Year: 2010

G20 meets low expectations

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After two days of talks, the G20 has ended up at the lowest common denominator.

An agreement to develop “indicative guidelines” to help identify large current account imbalances that risk destabilising the global economy was the bare minimum expected of the leaders of the world’s 20 major economies.

By giving finance ministers the task of working out the indicators that will constitute the guidelines, the G20 will invite criticism that it is just kicking the can down the road.

Sceptics will say that a smaller, more cohesive group would have acted more decisively, especially at a time when – in the words of a closing communique – tensions and vulnerabilities in the international monetary system are plainly apparent.

Those tensions, especially between the United States and China over the yuan, could yet become unmanageable.

Against this difficult background, the G20 did itself no favours. The divisions between surplus and deficit countries as to how to share the burden of global adjustment are papered over in the closing communique, but they are all too visible.

US Treasury Secretary Timothy Geithner had abandoned his proposal for numerical targets for current account balances before coming to Seoul in the face of implacable Chinese and German opposition.

But the G20 could not even agree how to describe the vaguer alternative of guidelines. A draft of the communique had dithered between “measurable” and “quantitative and qualitative”. In the end no description was applied.

And what purpose should these guidelines serve?

The draft had suggested they might work as an “alert” or “detection” mechanism. The words, though, were in brackets, denoting disagreement.

Sure enough, they did not find their way into the final declaration: for some countries either word would have smacked of automaticity, an obligation to switch policy course at the behest of its peers.

Finally, the G20 leaders gave themselves plenty of time to draw up the guidelines. Initially, they were going to instruct their finance minister to have finished the job by spring. In the end, they merely asked for a progress report in the first half of next year.

In short, the sense of urgency coursing through markets about the need to restore faith in the global economic and monetary order is conspicuous by its absence in the Seoul Declaration.

But will the world now descend into a nether world of trade barriers and currency wars? Not necessarily.

Still relevant
One of the few heartening outcomes of the 2008 global financial crisis is that protectionism has been contained. There has been no replay of the tit-for-tat tariffs of the 1930s despite low growth and high unemployment in the West.

On the currency front, expect some countries to follow the example of Brazil and Thailand and resort to capital controls to slow unwanted capital inflows.

But the G20 has drawn the sting from the issue by saying emerging economies with overvalued exchange rates are justified in taking “macroprudential” measures to ward off capital inflows.

The G20 has met low expectations. The agreement is weak. But it is at least an agreement that keeps a disparate group heading in the right direction.

Critically, a deal that President Obama called a “hard-won consensus” buys time for the United States and China to keep working out ways to reduce their politically contentious bilateral trade deficit – the crux of the problem.

“I am not saying we are going to solve each and every one of these problems”, British PM David Cameron said after listing the issues that confronted the Seoul summit.

“I am not saying that the G20 is in its heroic phase as it was during the 2008 crisis, but I would challenge those who say that the G20 is losing its relevance. I do not accept that.”

Geithner: China can’t resist upward yuan pressure

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China cannot continue to resist upward market pressure on its yuan currency without facing higher inflation and rising asset prices, US Treasury Secretary Timothy Geithner said recently.

Geithner, in an interview with CNBC television on the sidelines of a Group of 20 leaders summit, said he believed there had been progress on China currency issues and authorities in Beijing believed that it was important to let the appreciation process continue.

“If you resist those market forces that are just a reflection of confidence that you’re going to see strong growth in China, strong productivity growth in China, if you resist those market forces, that pressure is not going to go away,” Geithner said. “It’s just going to end up in higher inflation or higher asset prices and that’ll be bad for China.”

A draft copy of the G20 leaders’ final statement calls for them to move “toward more market determined exchange rates and enhancing exchange rate flexibility rate flexibility to reflect underlying economic fundamentals.”

Geithner said this was important because countries that resist such fundamental exchange rates pressures would only increase problems for countries with more flexible currencies.

“What that means is all the pressure you see falls disproportionately to those emerging market economies that allow their currencies to move and that’s unfair to them and creates a set of broader tensions in the economy that are worth trying to avoid,” he said.

Weaker dollar in US interest?
Geithner also defended US exchange rate policy, saying IN the interview the United States would never deliberately weaken the dollar.

“The US will never do that,” Geithner said, responding to a suggestion by former Federal Reserve Chairman Alan Greenspan that Washington was pursuing a policy of weakening the dollar.

“We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” Geithner said. “It’s not an effective strategy for any country and it’s not for the US We’ll never do that.”

Greenspan wrote in a Financial Times guest column published in early November that a weak US dollar policy, coupled with the suppression of China’s yuan currency, was driving up exchange rates in the rest of the world.

Geithner attributed the dollar’s weakness to a reversal of safe-haven capital flows and a return to risk appetite. He said two and a half years ago the dollar began rising because the world was concerned about depression and systemic collapse and sought “the safety of the risk-free assets of the US.”

“The dollar generally rose during that period of time and as the world becomes more progressively confident, some of (those) safe haven inflows have been reversed,” he told CNBC. “That’s been the dominant trend we see, that’s very encouraging,” he added.

He also said that leaders from the Group of 20 wealthy and emerging economies will endorse the G20 finance ministers agreement to avoid competitive currency devaluation and limit excessive current account imbalances.

“It’s worth stepping back to see what are basic objectives of this proposal and they are to make sure that as the world recovers, we don’t set in motion the types of forces that could lead to re-emergence of excessive imbalances around the world – deficits and surpluses – because those would threaten our future growth,” he said.

Standpoint: The World Finance Q&A

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Should Eurozone members that break the rules on public finances be excluded temporarily from Europe’s political decision-making?

Dr Bob Swarup: In an ideal world, political sanctions always sound like a good idea. The problem is that the European Union is an imperfect mishmash of countries bound by largely economic ties, not political ones or some shared heritage. Therefore, most play to the local political audience and the only effective restraint is economic, as evidenced by Greece.

Frank Feather: Yes. Rules are toothless unless enforced. Otherwise you will have ad hoc behavior which flaunts those rules. The severity of punishment is for the EU to decide collectively. But either the EU is unified, or it isn’t. Members who misbehave, as with a naughty child, should be “sent to their room” until they apologise and behave.

Leslie L. Kossoff: No. That might be emotionally satisfying but it’s not a realistic tactic to build cohesion. The suggestion, however, demonstrates the underlying problems of the existing structure’s competing agendas – sovereign, economic and political. This needs to be addressed before it becomes necessary for future interventions which create greater dissatisfaction and distrust within member states.

Can a Volcker Rule prevent crises?

Dr Bob Swarup: You can’t change human nature. There have always been outbreaks of speculative fever caused by new profitable opportunities. Some unexpected catalyst then inevitably leads to a crisis as investors scramble to withdraw funds before the brevity of financial memory allows us to repeat the cycle endlessly.

Frank Feather: No specific rule or concept can be 100 percent guaranteed to prevent financial crisis. The Volcker Rule provides strong discipline. But in the end, central banks and commercial banks need to behave themselves. After all, it is in their self-interest to be prudent and not reckless risk takers.

Leslie L. Kossoff: No. A Volcker Rule can, at most, mitigate the risk of crises occurring as a result of what’s already known. But that doesn’t take into account the creativity of the financial sector to create new – and risky – strategies. Regulation is going to have to be just as creative and fluid as financial industry innovation to help avoid crises.

Are fears of a double-dip in the US and UK exaggerated?

Dr Bob Swarup: The market today is strangely dichotomous, with people either strongly bullish and hopeful we are in the early stages of recovery, or perma-bearish and convinced we stand on the cusp of another leg downwards. Economic numbers are weaker but businesses are in strong health. The final coin-toss depends on policy – the scope for error has never been so large.

Frank Feather: There is far greater chance of a “W” recession in the EU than in USA. The EU is challenged by a humongous amount of inter-country debt which could implode. EU governments cannot carry their debt load as easily as can the larger US. I do not expect a double-dip in US, but slow recovery. EU is another matter.

Leslie L. Kossoff: Yes. It’s going to be a long haul for both countries to see their way completely out of the recession, but the Fed and BoE will intervene to avoid a full-blown double dip. The greater problems are the impact of the fear from media reporting, lack of perceivable positive movement to the populace and continuing perception of corporate greed.

Here’s €10,000. Where do you invest?

Dr Bob Swarup: Investment horizons are getting shorter. I’d invest in: high-dividend megacaps – in a low growth world, cashflow and yield are increasingly important; emerging markets – these went through a recession dynamic, not a depression; and real assets – the value of money will be the big fear going forward.

Frank Feather: Frankly, I would sit on the sidelines until the economic picture stabilizes. Otherwise, selective picks in solid futuristic companies with reasonable P/E ratios. Also look at US real estate, which is at its low, and which offers spectacular gains over the next 2-3 years as inventory gets worked off.

Leslie L. Kossoff: In commodities.

What’s the best piece of advice anyone has ever given you?

Dr Bob Swarup: There are two invaluable pieces of advice that come to mind immediately. From JK Galbraith: “The only purpose of economic forecasting is to make astrology look respectable.” And second, from when I began in hedge funds, “All models are broken.”

Frank Feather: “Economic cycles are real. Save for a rainy day!” Post-recession, consumers will have a depression-era mindset for a decade, even a generation. Savings rates are rising already. We will see less debt-based consumption as people demand value. Still, the next slowdown (around 2019) will catch millions unprepared.

Leslie L. Kossoff: Do the best you can with the information you’ve got, knowing that you’re making the best decision possible at the time and with no regrets afterwards. From then on, decide whether and with whom you want to continue doing business or having in your life – but that’s on them. For you, it’s continuous learning.

All members of our panel have written for QFINANCE: The Ultimate Resource. Please visit www.QFINANCE.com for more information

Republican win could revive US trade deals

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While the fate of those deals rests primarily with President Obama, US business leaders say trade is one area of potential compromise between the White House and Republicans in 2011.

“Trade has been at the back of the bus for last two years and I think there’s a real opportunity for trade to be in the front seat next year,” said Christopher Wenk, senior director for international policy at the US Chamber of Commerce.

Republicans are expected to pick up enough seats in the congressional elections to take control of the House, which they lost to Democrats in 2006. Democrats are likely to hold onto the Senate, but the party’s opposition to trade agreements traditionally has been strongest in the House.

Other factors could influence the debate too.

Obama, who tapped into the Democratic party’s aversion to free-trade deals when he ran for president in 2008, must decide whether to push Congress to approve the deals negotiated by his predecessor George W Bush and risk alienating a swath of his Democratic Party base.

Indeed, critics of the deals, such as Public Citizen’s Global Trade Watch, say Obama risks his own re-election in 2012 if he pushes the three agreements through without big changes.

“We’re looking at over 100 House races where Democrats are playing defense and those campaigning on ‘fair trade’ themes appear a lot more likely of succeeding,” said Todd Tucker, research director for Global Trade Watch.

If the recovery of the US economy remains sluggish – and unemployment holds near 10 percent – Obama could face voters in 2012 who are even more skeptical of trade deals. That would hurt his chances in Ohio, Pennsylvania, North Carolina and Virginia — states that were important in his 2008 victory.

Tea Party influence
Another wild card? The Tea Party movement and what side of the trade debate it will join. Tea Party candidates, who favor a smaller, less expensive federal government, could win dozens of seats.

Representative Kevin Brady, a Texas Republican, said he thought most would support the pacts.

But some analysts see a more mixed effect.

“Some of these Tea Party advocates may not be automatic votes for trade agreements. I think some of the Tea Party members are prone to the more populist rhetoric about foreign influence and jobs going overseas,” said Dan Griswold, director of trade studies at the Cato Institute.

“They’ll help boost the overall number of Republicans, but also increase the size of the more trade-skeptical faction within the Republican caucus,” Griswold said.

Representative Dave Camp, a Michigan Republican in line to become chairman of the House Ways and Means Committee if Republicans take control, has promised he would hold early hearings on the three trade agreements.

Republicans also could make a push to give Obama new “fast track” authority to negotiate trade deals, which would send a positive signal of US interest in finishing the nine-year-old Doha round of world trade talks.

The current Ways and Means chairman, Sander Levin, a Michigan Democrat, has been so loathe to deal with trade that he has not once invited Obama’s chief trade negotiator, US Trade Representative Ron Kirk, to testify publicly.

Obama has moved slowly toward embracing the pacts since entering the White House, especially the one with South Korea.

But many Democrats say they can only support the trade deal if the president persuades the Koreans to accept other difficult demands in areas such as the pact’s investment chapter and its financial services provisions.

Xstrata to spend $246m to expand Australia zinc

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Miner Xstrata, the world’s biggest integrated zinc producer, will spend A$274m ($246m) to boost output at its George Fisher mine in Australia by nearly 30 percent by 2013.

Xstrata said in a statement it had got approvals from the state government of Queensland to proceed with the expansion of the mine at the group’s Mt. Isa operations.

“George Fisher Mine contains one of the largest zinc reserves in the world and the expansion project enables us to further tap its significant resource potential,” said Brian Hearne, chief operating officer of Xstrata’s Australian zinc division.

The expansion will increase the annual production rate to 4.5 million tonnes from 3.5 million tonnes.

“While the increased production rate will reduce the life of mine by five years to 21 years, the orebody remains open at depth to the north of the mine,” Hearne added.

Xstrata has increased reserves at the operation by 126 percent to 76 million tonnes from 33 million tonnes when it acquired it in 2003.

Defending the state

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For thirty years the recommendation of economists has been: roll back the state. Governments are told either to step back; or to create new markets, such as for carbon permits, and then step back. Big business is happy to hear this message and promotes it loudly.

What arguments are made for this view? First, we are told that redistribution, especially direct transfer of income as social welfare, weakens the incentive to work and creates an idle disruptive underclass. Second, since governments are less directly engaged with events on the ground, they supposedly have less information and manage the economy poorly through regulation and redistribution – as opposed to individuals and firms who make better decisions because they know their own situation. And, third, economists believe that state officials will do nothing but feather their own beds and those of their cronies.

None of these views are justified. Take incentives to work. Before the recent recession, the difference in equilibrium unemployment between the US and statist Europe was about two percent of the labour force. This was partly due to factors other than redistribution, but, even if it were all due to redistribution, it would be a modest price for the benefits of an active state. And this is in any case offset by the fact that unemployment insurance lets people take risks in their career – benefiting economic progress.

Likewise, even if welfare does create an underclass, abolishing welfare would probably create a much bigger underclass composed of those who fell out of the system and never clawed their way back. It is even possible that those countries with meagre welfare systems maximise the size of their underclass by having enough welfare to encourage some people not to work but not enough to help more diligent individuals suffering difficulties.

Similarly, it is false that individuals and firms are better informed than governments. Individuals are confused by the barrage of information they face and are influenced by advertising, while firms swing with market sentiment. Even what looks like an ‘innovative’ firm satisfying previously unnoticed demand and offering a new product is often just its creating such demand through marketing and hype. By contrast, governments have more analytical resources and are more detached. Beyond issues of information, governments have different incentives from firms: they aim to make the system work well, as opposed to just benefiting themselves.

Are state officials completely selfish? There is, of course, corruption – especially in weak legal jurisdictions. But the reality is that most public servants, like others, feel intrinsically compelled to do a good job because of moral conscience, workplace loyalty and personal pride. Even where they are of a shady type, the electoral incentives of their political bosses and the legal sanctions associated with abuse tend to keep them in check.

There is no relationship between the size of the state and economic performance. Taking World Bank data for all available countries over the period 1960-2008, one finds no correlation – negative or otherwise – between total tax take and GDP growth.

Few countries have a tax take below about 20 percent of GDP and few developed countries have it below 35 percent. If they had less, essential services that can only be financed by the state would stop and growth would suffer. Furthermore, if the state spends well on research and development and other targeted areas, it can do much to boost growth. The socialistic countries of Scandinavia routinely manage faster growth (and lower unemployment) than the US.

There is a strong positive correlation between the size of the state and various indices of well-being and happiness. This breaks down only when governments nationalise too many firms, causing inefficiency. In short, the state is good.

Investor Relations Awards 2010

Posted on by Ashton Wenborn

Best Online Annual Report in Greater China
Air Asia

Best Financial Disclosure Procedure in Greater China
Advanced Semiconductor Engineering, Inc.

Best Online Annual Report in Africa
Copperbelt Energy Corporation Plc

Best Financial Disclosure Procedure 
in Africa
Kenya Airways, The Pride of Africa

Best Online Annual Report in Latin America
Mexichem

Best Financial Disclosure Procedure in 
Latin America
Copasa

Best Online Annual Report in North America
Keyera

Best Financial Disclosure Procedure in North America
Imnet Mining Corporation

Best Online Annual Report in Asia Pacific
Samsung

Best Financial Disclosure Procedure in Asia Pacific
CapitaLand Limited

Best Online Annual Report in Europe
Fraport AG

Best Financial Disclosure Procedure in Europe
Metro

Telecoms Awards 2010

Posted on by Ashton Wenborn

Telecoms Innovation of the Year, Western Europe
Türk Telekom

Telecoms Innovation of the Year, Eastern Europe
Netia

Telecoms Innovation of the Year, North America
iBasis

Telecoms Innovation of the Year, Latin America
TeleNorte

Telecoms Innovation of the Year, Asia
Phorm

Telecoms Innovation of the Year, Africa
Globacom

Telecoms Innovation of the Year, Middle East
Axiom Telecom

Telecoms Innovation of the Year, Australasia
F-Secure

Wireless Telecoms Provider of the Year, Western Europe
Telecom Italia Mobile

Wireless Telecoms Provider of the Year, Eastern Europe
Polska Telefonia
Cyfrowa Sp. Z o.o.

Wireless Telecoms Provider of the Year, North America
Verizon Wireless

Wireless Telecoms Provider of the Year, Latin America
TIM

Wireless Telecoms Provider of the Year, Asia
NTT DoCoMo

Wireless Telecoms Provider of the Year, Africa
Vodacom

Wireless Telecoms Provider of the Year, Middle East
Etisalat

Wireless Telecoms Provider of the Year, Australasia
Telstra

Fixed Line Provider of the Year, Western Europe
Türk Telekom

Fixed Line Provider of the Year, Eastern Europe
Telekomunikacja
Polska S.A.

Fixed Line Provider of the Year, North America
CenturyLink

Fixed Line Provider of the Year, Latin America
Oi Fixo

Fixed Line Provider of the Year, Asia
Pacific
Century
CyberWorks Ltd

Fixed Line Provider of the Year, Africa
Globacom

Fixed Line Provider of the Year, Middle East
Nawras

Fixed Line Provider of the Year, Australasia
Telstra

Broadband Service Provider of the Year, Western Europe
British Telecom

Broadband Service Provider of the Year, Eastern Europe
Stream Communications Network and Media Inc.

Broadband Service Provider of the Year, North America
Century Link

Broadband Service Provider of the Year, Latin America
Brasil Telecom

Broadband Service Provider of the Year, Asia
Hikari Tsushin Inc

Broadband Service Provider of the Year, Africa
MTN

Broadband Service Provider of the Year, Middle East
Batelco

Broadband Service Provider of the Year, Australasia
EFTEL Ltd

Fully Integrated Telecoms Provider of the Year, Western Europe
Türk Telekom

Fully Integrated Telecoms Provider of the Year, Eastern Europe
Hrvatske
Telekomunikacije d.d.

Fully Integrated Telecoms Provider of the Year, North America
Verizon
Communications

Fully Integrated Telecoms Provider of the Year, Latin America
Telefonos de Mexico

Fully Integrated Telecoms Provider of the Year, Asia
SK Telecom

Fully Integrated Telecoms Provider of the Year, Africa
Uganada Telecom

Fully Integrated Telecoms Provider of the Year, Middle East
Qatar Telecom

Fully Integrated Telecoms Provider of the Year, Australasia
Optus

Financial Services Telecom Application of the Year, Western Europe &
UK
IG Index

Financial Services Telecom Application of the Year, Eastern Europe
Armenbrok

Financial Services Telecom Application of the Year, North America
E*Trade US

Financial Services Telecom Application of the Year, Latin America
Banco de Brasil

Financial Services Telecom Application of the Year, Asia
CMC Markets

Financial Services Telecom Application of the Year, Africa
Neo Africa

Financial Services Telecom Application of the Year, Middle East
Mubasher
Financial Services Telecom Application of the Year, Australasia
IG Markets

Green Telecoms Company of the Year, Western Europe
Telekom Austria Group

Green Telecoms Company of the Year, Eastern Europe
ZTE

Green Telecoms Company of the Year, North America
Polycom

Green Telecoms Company of the Year, Latin America
Telefonica

Green Telecoms Company of the Year, Asia
Fujitsu

Green Telecoms Company of the Year, Africa
Orange-Guinea

Green Telecoms Company of the Year, Middle East
Axiom Telecom

Green Telecoms Company of the Year, Australasia
Telstra Telecoms

Software Company of the Year, Western Europe
INQ Mobile

Software Company of the Year, Eastern Europe
Mera Software

Software Company of the Year, North America
Equinox

Software Company of the Year, Latin America
Elandia

Software Company of the Year, Asia
CRM Software

Software Company of the Year, Africa
Ectel

Software Company of the Year, Middle East
Zain Group

Software Company of the Year, Australasia
Quickcom

Global Mobile Handset Manufacturer of the Year
Acer

Global Telecoms CEO of the Year
Henrik Poulsen, TDC

Global Telecoms CTO of the Year
Ajay Joseph, iBasis

Global Telecoms CFO of the Year
Efrat Makov, Alvarion

The back-to-front world view of Standard Chartered

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Standard Chartered does not see the world in quite the same way as other banks. In March this year, the bank appointed V Shankar as chief executive of the Middle East, Africa, the Americas and Europe and moved him to Dubai.

Read the job title again, and it almost looks like a deliberate snub to the traditional Atlanticism of the financial markets.
At a time when most of the banking world is rushing east to take advantage of fast-growing markets in Asia and Africa, Standard Chartered, which generates just seven percent from the region it calls “Europe/US”, is already there. Instead, it is asking itself whether it should be going the other way.

Mike Rees, chief executive of wholesale banking, which encompasses the corporate and investment banking divisions at Standard Chartered, said: “Yes, we want to expand westwards, but westwards from Shanghai into mainland China, not westwards into large but highly developed and slower growth markets such as Europe or the US.”

Standard Chartered is sticking to its roots in Asia, the Middle East and Africa, which date back to the 19th century, and pursuing a two-pronged growth strategy to build scale in local markets and expand the range of products – particularly in investment banking and financial markets – that it can offer to its traditional clients.

Rees said Standard Chartered’s rule of thumb was that wholesale banking revenues would grow at two to two-and-a-half times the rate of GDP growth over the cycle. In high growth markets, this should translate into annual growth in the mid to high teens.

The wholesale banking division, of which Rees has been in charge since 2002, has been running ahead of this target, with revenues and pretax profits growing at a compound annual rate of more than 25 percent since 2005, to $5.01bn and $2.47bn respectively in the first half of this year. As foreign competition increases in the many markets it calls home, the big question for Standard Chartered is whether it can manage and maintain this rate of growth.

This growth has been accompanied by rapid hiring in global markets – with staff rising from 4,500 in wholesale banking in 2002 to 16,500 today. Most of these have been in the “arc of growth” – through South East Asia, across India, into the Middle East and Africa. Standard Chartered’s global products heads are based almost exclusively in Asia: recent hires in Hong Kong include a global head of equities, fixed-income research and equity sales.

Lenny Feder, head of financial markets, is based in Singapore, along with the recently hired global head of commodities research and of client coverage. The global head of debt capital markets sits in Dubai. Rees is the exception in that he is based in London, where the bank is headquartered despite employing only 2,000 of its 77,000 staff in the UK.

The world’s local bank?
Rees said: “Our clients – individuals, companies and governments – view us as a local bank and, in many cases, one that has been working with them for decades, not as a foreign bank that operates by parachuting product bankers in to see the client.” He views competition from overseas banks as “episodic”, and instead of merely gaining a foothold in new markets, the wholesale division aims for local scale, with a target of being at least the fourth or fifth largest participant in each market with a market share of 10 percent and above.

Feder, who joined in 2007 after a career at Lehman Brothers and Bear Stearns, said this record of getting into markets early and staying – “we have never voluntarily left any market in which we are active” – had resulted in strong client relationships.

The challenge the bank faces is keeping up with those clients and expanding its product range to meet their needs. Feder said: “Our clients are in the world’s fastest growing markets and their business has grown in tandem. Our focus is to continue to build product capability to meet their changing and growing needs. We don’t want to lose that relationship with the CEO when they get to the next big stage in their development.”

Not having these additional products and being forced to walk away from clients is not just about losing money, said Feder: “It’s about losing touch points with the client and not being able to further our relationship with them.” This geographic and product roll-out appears to have resulted in greater penetration and “wallet share” with Standard Chartered’s existing client base. One metric the bank uses is tracking how many clients pay more than $1m, $5m and $10m in fees and commissions. Between 2007 and this year, the number of clients paying more than $5m nearly tripled to 240, and the number paying more than $10m quadrupled to 96.

The wholesale division’s rapid growth is reflected in its contribution to the group. In 2005, 45 percent of Standard Chartered’s group revenues came from wholesale banking. In the first half of this year, that contribution rose to 63 percent, with two thirds coming from financial markets and corporate finance compared to just under half in 2005.

Going for growth
In the past five years, revenues and profits in wholesale banking have more than tripled – a higher growth rate than at any of its international rivals. HSBC, whose banking and markets revenues in the first half of this year were $10.8bn, managed 99 percent growth over five years. Global markets revenues have risen more than fourfold and, at a time when many banks are cutting their risk-weighted assets, Standard Chartered’s have more than doubled to $175bn and are still growing.

Such rapid growth might usually be associated with margin compression, higher costs, lower profitability and a big increase in risk. But pretax margins in the wholesale division have remained stubbornly high in the mid to high 40 percent range, touching 49 percent in the first half of this year. Value at risk, a measure of trading risk, is around $25m, or around a quarter of its US and European rivals’. As risk-weighted assets have increased, so the return on them has grown from 1.9 percent in 2005 to an annualised 2.8 percent this year.

Rees said: “This is business that is doubling in size every three years. Of course, we need to focus on the discipline and consistency of that growth, but we believe it is a rate of growth that is sustainable.”

Maintaining and managing annual growth in the high teens will be a formidable challenge for Rees and his team.

Analysts covering the bank, appear to be onside, at least for the time being. A recent report by Credit Suisse subscribed to the bank’s growth targets for wholesale division over the cycle and, of the 21 analysts covering the stock who have published research in the past two months, 10 rate the bank as outperform, eight as neutral and just three as underperform.

Integral to the bank’s ability to manage this rate of growth is for it to be able to attract and retain talent. Rees said he worried that this was being undermined by FSA’s new rules on remuneration, which apply not only in the bank’s home market but in every country in which the bank operates, and by other regulatory reforms.

He said: “When a regulator comes into the room and asks me what my biggest risk is, I say: ‘You’. We understand that the bonus tax was political expedient, but when they look to introduce regulations that create structural long-term competitive disadvantages, then there is a problem. No one wants to move out of the UK. But we need to show that there are two sides to this argument.” Standard Chartered’s wholesale banking growth has not been a one-way street.

It came under fire for a $7bn structured investment vehicle called Whistlejacket that collapsed in February 2008, got tied up in some controversial currency derivatives called Kikos in Korea, and lost money lending in some countries such as Saudi Arabia where it does not have a local base.

Without commenting on specific cases, Rees openly admitted the bank had made mistakes. Most prominently, it was one of the biggest lenders to Dubai World, the Emirati conglomerate that was forced to restructure its debt. Did the bank get carried away by the Dubai story? “No. That was one strategy.

There will always be ups and downs in the business, but standing by a client is never a mistake,” he said, pointing out that the week before the bank had been one of the three banks, along with Deutsche Bank and HSBC, to be picked to lead the Dubai government’s first bond offering since the crisis in one of the most plum deals in the region this year.
For the past eight years, it has been mostly up for Rees and the wholesale banking business at Standard Chartered. Their real test will come if – or when – the spectacular growth it has enjoyed begins to stall.

© 1996-2010 eFinancialNews Ltd

Tax treaty heralds a brave new world

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Spain is considering a similar tax deal with the Swiss, as tax authorities across Europe seek to boost their coffers by agreeing tax secrecy will continue.

Under the planned deal, expected to be signed next month, the Swiss would apply a withholding tax on German assets held in Switzerland and provide more co-operation in tax evasion investigations. By way of return, details on German client accounts would not automatically be shared with the German authorities, thus preserving Swiss bank privacy.
Switzerland’s private banks are relieved. A spokesman for Clariden Leu said: “Bank client confidentiality is intact and will remain in force. We believe Switzerland will continue to be an attractive place thanks to its high compliance standards, among other reasons.”

With €200bn of untaxed wealth squirrelled away in Switzerland, according to analysts, German individuals are the country’s biggest clients. A breach of secrecy would have given Germans – who benefit from zero banking privacy in their homeland – little reason to retain their Swiss bank accounts.

Patrick Odier, chairman of the Swiss Bankers Association, said in a statement: “There are grounds for optimism. We note with satisfaction that Wolfgang Schäuble, Germany’s finance minister, has announced in public that he agrees with our proposal for a flat-rate withholding tax.”

The SBA, which represents more than 300 banks including UBS and Credit Suisse, said the withholding tax could raise “billions per year”.

The development is a ray of hope for Swiss private banks: Berlin has paid for stolen data from a number of Swiss private banks. It raided the German offices of Switzerland’s second-largest bank, Credit Suisse, this year, severely denting trust.

Last year, the US tax authorities brought a civil lawsuit against UBS to gain details of some of its US client accounts. Switzerland’s number one bank went on to haemorrhage $200bn of assets from its Swiss and international wealth management arm, although the situation is now stabilising.

Christian Nolterieke, managing director of Swiss-based consultancy MyPrivateBanking, warned of the German deal: “Wealthy clients do not care what is written in a contract, if every few months another CD with client data pops up.”
Even if one country does a deal, another can continue to challenge the status quo. Despite assurances by UBS and the Swiss government that their privacy would not be breached, the Swiss bank was ultimately forced to hand over data on its American clients.

Nolterieke said: “Even if the Swiss can negotiate that no automatic information exchange is part of the treaty, the trust in the Swiss banking industry is gone.”

Others say Switzerland is well placed to bring in more business, particularly after the German deal. Christopher Wheeler, an analyst at Italian bank Mediobanca, cites factors in Switzerland’s favour including political and economic security, a strong and stable currency, a highly diversified banking sector, well-trained bankers and regulation.

The strength of the Swiss franc, up five percent this year against the dollar, suggests money is flowing its way. In an annual survey published by the World Economic Forum this month, Switzerland was named the most competitive nation in the world for the second year running.

Wheeler added: “Show me a good alternative to Switzerland. Monaco, Singapore and the Bahamas are all subject to OECD tax information exchange agreements. Most centres not covered by these protocols lack the sophistication wealthy clients require.”

Kinner Lakhani, an analyst with US bank Citigroup, said: “We believe that the new double-taxation treaty with Germany is a landmark deal which could potentially serve as a new template for Swiss private banking.”

Francis Rojas, partner at law firm Withers, said Spain could also benefit from the Swiss-German agreement. He said: “As Spain has a most favoured nation clause in its tax treaty with Switzerland, the revised exchange of information clauses in treaties with other EU member states indirectly also apply to Spain. Like other member states, Spain will be anxious to see how they can benefit from the precedent being created with Germany.”

Philip Marcovici, an international tax specialist on the board of Kaiser Ritter Partner, a Liechtenstein-based wealth adviser, said: “We are watching developments regarding Switzerland’s negotiations with Germany and other countries with fascination.”

But Marcovici said complications arising out of the bilateral agreement could lead to further taxation: “The reality is that many families own non-bankable assets that will also be of interest to tax authorities, making a withholding approach very difficult to implement and, possibly, expensive for the wealthy.”

Citigroup’s Lakhani said that although an automatic tax exchange agreement seemed unlikely, withholding tax levies could be extortionate: “While we believe the likelihood of automatic information exchange remains limited, further steps appear inevitable.”

He said the withholding tax option of the European Union Saving Tax Directive – to be increased from 20 percent to 35 percent in July 2011 – could be pushed higher over the years to head off pressure from authorities.

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