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 […]

Continue Reading

Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

Continue Reading

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 […]

Continue Reading

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 […]

Continue Reading

Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

Continue Reading

Archive | November, 2016

Investors must treat FTSE 100 rally with care

Posted on 05 October 2016 by

British business leaders warn Brexit would deter investment, threaten jobs...epa05176875 (FILE) A file photo dated 01 February 2013 shows dark clouds above London's financial heart, Canary Wharf, in London, Britain. A group of more than 100 leaders of major businesses on 23 February 2016 backed Prime Minister David Cameron's campaign for Britain to remain in the European Union, saying a British exit, or Brexit, would 'deter investment and threaten jobs.' 'Business needs unrestricted access to the European market of 500 million people in order to continue to grow, invest and create jobs,' the business leaders said in a letter published in the Times. 'We believe that leaving the EU would deter investment, threaten jobs and put the economy at risk,' the letter read. The nearly 200 signatories included top executives from 36 companies listed on London's FTSE 100 index. EPA/ANDY RAIN©EPA

We have a landmark alert on UK stocks. The FTSE 100 has breached 7,000 and closed on Tuesday within a whisker of its all-time record, set last year. The FTSE 250 index of smaller companies, more dependent on the UK economy, is at an all-time high? What explains this, and can it still be a time to buy?

Discussions of UK markets have grown unavoidably political. So it is as well to get the importance of the currency and Brexit out of the way straight away.

    The pattern of the UK’s performance looks wholly different when viewed in dollar terms; the FTSE 100 is down slightly for the year in dollars, and lags behind FTSE’s index for the rest of the world by seven percentage points. Substantially all of that gap has opened up since the Brexit referendum in June, which initially caused stocks to fall globally. Stocks in the US made a full recovery; stocks in the UK did not, unless you measure them in the UK’s depreciated currency.

    Longer term, this continues a trend of savage British underperformance. Since a peak in 1998, the FTSE 100 has underperformed the rest of the world by 50 per cent in dollar terms, according to FTSE.

    What more can be said of the Brexit referendum is that it did not spark the systemic event that had been feared. The huge one-off devaluation sterling suffered at the time did not put any hedge funds or banks out of business, and has instead acted as a shock absorber that has stopped other UK assets from falling further.

    The facts that UK stocks have lagged behind the world badly since the referendum, in common currency terms, and that the pound has dropped to a fresh 31-year low since UK politicians started saying over the weekend that they were prepared to suffer a “hard Brexit” in return for regaining control of migration, show that international markets perceive Brexit as risky, and potentially harmful for the UK economy.

    There are other ways in which the FTSE’s rally is not as impressive as it appears. It trades at a huge multiple of 69 times trailing earnings (exceeded only during the earnings recession of 2009 and at the top of the tech bubble), and the gains have been concentrated in the materials and mining groups that populate the London market. Anglo-American has trebled this year, while Fresnillo and Glencore have more than doubled; all are rallying from a severely sold-off position, and rely on a continued recovery in commodity prices. While a recovery in earnings is likely, it has already been priced in.

    With those arguments over, can it make sense for foreign investors to invest in the UK? That rests on two issues. First, there is the currency, which has dropped to a 31-year low. Second, we need to know the prospects for UK-quoted companies.

    On the currency, the fall has been spectacular, and a hard Brexit is now at least partially priced in. It is plenty possible to imagine a fresh wave of negative sentiment taking over the currency if the Brexit talks go badly. That is a real risk. But there is at least a case for entering now; sterling has probably not hit bottom, but this could easily look like a good entry point.

    On the macroeconomy, there is reason for some optimism, at least for the next year or two. Leaving Brexit to one side, Chris Watling of Longview Economics points out that money supply growth has risen sharply in the last year, while the pace of reversing home equity extraction (or paying off mortgages) has halved. Taken together these data points suggest that years of cheap money have at last worked, and that Britons have stopped paying down debt and begun to spend money on things. This would explain why the economy has proved so resilient to the shock of the referendum, at least so far. And it would suggest some kind of a floor under sterling.

    This is good news for domestic companies. They will have to pay more for anything they import, thanks to the weaker pound — but the currency should also help to protect them against imports, so they may well have the power to pass this on to consumers.

    Barring a disastrous exit, this sounds like a decent case for growth — certainly stronger than can be found on the continent. But against this, there is a problem finding value.

    Anyone looking for solid value stocks in the wake of the Brexit sell-off will be disappointed. The rally since then, in local currency terms, has left almost nothing compellingly cheap. For example, the screen for both quality and income used by Société Générale’s Andrew Lapthorne, which requires well-supported and consistent earnings as well as dividends, finds only two UK stocks that qualify: AstraZeneca and BAE Systems. Weakening the standards slightly, by dropping the required yield from 4 to 3.5 per cent, only adds another two, in Booker and Tate & Lyle.

    The case for a convinced move into the FTSE 100, at least this side of the formal start to Brexit negotiations next year, therefore still looks hard to make. There is still the risk of downside on the currency, even if that is somewhat limited at this point, and there is still far too much potential downside on stocks.

    Cautious moves into sterling itself, and into domestically-oriented stocks that stand to benefit from the pick-up in economic activity, however, do seem to make sense for those with a longer time horizon. Given the intense political emotions that still roil all discussions of Brexit in the UK, there should be some reward for those who stay dispassionate and move with caution; others will have made too many mistakes.

    Asia drifts as markets weigh stimulus outlook

    Posted on 05 October 2016 by

    20 Euro banknotes are seen in a picture illustration, August 1, 2016. REUTERS/Regis Duvignau/Illustration/File Photo©Reuters

    Wednesday 05.30 BST. Financial markets across Asia were struggling for direction as investors weighed the outlook for global central bank stimulus.

    The euro was up 0.2 per cent at $1.1223, having trimmed losses sharply late in the previous session after media reports that the European Central Bank was considering tapering its quantitative easing programme before its intended conclusion in March next year.

    The reports also prompted benchmark German Bund yields (which move in the opposite direction to price) to close 3.9 basis points higher at minus 0.054 per cent, a two-week high.

    Rodrigo Catril, currency strategist at National Australia Bank, said that markets had overreacted to the article, which was published by Bloomberg and cited unnamed sources.

      “Discussion on how to go about ending the programme doesn’t necessarily mean it is about to happen,” he said. “The story also notes officials did not exclude the asset purchase programme could still be extended. We would also note that the ECB extended its buying programme from €60bn to €80bn in April and given the anaemic growth in the eurozone and subdued inflation, tapering the programme at this stage wouldn’t make any sense.”

      Investors were also pondering the outlook for accommodative monetary policy from the Federal Reserve after Charles Evans, president of the Chicago Fed, said in a speech that “frankly, nobody knows” when the US central bank would raise rates but added he would be “fine” with the Fed raising rates once by the end of this year.

      That followed comments on Tuesday from Jeffrey Lacker, president of the Richmond Fed, who said the central bank should head off a likely increase in inflation with a pre-emptive interest rate rise. Both Fed presidents are non-voting members of the policy committee.

      Combined with some encouraging manufacturing data on Monday, the prospect of tighter US monetary policy has been given a stir this week. Fed fund futures prices show the chances of an interest rate rise at the Fed’s December meeting have increased to 61.2 per cent from 49.9 per cent a week ago.

      The dollar index, a measure of the US currency against a basket of global peers, was down 0.2 per cent at 95.997 but rose a combined three-quarters of a per cent over the first two sessions of this week.

      Gold, which is sensitive to monetary policy expectations, was up 0.4 per cent at $1,274.17 an ounce on Wednesday and on track for its first gain in seven sessions. The yellow metal on Tuesday slumped 3.4 per cent — the most in more than a year — to its lowest point since the UK voted to leave the EU.

      “General wariness about Fed tightening and less accommodation from the [Bank of Japan] and the ECB is likely to prompt some short-term volatility in Asia interest rates,” said analysts at DBS. “However, with Asia’s external accounts generally stronger (India and Indonesia in particular) than in 2013, the spillover should be contained.”

      The yield on 10-year Japanese government bonds rose 0.9 basis points to minus 0.063 per cent, while the yield on equivalent Australian government bonds was up 5.9 basis points at 2.128 per cent a day after the Reserve Bank kept interest rates on hold.

      With the dollar in decline and the euro on the ascent, the Japanese yen was 0.1 per cent stronger at ¥102.82 per dollar and facing its first gain in seven sessions. The British pound was fractionally higher at $1.2731, having hit a 31-year low on Tuesday.

      The Australian dollar strengthened 0.2 per cent following data showing retail sales grew 0.4 per cent month-on-month in August — double the pace economists expected and improving from zero growth in July.

      Australia’s S&P/ASX 200 was down 0.5 per cent, as gold miners tumbled in response to the recent sell-off in the yellow metal.

      Japan’s broad Topix benchmark and the Nikkei 225 Average were both up 0.6 per cent, while the Hang Seng in Hong Kong gained 0.5 per cent. Chinese markets remained closed for the Golden Week holiday.

      Oil prices were stronger in Asia after a volatile session on Tuesday in which they ended barely changed. Brent crude, the international benchmark, was up 0.9 per cent at $51.30 a barrel while West Texas Intermediate gained 1 per cent to $49.14.

      For market updates and comment follow us on Twitter @FTMarkets

      SVG investors urged to accept £1bn bid

      Posted on 05 October 2016 by

      LONDON, ENGLAND - SEPTEMBER 07: Lynn Fordham of SVG Capital descends the Cheesegrater for The City Three Peaks with The Outward Bound Trust And The Royal Navy And Royal Marines Charity on September 7, 2015 in London, England. (Photo by Eamonn M. McCormack/Getty Images for the Outward Bound Trust and the Royal Navy and Royal Marines Charity)©Getty

      Lynn Fordham, chief executive of SVG Capital, during a charity event

      US private equity group HarbourVest Partners is not giving up on a bid to buy SVG Capital — even after its UK rival rejected its £1bn offer and instead proposed winding down its business and selling half of its portfolio to rival managers Pomona Capital and Pantheon Ventures.

      On Wednesday, HarbourVest managing director David Atterbury urged SVG shareholders to accept his group’s bid “without delay”, arguing that the all-cash offer “provides superior cash value in the immediate term, and certainty”.

        Boston-based HarbourVest, which has $42bn under management, first made an unsolicited, all-cash offer for SVG last month, valuing the UK private equity group at 650p per share — a 14.7 per cent premium to the London-listed group’s closing price before the bid.

        But the bid, which HarbourVest said was final, was swiftly rejected by SVG chief executive Lynn Fordham, who claimed last month that it undervalued the company and its assets.

        She also said at the time that SVG had received several other approaches that had the potential to be “more attractive”, and the company was focused on “delivering maximum value to its shareholders”.

        On Monday, SVG revealed that Goldman Sachs and the Canada Pension Plan Investment Board were among a group of investors considering a joint bid.

        However, on Tuesday, SVG’s board instead proposed winding the company down and selling half of its investment portfolio to rival fund managers Pomona Capital and Pantheon Ventures — making no mention of Goldman or CPPIB.

        SVG said it had agreed “key commercial terms” for a sale of holdings to Pomona and Pantheon for £379m — a price that represents a 7.8 per cent discount to their next asset value at the end of July, on a constant currency basis.

        It explained that this sale would be followed by a winding-down of the company through a £450m tender offer before year-end at 700p per share — a 5 per cent discount to stated net asset value — and a further £300m tender offer at the prevailing net asset value early in 2017. Further tender offers would be made as investments were sold, the company said.

        Schroders, SVG’s second-largest shareholder with an 11 per cent stake, has since come out in favour of the new plan. On Wednesday, a spokesperson said: “We are supportive of the SVG board’s efforts to maximise value for shareholders with the proposed transaction and the plan to wind-up the company.” SVG was spun out of the private equity arm of Schroders in 1996.

        Lombard

        HarbourVest revives the dawn raid

        LORD HANSON CHAIRMAN OF HANSON LEAVING COMPANY'S HQ

        Boston private equity group has made a daring £1.1bn swoop on UK rival SVG Capital

        But HarbourVest’s Mr Atterbury dismissed SVG’s proposals, saying they “begin and end with complexity, and conditionality, offer little clarity as to value, are non-binding and carry significant market and execution risk”.

        “Many of SVG Capital’s assumptions are not borne out through precedent transactions nor do they reflect the commercial realities of the private equity secondaries market,” he said, adding that “no assurance can be given as to the initial sale of the investment portfolio or the value of the residual portfolio”.

        Pantheon and Pomona, meanwhile, issued a separate joint statement, saying they had “enthusiasm for the potential of the [SVG portfolio] transaction”.

        SVG shareholders have until Thursday afternoon to accept HarbourVest’s bid. However, the company can request an extension under the UK Takeover Code, which would move the deadline for shareholders’ approval to mid-November.

        So far, SVG’s largest shareholder, Coller Capital with a 26 per cent stake, has irrevocably backed HarbourVest’s bid, and HarbourVest recently bought an 8.5 per cent stake in SVG. Other shareholders with a combined 22.7 per cent stake, including Aviva, Old Mutual and Legal & General have signed non-binding letters of intent to back the 650p-per-share offer.

        Shares in SVG fell more than 3 per cent in the first hour of trading on Wednesday, to 652p per share.

        Regulators clamp down on prepaid cards

        Posted on 05 October 2016 by

        WASHINGTON, DC - JUNE 29: Director of the Consumer Financial Protection Bureau, Richard Cordray, delivers remarks during a public meeting of the Financial Literacy and Education Commission at the United States Treasury on June 29, 2016 in Washington, DC. The agenda focused on financial education and investment advice, as well as the intersection of financial education and legal aid. (Photo by Pete Marovich/Getty Images)©Getty

        Richard Cordray, director of the Consumer Financial Protection Bureau

        US regulators are clamping down on the estimated $100bn market for prepaid cards, in a move welcomed by consumer champions but attacked by the industry for limiting access to funds for low-income households.

        The proposals from the Consumer Financial Protection Bureau mark Washington’s first big push to regulate one of the fastest-growing corners of finance.

          An estimated one in 11 Americans use prepaid cards, which can help consumers struggling to open a regular bank account to make purchases and manage money.

          The industry has rushed to fill a gap left by banks, which have dropped riskier customers in the face of higher regulatory requirements imposed after the financial crisis. It is estimated that about $112bn will be loaded on to the cards in 2018 — nearly double 2012 levels, according to the CFPB.

          The new rules will give prepaid account customers similar protections to those enjoyed by current account and credit card holders. They will require providers to limit losses to $50 when funds are stolen or cards are lost, investigate and resolve mistakes and give consumers free access to account information.

          Consumer rights advocates have long complained about practices in the industry, including high and unexpected fees and a lack of legal protections.

          Concerns about the cards came to the fore last year when holders of RushCard, a business founded by the hip-hop impresario Russell Simmons, were unable to access their money because of technical problems.

          The crackdown is the latest sign that the CFPB is flexing its muscles. The agency last month slapped a $100m fine on Wells Fargo — the largest in its five-year history — after the bank’s employees opened as many as 2m accounts without customers’ permission.

          Backers of the agency said it had landed a big scalp with the move against Wells, although critics complained it had been slow to act. The CFPB, set up to protect consumers after the last financial crisis, has also been taking action in areas from payday lending to credit scores.

          The latest regulations cover traditional prepaid cards as well as mobile wallets, so-called person-to-person payment products and other types of accounts including payroll cards.

          They require operators to provide information about fees and account terms, establish that customers allowed to borrow using the cards are able to repay the debts, and cap interest charges.

          Richard Cordray, CFPB director, said: “This rule closes loopholes and protects prepaid consumers.”

          The industry argued that the plans would hit the so-called unbanked or underbanked.

          Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen

          – Christina Tetreault, Consumers Union

          “The CFPB has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect,” said Brad Fauss, head of the Network Branded Prepaid Card Association.

          He added that the proposals “will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money.”

          However, Christina Tetreault, staff attorney for Consumers Union, said: “Consumers have lacked the legal safeguards they deserve to protect their money.

          “Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen.”

          The CFPB said the new rules applied “specific federal consumer protections to broad swaths of the prepaid market for the first time”.

          Markets eye the taper but fear the tantrum

          Posted on 05 October 2016 by

          Illustrative picture shows Japanese 10,000 yen bank notes spread out at an office of World Currency Shop in Tokyo in this August 9, 2010 illustrative picture. REUTERS/Yuriko Nakao/File Photo©Reuters

          To taper or not to taper — and if so, how?

          Those are the questions investors are asking with increasing urgency as they tire of endless monetary policy easing and as central banks seek to persuade governments to help take on the challenge of quickening global growth.

            The world economy has “moved sideways”, Maurice Obstfeld, chief economist of the International Monetary Fund, said on Tuesday. “Growth has been too low for too long.”

            “Tapering” is the inexact science of how central banks wind down programmes such as quantitative easing, either when economic conditions begin to render them no longer necessary or they reach the limits of their effectiveness.

            As the US Federal Reserve discovered in 2013, the problem for policymakers is how to convey this message to a market mentally fixated on bond-buying without causing upheaval — which is how “taper tantrum” entered the financial lexicon.

            Having navigated its path away from QE, the Fed has now moved beyond tapering and, after raising rates last December, is poised to do so again before the year is out. The market is now asking whether it is the turn of the Bank of Japan and the European Central Bank, both of which have added negative interest rates to their arsenal amid much criticism, to take the plunge and taper.

            For investors dependent on mass bond-buying programmes, this question involves poring over policymakers’ pronouncements for clues about their long-term intentions. When ECB president Mario Draghi last month said the governing council had not discussed an extension of QE, he reignited debate about the effectiveness of its asset-purchase programme.

            The BoJ is going through similar ructions. Two weeks after it announced changes to its monetary policy strategy, traders are still trying to determine whether they amounted to the start of tapering.

            The uncertainty centres on the fact that just before the meeting, Haruhiko Kuroda, BoJ governor, was clear that the bank would not consider reducing monetary accommodation. Nevertheless, said Nicholas Smith, CLSA’s Japan strategist, “steepening the yield curve while leaving the short end untouched seems suspiciously like precisely that”.

            Sean Darby, a strategist at Jefferies, said the BoJ’s comments were “suitably vague” and argued that the BoJ had, in effect, been forced to taper because its massive JGB buying programme had left it with a shortage of bonds to buy.

            Market Insight

            epa05339762 Japanese Prime Minister Shinzo Abe gestures during a press conference at Abe's official residence in Tokyo, Japan, 01 June 2016. Prime Minister Abe announced the delay of the consumption tax hike from April 2017 to October 2019. EPA/FRANCK ROBICHON

            Japanese stocks: unloved and stuck in the shadow of Abenomics

            The move, say traders, has allowed two clear schools of thought to emerge — one thinks that the BoJ’s move was, in effect, a tapering and another that does not but is guessing that the yen might trade for several months as if it were.

            Shusuke Yamada, Japan head of FX strategy at Bank of America Merrill Lynch, said that while some market participants certainly had interpreted the BoJ’s move as the signal of a taper, the dollar-yen market had over recent months priced that in. The reason the yen had remained comparatively stable since September 21 was that the market had not left much room for a sudden repricing.

            But Mr Yamada, who maintains his call that the yen will weaken in 2017, argues that the BoJ’s move was not a tapering. Instead, the move to control the JGB yield curve was a signal that it cares about the profitability of the financial sector and recognises that it is threatened by its negative interest rate policy.

            If you think that monetary policy is transmitted by the financial institutions, said Mr Yamada, then the BoJ’s move should be interpreted as not a taper but one that smooths the way for it to continue with its easing programme.

            The complexity is deepened, argue analysts at Nomura, because the yen’s movement against the dollar, euro and other currencies could spend the remaining months of 2016 in even greater thrall to Japan’s banks and life insurers and the calls they are now likely to make on what the BoJ’s latest move portends for the JGB market.

            ECB holds fire on extending QE

            President of the European Central Bank Mario Draghi speaks during a news conference in Frankfurt, Germany, Thursday, Sept. 8, 2016, following a meeting of the ECB governing council. (AP Photo/Michael Probst)

            The European Central Bank has signalled it will hold fire until the turn of this year before unleashing a fresh wave of stimulus, even as it inched down estimates for growth over the next two years.

            The tapering question is not confined to the ECB and the BoJ. Norges Bank last month changed guidance on rates because of a stronger growth trajectory. It is now no longer planning for rate cuts.

            Taper talk is changing market calculations. The Norwegian krone is 3 per cent higher since last month’s central bank announcement. Late on Tuesday, the euro erased its losses and bond prices fell on reports that the ECB was preparing the groundwork for tapering.

            Andrew Balls, head of global fixed income at Pimco, suggested that central bank interventions were suffering diminishing returns and investors were underestimating the market jolts that tighter monetary conditions would create.

            The ECB maintains that the governing council has not discussed the topics, yet investors have long been aware that, within the eurozone, QE remains a divisive policy and that, despite spending €1tn on government bonds in a bid to revive inflation and growth, targets are proving stubbornly hard to reach.

            Whenever it comes, exiting QE will be as game-changing as its introduction.

            “If there is going to be a withdrawal of stimulus, risk markets will turn lower and volatility will go up,” said Paul Lambert, currency manager at Insight Investment — and that might be enough to force an about turn from central banks.

            “They will look at tapering with an option to untaper quite quickly,” Mr Lambert said. “A bit like taking the foot off the accelerator but not yet putting it on the brake.”

            Commonwealth fears fallout of Brexit vote

            Posted on 05 October 2016 by

            GG2THR African Elephants swimming across the Chobe River, Botswana with tourists on safari watching on©Tim Hester/Alamy

            Tourists watch elephants swimming across the Chobe river, Botswana. Commonwealth states fear the impact of sterling devaluation on tourism from the UK

            Commonwealth countries are increasingly concerned that the sustained fall in the value of the pound since the Brexit vote will hit exports and lead to a sharp slide in tourism from the UK.

            Supporters of a British exit from the EU have argued that it could lead to a significant boost in trade with the Commonwealth, a development that would give fresh economic impetus to the nations of the former British empire.

              But in an economic assessment of the impact of Brexit, published on Wednesday, the Commonwealth Secretariat based in London warned that it posed potentially serious challenges to many of its 53 members and that the organisation needed to move from the “shock” of Brexit to finding solutions to the problems it had created.

              The secretariat said in its report that Brexit promised considerable potential for a boost in trade between the UK and its members, adding that the UK was the fourth most important market — behind the US, China and Japan — for Commonwealth exports.

              “There is scope for the UK to really boost its trade with other Commonwealth countries,” said Patricia Scotland, the Commonwealth secretary-general.

              However, the report by Baroness Scotland’s team focuses heavily on the negative consequences of Brexit on its members and in particular the three risks posed by sterling devaluation.

              Brexit and the weaker pound: what next?

              epa05408713 (FILE) A file picture dated 22 February 2016 shows British Pounds in London, Britain. The British Pound Sterling on 05 July 2016 dropped to its lowest level in three decades in reaction to the 23 June's referendum in which Britons voted to leave the European Union (EU). EPA/ANDY RAIN

              Currency hit by renewed weakness as looming Brexit negotiations test market sentiment

              The first is to exports. The report said the UK was a very important market for many Commonwealth countries seeking to sell overseas. It noted that six states, in particular — Botswana, Belize, Seychelles, Mauritius, Bangladesh and Sri Lanka — might suffer “a big hit” from a fall in the pound because the UK accounts for more than 10 per cent of their total exports.

              Botswana relied on the UK market for more than half of its exports, the report said. The UK’s share of imports from Canada, South Africa, India and Sri Lanka might also be affected.

              A second area of concern is the potential impact that sterling devaluation could have on British tourism among member states. Some 60 per cent of Commonwealth nations are small states and tourism is the main income earner for these countries. For most, the UK is in the top three countries from which tourists travel.

              A third risk is the impact that a falling pound might have on the flow of remittances from Commonwealth citizens living in Britain back to their home countries. In 2012, migrants in the UK sent $12bn of remittances to families back home. “A slowdown in UK remittances due to Brexit would have a negative impact on recipient countries,” the secretariat said.

              Another concern highlighted in the paper is the potentially negative impact that Brexit could have on EU aid to the Commonwealth’s least developed countries. The UK contributes 10 per cent of its aid budget to EU institutions and Baroness Scotland warned of the potential loss of “EU aid to these states after Britain leaves the EU”.

              India private-sector banks eye retail respite

              Posted on 05 October 2016 by

              Customers wait for their turn to withdraw cash from an ATM at the ICICI Bank Connaught Place branch in New Delhi, India, Wednesday, September 6, 2006. Photographer: Amit Bhargava/Bloomberg News.©Bloomberg

              ICICI Bank and Axis Bank — the Indian private-sector lenders hit hardest by a surge in distressed corporate loans — are relying on buoyant retail lending and market share gains from state rivals to revive their flagging performance.

              Defaults by borrowers in struggling industries, such as infrastructure and steel, have pushed up bad-loan ratios in India over the past year, raising concerns about the sector’s ability to support investment in the world’s fastest-growing major economy.

                Most of the pain has been felt by the dominant state-backed lenders. However, ICICI, the biggest private-sector bank by assets, has also been badly affected: the value of its non-performing loans rose 80 per cent in the year to March, to reach 5.3 per cent of assets. At Axis Bank, India’s third-biggest private bank, non-performing loans more than doubled in the same period, to 2.5 per cent of assets.

                In interviews last week with the Financial Times, the chief executives of both banks acknowledged the extent of the problem,
                with further defaults by some corporate clients likely, and credit demand in the wider business banking sector showing no sign of picking up.

                But Chanda Kochhar, chief executive of ICICI, said its ratio of non-performing loans could be reduced by strong credit growth from the retail sector.

                The larger growth is coming from consumers, who are still spending, still buying homes, cars, two-wheelers

                – Chanda Kochhar, ICICI chief executive

                 “The larger growth is really coming from the consumer side”, she said, noting that individuals were “still spending, still buying homes, cars, two-wheelers”. In retail lending, ICICI recorded 22 per cent growth over the three months to June.

                Shikha Sharma, Axis chief executive, said the banking sector would rely on rising demand for retail and small business loans to drive growth for at least the next year. She attributed that trend to a big rise in first-time bank users, driven by new technology and a national biometric identification system that accelerates the sign-up process.

                Both of the chief executives’ remarks highlight a divergence noted by economists between India’s robust growth in consumption — helped by a wetter monsoon season and increases in public servant wages — and weak private investment that Nomura says shows “no sign of recovery”. Private consumption grew 6.7 per cent in the second quarter, according to the government, while fixed investment fell 3.1 per cent.

                Nevertheless, even in a sluggish environment for corporate borrowing, both Ms Kochhar and Ms Sharma argued that there were opportunities to take market share from the state-owned banks, where the overall non-performing loan ratio stood at 9.6 per cent at the end of March.

                India stressed assets

                “The opportunity is there for those banks who have the capital to grow, the distribution networks, and who have the efficiency through use of technology,” Ms Kochhar said.

                Some potential buyers of bad loans have complained that banks holding troubled assets are refusing to sell them at reasonable prices — implying a broader reluctance to take the appropriate writedowns on their books. Both chief executives disputed this claim, though.

                Ms Sharma said increasing the sales of distressed loans required a greater number of well-capitalised buyers — which are now starting to emerge in the market.

                In July, Canada’s Brookfield Asset Management announced a $1bn commitment to a fund that will invest in Indian distressed assets, four months after US private equity group JC Flowers announced a $100m joint venture with India’s Ambit Holdings for a similar purpose.

                Fitch warns Wells Fargo over AA rating

                Posted on 05 October 2016 by

                FILE - In this May 6, 2012, file photo, a woman enters a Wells Fargo bank in New York. When Wells Fargo CEO John Stumpf testifies before a Senate committee hearing Tuesday, Sept. 20, 2016, it won't be just his bank under fire for turning friendly branches into high-pressure sales centers. It'll be the entire industry. (AP Photo/CX Matiash, File)©AP

                Fitch on Tuesday warned Wells Fargo it risks losing its coveted AA credit rating for the first time in two decades because of potential damage to its reputation and profits from the fake-account scandal.

                The rating agency lowered its outlook on the bank from stable to negative, meaning there is a “heightened probability” of a downgrade over the next 12 to 18 months. It is the only one of the three big rating agencies so far to do so.

                  The negative outlook from Fitch comes amid the fallout after regulators found that thousands of Wells employees created bank accounts and credit cards for customers without their knowledge, and fined it $185m.

                  Wells, the most valuable bank in the world before the scandal erupted, still has one of the strongest credit ratings in the industry — testament to a hard-won image as a customer-friendly lender and dependable financial performer.

                  It has a higher credit classification from Fitch than
                  JPMorgan, which is graded A+, and Citigroup and Bank of America, which are rated A. Wells last had a rating lower than AA- from Fitch in 1996.

                  In the latest sign of political pressure on Wells, the chairman of the Senate’s small business committee said that “thousands” of small businesses — as well as consumers — had been caught by the bank’s mispractices.

                  In a letter to chief executive John Stumpf published on Tuesday, Senator David Vitter, a Louisiana Republican, called on him to provide further details on how small businesses had been affected.

                  Fitch said the $185m penalty would barely dent the earnings power of the bank, which produced $5.2bn in net income in the second quarter.

                  However, it pointed to the “ensuing reputational damage, risk oversight failures, impact to its selling practices, and the resulting effect on earnings as much larger issues than the actual fine”.

                  Fitch said the bank’s earnings prowess had been supported by its apparent success at cross-selling, and it had been “an early and strong advocate” of the practice.

                  In an effort to limit damage from the scandal, Wells eliminated product sales targets in retail banking from the beginning of this month, which Fitch said “may impact the company’s revenue streams in the future”.

                  It added: “While Wells Fargo emerged from the financial crisis in a much better position than similarly sized peers, Fitch believes this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not.”

                  Fitch believes this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not

                  – Fitch

                  Despite the negative outlook, the rating agency also said that Wells — which holds the second-largest deposit balances in the US — had the lowest cost of funding on average among its peer group. It also pointed to the bank’s strong liquidity and benign asset quality.

                  Wells declined to comment on the Fitch outlook. In response to Senator Vitter’s letter, it said: “While the vast majority of accounts in the settlement were consumer accounts, to the extent there were small business accounts included, all were previously reported in the total number of potentially impacted accounts. As stated earlier, Wells Fargo has already refunded 115,000 accounts.”

                  It added: “We will be addressing the requests in the letter from Senator Vitter in a timely manner.”

                  Markets question ECB bond-buying outlook

                  Posted on 04 October 2016 by

                  epa05530315 Mario Draghi, President of the European Central Bank (ECB), speaks during the ECB press conference in Frankfurt am Main, Germany, 08 September 2016. EPA/ARNE DEDERT©EPA

                  The eurozone bond market was rattled on Tuesday by concerns that the European Central Bank might be contemplating how to scale back its quantitative easing programme, sending yields sharply higher and contributing to the worst day for gold in over a year.

                  The euro also jumped higher versus the dollar after Bloomberg reported — citing unnamed officials — that the ECB might wind down its bond purchases in steps of €10bn a month. The ECB’s €80bn monthly current QE programme is due to end in March 2017.

                    An ECB spokesperson told the Financial Times that the ECB’s Governing Council “has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament”, and the Bloomberg report stated that policymakers might still extend the whole bond-buying programme.

                    But given how most investors have expected the ECB’s monetary stimulus to be extended and perhaps even enlarged, even the discussion on how it might eventually be gradually scaled back sent shivers through the eurozone government bond market.

                    The 10-year government bond yields of Germany, France, Italy and Spain all jumped about 4 basis points, the euro clawed back its earlier losses to trade flat on the day at $1.1205 and the price of gold — which has been buoyed by central banks pushing interest rates and bond yields into negative territory — deepened its decline to 3.3 per cent.

                    If the ECB does decide to trim its €80bn a month QE programme in €10bn steps then it would mirror the Federal Reserve’s strategy in unwinding its own bond-buying programme in 2013. That initially caused a sharp jump in US bond yields, and Janus Capital’s Bill Gross said on Twitter a similar ECB “taper tantrum” was now also under way.

                    Barclays’ economists predicted that the ECB would choose to purchase less than €80bn of assets a month after its March meeting, but stressed that the central bank would “need to manage communication carefully to explain that reducing the amount of monthly purchases while maintaining it for an undefined but long period is not tapering. Firmer QE forward guidance could help to address market perceptions of tapering.”

                    Euro and Bund yields jump on ECB talk

                    FTSE 100 soars as pound hits 31-year low

                    Nonetheless, any formal talk on whether to extend — or taper — asset purchases is yet to begin and a decision to reduce asset purchases remains far from the baseline scenario. Neither the ECB’s governing council nor its executive board, composed of the bank’s top six officials and headed by president Mario Draghi, has discussed the matter yet.

                    The council is currently meeting in Frankfurt, but the topic of QE is not on the agenda. The ECB is expected to make a decision on how it plans to continue with QE past the current end date of March 2017 around the turn of this year. Committees of eurozone central bankers are working on ways that the design of the programme could change to compensate for a scarcity of eurozone government bonds that are eligible for the ECB to buy.

                    You need JavaScript active on your browser in order to see this video.

                    No video

                    David Joy, chief market strategist at Ameriprise Financial, said markets were most likely misinterpreting Bloomberg’s story as a hint of an upcoming tapering, rather than simply as a discussion of how the ECB will eventually scale back the programme, most likely instigated by some of the more hawkish officials.

                    “It’s had a pretty significant impact on markets, but the ECB is just saying what they will do when they want to end the programme, and they’re probably nowhere near that,” he said.

                    Pound’s fall is a reality check for May

                    Posted on 04 October 2016 by

                    The face of Queen Elizabeth II is seen on rolled ten, twenty, and fifty pound sterling banknotes in this arranged photograph taken in London, U.K., on Thursday, March 6, 2014. The pound was 0.5 percent from the strongest level in four years against the dollar after the Bank of England announced it would keep interest rates at a record low this month. Photographer: Simon Dawson/Bloomberg©Bloomberg

                    There is a conspiracy theory that Donald Trump is trying to throw the US presidential election. How else to explain his car-crash performance at the first debate?

                    Here is another one about Theresa May: she is deliberately talking down the pound, or at least letting it fall.

                      The summer has been a phoney war over sterling, with fears over Brexit counteracted by surprisingly good data. On Sunday, the UK prime minister broke cover and ended the stalemate with a speech to the Conservative party conference that laid out the timing and process of the Brexit negotiations.

                      Sterling’s subsequent plunge should not have come as a surprise. The market has been fretting about the date when the UK would trigger Article 50 notification, starting the two-year countdown for officially leaving the bloc. Some have even assumed it would never happen.

                      The conference speech was evidently a key set-piece moment for Mrs May. Further vacillation on the issue would have frayed fragile investor confidence and tested the patience of the EU to the limit. So she set an end of March deadline.

                      Better to live with a sharply weaker pound now than have a drip-feed of weakening sterling, the theory goes.

                      Special Report: London and the World

                      The City of London faces up to the future beyond Brexit

                      illustration for London and the World special report 'Beyond Brexit' story

                      How serious is the threat to the financial services sector — and are there opportunities?

                      Why does that matter? Decades in politics will have taught Mrs May the value of timing. Triggering Article 50 right after the vote would have continued the post-referendum slide of the pound, crushing confidence. Either by luck or by judicious monetary policy, the summer delivered a calmer market, free-spending tourists and foreign investors who kept faith with the UK.

                      This week, standing in front of her party, was her moment to shore up her rightwing credentials with a “hard Brexit” tone, and to let sterling fall again. The side benefits are record FTSE 100 and 250 highs: good news for the pension pots of the party faithful as well as the competitiveness of UK exporters.

                      But there are only so many times you can talk up the benefits of a falling currency, particularly if it leads to rising input prices and depleted consumer spending power, and investors pulling projects and jobs from the UK.

                      That should be Mrs May’s reality check. For those investors who had been clinging on to the belief that Brexit would never happen, her speech this week was theirs.

                      You need JavaScript active on your browser in order to see this video.

                      No video

                      roger.blitz@ft.com