Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Property

Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Archive | November, 2016

Systemic fears over Deutsche do not add up

Posted on 30 September 2016 by

Dark clouds hovering over Deutsche Bank towers...epa05001594 (FILE) A file photo dated 20 May 2015 showing dark clouds hovering over the headquarters of German banking and financial services corporation Deutsche Bank in Frankfurt, Germany. Deutsche Bank, Germany's largest bank, said 29 October 2015 that it will cut about 9,000 jobs, four days after it announced a restructuring. The reorganization of the bank's leadership was announced Sunday by chief executive John Cryan, who said the aim was 'to create a bank that's better-controlled, more cost-efficient and more strongly focused.' The bank has been dogged by a host of problems in recent months, ranging from shake-ups in management to major anticipated losses. It also was fined 2.5 billion dollars in April for its role in manipulating the benchmark Libor interest rate, which banks charge one another for loans. Deutsche Bank is also preparing to sell its Postbank subsidiary, which will mean a loss of a further 15,000 positions. EPA/ARNE DEDERT©EPA

There can be little doubt Angela Merkel would bail out the Germany’s biggest bank if necessary

Is Deutsche Bank a systemic risk? The answer seems blindingly obvious.

On Thursday, after another brutal day for Germany’s biggest bank, which saw its shares tumble 6.7 per cent, US financial stocks lost almost 2 per cent. In London and New York, market sentiment verged on panic. Comparisons were made with the collapse of Lehman Brothers in 2008.

    The International Monetary Fund had pointed at Deutsche back in July, describing it as the world’s most systemically risky bank. In an unusual analysis that looked at the influence of banks’ share price volatility on each other, it found that movements in Deutsche’s share price carried over to rivals more than was true for any other big bank. It is a second-hand measure, but it could be seen as a proxy for the intricacy of the bank’s counterparty relationships and the fallout that could be expected in a disaster scenario.

    The market has spent the past two weeks betting that the time for that scenario has come. On Friday September 16, it emerged via a leaked report in the Wall Street Journal that the US Department of Justice was seeking $14bn to settle accusations the bank mis-sold mortgage securities. Deutsche’s shares have been falling ever since. But on Friday, after falling again in the morning — losing 20 per cent in a fortnight — they regained 6.5 per cent in the afternoon on rumours of a much smaller $5bn settlement.

    And yet the systemic contagion theory does not stack up. Until the past couple of days, the shares of most other big banks had been largely unaffected, shrugging off the Deutsche settlement issue — and the attendant pressure on capital — as an idiosyncratic risk.

    When modest tumbles did come at Barclays and Credit Suisse, traders said it reflected hedge funds trying to replicate the short selling wins made with Deutsche stock, rather than a market fright about counterparty risk between Deutsche and the rest of the banking sector.

    This is a long way from the kind of contagious virus that spread a full-blown crisis in September 2008 — for two reasons.

    First, more robust regulatory defences have been put in place during the past eight years. Capital levels are three or four times what they were, liquid asset reserves are vast — €215bn in Deutsche’s case — and monitoring has been stepped up. Deutsche, along with 50 other European banks, went through a region-wide stress test over the summer. It emerged in 42nd place, relatively weak, but still better than some had feared.

    Second, this is Germany’s biggest bank, with a brand that hammers home the connection with its domestic market. Whatever a politically pressured Angela Merkel might have to say in public, there can be little doubt that if it became necessary, the German chancellor would bail out the country’s biggest bank — albeit within the limitations of European law and its requirement that market conditions are respected and bondholders bear some burden, too.

    That could translate into losses for holders of Deutsche’s contingent convertible bonds, its senior bonds, and its equity (though there is widespread, and justified, scepticism that any policymaker would have the chutzpah to “bail in” investors aggressively for fear of exacerbating market panic.)

    Either way, the situation would be Deutsche specific. Contagion across the sector would be illogical, since counterparties should be safe.

    All of that said, there is another kind of contamination that has been gradually spreading across much of the banking sector, especially in Europe. The root cause is not Deutsche Bank, or any other commercial entity, but central banks such as the ECB. Their zero interest rate policies have added to all the other pressures on banks and left them unable to generate anything like the level of profitability that equity investors would like.

    Whatever happens with Deutsche’s DoJ settlement, expect depressed share prices to persist at Germany’s biggest bank — and across much of the sector — for a good while yet.

    IC — Moss Bros, J Sainsbury, Smiths Group

    Posted on 30 September 2016 by

    Buy: Moss Bros (MOSB)

    Inside A Moss Bros Store Ahead of Results...A Moss Bros Group plc employee arranges a shirt display at a store in London, U.K., on Monday, Sept. 26, 2011. U.K. shop vacancies may rise as high as 14 percent next year from the current 12 percent because of increased online retailing, competition from supermarkets and the faltering economy, an industry lobby said. Photographer: Jason Alden/Bloomberg©Bloomberg

    Margins fell in Moss’s hire business, but this was attributed to investment in improving quality, writes Bradley Gerrard. With more store openings (two already this half), the addition of the “Tailor Me” personalised service and more than £20m of net cash on the balance sheet, the shares’ 21 times forward earnings is justifiable; especially given the dividend.

    The belt-and-braces overhaul at clothier Moss Bros has led to a 30 per cent surge in operating profit, suggesting its new-look stores and revamped ranges are proving popular. Gross margins in its retail division, which accounts for 85 per cent of total revenue, rose 3.3 percentage points as the different price points of its new sub-ranges removed the need to have a midseason sale. Investments in its e-commerce operations, alongside the appointment of a customer director and new chief financial officer, mean better data collection from online sales which have been used for more targeted marketing.

      Chief executive Brian Brick says its store refurbishment programme, which means “gutting the store and putting in new infrastructure”, is nearing completion. There are nine stores to be completed this year, 20 in the next financial year and a handful the year after. “The old perception of Moss Bros is different to the reality now,” says Mr Brick. Roughly a quarter of its products are sourced in dollars but the company is hedged through to spring 2017, and management says buying prices have been improved by using fewer suppliers.

      Analysts at Liberum expect pre-tax profit of £6.4m for the year to January 2017, leading to earnings per share of 4.8p compared with £5.6m and 4.2p in full-year 2016.

      Buy: J Sainsbury (SBRY)

      With deflation, discounters nipping at the heels of the majors and the entry of Amazon into grocery shopping, its A tough time to be a supermarket, writes Bradley Gerrard. But we continue to believe Sainsbury is coping impressively with the challenges, and with the shares trading on 11 times forward earnings, we still rate them a buy.

      With deflation, discounters nipping at the heels of the majors and the entry of Amazon into grocery shopping, its A tough time to be a supermarket. But we continue to believe Sainsbury is coping impressively with the challenges, and with the shares trading on 11 times forward earnings, we still rate them a buy.

      The deflationary battle has left a war wound on grocer J Sainsbury after it reported a 1.1 per cent drop in like-for-like sales excluding fuel in spite of both like-for-like transaction and volume growth.

      Chief executive Mike Coupe said this showed “customers are consistently choosing Sainsbury’s for the choice, quality, value and customer service we offer” but the price was is having an impact on the numbers.

      There are signs its recent acquisition of Argos-owner Home Retail will help matters. A total of 200 new digital collection points are due to open by the end of the financial year. The company already has 15 Argos digital stores open in Sainsbury’s stores with the aim of having 30 by Christmas. This will mean customers will be able to collect Tu clothing, Argos products, eBay purchases and DPD parcels in one place.

      In its second quarter to August 27, Argos achieved total sales growth of 3 per cent and like-for-like sales growth of 2.3 per cent.

      Mr Coupe also suggested there would be no let up in terms of the tough operating environment and the effect of the devaluation of sterling “remains unclear”. He added that the group’s strategy would allow it to “continue to outperform our major peers”.

      Hold: Smiths Group (SMIN)

      Subsidiary John Crane accounts for 28 per cent of Smiths Group revenues, so its travails will continue to drag on overall performance, though trading should be weighted towards the second half, writes Mark Robinson.

      Some minor financing gains enabled Smiths Group to book a slight uptick in full-year earnings, but operating profits before restructuring costs, provisions and other one-offs were flat on July 2015. Margin expansion in the medical, detection and interconnect divisions was countered by a 20 per cent fall in underlying operating profits at US subsidiary John Crane, which manufactures mechanical seals used extensively in the petroleum industry and beyond.

      Despite favourable currency translation effects, the US subsidiary was the only division within the engineering and technology group that failed to drive up its reported top line through the period, though revenues at its interconnect and Flex-Tek divisions were slightly down on an underlying basis.

      Expenditure in the oil and gas industry has fallen away dramatically over the past two years. However, revenue streams linked to maintenance and remedial activities have held up reasonably well. This is reflected in the underlying performance of John Crane, where weakness in the sales of first-fit equipment contrasted with relatively resilient after-market sales. Indeed, 59 per cent of its revenues are now derived from after-market products and services.

      There’s no end in sight to these wider industry problems. The latest spat between Saudi Arabia and Iran highlights the geopolitical complexities at the heart of the Opec cartel. Short of any co-ordinated response to the fall-away in crude prices, it will be some time before the market starts to rebalance. Management doesn’t anticipate any easing in John Crane’s end markets, though this should be “more than offset by moderate underlying revenue growth” in the other four divisions. It is also actively trying to increase the proportion of the division’s sales derived from non-oil and gas industries, in addition to improving market penetration in important geographies such as China.

      Before these figures, Morgan Stanley was predicting cash profits of £559m for the July 2017 year-end, giving rise to earnings per share of 71.6p, rising to £581m and 75.2p in full-year 2018.

      Stock screen: Investment trusts

      One way investors with long time horizons can attempt to beat the market is by being prepared to take on substantial risk in the short term based on the expectation that ultimately they will generate outsized rewards — even if this means stomaching the odd disaster along the way, writes Algy Hall. That said, risk for the sake of risk is to be avoided and any such approach to investing needs to be founded on a solid, sensible investment strategy capable of producing long-term outperformance.

      When I back-tested my overlooked and outperforming investment trust screen over two 10-year periods, its appetite for taking on risk by targeting distinct sector themes was key to it achieving substantially better returns than the market. The screen’s results this year suggest it is definitely in a “risk on” mode with all the potential for large gains and losses that entails.

      It is hard to find metrics that can draw comparisons between such a broad range of funds. Fortunately, there are two measures that I believe are up to the job and my backtesting of a strategy that combines them provides some vindication for this.

      The screen uses the method devised by hedge fund manager Joel Greenblatt for use in his two-factor “magic formula”. The method simply ranks both factors and then adds the ranking together to find the trusts with the most attractive combined ranking. I also have a set of rules that are applied to the screen to avoid it focusing too much on a single market niche or on trusts that are likely to prove highly illiquid.

      The rules

      ● Market capitalisation must be more than £100m.

      ● No tracker or hedge funds.

      ● No more than half the portfolio (five out of 10 shares) should be in funds with a niche theme. Trusts defined as niche are those focused on non-mainstream asset classes or subsectors such as private equity, debt, technology and biotechnology, and those focused on single countries (excluding the UK and US) or high-risk economic regions such as emerging markets. I also regard Asian smaller companies trusts as niche, but not Asian generalists.

      ● No more than half the portfolio (five out of 10 shares) should be mainstream funds of the same type. This rule does not apply to global funds, but it does to other mainstream themes such as trusts investing in the UK (large and small companies), Europe, the US or Asia.

      ● All trusts must trade at a discount to NAV.

      When the screen works it tends to work very well, but it can also pick up on stocks that have been marked down for good reason. Last year’s mega dog, Better Capital 2012, illustrated the negative side of this coin. The screen highlighted a number of private equity funds last year, but due to the rules only two were chosen. Broadly speaking, the private equity theme was a good one, which was reflected in the strong performance of the Standard Life European Private Equity trust. Meanwhile, the average one-year return from direct private equity funds was 36 per cent and 24 per cent from fund of funds. However, the Better Capital trust had its own distinct problems and was a major contributor to the screen’s underperformance against both indices I measure it against. On a cumulative basis, over the two years since I started running the screen, it is behind the FTSE All-Share but ahead of the S&P Global 1200, with the respective total returns coming in at 14.7 per cent, 12.1 per cent and 6.7 per cent. If I add in 1.5 per cent for costs, the screen’s performance drops to 8.8 per cent.

      The funds selected by this year’s screen are: Templeton Emerging Markets, JPM Indian, Pacific Horizon, Baillie Gifford Japan, JPM Asian, Allianz Technology, Scottish IT, Edinburgh Worldwide, TR European Growth, Invesco Asia.

      The Financial Times and its journalism, including Investors Chronicle content, are subject to a self-regulation regime under the FT Editorial Code of Practice: FT.com/editorialcode

      Puerto Rico handed deadline by debt board

      Posted on 30 September 2016 by

      epa05400536 Puerto Ricans hold a demonstration in front of Federal Court after the US government issued the Puerto Rico Oversight, Management, and Economic Stability Act, a law that created a federal oversight board to manage the nation's debt, in San Juan, Puerto Rico, 30 June 2016. Soon after the law was passed the Governor of Puerto Rico Alejandro Garcia Padilla authorized the suspension of the island nation's payments on its general obligation debt, a move made to prevent creditors from taking control of the nation's assets. Puerto Rico is scheduled to make a 1.9 billion US dollar debt payment on 01 July. EPA/THAIS LLORCA©EPA

      The powerful control board established to oversee a restructuring of Puerto Rico’s $69bn debt burden elected insurance executive Jose Carrión III as its chairman on Friday as it set a two-week deadline for the island to submit a turnround plan.

      The board, whose first public meeting in Downtown Manhattan was interrupted by protesters vehemently opposed to an entity they see as overly colonial, gave the governor until October 14 to draw up plans to put the US island of 3.5m people on a sustainable fiscal path.

        Mr Carrión, who is one of four of the seven-person board members that was born and raised in Puerto Rico, said he would endeavour to be “as transparent as possible” as the group began its work.

        The oversight board, which has already received technical briefings in Washington, has to sign off over the island’s finances and will have oversight over the restructuring negotiations with creditors.

        Puerto Rico has suffered a series of escalating defaults over the past year under governor Alejandro García Padilla, who is in his final months as the head of the US territory. The island missed nearly $1bn of payments due this July, including on bonds backed with a constitutional guarantee.

        Investors have been somewhat content with the appointment of the seven-person control board, made up of four Republican nominees — including Mr Carrión — and three Democratic ones. Richard Ravitch, the former New York lieutenant-governor, serves in place of the governor as an ex officio member and does not hold a vote.

        About two dozen protesters gathered outside of the Alexander Hamilton US Customs House where the board met, shouting “shame on you” to members and attendees as they exited.

        “As the vast majority of you did, I did not agree either with the excessive powers given to the board nor with several designations to it,” Governor García Padilla said on Thursday as he handed over financial information to the board. “But the truth is we had no alternative.”

        Investors and locals have been waiting patiently for the formation of the board with negotiations primarily on hold as the team gets familiarised with the structure of Puerto Rico’s intricate debt stock.

        The board agreed that the emergency legislation signed by US President Barack Obama — the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa — gave it purview over the commonwealth, its employee and teacher retirement system, the influential Government Development Bank and the Sales Tax Financing Corporation.

        It also plans to establish deadlines for the island’s electric utility and sewer authority, which have $13bn of debt outstanding and have lost access to capital markets, to submit fiscal plans.

        Before the passage of the Promesa legislation, Puerto Rico did have not have access to a court-backed restructuring process.

        eric.platt@ft.com

        Twitter: @ericgplatt

        Deutsche Bank: Settling for less

        Posted on 30 September 2016 by

        ©FT montage

        Deutsche Bank’s shares fell on news that the US Department of Justice was seeking a multi-billion dollar settlement

        Having worked at UBS during the Swiss bank’s flirtation
        with collapse in the financial crisis, John Cryan knows a thing or two about the skittishness of global markets. But even for someone as battle-hardened as the 55-year-old Briton, the last fortnight at Deutsche Bank has been a rollercoaster ride.

        On September 16, shares in Germany’s biggest bank, where Mr Cryan is now chief executive, slumped 8.5 per cent after it emerged that US authorities had demanded $14bn — three times what had been expected and only slightly less than Deutsche’s wizened market value — to settle allegations that the bank mis-sold mortgage-backed securities before the financial crisis.

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          A week later, they tumbled 7 per cent after it was reported that, despite fears that such a huge penalty could hurt Deutsche’s financial strength, the German government had ruled out rescuing the lender. In early trading yesterday, they plunged another 8 per cent after a handful of hedge funds began withdrawing some of their derivatives business from the bank. The turbulent fortnight saw the bank’s share price, already pummelled by months of precipitous fall, hit a 33-year low of €9.90 early yesterday before recovering to €11.57 at the close amid rumours that a deal with US authorities was imminent.

          Despite vehement denials from both the bank and the German government, there has been rampant speculation in recent weeks that Deutsche — long the biggest player in Europe’s strongest economy and a vital cog in global capital markets — could need a government rescue.

          For a bank that spent much of the past 30 years trying to break the US grip on global investment banking, it is a remarkable turn of events. And given how big, and interconnected, Deutsche has become in its pursuit of its Wall Street rivals, its woes have sent jitters through markets all week.

          For Angela Merkel, the German chancellor, whose popularity is already on the wane over her open-door refugee policy, a bailout of Deutsche would be political poison. Putting taxpayers on the hook for the hard-charging investment bank would cause Ms Merkel severe political damage ahead of next year’s parliamentary elections. Abroad, it would provoke accusations of double standards, since Germany has insisted that private bondholders in other European countries to take losses before governments wade in.

          “If [the chancellor] now has to squander taxpayer money again to rescue a failed bank, then she shouldn’t bother to run again,” Sahra Wagenknecht, co-leader of the Left party, said earlier this week. “It would be a total disaster.”

          State bailout

          Mr Cryan insisted this week that the bank does not need state assistance. With a core tier-one ratio — a key measure of financial health — of 10.8 per cent, the bank’s capital position is far stronger than during the financial crisis, and comfortably above what regulators demand. With €215bn in liquidity reserves, it has a significant cushion against a funding squeeze. Yesterday it stressed that the behaviour of the vast majority of its 800-odd hedge fund clients was unchanged in recent days.

          A senior banker with close ties to Deutsche blames the recent spate of bad news on rumours
          spread by hedge funds that have bet on a fall in the bank’s share price. “This is in their playbook — they are trying to drive the shares down to €8 and then buy them back,” he says.

          The bank insists it will not pay anything close to the $14bn demanded by the US Department of Justice. Insiders hope that it will be treated in a similar fashion to Goldman Sachs, which faced an initial claim for $15bn from the DoJ before settling for close to $5bn. Deutsche has set aside €5.5bn in reserve.

          ©FT montage

          The US is demanding that Barclays, Credit Suisse and Deutsche Bank settle multi-billion dollar cases of mis-selling of mortgage securities

          Goldman, however, was able to conduct its negotiations in secret. In the Deutsche case, the DoJ’s opening gambit became public just weeks before the US presidential election, which could make it harder to negotiate down.

          Muddying the waters further, there are now indications that Deutsche’s settlement could end up being rolled into a broader deal including Barclays and Credit Suisse.

          “I’m worried that the banks are in the middle of a political game between the US and Europe,” a debt investor at a large UK fund says. “The concern is that when it comes to Deutsche, Credit Suisse, Barclays, the DoJ can do whatever it wants . . . People are scared.”

          Deutsche Bank shares bounce back sharply as chief hits out

          Executives and regulators rally round Germany’s largest lender

          Those focused on financial stability point a finger at the US authorities. “I’m very upset that the information about the $14bn was leaked,” says one European policymaker. “It’s a disgrace.”

          Looking for its day in court

          If Deutsche is unable to persuade the DoJ to lower its sights, it still has options. Crucially, the $14bn is a settlement demand not a fine, so Deutsche only pays it if it agrees to. Mr Cryan’s insistence that a state bailout is “out of the question” suggests Deutsche would rather risk going to court than settling at a level that would force the bank to seek additional capital from investors or even from the state
          .

          Alternatively, the bank could seek to foot the bill by selling parts of its business. Deutsche has agreed a €1.09bn deal to sell its Abbey Life insurance business, and is waiting for Chinese approval to complete the disposal of its €3.7bn stake in local lender Hua Xia. With less success, it is also trying to sell Postbank, the post office bank it bought in stages from 2008.

          “They could sell more businesses if they had to, such as their European retail network,” says one of Deutsche’s top 10 investors. “At a push, they could even sell their asset management business — although that would be a bitter move.” An asset management sale — ruled out by Mr Cryan two weeks ago — could raise €8bn, analysts estimate.

          Angela Merkel, Germany's chancellor and Christian Democratic Union (CDU) party leader, looks on during a news conference following a CDU federal board meeting at the party's headquarters in Berlin, Germany, on Monday, Sept. 19, 2016. Merkel's party was dealt another blow in a regional election, posting its worst result in Berlin since the end of World War II as the anti-immigration Alternative for Germany extended its challenge to the political establishment by siphoning off voters. Photographer: Krisztian Bocsi/Bloomberg©Bloomberg

          Angela Merkel would face criticism if she gave Deutsche Bank a bail out – and a storm at home if she did not

          In addition to disposals, Deutsche could seek to close the capital gap left by a big fine by shrinking its balance sheet, the investor says, pointing out that the bank has been securitising some of its loans in a bid to free up capital.

          Both approaches might plug a short-term capital hole, but neither would do the bank much good in the longer term. Selling businesses such as Deutsche’s European retail network or its asset management division would make the bank more dependent on its volatile investment banking arm. Cutting assets would also shrink its revenues. Neither would be easy to do quickly.

          Balance sheet doubts widen German lender’s credibility gap

          Investor concerns are not about bad loans but illiquid and ‘unobservable’ assets

          To avoid such damage, Deutsche could instead seek to raise capital. The bank currently has authorisation from its shareholders to increase its share count by almost 50 per cent if needed. The question is who would buy them. One of Deutsche’s top 20 investors says the idea that the bank could raise capital at current prices is “illusory”.

          “The dilution would be enormous,” he says.

          The top 10 investor is also sceptical. “One thing I can rule out is participating in a capital increase just to fund litigation. There has to be some perspective on how they will set themselves up [to be successful] in future.”

          A key worry is
          the bank’s
          depressed earnings power. Investors were resigned to the return on equity being below 3 per cent next year. That could get worse if the turmoil hits business and more clients follow the hedge funds’ lead.

          Merkel’s dilemma

          If neither asset sales nor a capital-raising provide Deutsche with the cash to resolve its litigation issues — which also includes an investigation into trades involving its Russian business — then the German government would face a choice between bailing in the bank’s creditors or bailing it out.

          “If push comes to shove, the German government would contribute because Deutsche Bank is the only global bank that Germany has,” says Marcel Fratzscher, head of the DIW think-tank. “The industrial companies would say so. So the government would step in, but a lot would have to happen before then. And there would be tight conditions.”

          In public, German officials merely point out that banks in need of financial rescue must follow European procedures, which Germany fought to put in place after the 2008 global financial crisis. Jens Spahn, deputy finance minister, told the Financial Times: “I am not taking any view about the situation of any individual institution. The European Central Bank is responsible for the question of the financial and accounting capital position of banks. The mechanisms are set out at the European level.”

          In private, European regulators and officials acknowledge that in an emergency, there is scope under European rules to inject state funds to support a bank, as long as it is done in line with market conditions.

          Despite the hedge funds’ moves, other counterparties are, for now, more relaxed about Deutsche. “Even US banks who are typically prone to throwing Europeans under the bus seem to view it [Deutsche’s travails] as a damp squib,” says a senior executive at a large institutional investor.

          Until Deutsche resolves its litigation, however, markets are likely to remain on edge. “I don’t think Deutsche needs a bailout at this point. Their capital and liquidity is absolutely sufficient,” says Jörg Rocholl, president of Berlin’s ESMT business school. “But the constant uncertainty and speculation does not help. Banks depend to a great extent on confidence — and the risk is that once it is gone, it is very hard to get back.”

          Additional reporting Stefan Wagstyl

          Senior officials rally behind Deutsche

          Posted on 30 September 2016 by

          FRANKFURT AM MAIN, GERMANY - SEPTEMBER 26: The headquarters of Deutsche Bank stand on September 26, 2016 in Frankfurt, Germany. Shares of Deutsche Bank dropped by over 6% today and fell to their lowest level since the 1980s following reports that the German government will not step in to shore up the bank. U.S. regulatory authorities are seeking a USD 14 billion fine from Deutsche Bank due to its role in contributing to the U.S. sub-prime mortgage crisis of 2007-2008. (Photo by Hannelore Foerster/Getty Images)©Getty

            Deutsche Bank won respite on Friday from the market storm that threatened to engulf it during a week of intense volatility that exposed the fragility of Europe’s banking system.

            As senior political and financial figures rallied round Germany’s biggest lender, it emerged that John Cryan, chief executive of Deutsche, had travelled to the US this week seeking to settle the Department of Justice’s probe into alleged mis-selling of mortgage securities.

            A settlement of the case, which has destabilised investor confidence in the bank, was possible as early as this weekend, said people briefed on the talks.

            Deutsche shares rallied sharply and closed up 6.4 per cent on Friday, having fallen as much 9 per cent earlier in the day to €9.90, their lowest since 1983.

            Sentiment was boosted after the AFP news agency reported that Deutsche was close to a $5.4bn deal with US authorities — far below the initial $14bn demand from the authorities that sparked the worries about the bank’s capital levels.

            However, analysts and academics said that while the fears of collapse at Deutsche were overdone, the events of the past week have exposed cracks in Europe’s banking system. “An inability to generate organic capital is the root of Deutsche’s problems in our view,” wrote Kian Abouhossein, analyst at JPMorgan, in a note.

            The sharp fall in Deutsche shares in early morning European trading was triggered after hedge funds on Thursday had started to pull some of their business from the bank.

            In response, Mr Cryan sent a memo to staff in which he said the bank had “strong foundations” and called on employees to ensure that any “distorted perception from outside” did not affect the bank’s daily business.

            John Cryan Deutsche Bank©AP

            John Cryan

            More on Deutsche Bank


            FRANKFURT AM MAIN, GERMANY - SEPTEMBER 26: The headquarters of Deutsche Bank stand on September 26, 2016 in Frankfurt, Germany. Shares of Deutsche Bank dropped by over 6% today and fell to their lowest level since the 1980s following reports that the German government will not step in to shore up the bank. U.S. regulatory authorities are seeking a USD 14 billion fine from Deutsche Bank due to its role in contributing to the U.S. sub-prime mortgage crisis of 2007-2008. (Photo by Hannelore Foerster/Getty Images)

            The Big Read: Settling for less

            US demand for $14bn has rattled Germany’s biggest bank

            Patrick Jenkins: Systemic fears do not add up

            This is a long way from the contagion of 2008

            FT Alphaville: Deutsche farce

            Deutsche Bank’s coco bonds slide to record low

            German bank helps sour sentiment towards whole sector

            “In banking, trust is the basis of everything. There are currently some forces at play in the market that want to weaken this trust in us,” he wrote.

            Martin Hellmich, professor at Frankfurt School of Finance and Management, said: “What we saw this week was that the banking sector in Europe is still very weak. When you combine this with negative rates, with rising regulatory requirements and with loss of share to the US that is a very negative spiral that Europe has still not been able to break out of.”

            Martin Zielke, chief executive of Commerzbank, said he was “relatively relaxed” at a press conference in Frankfurt, which was called after the bank unveiled plans to cut 9,600 jobs and scrap its dividend. “Market moves sometimes happen that you shouldn’t take too seriously,” Mr Zielke added.

            Sabine Lautenschläger, a member of the European Central Bank’s executive board, also weighed in, saying: “Banks today are on average much better capitalised than before the crisis, and a lot has also been done on supervision”, adding that during periods of market volatility such “improvements in the overall picture” were often forgotten.

            Hans-Walter Peters, president of the Association of German Banks, dismissed the pressure on Deutsche. “That short-term operators like hedge funds, in particular, react to speculation and cause prices to change is not unusual and should not be blown out of proportion,” he said.

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            Additional reporting by Barney Jopson, Michael Hunter, Michael MacKenzie, Josh Noble and Mark Odell.

            Strategic challenge facing European banks

            Posted on 30 September 2016 by

            The logo of Germany's biggest lender Deutsche Bank can be seen during the company's annual shareholders' meeting in Frankfurt am Main, western Germany, on May 19, 2016. / AFP / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)©AFP

            It has been a torrid week in Europe’s banking sector. Deutsche Bank, the focus of investors’ anxiety, saw its shares drop to levels not seen since the 1980s, after a $14bn demand from US regulators led to new concern over its capital position. Talk of a government rescue plan, which Berlin has denied, is premature. Indeed, rumours of a deal with regulators fuelled a rally in the shares on Friday. However, John Cryan, the bank’s chief executive, cannot simply batten down the hatches and wait for the storm to pass. He has to convince investors that the bank has a business model worth backing. Moreover, Deutsche Bank is merely the most prominent victim of structural problems afflicting many eurozone banks.

            Germany’s biggest bank should be at little risk of an acute funding crisis. Its capital position is stronger than during the global financial crisis and well above the regulatory minimum. It has an ample cushion of liquidity.

              In extremis, it could turn to the European Central Bank. A bail-in of bondholders would risk repercussions in a fragile eurozone financial sector, and the German government, conscious of the demands it has made of Rome in dealing with Italian banks, insists there will be no bailout by taxpayers. Yet few believe that Berlin would ultimately allow Deutsche Bank to fail.

              It is not enough for Mr Cryan to blame
              nebulous “forces in the market” for creating a “distorted reality”. The initial $14bn demand from the US Department of Justice may well be reduced to a manageable penalty, judging by the settlements other banks have reached in similar cases. Yet it is likely to remain a sizeable problem; this week’s turbulence could result in damage to Deutsche’s business if it causes clients and counterparties to go elsewhere. Moreover, the justice department demand was merely the trigger for the latest sell-off. The underlying issue is that investors are not convinced by Deutsche’s strategy.

              Deutsche Bank’s ambitions as a leading European investment bank, seeking growth in markets such as Greece and Italy, took a severe knock after the global crisis. Rivals such as Barclays, facing similar challenges, have been able to fall back on a reasonably solid retail business. Yet Deutsche’s home market is not an attractive one.

              Large German companies, the bedrock of its business, are flooded with cash, able to borrow cheaply in bond markets and see limited opportunities to invest at home. Germany’s ageing population is more inclined to save than to borrow. The profitability of the country’s banks suffers from the fragmentation of the sector, which has more than 1,500 lenders, many of them small, municipally owned savings banks. The ECB’s ultra-loose monetary policy merely compounds these problems.

              There are several steps Deutsche Bank could consider to improve its capital position, ranging from asset sales to more speculative ideas such as bonus clawbacks. The German government is right to intimate that it should solve its own problems. However, Deutsche will struggle to raise fresh capital until it can present a convincing long-term plan.

              The bigger question is whether Germany’s banking sector still has a business model. Indeed, Mario Draghi, ECB president, argued last week that one of the chief problems afflicting eurozone banks was that the sector had become too big relative to the needs of the economy. Individual institutions are under pressure to adapt to changed conditions.

              Policymakers may need to recognise the need for the sector to shrink.

              HBOS losses in alleged scheme reached £266m

              Posted on 30 September 2016 by

              From left to Right Michael Bancroft, David Mills and Lynden Scourfield in Barbados

              (Left to right) Michael Bancroft, David Mills and Lynden Scourfield in Barbados more than a decade ago

              HBOS had to write off nearly £266m of loans sanctioned by a senior bank manager who was showered with expensive gifts, cash, luxurious foreign travel and sexual encounters with escorts, a London trial has heard.

              Lynden Scourfield, the lead director of HBOS’s impaired assets division, formed a “corrupt relationship” with business consultant David Mills between 2003 and 2007 in return for “huge rewards” it has been alleged in a trial at Southwark Crown Court.

                Mr Mills used his firm QCS to take over struggling businesses in HBOS’s impaired assets division. Such companies were then lent more money by HBOS and charged “huge fees” by QCS, the jury has heard.

                Tom Angus, a senior HBOS manager who started to investigate Mr Scourfield’s activities in 2006, told the trial on Friday that the bank had to write off close to £266m as a result of the losses incurred and its total risk exposure to the loans was £375m. HBOS was rescued by Lloyds Banking Group in 2008.

                The trial has heard that Mr Mills provided Mr Scourfield with gifts, travel and his own American Express card for personal spending. He also paid for Mr Scourfield and his wife to fly business class to Barbados where they stayed in a villa for a week to celebrate the 40th birthday of Mr Mills’ wife Alison.

                Mr Mills, 59, denies six counts including four of fraudulent trading. His wife Alison, 51, denies two counts of fraudulent trading and money laundering. Mr Scourfield is not on trial.

                Mr Angus testified to the trial that he had “never heard” of a bank employee being given their own credit card by a bank customer. This would be “completely inappropriate” as it would make them “hopelessly compromised”, he said.

                “Have you ever known of a corporate customer inviting a senior bank employee and his wife to join him and his wife in Barbados to celebrate a birthday — all expenses paid?” prosecutor Brian O’Neill put to Mr Angus.

                “I have never heard of anything like that.” Mr Angus replied.

                Co-defendants Mark Dobson, 55, an ex-senior banker at HBOS denies two counts including conspiracy to corrupt and money laundering. QCS consultant Michael Bancroft, 73, denies five counts including three of fraudulent trading.

                Jonathan Cohen, 56, an accountant at Brett Adams based in Pinner, Middlesex, denies two counts and John Anthony Cartwright, 71, — known as Tony — who lives in Hyde, Cheshire denies three charges.

                The case continues.

                Deutsche Bank puts CDS market to test

                Posted on 30 September 2016 by

                ©Reuters

                The sharp fall in Deutsche Bank’s shares comes after a year of decline

                As Deutsche Bank’s share price has swung dramatically throughout the week, traders have also fuelled demand for another type of security: the credit default swaps that offer insurance against a default by the lender.

                Deutsche Bank’s €37bn credibility gap

                Investor concerns are not about bad loans but illiquid and ‘unobservable’ assets

                So heavily have these been traded that they have posed the biggest post-crisis liquidity test of the wider CDS market.

                While Deutsche Bank CDS remain the most liquid securities in the sector, some market players are growing concerned that capital constraints imposed by regulators might impede the ability of market-making banks to keep these securities trading freely.

                This pressure, they say, may grow ahead of the upcoming quarter end, because “credit valuation adjustments” — a routine re-evaluation of counterparty derivative risk carried out by banks and trading institutions — can require the purchase of CDS protection.

                  One major concern is that, without the capacity to buy CDS protection directly, market players will instead look to short sell Deutsche Bank shares, or withdraw collateral from the bank to reduce their credit exposure. This could exacerbate the sell-off in the German lender’s shares, triggering a negative feedback loop that only increases the need for credit protection.

                  “The menu of instruments by which a counterparty can hedge bank risk has shrunk to the point where it is shorting the stock, or nothing,” said one informed party. “I think the risks of a feedback loop have been known for a long time.”

                  According to Craig Pirrong — a noted derivatives expert from the University of Houston, and a critic of some post-crisis regulation — overall liquidity in the single- name CDS market has deteriorated markedly since 2008, due to the risk-weighted capital constraints imposed by regulators.

                  “It’s much more costly for banks to make markets,” he noted. “This is especially true for a name like Deutsche, because of the ‘wrong-way’ risk inherent in a dealer bank’s CDS.”

                  “Wrong-way” risk emerges when both default risk and credit exposure go up in tandem, creating a situation where profits from a winning trade cannot necessarily be realised because the counterparty who owes the funds is no longer solvent.

                  Since a bank with a short position in Deutsche credit would have to pay out just when the shorting market is most likely to be under stress, this would impose a higher capital charge — leading to a reluctance to make markets.

                  Gavan Nolan, an analyst at IHS-Markit took a similar view of the CDS situation. “We have seen liquidity diminish in the last few years and this is mainly because of the capital requirements imposed on banks — there aren’t as many as there used to be and there’s been a big push from the buyside firms to increase liquidity.”

                  Thus far, however, the market for Deutsche Bank CDS has remained active, with the number of quotes registered in the Markit database increasing, said Mr Nolan. Last week’s figures from the Depository Trust & Clearing Corporation showed that Deutsche Bank swaps were the sixth most heavily traded in their sector, supporting the view liquidity is not a problem yet.

                  “I don’t think what we’re seeing in the case of Deutsche has anything to do with regulation,” said Mr Nolan. “The CDS are reflecting concerns over Deutsche as a bank, so I don’t think it’s an issue of liquidity,” said Mr Nolan.

                  On Friday morning, the spread between buying and selling prices for CDS on Deutsche Bank’s subordinated five-year debt had widened by 42 basis points to 510 basis points. Equivalent CDS on senior debt were being quoted with a spread of 241bp.

                  Other market participants expressed doubt that hedge funds would be inclined to short Deutsche Bank shares or withdraw balances because of CDS liquidity issues.

                  “All in all, with Deutsche Bank there is no liquidity risk, and no solvency risk, only dilution risk,” said one market participant.

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                  Deutsche Bank’s coco bonds flash red

                  Posted on 30 September 2016 by

                  ©FTGraphics / Getty

                  The riskiest bonds sold by Deutsche Bank hit a record low on Friday, underlining the anxiety over a lender that is in the crosshairs of investors who have been worried all year about the health of Europe’s banking sector.

                  Deutsche’s €1.75bn coco bond dropped as much as much as 7 per cent to a record low of 69.97 cents on the euro, sinking beneath the level touched in February when the last major squall about the bank’s health flared.

                  Designed as an instrument to both bolster banks’ capital levels and ensure creditors take a hit if a lender runs into difficulties, cocos were just one concern on a day in which several signs of financial stress were flashing red.

                  “Deutsche has enough ammunition to sort itself out,“ said Matthew Cobon, a portfolio manager at Columbia Threadneedle. “The problem more generically is European banks are in a bit of hole and it is difficult to earn their way out of this hole. The market underestimates the sum of individual risks.”

                  Here is a snapshot of how other assets are reacting and what investors are saying.

                  European banks

                  Deutsche shares were the heaviest fallers, sliding as much as 10 per cent to breach the €10 mark, though rival Commerzbank was close behind with a drop of 6.8 per cent.

                  The wider European banking sector was feeling the heat. By early afternoon trading in London, the Euro Stoxx Banks Index was down 3 per cent, taking its drop for the year to 31 per cent. European stock indices are lower — London’s FTSE by 1 per cent, German Dax lower by 1.2 per cent and French CAC 40 off by 1.6 per cent.

                  Safe havens

                  Deutsche Bank chief hits out at ‘forces in the market’

                  Share price pares losses after initial 9% fall in Germany’s largest lender

                  The faltering share price of banks’ fanned appetite for havens higher. Gold was up 0.3 per cent to $1,324; eurozone sovereign bonds rose, with German Bunds leading the way. The yield on the 10-year fell 4 basis points to minus 0.15 per cent.

                  Cost of dollar funding

                  The euro-dollar cross-currency basis swaps — a measure of the cost of converting euros into dollars — is at its widest in four years, suggesting higher demand for dollar funds. The euro dropped to a two-month low against the Swiss franc and has weakened 0.4 per cent against the dollar to below $1.12.

                  Short selling

                  Short-selling activity in Deutsche Bank is picking up, according to the latest data from Markit released on Friday. The percentage of shares out on loan rose to 3.9 per cent on Thursday, up from 3.1 on Wednesday and 2.4 per cent on Tuesday.

                  Short selling involves paying to borrow a company’s shares, selling them and then buying them back at a profit after they have dropped. Short interest in Deutsche, however, remains below levels seen in early July in the aftermath of the UK’s vote to leave the EU. Then 4.4 per cent of shares were out on loan. This time last year less than 1 per cent of shares were out on loan.

                  Investors and strategists give their view

                  “I don’t see Deutsche Bank as a Lehman moment but confidence is fragile and authorities will be keen to stop any systemic risk quickly,” said Alan Wilde, head of fixed income at Barings.

                  Paras Arnand, head of European equities at Fidelity International, said: “It is about the shape of individual business models. Banks that were able to take restructuring in the immediate wake of the crisis are in better shape. The restructurings are getting more complex over time.”

                  He added: “Deutsche is clearly at the more complex end of the spectrum. Because the valuations are quite low and the upside on some banks quite high, you don’t need to take on exceptional business risk.”

                  Kian Abouhossein and Amit Ranjan, strategists at JPMorgan, said of Deutsche that its “inability to adjust the business model to a declining revenue environment is a major problem for an IB-geared bank and has led to the inability to generate retained earnings and hence capital generation in our view”.

                  Third of stamp duty is from £1m-plus homes

                  Posted on 30 September 2016 by

                  House prices in Knightsbridge were down 6.8 per cent in the year to August©Charlie Bibby

                  House prices in Knightsbridge were down 6.8 per cent in the year to August

                  Homes costing more than £1m accounted for more than a third of the £7.2bn paid in stamp duty last year, after reforms increased the tax on expensive properties.

                  Although they made up only 1.6 per cent of all housing transactions, £1m-plus homes generated £2.6bn in stamp duty, or 36 per cent of the total, for the public purse in 2015-16.

                    This was a 19 per cent rise from last year, despite concerns that the higher stamp duty rates on more expensive homes introduced in December 2014 would slow the market.

                    “There was a lot of speculation that the stamp duty take over £1m would have fallen because of the changes. It will be frustrating that this hasn’t been the case for those arguing the top end of the market has become too heavily taxed,” said Lucian Cook, director of residential research at Savills.

                    The figures for England, Wales and Northern Ireland were published on Friday by HM Revenue & Customs and are the first to reflect a full year after reforms made by the former chancellor George Osborne.

                    The changes cut costs for most, except for those buying properties for more than £937,000. They have also increased the share paid by London, where receipts were up by 11 per cent to £3.4bn, while those from every other region fell.

                    “The increase in stamp duty receipts shows how important the London market has been to the Treasury, given that the capital now generates 46 per cent of stamp duty receipts from residential property,” Mr Cook said.

                    Two boroughs — Westminster and Kensington & Chelsea — each accounted for 7 per cent of revenues, and the highest average stamp duty on a residential purchase was in Westminster at £136,500.

                    Chart on luxury flats and stamp duty

                    Kensington and Chelsea’s contribution, at £514m, was higher than the total from the east and West Midlands combined.

                    The increase in stamp duty take from expensive properties comes despite house prices falls in London’s wealthiest areas.

                    Agents and developers blame the stamp duty reforms — as an example, the charge on a £2m home has gone from £100,000 to £153,750 — and some have called for adjustments to reduce the bill for buyers. But there was little noticeable change in transaction numbers in 2015-16 from a year earlier; about 11,000 homes costing £1m to £2m changed hands during the year, up from 10,000.

                    Which cities are the next UK property hotspots?

                    Liverpool, Glasgow, Birmingham and Manchester tipped for price growth

                    However, an additional stamp duty charge amounting to an extra 3 per cent of the purchase price was applied to second and additional homes from April this year. Mr Cook said the effects of this change had not yet fed through to the data.

                    “We have seen a more noticeable impact on high-value transactions since these changes were compounded by the additional 3 per cent duty . . . and the uncertainty around Brexit. That means these figures don’t give the whole picture,” he said.

                    Berkeley Homes, which specialises in building expensive properties, has been especially vocal in seeking changes to the stamp duty system. It said this month that “transaction taxes were now too high, and this was restricting both mobility in the second-hand market and the pace of supply and delivery of new homes in London and the south-east”.

                    Overall, stamp duty receipts from home sales were down 2.5 per cent to £7.3bn, but the decline was mainly because Scotland no longer figures in the statistics after stamp duty was devolved to Holyrood. Like-for-like receipts were up about 1 per cent.