed UK companies, pushing back against pension fund trustees’ moves to strengthen corporate governance.

              Theresa May, prime minister, shone a spotlight on corporate governance earlier this month, promising sweeping changes to boards and pay in an attempt to encourage responsible capitalism.

                Pension funds, however, say that asset managers are thwarting an initiative launched last year by the Association of Member Nominated Trustees, the trade body of pension fund representatives, to influence the companies they invest in.

                The AMNT developed the so-called red line voting programme, which sets out standards around environmental, social and corporate governance issues, after a 2014 recommendation from the Law Commission.

                Janice Turner, co-chair of the AMNT, said: “We have quite a few pension schemes that want to adopt [the initiative] but fund managers have been very resistant to them adopting it.

                “This is an absolutely huge problem.”

                The commission said that pension fund trustees should take account of environmental, social and governance issues in their investment decisions when these are financially material.

                Jonathan Hoare from ShareAction, a charity that campaigns for responsible investing, said it was “troubling” that asset managers were pushing back against the red lines programme.

                “Government policy should enable and encourage active voting by investors, particularly by trustees and retail investors,” he said. “The whole investment system would function more effectively if this was the case.”

                Pension funds, which can adopt all or some of the red lines, rely on the asset managers to implement their views on ESG issues when voting at company meetings.

                Several asset managers contacted for this article, however, said that voting the way that pension funds want is logistically challenging and potentially expensive if the scheme’s money is invested alongside other investors’ assets in so-called pooled funds.

                In cases like this, asset managers will typically vote one way on behalf of all the investors in the fund.

                Laurent Ramsey, chief executive of Pictet Asset Management, said that its pooled vehicles abided by the rule of managing assets on behalf of a pool of clients collectively.

                “Voting is an act of management and it is, therefore, done uniformly for all clients invested in pooled vehicles so far — so, no split votes on pooled funds,” he said.

                “So far we have had very little, if any, request to do so from our client base.”

                In light of the Law Commission’s review, Ms Turner said: “It is simply unacceptable for trustees to be put in a position that much of the funds they oversee are in pooled funds, but they can have no influence on the vote.”

                Asset managers are more likely to allow large institutional investors a say over their votes in pooled funds than smaller pension funds, according to trustees.

                Bill Trythall, a trustee at the Universities Superannuation Scheme, said that the £50bn pension fund had made it a condition of investing in some pooled funds that asset managers would vote in accordance with its instructions.

                US $18bn credit card spree sparks fears

                Posted on 31 July 2016 by

                credit card chip©Dreamstime

                US banks have ramped up lending to consumers through credit cards and overdrafts at the fastest pace since 2007, triggering concerns that they are taking on too much risk in a slowing economy.

                The industry has piled on about $18bn of card loans and other types of revolving credit within just three months, as consumers borrow more and banks battle for customers with air miles, cashback deals and other offers.

                  The surge in lending has come as economists expect the US election to create sufficient uncertainty to impede growth for the rest of the year, increasing the stakes for lenders at a time when the credit cycle appears to have passed a peak.

                  Recently disclosed second-quarter results showed that credit card loans increased 10 per cent year-on-year at Wells Fargo, 12 per cent at Citigroup and 16 per cent at US Bank, according to Deutsche Bank research. Expansion was an especially aggressive 26 per cent at SunTrust, the $200bn Atlanta-based lender.

                  Across the US banking industry, credit card and other revolving loans rose at a seasonally adjusted annual rate of 7.6 per cent in the second quarter to $685bn, according to Federal Reserve data.

                  The credit card business remains among the most profitable in banking. Lenders can charge much higher interest rates — the US average is between 12 and 14 per cent — than for other types of credit, and borrower delinquencies are still low by historical standards.

                  However, there are some early indications that the cycle is beginning to turn.

                  “In the present environment it’s probably a safe strategy, but as we saw with housing in 07/08 that environment can change very rapidly,” said Nancy Bush, banking analyst at Georgia-based NAB Research. “They need to be very careful.”

                  Bob Hammer, the veteran credit-card consultant, said: “Times are pretty good right now, but it’s questionable how long it’s going to last”.

                  Synchrony Financial, the largest supplier of store-branded cards in the US, sent a shudder through the sector in June when it increased its forecast for credit losses.

                  Several banks have since disclosed that they have boosted reserves for losses, although executives said this largely reflected expansion of their businesses rather than a deterioration in credit quality.

                  Capital One added $375m to its loan loss reserve for its domestic card business, according to Barclays, while
                  JPMorgan Chase added a $250m loss allowance for its credit-card portfolio.

                  The largest US bank by assets has expanded in the past two or three years into what Marianne Lake, JPMorgan Chase chief financial officer, described as the “near prime space” — in essence, customers with lower credit scores.

                  Executives say that the lending push is justified as the consumers they target are in good financial shape, pointing to rising house prices and low unemployment.

                  “We’re growing our direct consumer lending portfolio at a very rapid pace,” said William Rogers, chairman and chief executive of SunTrust. “That is indeed helping to mitigate the effect of [pressure on profit margins] overall.”

                  AIG set for lowest profit since crisis

                  Posted on 31 July 2016 by


                  AIG is set to record its lowest second-quarter profit since its taxpayer bailout in 2008, putting further pressure on chief executive Peter Hancock after he defied calls from activist investors to break up the US insurer.

                  Wall Street analysts have cut earnings estimates for AIG by a third over the past year, underlining how persistently low interest rates are damaging the fortunes of the insurance sector.

                    Hartford Financial Services last week set a downbeat tone for the sector’s earnings season after its net income dropped by almost half. The fifth-biggest US insurer by assets cited “increasingly aggressive” competition and a squeeze on investment income. Shares tumbled 9 per cent on Friday.

                    Life insurers MetLife and Prudential Financial are expected to follow up this week with declines in adjusted net income of about 15 per cent at both companies.

                    AIG is forecast to have produced adjusted net income, which strips out one-time items, of $1.09bn in the second quarter, according to Bloomberg data. That is down more than two-fifths from a year ago and the lowest since 2008. 

                    Since the crisis, AIG has slimmed down radically, getting out of businesses from aircraft leasing to consumer finance and shedding more than $90bn of assets. The insurer employs about 65,000, down from about 120,000 shortly before the crisis.

                    Since the third quarter of 2013, AIG has also moved to buy back almost $20bn of stock, according to Meyer Shields, an analyst at KBW.

                    Yet returns remain underwhelming. For the second quarter, analysts have forecast a return on equity of 4.63 per cent and adjusted earnings per share of 92c, down a third from a year ago and the lowest second-quarter number since 2011.

                    Mr Hancock, the former JPMorgan banker who replaced the late Robert Benmosche almost two years ago, has resisted calls from activists Carl Icahn and John Paulson for the insurer to split its life and general insurance arms.

                    The results on Tuesday will be the first since the rebel shareholders took seats on the board, which they secured as part of a truce with the company’s managers.

                    Earlier this year Mr Hancock set out plans for further disposals — notably a listing of United Guaranty, AIG’s North Carolina-based mortgage insurance arm — and accelerated cost cuts.

                    Other steps the Englishman is taking to revive the insurer’s fortunes include a segregation of troublesome legacy assets and a reduction of its hedge fund exposure.

                    In March this year, Mr Hancock received a pay rise to $12.5m in total remuneration for 2015, up from $12.1m a year earlier. He received a base salary of $1.66m, a rise from $1.43m, and stock awards worth $8.23m, up from $7m.

                    However, the short-term incentive part of his remuneration declined 29 per cent to $2.5m as the insurer missed targets for profitability and expense management.

                    Net income on a GAAP basis is forecast to come in at $1.22bn. Although down about a third, and the lowest second quarter number since 2010, that would mark a return to profits after three consecutive quarters of losses.

                    As well as weak investment income, AIG’s recent results have been hurt by losses from hedge fund investments and claims from historic insurance policies — written from as far back as the 1990s.

                    Its second-quarter earnings are expected to be dented by losses from disasters that have struck the non-life insurance sector, including wildfires in Alberta, Canada.

                    AIG declined to comment ahead of its results.

                    Hedge funds sue StanChart on Indian bonds

                    Posted on 31 July 2016 by

                    Revenues at Standard Chartered will remain under pressure©Reuters

                    Standard Chartered is being sued by a group of multibillion-dollar hedge funds, including Arrowgrass, Highbridge and Pine River, over who should hold the losses on derivative contracts tied to the bonds of an Indian car-parts company.

                    The hedge funds allege that the company, Castex Technologies, manipulated its own share price so it could force the conversion of its convertible bonds into equity.

                      The dispute stems from a period between March and July 2015, when Castex’s share price rose steeply before falling just as dramatically. The hedge funds say in court papers that the swings are “consistent only with manipulation” and are “suspicious”.

                      Castex had issued $130m in bonds in 2012, with the British bank as the lead arranger. Standard Chartered then sold the hedge funds a type of call option called “asset-swapped convertible option transactions”, or Ascots. Pine River also owns some of the bonds directly.

                      Under the terms of the bond, Castex was entitled to convert the bonds into equity at a fixed price if its share price exceeded Rs130, an amount more than twice its average trading level, after April 5 2015 for 30 consecutive trading days.

                      During the share price swings in mid-2015, the stock reached as high as about Rs344 in July. It is now trading at close to Rs14.

                      Standard Chartered has told the funds that they must pay more than $30m to buy the shares issued in place of the bonds related to their options and to pay the bank the value of the bonds.

                      While the dispute itself is not as large as many that banks face, the allegation from several leading hedge funds is still an added headache for Standard Chartered as it grapples with the fallout from the referendum vote in Britain, and what that means for the future of the country’s financial sector.

                      The funds have asked the High Court in London to rule whether the Castex share price was manipulated, and therefore that the conversion should never have happened. If the court does decide that the conversion was valid, then the funds are seeking assurance from the court that they are not obliged to buy the Castex shares, but rather options over those shares.

                      The dispute ultimately comes down to who should be holding the losses, Sue Prevezer QC, representing the hedge funds, said at a court hearing in the case in London on Friday.

                      “The real issue between the parties [is] where that damage should fall and where it should be recovered,” Ms Prevezer said.

                      “It’s easy to see why SCB is taking the position it’s taking,” she added, referring to Standard Chartered. “It’s seeking to pass that loss on.”

                      In a statement, Standard Chartered emphasised that the hedge funds were not alleging that the bank had committed any wrongdoing.

                      “Other issues arising from this matter are in dispute between the parties, and subject to legal proceedings,” the bank said. “As such we are unable to comment further at this stage.”