China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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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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Archive | Financial

Defaults gather, and now our Ratesetter watch begins

Posted on 30 November 2016 by

Here’s a deceptively simple question: what are the expected defaults on Ratesetter’s loan book?

It’s simple because there should be a straightforward answer, even if there’s some uncertainty and subjective judgement built into the number. It’s deceptive because there seem to be two answers, one that makes everything look fine and another, which requires some calculation, that’s not so great.

Ratesetter is one of the UK’s top three online lenders, which call themselves P2P, and probably the most complicated of the lot. While the classic P2P lending model involves individuals taking individual risk, Ratesetter collectivises risk. The startup, which is backed by star fund manager Neil Woodford, does this through its provision fund, which exists to protect loan investors against defaults.

As we’ve discussed in detail before, Ratesetter now reserves the right to take interest payments and capital away from investors and put it into the provision fund, in order to make sure there are enough funds to account for loans going bad. The upshot is that investors in Ratesetter need to pay attention to the entire book of loans, rather than their individual investments. (Whisper it softly, it’s sort of like a bank.)

So how’s the provision fund doing? Well, here’s one set of data the company shows to investors on its provision fund page, as it was on Tuesday, with the relevant numbers highlighted:


As you can see, the current and expected money in the fund is larger than the expected losses. Great, even if the reliance on “contractual future income” has increased in recent months.

But there’s another set of data provided by Ratesetter, which tells a slightly different story. It’s on their statistics page, which provides “data on annual performance of loans and returns, updated automatically in real time.” Again, the relevant numbers are highlighted below:


The first thing to note is that the expected bad debt rate for 2014, 2015 and 2016 are all well above 3 per cent. Those three years account for about 90 per cent of Ratesetter’s lending to-date, which raises a question mark over the 2.8 per cent or less bad debt rate figure provided on the provision fund page.

The second thing to note is that it’s possible to calculate the total value of expected bad debt using the numbers on the statistics page. It’s a simple matter of applying the “actual lifetime bad debt rate to date” figures to the total amount lent, and then comparing that to the value implied by the “projected lifetime bad debt rate”. The difference is the total amount of defaults that are yet to happen.

It comes to £24.3m, according to our calculations, which is about £2m higher than the amount of current and expected money in the provision fund. However, according to a Ratesetter spokesperson, that’s not the whole story. They said “around £3m” of those losses are on loans not covered by the provision fund, which means they are held by institutional rather than retail investors.

We’re not the only ones to get tripped up by this nuance. Ratesetter is updating the 2.8 per cent bad debt rate on its provision fund page to 3.1 per cent because it too was including loans not covered by the provision fund in its calculation.

But, even after accounting for that, the figures on the statistics page suggest total expected bad debts of £21.3m, which is a little too close for comfort to the total value of the provision fund. It also doesn’t match with the £18.6m of expected bad debts shown on the provision fund page.

So what’s going on here? Well, it’s complicated in the kind of way that makes you wonder if any of Ratesetter’s investors actually understand what’s going on.

According to Ratesetter, the difference is because they use different methodologies to calculate the expected bad debts on each page. Bear with us here as we try to explain.

The expected bad debts on the provision fund page are estimated by looking at a 12-month cohort of loans that are at least 18 months old. So, at the moment, it reflects the performance of loans originated between June 2014 to May 2015. The company then extrapolate that performance to the entire loan book, taking into account the split between loans that are less than one year old or more than one year old. Older loans are given a lower expected loss figure, on account that they are past the point where default risk is highest.

The projected year-by-year loss numbers on the statistics page are calculated in a different, slightly weirder way. Take 2016, for example. As we’ve still got a month to go, Ratesetter does the same thing it does above in terms of looking at a past 12-month cohort of loans that are at least 18 months old. When the year is finished and no more 2016 loans are being originated, the company then looks at the actual performance of loans originated this year and adjusts its expected losses. If the loans originated in 2016 have lower defaults than in previous years, which Ratesetter believes will be the case, then the expected loss number will come down over time.

However, the key reason for the difference today, according to Ratesetter, is that on the statistics page they don’t take into account lower expected losses on older loans — this, apparently, is why the loss number is higher than the one given on the provision fund page.

The obvious point here is that it’s not particularly helpful for a company to be putting out two sets of numbers about the performance of its loans that are calculated in two different ways. Or, at least, it’s not helpful to do that without a careful explanation and comparison of the methodologies.

Ratesetter has had issues with its data in the past. In March, when we dived into their loanbook, we found that some of the loans had been mislabelled. Two weeks ago, a spokesperson for Ratesetter emailed us to let us know they were updating some of the numbers on the statistics page, specifically the figures for provision fund usage and percentage repaid. Apparently there was a problem with how they had been pulled from their database. Here’s how far they were off:


If companies are going to sell loans to retail investors, there has to be some confidence that the retail investors are able to grasp the risks involved. Regardless of the intelligence of investors, it’s impossible to do that without clear, straightforward and consistent information.

Otherwise, you’re just left trusting the platform when they say everything is fine, which, for fear of repeating ourselves, isn’t very “peer-to-peer”.

Related links:
Wake me up when online lenders are done turning into banks — FT Alphaville
P2P lending rediscovers balance sheet magic — FT Alphaville
Re-setting Ratesetter’s provision fund — FT Alphaville
Re-setting Ratesetter’s default ratings — FT Alphaville
Ratesetter’s provision fund “is going to be pushed to the limit” – FT Alphaville
Peer-to-peer maturity transformation – FT Alphaville
The curious state of UK “peer-to-peer” lending – FT Alphaville
It’s lenders all the way down – FT Alphaville
Lifting the bonnet on an online lending business – FT Alphaville

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Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Posted on 30 November 2016 by

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events.

The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the domestically focused group’s prospects.

Shares in Polymetal, which owns gold and silver mines, have fallen 20 per cent since Donald Trump’s election as US president on November 8. The stock has tumbled together with the gold price, which has suffered as investors have switched out of the precious metal to return to riskier assets such as equities.

Both Travis Perkins and Polymetal are eligible for potential demotion into the FTSE 250 index as their market capitalisations have dropped, according to indicative positions at the close of trading on Monday. A final decision will be made on the reshuffle after the market closes on Wednesday.

Medical products specialist ConvaTec, one of London’s initial public offering success stories, and Scottish Mortgage Investment Trust are in line for promotion to the FTSE 100 from the FTSE 250.

ConvaTec will automatically be placed in the FTSE 100 as it gains entry into the index following its float, which gave it a market cap of more than £4bn. Newly listed groups have to wait until the quarterly reshuffle to be given a place on one of the FTSE indices.

Scottish Mortgage Investment Trust is an actively managed investment group, which has done well through its investment in technology stocks such as Amazon.

Guy Foster, head of research at wealth manager Brewin Dolphin, said: “We are seeing winners and losers from Brexit and the election of Donald Trump. And these factors will go on influencing the FTSE for some time yet.

Danny Cox, at Hargreaves Lansdown, added: “The Trump election has clearly hit Polymetal with the reversal in the gold price. The prospect for interest rate rises has seen the equity markets move into risk-on mode and that has not helped havens such as gold and bonds.”

Countrywide, which runs Britain’s biggest chain of residential estate agents, is another group facing demotion after its shares have dropped more than 50 per cent following the Brexit vote.

On indicative prices on Monday, Countrywide would fall into the FTSE Small Cap index from the FTSE 250 as its stocks have suffered from worries over the UK property market and changes in stamp duty.

BGC Partners eyes new platform to trade US Treasuries

Posted on 30 November 2016 by

BGC Partners plans to launch a new platform to trade US Treasuries early next year, in a bid to return to a market in the middle of evolution, according to people familiar with the plans. 

The company, spun out of Howard Lutnick’s Cantor Fitzgerald in 2004, sold eSpeed, the second-largest interdealer platform for trading Treasuries, to Nasdaq in April 2013. The deal prohibited BGC from competing in the space for three years. With the non-compete period over, people familiar with the venture say the company is planning to launch a platform in the first quarter of 2017. BGC declined to comment. 

It comes at a time when both start-ups and established venues are seeking to position themselves for the future structure of the Treasury market. A flood of offerings have come to market seeking to shake up the traditional divide between banks trading with each other and banks trading with their clients. But so far the platforms have only made minor inroads.

The flurry of activity has been spurred in part by a rise in prominence of high frequency, principal trading firms that have muscled their way on to interbank trading venues as some established dealers have pulled back. 

Some of the new solutions, including BGC’s offering, will seek to create a market which mixes up the trading activity of PTFs, banks and buyside firms such as asset managers and hedge funds. Mr Lutnick’s new venue is likely to also have anonymous trading and lean on the settlement capabilities of Cantor Fitzgerald — settlement has been a stumbling block for smaller start-up venues.

“Why would he want to get back in to a business he has already got out of?” asked Kevin McPartland, head of market structure at Greenwich Associates. “The players, the position in the economic cycle and what is coming out of Washington suggests maybe things have changed.”

When Mr Lutnick, the entrepreneurial head of both BGC and Cantor Fitzgerald, sold eSpeed it accounted for close to 36 per cent of interdealer Treasury trading, according to Nasdaq, but that market share has dwindled to about 23 per cent, the firm added.

Nasdaq recently hired John Shay from the high-frequency trading shop Virtu to head up fixed income and commodities as part of a renewed effort to reinvigorate the platform. Shortly after Mr Shay’s arrival, the firm ended a joint venture for a new, separate start-up Treasury venue called CrossRate, after the partner firm failed to generate enough client interest, according to a Nasdaq spokesperson. 

“Hopefully first quarter next year we will come out with some interesting new ideas,” said Mr Shay. He added that the dominance of ICAP’s BrokerTec, which accounts for almost all of the rest of the market, is “unhealthy”. 

“It is weighted in one camp right now,” said Mr Shay. “From a pure market structure point of view it is unhealthy. It would be better to see it back closer to 50-50.” 

David Rutter, the former head of ICAP’s BrokerTec, has also returned to the market with a new venture called LiquidityEdge. Established venues BrokerTec and Tradeweb have also launched new platforms. Other start-ups include OpenDoor, focused on less liquid, older Treasury securities, and Direct Match, which having announced it was shutting down in August is said to be attempting to make a comeback, according to people familiar with the plans.

“The two folks who built the leading platforms are now both setting up new ones,” said Mr McPartland. “It suggests they see opportunity here.”

RBS emerges as biggest failure in tough UK bank stress tests

Posted on 30 November 2016 by

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 modelled by the Bank of England, but they were judged to have sufficient capital-raising plans already in place.

The outright failure of RBS — partly caused by heavy litigation costs still hanging over the bank — underlines how it is still struggling to regain a stable footing eight years after being bailed out by the taxpayer in the financial crisis.

It is also a blow to UK government, which wants to start selling down its 73 per cent stake in the bank, and shareholders, who had hoped for the resumption of dividend payments.

RBS had its revised capital plan accepted overnight by the BoE after it suffered the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014.

RBS shares opened down 2.3 per cent after the news on Wednesday morning.

Overall, the BoE said the results showed the banking system had continued to increase its overall levels of capital and came out of the stressed scenario with stronger balance sheets than in previous years.

RBS, however, was the only bank to fall below the minimum hurdle rate even after “assumed management actions” but before the presumed benefit of converting its loss-absorbing hybrid debt know as alternative tier one (AT1) securities.

In the stressed scenario, RBS’s common equity tier one ratio — a measure of capital to risk-weighted assets that is the main benchmark of banking strength — fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. That is below its 6.6 per cent hurdle rate and its 7.3 per cent “systemic reference point” — a second, more stretching target set for systemically important banks.

“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the BoE said. “Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA board.”

RBS said in a statement that its revised plan was made up of “an array of capital management actions”.

These included “further decreasing the cost base of the bank; further reductions in RWAs [risk-weighted assets] across the bank; further run-down and sale of other non-core loan portfolios in relation to our personal and commercial franchises; reduction in certain non-core commercial portfolios in commercial banking; and the proactive management of undrawn facilities in 2017”.

It added that “additional management actions may be required until RBS’s balance sheet is sufficiently resilient to stressed scenarios”.

Ewen Stevenson, finance director, said: “We are committed to creating a stronger, simpler and safer bank for our customers and shareholders. We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience including resolving outstanding legacy issues.”

The BoE said Barclays and StanChart also fell below their hurdle rates before management actions and conversion of AT1 securities. But in Barclays case the regulator was confident that its capital plan — including selling much of its African subsidiary — would be enough to fix its shortfall. In StanChart’s case, it said the bank had recently issued AT1 securities that would resolve its shortfall.

Lloyds Banking Group, HSBC, Nationwide and Santander UK all passed the stress test, which the BoE said hit riskier corporate loans harder than residential mortgage books.

The BoE toughened the tests from the previous two years and introduced higher individual targets for each bank — including an extra hurdle rate for the most systemically important lenders — instead of a standard hurdle rate.

BoE governor Mark Carney said on Wednesday: “We are pleased to see the banks will have resilience consistent with the ability to withstand what’s a very severe shock [modelled in the stress tests]. ‘Withstand’ means to being able to meet the demand for borrowing, for loans, for mortgages in that scenario — so growing lending in this scenario despite being hit with all this shocks. That’s what we want to see.”

He said RBS had made “a lot of progress over the last few years” in its core business of serving UK households and businesses. “Its challenge is that it still has legacy issues, misconduct costs, non-core assets and impaired assets. The orders of magnitude of their plans are much bigger than the size of the shortfall highlighted in the stress test.”

This year the test modelled the impact of a sharp contraction in Chinese and Hong Kong growth, with an overall 1.9 per cent contraction of the global economy, combined with the knock-on effect of emerging market currencies depreciating against the US dollar. It also examined the consequences of a 31 per cent fall in UK house prices over a five-year timeframe.

Steven Hall, banking partner at KPMG, said the banks’ performance was worse than expected. “All banks started this test in a better place than they have previously but this year’s test is the most severe we’ve seen. As predicted misconduct costs have weighed heavy on results.”

Europe’s share of investment bank fees falls to all-time low

Posted on 30 November 2016 by

Europe’s share of global investment banking fees has fallen to an all-time low, compounding years of decline that have hit the region’s biggest banks.

Thomson Reuters’ data shows that Europe, the Middle East and Asia (EMEA) accounts for just 24 per cent of the global fees for M&A deals, syndicated loans and underwriting paid so far this year. That’s the lowest since Thomson Reuters began collecting the data in 2000 and just a shade ahead of the 23 per cent of fees generated in Asia so far in 2016.

Asia is set to be the standout winner of 2016, with fees rising 5 per cent year on year to their highest level since 2000, fuelled by a 20 per cent rise in fees in China. Americas fees were down 17 per cent in the year to date, but still accounted for 45 per cent of the global tally.

Sales in Rocket Internet’s portfolio companies rise 30%

Posted on 30 November 2016 by

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”.

Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed.

Rocket said the adjusted margin for earnings before interest, tax, depreciation and amortisation improved from minus 34.4 per cent in 2015 to minus 17.5 per cent this year. The company’s share price rose nearly 2 per cent to €18.20 in morning trading.

One of the leading lights of the thriving Berlin tech scene, Rocket Internet has built up a stable of ecommerce companies active in areas from food delivery to fashion and home furnishings. It has stakes in HelloFresh, a Berlin-based group that provides boxes of fresh food to subscribers to cook at home, as well as furniture retailers Home 24 and Westwing and ecommerce start-up Global Fashion Group.

But its shares have slumped since its flotation in 2014 amid doubts about whether any of the companies it invests in will ever make a profit, and questions over the way it values its stakes in the start-ups.

Oliver Samwer, co-founder, said Rocket was “continuing to see improvement in profitability” in selected companies in its portfolio, though he acknowledged a fall in revenues and earnings in the third quarter, due to traditionally weak trading in July and August.

Mr Samwer reiterated a pledge that at least three of Rocket’s companies would turn profitable by the end of 2017.

Rocket also reported a consolidated loss for the first nine months of the year of €642m compared with a loss of €59.5m in 2015. That reflected an earlier reduction in the valuation of Global Fashion Group, one of its ecommerce companies, by two-thirds to €1bn following a funding round earlier this year.

It said it continued to be “very well funded”, with €1.6bn in available cash at Rocket and €1.1bn at its portfolio companies as of the end of October.

Mark O’Donnell, an analyst at JPMorgan, said Rocket’s nine-month revenues were more than “5 per cent better than we expected”.

He said HelloFresh had shown the “biggest positive surprise in terms of profitability”, with a loss of €66m — better than JPMorgan’s estimate of €79m.

But the €77m loss at Jumia, an online retailer active in Nigeria, came in larger than Mr O’Donnell’s forecast of €50m.

Wealth manager Brewin Dolphin hit by restructuring costs

Posted on 30 November 2016 by

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management.

The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year.

Finance director Andrew Westenberger said its 2015 figure was boosted by the one-off sale of a stake in Euroclear, worth £9.7m.

Brewin said it was a “good achievement in the difficult market conditions experienced in the first half of the period and immediately around the UK vote to leave the European Union”.

The wealth manager has spent the past three years transforming itself from an old-fashioned stockbroking group into a more modern wealth manager, increasing its focus on discretionary fund management.

It grew the discretionary arm of its business to £28.9bn over the year, a 16.5 per cent rise from £24.8bn in 2015. Core income was £263.3m, 4.8 per cent higher than the same period last year.

David Nicol, chief executive, said the numbers reflected the recent “strategic transition” of the company. “We have made encouraging progress in 2016,” he added.

Peter Lenardos, analyst at RBC Capital, said the wealth manager had “takeover potential”.

“Following recent sector consolidation, we believe that excess capital, a weak sterling, ultra-low interest rates, and an uncertain outlook could drive further M&A across the sector,” he said, adding that Brewin’s “attractive valuation” and strong balance sheet could make it a “tempting target”.

Paul McGinnis at Shore Capital said the wealth manager’s management team had done “a fine job of turning around the business over the past three years”, but said growth would now be “more of a struggle”.

Mergers and acquisitions swept across the £1.8tn sector this year, with a focus on midsized wealth managers that had between £5bn and £10bn of assets under management.

Brewin, whose results beat analysts’ consensus, was cautious in its outlook, acknowledging a “heightened sense of political and economic uncertainty”, but insisted it was “well placed to withstand any near-term downturns”.

Mr Westenberger said wealth and asset managers would face “pressure on pricing” following increased regulatory scrutiny and forthcoming European regulations known as Mifid II.

“There won’t be change that will happen overnight, but with Mifid II we’re going to have to be transparent for clients,” said Mr Westenberger. “We will participate and become more efficient, and even if pricing is under pressure we can provide a good service to clients.”

Brewin’s adjusted-profit-before-tax figure, which took account of the one-off Euroclear sale and excluded ongoing redundancy costs of £2.7m, was £61m in 2016 — marginally down from last year’s £62.2m. The company increased its full-year dividend by 8 per cent to 13p.

Hard-hit online lender CAN Capital makes executive changes

Posted on 30 November 2016 by

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 an internal review found that “some assets were not performing as expected and there was a need for process improvements in collections”.

CAN said it had promoted Parris Ganz, the company’s chief legal officer, to acting head of the company, replacing Dan DeMeo, chief executive. Arman Verjee, a former PayPal and Ebay executive who joined the company as chief financial officer last year, has also been put on a leave of absence, along with Kenneth Gang, chief risk officer and a former executive in Wells Fargo’s car finance division.

The company also said that it put a pause on generating new business until the end of the year, instead focusing on servicing current customers. It expects to resume growth in originations in 2017.

“It became clear that our business has grown and evolved faster than some of our internal processes,” CAN said.

The disclosure from privately owned CAN, which says it has supplied more than $6bn of loans and other credit products to small businesses since it was founded in 1998, comes amid broad fears that a new crop of online lenders has extended more credit than customers and small businesses can cope with. Such platforms have grown explosively in recent years, many of them claiming to provide faster cash at better rates than the lumbering brick-and-mortar lenders.

In the consumer-lending segment, platforms such as Lending Club, Prosper and Avant have radically reduced the pace of their originations, as investors have baulked at rising delinquencies in the riskiest parts of their portfolios.

In small-business lending, too, the pace of growth has dropped. Critics have warned that some of the practices employed by teams of loan brokers have been reminiscent of mortgage brokers in the run-up to the last financial crisis, foisting big loans on people ill-equipped to repay them.

Karen Mills, a senior fellow at Harvard Business School and a former Cabinet-level official in charge of small businesses, described parts of the current lending environment as a “Wild West”. She noted that the new crop of online lenders is operating under a patchwork of state and federal rules, with no single agency claiming special oversight.

Doug Nadius, chief executive of World Business Lenders, who runs a team of about 210 brokers operating out of new headquarters in Jersey City, says that his company took a decision to get out of unsecured lending to small businesses about two years ago, “because of broadly irresponsible lending practices driven by excess liquidity”.

CAN supplies both secured and unsecured loans, keeping some of them on its balance sheet and selling others into securitisations. The company funds much of its lending through a line of credit supplied by a dozen banks led by Wells Fargo, and including Morgan Stanley, Barclays, UBS, JPMorgan and SunTrust.

Kathryn Petralia, co-founder and head of operations at Kabbage, the third big player in small-business lending in the US, alluded to sloppy practices across the industry at a Las Vegas conference last month.

“There are 1,000 shitty ways to acquire a … customer,” she said. “We have to eliminate all of them.”

Banking app targets millennials who want help budgeting

Posted on 30 November 2016 by

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday.

For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling into debt.

Loot already offers a prepayment card in some UK universities. This week it is launching an account into which salaries can be paid and a contactless debit card. The fee-free account does not pay interest and will allow two cash withdrawals a month at the outset, followed by a £1 fee per time.

The Loot app permits customers to set a budget or savings goal and then track their spending, sending notifications on how much can be spent during the day to stay on course.

Customers can compare their spending with peers, and are offered discounts at retailers and coffee shops based on their spending habits. Loot will share spending data anonymously, in return for commission.

Loot founder Ollie Purdue, a 23-year-old law graduate, wanted to create “an app that said: you can spend this much today” after regularly running out of cash when he was studying © Loot Bank

“I realised at university that I had a student loan and worked in a shop and yet every month I would somehow run out of cash,” Mr Purdue said. “My bank app told me my balance and that was about it. I wanted to know how much was I spending and whether it was normal. I wanted an app that said: you can spend this much today.”

Unlike the app-based “challenger” banks that are attempting to compete with high street lenders, Loot does not have a banking licence.

Instead of applying for regulatory approval in the UK, which allows banks to gather customer deposits and lend them out, Loot has a partnership with Wirecard, a regulated German payment processing company, to hold customer cash.

Mr Purdue said that applying for a licence was time-consuming, expensive and involved continuing regulatory compliance that made it harder to turn a profit.He said the arrangement with the UK division of Wirecard means customers’ cash is ringfenced and not lent out.

There are limitations. Customer deposits are not covered by the Financial Services Compensation Scheme and the Loot bank account cannot offer an overdraft, unless it partners with another company.

Loot will also offer other services — such as international money transfers — for low fees, it said.

Some 23,000 people have signed up for the account ahead of the launch, Mr Purdue said. Loot has publicised itself using social media sites such as Instagram.

Mr Purdue said he pitched the idea to the chief executives of the largest high street banks and requested meetings, but the lenders declined his requests. They told him their customer data were not accessible enough for the project to work or that mobile apps were not a priority, prompting Mr Purdue to launch Loot.

A number of venture capital firms have backed the app, including Speedinvest — which has supported Holvi, a money management service for businesses — and Global Founders Capital, which has backed Iwoca, a small business lender. To date, Loot has raised more than £4.2m.

Hunt for yield pushes more investors into riskier assets

Posted on 29 November 2016 by

Pension funds and insurance companies have increasingly embraced riskier assets in their hunt for higher returns over the past five years.

Alternative assets such as property, infrastructure, private equity and hedge funds have been bought up by institutional investors in a world where yields on safer government bonds have hit rock bottom.

Total assets managed by the 100 largest alternative investment managers rose to $3.6tn this year, up 3 per cent on 2015, according to consultants Willis Tower Watson, as these assets have become more embedded in the portfolios of pension funds and insurance groups.

This switch into alternative products has prompted warnings that some of these institutional investors could be severely affected in the event of a financial shock or the seizing up of liquidity in the markets.

The OECD, the Paris-based group of mostly rich nations, warned last year that pension funds and insurance companies faced a growing threat of insolvency because of their increased allocations to riskier assets.

“The main concern is whether pension funds and life insurance companies have, or might, become involved in an excessive ‘search for yield’ in an attempt to match the level of returns promised earlier to beneficiaries or policyholders when financial markets were delivering higher returns. This might heighten insolvency risks,” the OECD said in its business and finance outlook for 2015.

So what are institutional investors doing to make sure they are not taking on too much risk?

Chris Hitchen, chief executive of the UK railway pension fund RPMI Railpen, says: “It is much harder to get returns today because yields are low. It takes decent returns as well as decent contributions to make decent pensions. This involves some risk.

“We have risk systems in place to try to ensure we do not get into a position where we are forced sellers. In the event of falling markets, we want to be in a position where we have enough liquid assets to pay our pensions and firepower to invest at lower prices.”

RPMI has investments in quoted shares, real estate, infrastructure, private equity and hedge funds, all considered riskier than government bonds, traditionally the safest assets.

The group has a system in place that monitors risk to its portfolios daily, while it employs experienced fund managers to ensure that its funds’ positions deliver the best returns with risks reduced to the lowest possible levels.

Other institutions such as Legal & General Investment Management carefully monitor systemic risk, or the perceived dangers to the markets of a breakdown in the financial system that would prevent investors from being able to sell assets or liquidate positions.

LGIM says that risks to the system are elevated because of rising worries over a hard landing in China, the threat of a break-up in the EU as the economies continue to struggle to grow, the potential fallout of Brexit and concerns over the impact of expected US interest rate moves.

John Roe, head of multi-asset funds at LGIM, says: “There are elevated risks in the system. As a fund manager or institutional investor, that means you have to be more vigilant and think more carefully about the weightings in your portfolio.”

Other fund managers say investors need to be more disciplined and flexible, seeking opportunities in areas of the market such as corporate high-yield bonds, subordinated bank debt, infrastructure and equities.

“Equities look good value and so does infrastructure. But you need a longer term horizon to invest in these type of securities,” says the investment director of a top UK fund manager.

“A pension fund that is still open to new members and is looking to hold an asset for a long time can be quite comfortable with equity volatility or the illiquidity in a market like infrastructure because they can hold these assets for years.

“Some pension funds refer to their quarter as 25 years, rather than three months. If you have that kind of long-term horizon, you can take quite a lot of risk and not face any threat in terms of insolvency.”

However, the reality is that it is much harder today to make decent returns.

“Going forward, if you want 8 per cent today in returns, you are going to struggle,” says Mitch Reznick, co-head of credit at Hermes Investment Management. “It is harder to hit those kind of returns with zero interest rates.”

He adds that the days when a pension fund or insurance company could rely on government bonds, typically considered close to risk-free, for returns, is in the past.

Unless a pension fund puts all its money in cash or treasury bills, which offer zero rates or in some cases negative yields, then there will always be a danger that the market could undermine its portfolio and cause losses.

As Jim Leaviss, head of retail fixed income at M&G Investments, says: “There is no such thing as a free yield. If you want yield, you have to take some risks.”