Year: 2016

Anticipating future industry challenges is vital for wealth management firms

Posted on by Helen

The new year is already upon us and it seems as though 2015 was a fast moving train that carried some surprises and valuable lessons for investment managers worldwide. As we head into 2016, it is critical to reflect on what we have learned from previous years and to anticipate the challenges and opportunities that lie ahead. Last year, investors faced a period of diverging central bank policies on a large-scale; plummeting oil prices; Middle-Eastern political turmoil; and the eventual shake-up from the uncertainty surrounding China. Finding the bright spots to invest in proved to be a daunting task.

The right balance
The key condition that should and must be satisfied today is that advisors must understand their clients. They must understand their needs and be able to adapt their value proposition to changing times and circumstances. It always holds true that clients seek trust and transparency when selecting an advisor, but they also want to justify the fees they’re paying for the advisor’s services. On one front, advances in technology – as evidenced by the proliferation of robo-advisors and do-it-yourself trading platforms – have given investors lower-cost alternatives to working with professionals. On another front, the recent volatility has spooked many potential investors who have difficulty seeing the value in working with wealth managers.

These are a couple of the issues we are facing in this day and age and to overcome them, we must bring more value to the table. We can do so by providing the client with superior service by offering attractive alternative investments ideas that differ from traditional asset classes. Robo-advisors cannot source and provide attractive real estate or private equity deals, nor can they conduct the due diligence necessary for such deals.

The same goes for hedge funds and other alternative investments. Advisors can add more value through the relationships forged with hedge fund managers, and gain access to high-performing investments for their clients that are not typically accessible to the general public, due to certain restrictions or minimum requirements imposed by the manager. If we cannot offer that to our clients then we are no different from the robots that may be major game-changers in our industry as we move forward into the future. The need for tailored and specific investment advice is gaining more and more prominence. The more sophisticated clients we are working with today require an advisor who can tailor advice to their individual needs and who understands their needs at various stages of their lives. They are also looking for an advisor who can look at the entire picture and offer a holistic wealth management approach with solutions that extend beyond just portfolio management.

Investors are more tech savvy than ever before, and most firms have adapted their models to the digital age

For example, we have found that an often over-looked need in the MENA region is the ability to transfer wealth from generation to generation in the most efficient way through estate planning. In reality, more than 90 percent of the businesses in the MENA region are owned by families and are now just about to enter the phase where the second or third generation have to take over.

Statistics show that family businesses do not survive beyond the third generation unless properly structured through efficient family governance processes and where the interaction between the family and the business is well understood and accepted by all family members. We believe that estate planning is an essential solution that every wealth manager dealing with high net worth individuals and families should be able to offer. In that respect, experience and expertise are of essence, together with a deep knowledge of the local customs and laws.

Utilising the simplest communication
Another important factor for clients is ease of doing business with the advisor. Investors are more tech savvy than ever before, and most firms have adapted their models to the digital age. Recent surveys show that the majority of clients prefer to conduct most business matters by email and want ease of access to information. Their busy lives call for fewer face-to-face meetings and more accessibility through digitalisation. The challenge facing this type of innovation is cyber security. Therefore the proper systems and protocols must be in place to guard against cyber-attacks and the potential leak of sensitive client information.

Superior client service is another major added value in our industry and according to recent studies, it holds one of the top spots on the strategic agenda for most wealth management firms in the years to come. In order to attract new clients, and more importantly, retain existing clients, we must strive to deliver services that exceed client expectations. Clear communication, full transparency and accountability are vital for a good client/advisor relationship. Managing client expectations is just as important as meeting or exceeding expectations. The most successful advisors are realistic when it comes to their capabilities, and never agree to a certain hurdle that they are not likely to achieve.

Finally, and probably more importantly, wealth managers and banks in general are facing constant regulatory changes, and have to adapt to an ever-changing world where compliance and risk management are considered major components, if not the most important ones. Nowadays, the world has become more transparent from which traditional banking secrecy has almost disappeared. This is justified by more stringent exchange of information regulations where tax evasion has become a predicate offence underlying money laundering. Wealth managers, even if acting through limited power of administration over assets held in custodian banks, have to abide by the same KYC and due diligence procedures as those banks are bound by.

SFB boxout 2

The challenges that all wealth managers know they will be facing more and more include the threat of new entrants and competition, sector consolidation, cost control and pricing pressures. These challenges serve as further attestation of the need to re-evaluate a wealth manager’s value propositions and adopt a dynamic business model.

One of our greatest convictions is that reputation and the perception of your brand are huge differentiators among peers in our industry. While this view may seem intuitive to most of us, it is too often that we are seeing even the leading names in the industry penalised for misconduct or fraud. Building and protecting a good reputation is essential for survival and it involves careful management of our relationships with clients, regulatory bodies and all other affiliations of the firm.

Any employee is a representative of the firm and must be mindful of that when engaging the public in person or through social media channels. In addition, any marketing campaigns or advertising for the firm should be cautiously managed because once in the public eye, there is no taking back or deleting something that could potentially backfire on the firm and harm its image as it would be already imprinted in the minds of the viewers. Just as human beings have evolved and adapted to a rapidly changing world, wealth managers will evolve and adapt to the rapidly changing investment landscape. Regardless of the headwinds that continue to blow through the industry, there is always added value to be found for both clients and advisors alike that can withstand the wind.

Do financial modellers need a Hippocratic Oath?

Posted on by Ashton Wenborn

Economics has long modelled itself after hard sciences such as physics and engineering. For example, we speak of ‘financial engineers’, who use sophisticated models to mathematically eliminate risk (in theory). However, in the immediate aftermath of what has become known as the Great Financial Crisis of 2007/8, it became rather obvious that economics is a little different. For example, machines can be built to obey well-understood laws, the economy less so. And, as a number of people pointed out, engineering and economics have also evolved in very different ways, particularly in how they relate to the question of ethics.

Engineers have always realised that their work has an ethical dimension – especially because machines, if designed incorrectly, have a tendency to blow up and hurt people. In 1964 the US National Society of Professional Engineers decided to draw up an ethical code, which began with the key principle that “engineers, in the fulfilment of their professional duties, shall hold paramount the safety, health, and welfare of the public”. Other engineering bodies around the world have since adopted similar codes. But a strange exception is those financial engineers.

The ethics of ethics
As Australian economist Jason West observed in a research note entitled Ethics and Quantitative Finance: “The International Association of Financial Engineers does not consider ethics worthy of inclusion in [its] suggested core body of knowledge.” Furthermore, “No postgraduate mathematical finance programmes integrate the teaching of ethics and professional standards in their curricula and in fact, very few programmes even offer the teaching of ethics as an elective”.

The same holds true for the field of economics in general. According to Denver University Economist George F DeMartino: “We have no professional economic ethicists, or any texts, journals, newsletters, curriculum, regular conferences, or other forums that explore systematically what it means to be an ethical economist, or what it means for economics to be an ethical profession.”

Of course, one factor is that economists don’t directly experience the effects of their mistakes the way an engineer might. Their policy recommendations might indirectly make a factory go broke or a business collapse, but it doesn’t blow up right in their face. Financial disasters have health impacts, increase the suicide rate, and lead to social disruption, but few take their protests to the corridors of economics departments.

A more troubling reason is that ethical codes are omitted from finance because they just wouldn’t fit. After all, the dominant lesson of mainstream economics has long been that the markets are (nearly) always right, and that considerations of right and wrong have no role to play – and can even be harmful. According to Adam Smith’s ‘invisible hand’, the selfish pursuit of profit will lead to an optimal balance in the economy between supply and demand.

The efficient market hypothesis tells us that markets perfectly set prices of financial assets, again with no recourse to ethics. The result of this theorising, according to Czech economist Tomas Sedlacek, is that mainstream economics has neglected ethics to the point where “it is almost heretical to even talk about it”. However, there is also another issue, which has to do with the nature of mathematical models, and applies to any field where these models play a role.

The modeller’s oath
One property of mathematical models is that they can only be understood by a relatively small number of experts. And mathematical equations can seem imposing to those outside the field. So the details of models, and the assumptions on which they are based, are usually only debated by people working in the specific area, who usually share similar biases and incentives. This grants a degree of immunity from external scrutiny – with a resulting atrophy of ethical questioning.

This issue was recently raised by transport forecaster Yaron Hollander from the UK consultancy firm CT Think!, which published a report highlighting ways in which transport models are misused in order to give a false impression of accuracy. The list includes things like “reporting estimated outcomes and benefits with a high level of precision, without sufficient commentary on the level of accuracy”, or “avoiding clear statements about how unsure we really are about the future pace of social and economic trends”.

According to Hollander: “If you’re doing highly specialised work that affects people but they can’t challenge it then you’re like a doctor, and people need to know that you’ve taken some kind of ‘Hippocratic Oath’. My point is that we don’t have our own hippocratic oath for modelling, and we use tools that can do much less than what many people think, so we need to be clear that these forecasts aren’t the primary justification for any decision.”

A version of what such an oath might look like for the world of finance was proposed back in 2008 by two leading quants, Emanuel Derman and Paul Wilmott, with their Financial Modelers’ Manifesto. Drawing inspiration from Karl Marx and Hippocrates, the authors included what they called the Modellers’ Hippocratic Oath, which is worth quoting in full:

  • I will remember that I didn’t make the world, and it doesn’t satisfy my equations.
  • Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.
  • I will never sacrifice reality for elegance without explaining why I have done so.
  • Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
  • I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

Of course, getting quants and bankers to sign an oath is unlikely to fix the world financial system (malpractice suits, of the sort that doctors experience, might do more). But it would be a first step towards reminding financial engineers that their work has significant impacts – and not just on their bonuses.

The importance of energy efficiency beyond COP21

Posted on by Helen

The discussion in Paris last year was centred on which policies might be best to fight climate change and facilitate the adaptation to a low carbon economy. With an international agreement on the table, representatives of the 195 nations in attendance debated late into the night before agreeing on the goal of keeping the increase in the global average temperature to “well below 2°C and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.

In all, 187 countries presented pledges to reduce greenhouse-gas emissions covering actions that range from ending deforestation to fostering investment in renewable energy sources and reducing dependency on fossil fuels. A timeline for the review and upgrading of national pledges was established and the agreement called on all countries to prepare long-term low greenhouse gas development strategies, a demonstration that the risks of global warming are being taken seriously and of the need for international cooperation to manage them. Country pledges with climate goals and policies to attain them will contribute to increase predictability when analysing future policy scenarios and their impact on investments.

However, while the resulting text was stronger than had been expected, nowhere in it was the word ‘decarbonisation’ mentioned. In this sense we consider the energy sector to be of primary importance in the quest to reduce emissions and promote sustainable development. Establishing a carbon-neutral supply as well as through the electrification of more sectors of the economy is undoubtedly a substantial part of the solution.

So that decarbonisation can succeed, the right CO2 price signal needs to be applied to all sectors of the economy, and not only to electricity consumers on the basis of the “polluter pays” principle. In this sense measures on the transport and building sectors are inevitable if we want to mitigate the effects of climate change.

“Energy efficiency and technological innovation in the electricity sector are essential to both reduce emissions and improve the quality of life of citizens around the world”, according to a recent report penned by the Global Sustainable Electricity Partnership (GSEP), titled Powering Innovation for a Sustainable Future. Comprising many of the world’s leading electricity utilities, the organisation’s membership plays an important part in discussions on global electricity issues, and has taken great strides to promote sustainable development.

World Finance spoke to Ignacio Galán, Chairman and CEO of Iberdrola, to discuss the contribution of the electricity industry in the fight against climate change. “Together, we are leading the way in the global effort to avoid and reduce carbon dioxide emissions by optimising technologies in the right mix, amount, time and place”, said Galán. “By systematically optimising and applying the full portfolio of advanced technologies as they become commercially available, we believe that sustainable progress can be made over time to help meet global climate challenges.”

Leading a low-carbon economy
Iberdrola, as a global energy company and an important part of the GSEP’s plans, offers an insight into how utilities can spearhead sustainable development and foster new and innovative ideas in the energy market.

According to Galán, we need technology-neutral incentives for decarbonisation in order to encourage the development of the most efficient energy sources and drive technological change, including tools such as domestic policies and carbon pricing, as recognised by the Paris agreement.

With a market capitalisation of €42bn and assets in the order of €92bn, Iberdrola is well placed to lead the adaptation to a low carbon economy, and has done a great deal towards this end. “The company is a model of industrial success, engaged in a process of continuous growth that has prioritised green energy, and has surpassed its peers over the last few years in all of the economic, financial, and industrial variables that we can examine”, pointed out Galán. Already, Iberdrola’s emissions per kWh are 30 percent lower than the European average, and an impressive 62 percent of capacity is emissions-free.

Climate change puts pressure on the very foundations of development, impacting particularly heavily on the most vulnerable people worldwide

“A market-driven approach to decarbonisation would reduce emissions, create jobs and drive sustainable growth, and the electricity sector has the potential to account for 40 percent of the accumulated reduction by 2050. The 1.5oC scenario requires a major technological and infrastructure rollout at every stage of the electricity sector value creation chain and significant technological and managerial capacity”, said Galán.

The market is the best way to accelerate a low-carbon economy and the key to unlocking the rapid advance of clean energy. Governments need to understand that clean energy can be progressively produced on a commercially viable, subsidy-free basis. Abolishing subsidies to fossil fuels will be essential for this purpose.

The decarbonisation of the energy system should lead to a higher degree of electrification of the economy and a bigger share of non-emitting energies in the electricity mix. The high penetration rate of renewable energies, whose output is intermittent and not easily foreseeable in the medium and long-term, will require stronger and smarter grids, energy storage, back-up energy and new services offered by the system in order to guarantee the quality and continuity of supply, so that it is possible to integrate these energies on a more cost-effective basis.

Utilities have both the technical know-how and investment capacity to face up to these challenges, and the modernisation of the energy sector will likely attract further investment. Iberdrola’s own plans are to reduce the intensity of its emissions by 50 percent by 2030, compared to 2007 levels, and the goal is to deliver carbon-neutral, reliable and competitively priced electricity by the midpoint of the century. This focus means that Iberdrola is firmly committed to meeting the UN’s Sustainable Development Goals seven and 13 (affordable and clean energy and climate action).

Among the measures Iberdrola will take to halve the carbon intensity of its emissions by 2030, it is planning to bring down coal-fired generation; increase installed capacity of emissions-free generation facilities via renewable energies; increase investment to create stronger and smarter grids, back-up energy (pumped storage) and new services to guarantee the quality and continuity of supply; continue investing in R&D and innovation; and provide support for the electrification of transport.

Climate change puts pressure on the very foundations of development, impacting particularly heavily on the most vulnerable people worldwide. The Paris agreement represents a massive economic opportunity to change the course of history and set us on a path towards sustainable growth, boosting economic growth and prosperity across developed and emerging economies alike. Investing in research and innovation will create new jobs and sectors of the economy, promote new values and lifestyles that are more respectful of others and prioritise development for all in a sustainable way.

Providing over 1.1 billion people with universal access to electricity will require investing in the right sources of energy, avoiding the same consumption and production model that is already implemented in the first world, in order not to additionally press on the environmental situation of the planet. Countries should get ready for a just and rapid adaptation to a low-carbon and climate resilient economy, and have the right measures in place to ensure financial stability in the context of climate change.

Iberdrola is widely recognised as a leader in energy innovation. “We invest more than $200m annually in research and development, and our company’s venture capital fund invests directly » in technology start-ups working to ensure a sustainable energy future. The company has led the way in system automation and the use of smart grids, a technology we believe is fundamental to reforming our industry and engaging consumers to better manage their energy usage. We have installed more than six million smart meters across the globe”, noted Galán.

Alcántara hydro power scheme on the Tagus river, Spain, with downstream Roman bridge to the fore
The Alcántara hydro power scheme on the Tagus river, Spain, with downstream Roman bridge to the fore

Sustainable culture
As Europe’s first electricity company and one of the largest worldwide by market capitalisation, as well as the first renewable energy producer globally, Iberdrola is demonstrating that there need be no conflict between providing the power economies require with cutting emissions and creating shareholder value.

While the company’s sustainability policy places an especial emphasis on emissions reductions, equally important is the sustainable creation of value. Essentially the group aims to meet the needs of the present without compromising on the ability of future generations to meet their own.

According to Iberdrola’s General Corporate Social Responsibility Policy: “The company and all affiliated companies of the group carry out their business enterprise and their own business model with the objective of sustainably creating value for society, citizens, customers, shareholders, and for the communities in which they do business, providing a high-quality service through the use of environmentally friendly energy sources, innovating and maintaining awareness of the opportunities offered by the knowledge economy.”

These objectives, while common, do not come easily, and the importance of corporate governance and company culture surely cannot be underestimated. The company’s Compliance Unit, for example, is a collective, permanent and internal body linked to the Corporate Social responsibility Committee of the Board of Directors, tasked with abiding by the company’s stated code of ethics and keeping to regulatory requirements.

“Iberdrola has a three-pronged approach to the challenge of corporate governance”, said Galán. “Continuous improvement in internal rules and practices, direct engagement with shareholders and maximum transparency in information communicated to the market.” To offer an example of this three-pronged approach in action, the group will be presenting its third integrated report to the General Shareholders’ meeting, offering reliable, relevant and concise information on the main strategic lines of the company, and on how it creates value on a sustainable basis.

“The integrated report systemises information on conditions in the markets where the group operates, its business model and the corporate governance structure, the regulatory environment, risks and opportunities of the different businesses, management of its assets to secure long-term value creation, its objectives and actions in community affairs, environment and the economy.”

Following ethical business first
This commitment to ethical behaviour has gone quite some way towards building trust between the company and those both within and outside the organisation. By acknowledging that utilities have a responsibility to act, Iberdrola is part of a growing community of businesses for which profitability is no longer the single most important measure of success. Companies no longer enjoy the privilege of days past when trust was a given; rather, businesses today must earn it.

What’s more, if a company claims to have ethical values, it’s no longer enough to simply claim it, where consumers are convinced only by a tangible demonstration of this commitment. In the case of Iberdrola, the energy company has put in place a system of governance that supports ethical values and has fostered a culture that makes sustainability a key consideration in every decision. Essentially, ethical values are at the heart of Iberdrola’s business, and a willingness from the energy sector to do much the same will be crucial in driving decarbonisation.

For proof of Iberdrola’s commitments to CSR, observers need only look at the company’s social actions. For one, the group is committed to supplying vulnerable groups with safe and reliable energy supply, and has established protection procedures for vulnerable communities so that financially disadvantaged consumers can gain access to electricity. In Spain, for instance, Iberdrola is signing agreements with various public bodies to protect those who might otherwise be at a loss when it comes to paying gas and electricity bills.

These initiatives “are part of the Group’s General Corporate Social Responsibility Policy, whereby Iberdrola pays attention to customers in a situation of vulnerability and collaborate, according to the policies established by the competent public authorities in each case, to facilitate on-going access to electricity and gas supply.”

The Electricity for All programme is Iberdrola’s response to the call of the international community to provide universal access to modern forms of energy, with models that are environmentally sustainable, economically viable and socially inclusive. The goal is to ensure access to electricity for four million beneficiaries in regions where a significant proportion of the population does not have access to it.

This ambitious initiative focuses on harnessing the company’s technical, logistical, organisational and financial resources to carry out sustainable electrification programmes. In the past two years alone, the electrification schemes backed by the company have helped almost a million people to gain access to electricity, thanks to sustainable initiatives carried out in Latin American and African countries.

Iberdrola also runs a corporate volunteering programme, in which employees are encouraged to partake in charity initiatives and put the company’s mission, vision and values into practice: “Enhancing people’s quality of life, protecting the environment, promoting sustainable development and providing access to energy to those that are not connected to the grid.”

Taken together, Iberdrola’s contributions to both the energy market and the communities in which it operates are critically important in fighting the issue of climate change. However, more than that, they’re crucial in leading the charge to decarbonisation and as a demonstration of how companies can promote sustainable development.

Merger talks could create giant European trading house

Posted on by Helen

On February 23, it was revealed that Deutsche Börse and the London Stock Exchange (LSE) were discussing a potential merger. Reports confirmed that the union would be a “merger of equals”, and that both organisations would continue to operate under their existing brands.

Under the terms of the deal that have been disclosed so far, Deutsche Börse would own the majority share of 54.4 percent, while the LSE would hold the remaining 45.6 percent, in a combined company worth more than £21bn. This latest proposal marks the third attempt of Deutsche Börse and the LSE to join forces, the first being in 2000, followed by another endeavour in 2004.

According to Reuters, the two companies are taking lessons from past mistakes in order to ensure that the deal is completed this time around. So far, roadblocks from their respective governments have not appeared – however, approval from both domestic regulators and the EU Commission is still required.

It was also revealed that Deutsche Börse’s Chief Executive, Carsten Kengeter, and LSE Chairman Donald Brydon would both stay in their respective roles at the combined group. However, the LSE’s Chief Executive, Xavier Rolet, will step down if the deal is completed.

If there are to be any issues with the merger, it is likely that they will be in terms of anti-trust matters; particularly those relating to clearing, settlement data and market data. It is expected that the Commission’s anti-trust investigation will continue through to 2017, once it has been established whether the combined company would foreclose other competitors. The potential price increase of market data and trading fees has also been flagged up as a concern.

Nonetheless, investors have reacted positively to the news, with shares in the LSE surging by 17 percent following the announcement. As such, it would seem that many believe that it will be third time lucky for what may be Europe’s largest trading house in the not-too-distant future.

 

 

 

 

Eurobank has emerged from the Greek financial crisis stronger than ever

Posted on by Helen

After enduring six years of economic recession, the Greek banking system faces key domestic and global challenges. The most recent development, which had a catalytic effect on the sector, was the European Central Bank’s (ECB) comprehensive assessment of all four systemic banks in Greece. This culminated in an increase in share capital, with the four leading banks raising €5.4bn from international markets against a total capital shortfall of €14.4bn, as identified by the ECB.

The results from ECB’s stress tests on Greek banks demonstrated that Eurobank is the most resilient Greek bank, with the lowest capital shortfall in the adverse scenario upon which the share capital increases were finally based. The exercise confirmed that, despite the recent capital control regime imposed in June 2015, Eurobank maintained its strong capital adequacy ratio in the market. Based on this performance, the bank was able to convince its main shareholders and its anchor and institutional shareholders, as well as new private, international and Greek investors, of its promising future.

Eurobank raised €2.04bn in capital last year, while our book-building exercise was oversubscribed in what was an undeniably volatile period, full of uncertainty both locally and internationally. This was an important vote of confidence in the bank’s future prospects, and its potential to return to a stable and increasing profitability.

The bank’s shareholder base now has more depth and quality than ever, with institutional investors having reaffirmed their support for the bank and its management during challenging times. Shareholders include international investors, such as Fairfax Financial Holdings, WL Ross & Co., Brookfield and Highfields Capital Management. With the overwhelming support of our investors, Eurobank now has a fully international board of directors in Greece, a development that has added additional value to the bank’s strategy and operations. Eurobank’s management plan has also piqued the interest of an impressive line-up of clients and investors in Greece. Not only has the bank received a major injection of funds from local entrepreneurs and investors, but we have also gained the trust of a battered business community that is attempting to boost its prestige and image once more.

The results from ECB’s stress tests on Greek banks demonstrated that Eurobank is the most resilient Greek bank, with the lowest capital shortfall

Re-starting the economic engine
The combination of a strong capital position, a high tier 1 capital ratio, a resilient loan portfolio and a successful share capital increase has boosted the morale of the banks’ personnel, setting the conditions for Eurobank to take a leading role in the Greek and also the regional economy. However, while the banks’ status is on the up, the challenges that must be faced remain significant: these include the recovery of lost deposits, return to profitability, effective non-performing loans (NPLs) management, full repayment of state aid (including preference shares and government guarantees), and improving relationships with customers and personnel.

Our primary objective is the return of deposits: a record amount of deposits – approximately €120bn (over 65 percent of Greece’s GDP) – were withdrawn from the Greek banking system in the last five years. Our second objective is to encourage business development and new revenues: the bank aims to increase revenue from commissions, and to take advantage of the recent shift towards electronic transactions. A further area of emphasis will be on business loans – small, medium and large – as Eurobank aims to be the catalyst for a developmental leap in Greece, raising the funds that are needed with the cooperation of the business community.

The bank’s third objective is the effective management of NPLs. Greek banks need to significantly improve the efficiency with which they manage their €100bn of NPL portfolios. While the Greek banks’ ability to manage NPLs has markedly improved of late, the issue remains an enormous obstacle for Greece’s path to sustainable growth, consuming much-needed liquidity and capital. The problem therefore compromises investors’ confidence in the prospects of Greek banks and distracts management from focusing on their core business activities. At Eurobank, our goal is to convince our customers – including individuals, households and businesses – that we can offer them viable solutions for NPLs. Our aim is to maximise NPLs, turning them into healthy loans, and to offer the right products for any cooperative customers who may have previously experienced difficulties.

Lifting all capital controls as soon as possible is important for the Greek banking system. A prolonged period of capital controls would have severe ramifications for the banking system, business and corporate activity, the economy and the economic recovery process alike. Given that all systemic banks in Greece have now been successfully recapitalised, the ensuing steady return of deposits should allow banks to proceed with the full lifting of capital controls.

The current situation has no winners: taxpayers indirectly lose, tax revenue declines, informal channels that are not reported and not taxed of circumventing capital controls are developing and creating serious inefficiencies, and small, financially healthy enterprises are put under enormous stress.

Relying on small businesses
Greek economic activity is driven by small businesses. Representing 97 percent of total companies, compared to an EU average of 92 percent, small businesses provide 55 percent of employment in Greece. Eurobank is a pioneer in this segment, holding the largest portfolio and client base in the market. We are currently transforming our business model to a more targeted delivery platform for upper-market, high-potential clients, in order to achieve a higher income per client. We are also in the process of implementing a client segmentation scheme to develop our existing client base, as well as to expand value proposition to both further address the broad needs of clients and become more involved in their business.

Moreover, in an effort to further support small businesses and professionals, Eurobank is redesigning both its value proposition and service delivery model, structuring it from the client’s perspective. With the days of double-digit credit expansion long gone, we recognise that we need to serve the multitude of small business needs in a holistic manner, and so, apart from financing, liquidity management and day-to-day transaction banking, we have expanded our services to include broader trade, B2B ancillary and business advisory services.

€73.8bn

Eurobank’s total assets, 2015

16,662

Employees

8

The number of European countries where Eurobank has an established presence

Eurobank has implemented a new approach to small business financing, which replaces the old client credit request system with a responsible and informed decision-making process, thus creating a specific financing offer based on the needs and capabilities of the individual customer. This is achieved through leveraging on a structured and comprehensive business assessment tool, known as ‘business check-up’, alongside the services of Eurobank’s dedicated small business advisors.

Eurobank has also made a strategic decision to more aggressively embrace digital technology. We aim to position ourselves as the premier digital retail bank of the future in Greece.

Despite the local crisis, Greek society is enthusiastically embracing internet technologies, and so is poised to catch up with its European peers in the near future. In preparation for this, Eurobank has launched a comprehensive three-year digitisation programme with two primary pillars: full digitisation of the most critical bank processes in order to ensure absolute efficiency, and the seamless deployment of digital technologies in order to create an omni-channel experience for our customers. However, on top of transforming our model, we also aim to support companies in their own progression into the digital age, including new start-ups and other such businesses that contribute to the new economic model of Greece; one that is based on extroversion, innovation and entrepreneurship.

Making pivotal changes
To facilitate this progress, Greek banks must implement sound corporate governance policies that adhere to the strictest international standards. These policies should be aimed at convincing markets, depositors, regulators and society that these banks can manage their clients’ savings and the equity entrusted to them effectively and diligently, with transparency, accountability and risk prudency.

Although Eurobank has a reputation for upholding sound corporate governance practices, we nonetheless recently took the initiative to upgrade them. In accordance with first-rate international practices, five experienced international board members were appointed last year, intended to represent the interests of private shareholders and to chair major board committees.

All procurement and outsourcing activities now go through a competitive bidding process, while there is also a full separation of duties and independence from management concerning the audit, risk, compliance and credit functions that are already in place. Furthermore, a well-defined and restrictive relatives policy, code of conduct and conflict of interest policies have all been meticulously applied. Quarterly reports regarding media, public relations and communication spending have all been established, and all major board committees’ minutes are now recorded in English and Greek, ensuring full transparency. Lastly, reports of management remuneration are in place, and there is a regular quarterly meeting of the independent non-executive directors, where key sensitive issues can now be reviewed.

Despite the wider challenges, Eurobank remains optimistic. It is our aim to become the bank of the new era for the Greek economy, and the bank of first choice for our customers. Using a proven mix of key skills and commitments, we aspire to contribute to sustainable development, the positive implementation of new business objectives, support for households and the creation of new jobs nationally.

Eurobank’s message is, “Priority to you”. But the message alone is not enough if there is nothing tangible on offer for our target audience: our customers. The bank is made up of a team of people in Greece and seven other countries around Europe, giving it a significant regional presence, and it is these people at Eurobank that will create value for the economy, customers and society at large.

First electronic exchange for bullion markets is launched

Posted on by Helen

Australia-headquartered Allocated Bullion Exchange (ABX) has launched the world’s first global electronic platform for precious metals. The exchange will provide safe access to domestic markets, as well as to international liquidity pools, thereby reducing several common entry barriers to bullion markets.

With 11 trading hubs in various locations, ABX offers several services – including clearing, settlement, storage and delivery – in order to offer industry players a cost-effective and holistic solution for trading silver and gold.

“At a time of high volatility in global markets and resurgent interest in precious metals, the launch of ABX is expanding access, enhancing efficiency and raising transparency in a market that historically has been opaque”, said Tom Coughlin, CEO of ABX, in a company press release.

Up until now, physical precious metals was one of few asset markets that had not yet gone electronic, thus making trading less inclusive and causing a lack of confidence for participants. ABX’s MetalDesk Platform, however, resolves this issue, in addition to lowering costs for traders, increasing efficiency and offering members entry into the global market for the first time.

The exchange thus marks a new era of modernisation for bullion markets, and given that gold and silver can be used to hedge against inflation, a new period of popularity could be set to begin.

At present, ABX’s trading hubs are based in Bangkok, Dubai, Hong Kong, Istanbul, London, New York, Shanghai, Singapore, Sydney and Zurich.

 

 

How shareholders were able to best the financial crisis

Posted on by Helen

The stock market has faced three major crises in the last 30 years. Many view such events, which have wreaked havoc on financial markets and the global economy, as unmitigated disasters. However, they should really be considered everyday challenges that the market must simply learn to overcome. We all encounter difficulties during the course of our lives, and we must push forward through these challenges in order to develop as individuals. In a similar fashion, the stock market must accept and adapt to the obstacles that it faces along the way, regarding them as opportunities for growth, rather than something to be feared.

On August 24 2015, financial markets descended into chaos, causing a massive sell-off across the globe. These events were led by a monumental meltdown in the Chinese equities market, fuelled by low oil prices and investors’ fears over another currency war following the further devaluation of the Chinese yuan. In the end, the crash was limited to a six percent decline across major markets, including the Dow Jones Industrial Average (DJIA), but it still serves as a reminder of the impact that China’s economic slowdown is having on the stability of the global financial system as a whole.

Panic selling in China was another factor behind the flash-crash of August 24. While the country has been a major contributor to global economic growth and low inflation for more than two decades, an unmatched collapse in Chinese shares sent shockwaves through financial markets, triggering one of the roughest trading days that had been seen in years, with billions wiped off of indices across the world.

But with every crisis, new and exciting opportunities may rise from the ashes, providing investors with the chance to buy big in the aftermath of a massive market sell-off. In an attempt to drive this point home, let’s look at three major market crashes that occurred in the past 30 years, all of which shared a common catalyst: a sudden inflation in asset prices, which would be met by governments slashing interest rates in an attempt to prevent an economic crisis.

The stock market must accept and adapt to the obstacles that it faces, regarding them as opportunities for growth, rather than something to be feared

Black Monday
1986 and 1987 were remembered as banner years for the stock market: a bull run, which got its pace in 1986, managed to fuel massive levels of liquidity in the financial system. Lower interest rates remained a primary cause for the immense money supply, which in turn resulted in hostile takeovers, mergers and leverage buyouts, and the floating of junk bonds (a method of gaining higher rates of return on investments for an average investor), among other tools designed to attract the hard savings of the common man.

Market excitement was so intense that ‘booming’ came to describe a never-ending phenomenon. These positive developments were not a free lunch, however, as illegal inside trading, rapid credit and economic growth put pressure on inflation once the Federal Reserve System eventually began to gradually increase the lending rate. This monetary tool acted as a trigger point for massive selling and proved to be a nightmare for investors. Hedging of portfolios against rising rates therefore defined the crash in October 1987.

Soon enough, critical panic turned to a joy ride when the Fed intervened, instantly lowering the interest rate in order to prevent further free-fall. The market turned into a bull run soon after, something that was further bolstered by companies that possessed attractive valuations and strong fundamentals. Those who showed their courage and put their money where their mouth is were rewarded in the later stages of the run, as the market saw a handsome return of around 60 percent in less than two years after the lowest point of crisis.

The dot-com bubble
A similar situation played out in 2002 during the dot-com bubble (see Fig. 1). The foundations of this crisis were laid way back in the 1990s, when enthusiasm surrounding software companies led to the creation of many small start-ups. Most of these companies were fledgling and had been launched by recent college graduates, and so high profit margins attracted many venture capitalists whose only aim was to reap enormous profits after the companies got floated on the stock market. This led to many start-ups paying their employees with company shares.

At this stage, the internet age was born and took IT services to a new level. Economists started believing in a new economic balance, forgetting the age-old economic conscience of resources and retailing – as a matter of fact, the NASDAQ boomed from a level of 500 in May 1995 to 4,700 by March 2000 (up 940 percent in just five years). At the peak of this tech bubble, it was said that a new millionaire was created every 60 seconds in Silicon Valley.

But by early 2000, investors had realised that such high valuations were not sustainable and that a massive speculative bubble had been fuelled. When the penny finally dropped, the NASDAQ went into free-fall; toppling from 4,700 points all the way down to 804 – a drop of 83 percent.
The Fed once again intervened, introducing a lower interest rate that provided a cushion and allowed the market to slowly regain its pace. In fact, it had recovered by almost 93 percent in a short span of 15 months.

Subprime mortgage crisis
The script for the 2008 financial crash was written back in July 2007, when daily financial markets were all but ruined by a credit crisis. This sowed the seeds for mortgage companies to begin selling subprime mortgages, which wreaked havoc on the global markets.

The combination of rising interest rates and borrowers’ inability to repay their debts saw panic buttons being pressed across the investment and financial industry: in October 2008, 21 years to the month after the 1987 crisis, investors were shaken by another mammoth economic meltdown. The federal takeover of Fannie Mae and Freddie Mae, the collapse of 158-year-old investment bank Lehman Brothers, the takeover of Merrill Lynch by Bank of America, the liquidity crisis at AIG, and the seizing of Washington Mutual Fund by Federal Deposit Insurance Corporation were all key repercussions of a mammoth event that jolted stock markets across the world.KFH Capital Investments 2002 tech bubble crash recovery

But what is significant above all else is the quick action that was taken by various governments in order to prevent the crisis from turning into a full-blown collapse: interest rates were cut, while fiscal stimulus packages of varying magnitudes and quantitative easing remained key pushers for the markets.

Following the G20 summit in London, which brought global leaders together to curb the crisis and instil confidence in the financial markets again, $5trn worth of fiscal expansion was poured into the economy, helping to boost employment and growth in the process.

Recovering from a crisis
The market, after some more volatile hiccups, eventually started to see signs of life again. From a low of 6,500 in March 2009, the DJIA jumped and crossed the 10,000 threshold after only one year, returning more than 60 percent of the value that was lost.

Across all of these turbulences, there are two common factors: first of all, panic played a huge part in the downward spirals of the markets. However, it is clear that the scale of panic nowadays is much larger than it used to be, with investors constantly feeling stretched beyond their capacity. With the knowledge that stock prices around the world are generally inflated on the strength of tall tales and cheap money, investors now live in constant fear of everything crashing down around them.

The second factor is the recovery of the markets in question: historically, every single market crash has eventually proven to be nothing but a buying opportunity, which can easily be used to serve the purpose of boosting one’s returns.

For professional shareholders, irrespective of any market trends, an urge to search for ‘poor man’s stocks’ should be constant. For amateur investors, the solution is surprisingly simple: choosing a handful of equity funds with good long-term track records, steadily investing through Systematic Investment Plans (SIPs) and, most importantly, continuing with these methods even during a crash will provide the solution.

The basic idea behind SIPs is that, while the general direction of an equity investment is upwards or downwards, it is not possible to reliably predict the actual fluctuations that may occur. As such, the whole point of investing steadily in a mutual fund – and continuing to do so even during difficult times – is so that investors do not have to attempt to force the market.

Moreover, it is important to understand that in the medium to long term, the only thing that truly matters is the state of the local economy: in a growing market, a crash is always a buying opportunity. A steady, systematic investment strategy was the right one a decade ago, a year ago, a month ago, a week ago and today, and will undoubtedly remain so for the foreseeable future.

Education in the new financial landscape

Posted on by Helen

Today’s global financial landscape is almost unrecognisable compared to that of 10 years ago: trading power has rapidly shifted from west to east, and we have seen partnerships form between a greater range of countries and companies. Countless new business practices, regulations and compliance procedures have also emerged, while technological innovation has rapidly changed business models and operational processes.

Business education – something that is vital for individual and corporate progress in this new landscape – has faced a challenge trying to keep pace. Clearly, the next generation of business educators should be closely aligned with the world in which they educate. In our view, this means that business education must be arranged by industry practitioners with first-hand experience. Moreover, it must be global and digital.

But keeping pace alone is not enough: while globalisation and technology have provided significant opportunities, they have also presented challenges and exposed global inefficiencies, especially with regards to divergent business practices and local cultural nuances. This is where business education has the ability to bring some much-needed standardisation to the financial landscape. In this respect, it must set the pace.

A more complex business environment

One of the many benefits of globalisation, aided by the digital revolution, is the ease of expansion into new markets, something that has resulted in increased trade between a more diverse set of countries. In fact, while global trade growth has slowed of late, emerging market trade is still rising and remains above pre-crisis levels.

The International Chamber of Commerce’s (ICC)

Banking Commission’s Global Trade and Finance Survey 2015 found that so-called ‘south-south trade’ now represents as much as 42 percent of global exports, up 19 percent since 1990. Emerging market trade will also likely pick up in 2015-16, to about eight percent annual growth, taking on an even larger share of global trade.

Clearly globalisation offers huge opportunities for emerging economies, or for companies that wish to diversify markets or counterparties. Yet there are challenges: for instance, globalisation has contributed to divergent standards, solutions and terminology, especially in areas such as trade finance or supply chain finance. All of these can hamper efficient cross-border business.

The use of new methods, along with diverging practices, can hinder the ability of companies to effectively conduct business with their counterparties in both emerging and more developed markets.

Online business education platforms provide an equal playing field for skill development between emerging and developed markets

Adding to the complexity, the rise in alternative solutions, such as multi-banking solutions and specialist financiers, brings a host of new players into the financial landscape. Ensuring that companies and business professionals keep pace with such developments is therefore vital in a changing environment.

The need for global education

In today’s globalising world, education needs to evolve alongside the financial landscape. The use of digital platforms, for instance, means that virtual classrooms and online courses can provide professional education that is truly convenient and globally reaching.

Never before has it been so essential to have education that is accessible to all, especially considering the increase of emerging market companies and individuals involved in international trade. Digital platforms are less restrictive than traditional education methods, as students in developing or remote regions, with limited physical access to training, can participate in world-class professional education. Online platforms provide an equal playing field for skill development between emerging and developed markets.

The ICC Academy believes this is the correct approach, and provides digital education for professionals worldwide, regardless of where they are based or whether they work in SMEs, large corporations or banks. All courses are developed by the ICC’s network of experts.

Yet global education alone will not overcome the difficulties associated with a more complex trading landscape. It is essential that this education is also standardised in order to help break down the barriers of varying local nuances and practices.

The ICC Academy’s curriculum, for instance, is developed centrally in Singapore before it is distributed globally via the digital platform – ensuring standardised and relevant education worldwide.

In our opinion, education must also continue throughout an individual’s career, so that their knowledge remains up-to-date and they continually adapt to fit an increasingly volatile economic landscape. The ICC Academy allows professionals to regularly complete courses and attend various conferences and seminars so that they continue to progress, in order to fit the evolving landscape.

Globalisation and technology bring benefits, but also new challenges. In the face of diverging standards and complexity, education must be digital, convenient, and ongoing.

US court rules in Argentina’s favour

Posted on by Helen

A New York court has ruled in Argentina’s favour following a decade-long dispute with so-called ‘holdout’ bondholders. Led by US billionaire Paul Singer’s Elliott Management firm, the holdout bondholders refused to accept a haircut on debt obligations after one of Argentina’s numerous defaults in 2001.

The new ruling should see Argentina once again able to raise capital on international credit markets.

These holdout bondholders had previously attempted to pursue their claims in US courts, which initially ruled in their favour, saying that the holdouts were entitled to be repaid the full face value of the held bonds. However, while sovereign immunity laws had prevented attempts to seize Argentinian assets in order to recover loses, the dispute had essentially locked Argentina out of international capital markets.

A 2014 US court ruling decreed that Argentina could not service any international debt or raise new credit without first servicing those of the holdout bondholders. It refused to do so, and so the country faced another default on its debt in 2014.

However, US District Judge Thomas Griesa has now ruled that the order barring Argentina from international capital markets should be dropped, so long as Argentina repeals its own law that had barred it from making any repayment to holdout bondholders.

Under the previous Argentinian government of Cristina Kirchner, laws barred the nation from repaying back of any debt to holdout bondholders, whom she termed as “vultures” and “financial terrorists”. Argentina’s new president, Mauricio Macri, has shown a more conciliatory approach to the dispute, previously announcing that he intends to reach a compromise with the holdout creditors.

Sunway Group commits to lifelong community development in Malaysia

Posted on by World Finance

Malaysia has played a key role in the rise of Asia as a global economic powerhouse. One of the foundations of its growth: the country’s robust property and construction sectors. Tan Sri Dr Jeffrey Cheah, founder and chairman of property and construction developer Sunway Group, explains his vision of Sunway as a developer of communities – not just townships.

World Finance: Malaysia has played a key role in the rise of Asia as a global economic powerhouse. One of the foundations of its growth: the country’s robust property and construction sectors. I’m here with Tan Sri Dr Jeffrey Cheah to discuss how the industry is moving forward.

Tan Sri, first: Malaysia’s set an ambition of becoming a developed nation by 2020: how are the property and construction sectors supporting this?

Tan Sri Dr Jeffrey Cheah: As a fast developing economy, the construction and property sectors contribute significantly to Malaysia’s GDP which is set to grow four to five percent this year, and create millions of jobs that support the socio-economic development of Malaysia.

Last year I believe we will grow about five percent. And the construction and property sectors also have strong multiplier effects that cut across many industries in the country.

Our construction arm, for instance, contributes to nation building through infrastructure projects including the light rail transit (LRT), the mass rail transit (MRT), and the bus rapid transit (BRT) that help promote connectivity and accessibility in the country.

Our property arm continues to build communities that enable people to live, learn, work and play in a healthy, safe and connected environment.

Both sectors work hand-in-hand to promote better living and support the country’s vision of becoming a developed nation by 2020.

World Finance: And what makes Malaysia a particularly attractive destination for foreign investment compared with your ASEAN neighbours?

Tan Sri Dr Jeffrey Cheah: Malaysia is a multicultural, multi-ethnic nation with a relatively young population. Malaysia is also the gateway to ASEAN due to our participation in the ASEAN community, and in the Regional Comprehensive Economic Partnership Agreement.

We have competitive tax rates at only 25 percent. We have a wealth of natural resources from palm oil, to rubber, to oil and gas industries; a flourishing domestic market, and a globally competitive workforce.

We are the world’s top location for manufacturing, and we are listed in the top 20 for competitiveness by the World Economic Forum.

Despite a temporary slowdown in the global economy, I am confident that Malaysia remains as an attractive investment destination within the region.

World Finance: Tell me about Sunway Group then; what makes you stand out from the other property and construction developers in Malaysia?

Tan Sri Dr Jeffrey Cheah: It is our unique business model, Build-Own-Operate. And because we operate on the full real estate value chain, this diversifies our earnings base for our shareholders from our construction, property development, property investment and REIT divisions.

At the same time, this translates into a lifelong commitment to communities in our townships and sustainable growth for the Malaysian society. We are hoping to reach out to international communities in this part of the world as we expand our presence across Asia.

World Finance: You style Sunway Group as a Master Community Developer: what do you mean by this?

Tan Sri Dr Jeffrey Cheah: We build communities and relationships by creating jobs and opportunities, while fostering affordable and healthy lifestyles throughout the country.

In each of our flagship townships we remain the largest stakeholder. This way our communities are ensured a lifelong commitment from Sunway to continue growing and developing the townships.

Sunway Resort City is our first flagship township in Central Malaysia, where we have transformed 800 acres of wasteland into a wonderland that attracts some 42 million visitations every year. It is also the country’s first fully integrated green township as recognised by Malaysia’s Green Building Index.

World Finance: You’re not just building Malaysia’s communities, you’re also committed to building Malaysia’s education system. Why is this important to you?

Tan Sri Dr Jeffrey Cheah: My life’s philosophy is “I aspire to inspire before I expire,” and I believe that an investment in knowledge and education, in any society, always is the most powerful weapon to change the world, as Nelson Mandela says.

This is why I decided to set-up the Jeffrey Cheah Foundation: in perpetuity transferring the ownership and equity rights of Sunway Education Group’s 12 learning institutions into the foundation. This makes it the largest education-focused social enterprise in Malaysia to bring quality education to all.

We have forged academic ties with some of the world’s most renowned institutions. These partnerships allow a two-way flow of scholars and researchers between world-class institutions and the Sunway Education Group, to develop and elevate the standards of teaching and research in Malaysia.

As of 2015, the JCF has disbursed in excess of MYR 210m in scholarships to thousands of high-achieving and deserving students. We have also donated more than MYR 15m towards upgrading the learning environment of six of our adopted schools nationwide.

Italy makes ‘bad bank’ deal with EU

Posted on by Helen

After months of agonising back-and-forth negotiations, Italy and the European Commission have finally come to an agreement on the country’s non-performing loans (NPLs). The deal will help to ease market pressure on the financial sector by unloading €350bn of ‘bad’ loans, with a government guarantee to reduce the risk of doing so. Amounting to around 17 percent of Italy’s total loans, NPLs have hindered the ability of banks to generate capital and new credit, threatening the strength of Italy’s economy.

On 26 January, Italian Finance Minister, Pier Carlo Padoan, and Margrethe Vestager, the European Commissioner for Competition, held a meeting in Brussels to finalise the decision. Abiding by state aid laws, which prohibit favouritism or assistance that undermines competition, the deal introduced government guarantees that will facilitate the sale. The terms of the guarantees, which the banks can obtain by paying a fee to the government, are that they will only be provided for the safest loans. The guarantees also aim to incentivise investors to purchase the loan, with the government liable for the debt.

Bringing back profits

To prevent the guarantees from violating EU rules on state aid, Vestager insisted that the loans would be set no higher than market price. Furthermore, the Italian Ministry of Economy and Finance claimed that “this intervention will not create any burdens for our public finances”. The statement added, “The budget is neutral: in fact, the fees to be received are expected to be higher than costs and will therefore generate net revenues.”

After finally making the bad bank deal, there is renewed optimism between Italy and the European Commission. In an interview with Global Business, Padoan said, “This will bring back profits to banks. And as the economy grows more rapidly, this will reflect positively on banks, balance sheets and all of the economy.”

According to the Financial Times, Vestager commented, “Together with other reforms undertaken and planned by Italian authorities, it should further improve banks’ ability to lend to the real economy and drive economic growth.”

Their confidence in the deal isn’t unfounded: unloading these loans is essential in improving capital and economic growth. Before the deal was made, concerns over the bad loans hit capital markets, and the index of Italian banks was down nearly 25 percent since the start of the year. With the assistance of government guarantees, investors can rest assured that the debt will be sold at a higher price. The deal reduces the gap between what investors are willing to pay and what banks need to accumulate in order to avoid losses.

Too little, too late

However confident the Italian Finance Ministry and the European Commission are feeling, the deal isn’t without hurdles to be overcome. Filippo Alloatti, Senior Credit Analyst at Hermes, said, “The optimism part of my brain hopes this is the answer to some of the problems of Italian banks, but we have had false dawns in the past.”

The deal reduces the gap between what investors are willing to pay and what banks need to accumulate in order to avoid losses

Fabrizio Spagna, Managing Director at Axia Financial Research, said, “There are definitely advantages for the banks… but it is far from being the panacea for bad loans.”

One concern is that the deal doesn’t go far enough to allow the banks to recover. Previous efforts from those in Spain and Ireland forced banks to sell part or all of their bad loans at a set price to a government-backed bad bank, but Italy’s approach is more easy-going: the Wall Street Journal reported that a note from Citi analysts said, “The Italian scheme is a much lighter version, and as such it is likely to have a more muted impact on banks’ balance sheets.”

For instance, the government guarantee only covers the safest NPLs, and so analysts expect that the poorest-quality loans will remain largely unsold. If this is the case, this mechanism could later force banks to record sizable write-downs on their bad loan portfolios. Barclays’ analysts estimate that even with the guarantees, the six largest Italian banks could experience combined losses of between €6bn and €28bn.

Regardless of the speculation, Italy could not hold off on a decision any longer. In the aftermath of the financial crisis, other European countries, such as Spain, acted promptly, setting up bad banks to quickly remove soured loans from their balance sheets. Italy, however, felt that its banks were more robust and such measures were not necessary. Since then, NPLs have continued to pile up: according to research firm Imprese Lavoro, 75,000 firms went bust between 2009 and 2014, adding copious amounts of debt.

Changing landscape

The most common concern among analysts is not whether it’s the right approach, but whether it has been implemented too late. European countries that took action soon after the financial crisis were allowed more lenient economic policies in order to salvage their loans. In 2009, Ireland scooped bad credit off its banks’ balance sheets and into an asset management vehicle, and Spain followed suit in 2011, laying the foundations for stronger economic growth. Now the system in Europe has changed.

To prevent state aid that could effectively distort the market and competition, the European Commission is now taking a more severe approach: under new rules approved by the EU in 2013, shareholders and bondholders must bear the cost of bank failures before taxpayer money can be used in any rescue – including the creation of state-backed bad banks. Italy finds itself in a position that prohibits it from implementing the policies needed to recover the financial sector.

Last September, Padoan said, “Maybe this country realised a little late that something should have been done when European legislation still permitted it. The legislation on these things is much more restrictive since 2013, because of state aid rules.”

 

Few retail investors are studying fund information

Posted on by Helen

Recent research carried out by Instinct Studios, a design-led FinTech company, found that among the 500 retail investors they surveyed, 27 percent of women said they studied the fund information they received in detail. Conversely, only 21 percent of men said they did the same.

But when the same sample group was asked if they fully understood the information, 19 percent of women were confident that they did, compared to 25 percent of men.

“Our research adds to previous studies in the sector that show that there is a material difference between how men and woman absorb and act on financial information presented to them”, said Founder and CEO of Instinct Studios, Majid Shabir. “It is difficult to say whether this is due to differences in their respective appetites towards risk or familiarity with the financial terminology.

“Regardless of reasons, the fact that so few investors – both men and women, with large and small investment pots – are reading and understanding the fund information they receive, should ring alarm bells for advisers and fund managers.”

The research suggests that men are far more confident in their ability to understand fund information than women, but it is important to realise that the confidence found in men may not necessarily be warranted.

“With the FCA [Financial Conduct Authority] indicating that it is prepared to take action against firms that use jargon and asking the industry to look at communicating with their customer more simply, it’s surely time to review the way fund information is presented and overhaul it, radically”, added Shabir. “Using technology to filter information and provide contextual insight in a much more visual and intuitive way will allow fund managers to help both men and women make better investment decisions.”

Money must be removed from politics, says OECD

Posted on by Helen

In a recent report, the OECD revealed how private interest groups are able to abuse regulatory loopholes, using methods such as loans, membership fees and third party funding, in order get around spending limits. Such an arrangement is having a negative impact on the fairness of the entire political process.

The international organisation has urged governments to apply tighter regulations and to enforce them more thoroughly in order to restore public faith in the political process.

“Policy-making should not be for sale to the highest bidder”, said OECD Secretary General, Angel Gurría. “When policy is influenced by wealthy donors, the rules get bent in favour of the few and against the interests of the many.

“Upholding rigorous standards in political finance is a key part of our battle to reduce inequality and restore trust in democracy,” he added.

In its report, the OECD outlined a number of areas where advanced economies can act in order to make the political party funding and campaign donations process fairer, as well as more transparent.

It argues that countries need to “strike a balance” between public and private political financing, realising that relying solely on public or private funding is not possible, but rather a blend of the two.

The OECD also recommends that rather than developing and implementing a brand new set of rules, advanced economies should simply work harder to enforce existing regulations in order to ensure compliance.

Campaign finance has once again been a hot topic throughout the US presidential nomination process, with Democratic hopeful Hillary Clinton coming under fire recently for the donations that she received from the investment bank Goldman Sachs after she delivered a speech to its employees.

Former US president Jimmy Carter has made his feelings known about the damage that campaign finance has done to the American political process, labelling it “legalised bribery”. He even called the landmark 2010 Citizens United court decision, which declared that campaign spending is a form of free speech, an “erroneous ruling”.

“I didn’t have any money,” Carter said during an interview on BBC Radio 4’s Today Programme. “Now there is a massive infusion of hundreds of millions of dollars into campaigns for all the candidates. Some candidates like Trump can put in his own money, but others have to be able to raise a $100m to $200m just to get the Republican or Democratic nomination. That’s the biggest change in America.”

 

 

Is the Taiwanese insurance industry set to dominate Asia?

Posted on by World Finance

According to government statistics, Taiwan’s insurance penetration of 18.9 percent ranks number one in the world. Tsai-Ling Chao, Executive Vice President of Fubon Life Insurance, explains why insurance products are so popular, and discusses how the sector will continue to develop and grow.

World Finance: According to government statistics, Taiwan’s insurance penetration of 18.9 percent ranks number one in the world, showing insurance products’ great popularity among the public. Joining me to discuss how the sector is developing is Tsai-Ling Chao, Executive Vice President of Fubon Life Insurance.

Tsai-Ling, Taiwan’s insurance sector has developed hugely of late; why is this, and why is the penetration rate so high?

Tsai-Ling Chao: Taiwan is a mature market: most people are aware of the importance of life insurance. The acceptance of reinsurance products is very high – especially Taiwan is aging, so it’s a priority. The pensions provided by government and employers are not sufficient, and people have to save for their own retirement – which creates high demand for savings and annuity products.

The other reason is that liquidity in Taiwan is very high. The bank deposit rate is so low that people are willing to transfer their savings to higher return insurance products.

Banks are also waiting to sell insurance in order to earn commission income. That’s why the bancassurance channel grew substantially in recent years.

World Finance: What would you say are the challenges of Taiwan’s insurance sector currently?

Tsai-Ling Chao: The main challenge is regulation change. During the fast growth of bancassurance in the past few years, the FSC changed the regulations to force insurance companies to offer longer duration products, in order to differentiate it from bank deposits. Which makes new business sales more difficult.

The other one is the consumer-privacy protector act, which restricts insurance companies’ ability to acquire leads – and the telemarketing channel suffered the most.

The other challenge is on the investment side. It is very difficult for an insurance company’s investment team to manage risk – and in the mean time generate a decent return under the low interest rate environment.

World Finance: Taiwan’s government does have some policies in the works aimed at building up competitiveness in the insurance sector to expand business in Asia – how are you responding to this?

Tsai-Ling Chao: We feel very positive about the policy. Taiwan’s market is very mature, and we have to go abroad to pursue growth opportunities.

There are many countries in Asia still in the developing stage. They have pretty big and young populations, just like Taiwan many years ago.

Fubon has a lot of insurance management experience, and is keen to expand into other countries. We have been reviewing many cases, and are open to all possible investment opportunities.

World Finance: Fubon Life has been one of the leaders among Taiwanese life insurers – so what are your plans for future growth, and how are these responding to the sector’s needs?

Tsai-Ling Chao: Fubon’s strategy is focusing more on value than volume growth. We feel that there is huge demand for retirement products in Taiwan, and we are trying to meet customers’ needs.

In order to do that, we have to grow our agency force more aggressively. Fubon’s agency force is mostly concentrated in the north and the metropolitan areas. Our focus for the next few years is expanding into the south and rural areas.

Also, recruitment for the total industry has been pretty challenging in recent years. Fubon’s agency force is still growing at 10 percent per year for the past six years. We usually recruit new agents directly from campus, and have built up a reputation as the most desirable insurance company among young people. We try to keep them by providing good training and competitive products.

The back office support is also very important, to make sure we provide a good service to our clients.

World Finance: And finally, how do you ensure your clients receive the appropriate cover they need – and do you review existing policies for clients?

Tsai-Ling Chao: We have built up a needs-based sales process and trained our agents to identify clients’ needs before selling the right products.

We also have a call-out system from home office to make sure the customer understands the products they have bought.

For existing customers, we use our CRM to identify their needs and send the information to our agents, in order to approach them. We invite them to attend seminars or other activities to help them review their needs.

We also allow them to convert their policies to other products if they don’t fit their current needs any more.

Why African leaders like Chinese aid

Posted on by Helen

Western media and Western donors are often critical to the role that China plays in Africa. China is said to use its foreign aid to curry favour with political leaders in order to get access to natural resources, and to undercut political, social and environmental conditions of Western donors.

Many African political leaders, however, like Chinese aid. A prominent example is Uganda’s long-running president Museveni: he is of the opinion that “[t]he Western ruling groups are conceited, full of themselves, ignorant of our conditions, and they make other people’s business their business, while the Chinese just deal with you as one who represents your country”.

The negative views of Western media and Western donors, and the positive views of Museveni and his colleagues, may both go back to Beijing’s principle of non-interference into internal affairs and its respect for the autonomy of recipient governments to manage their own development policies. This approach gives political leaders in aid-receiving countries more discretion to choose where to implement development projects compared to the approach of Western donors (despite the Western donors’ lip service to ‘country ownership’ in development cooperation).

Museveni and many of his colleagues like the flexibility of this ‘aid on demand’ approach, while many Western donors are at unease with it – they worry that it may enable the aid-receiving countries’ political leaders to site projects according to their personal or political needs, rather than according to the needs of the recipient population.

The truth behind China’s motives

In a recent working paper with Axel Dreher, Andreas Fuchs, Brad Parks, Paul Raschky and Michael Tierney, we test this claim by comparing the subnational allocation of Chinese and World Bank development finance in Africa.

A major challenge is to get data on Chinese development finance: official data on the amount of Chinese aid does not exist, and collecting the data is difficult due to the often-blurred boundary between investment and aid, resulting from China’s involvement in large-scale investment projects.

Fig. 1: This map shows the amount of Chinese development finance given to all subnational administrative regions within Africa. Source: AidData
Fig. 1: This map shows the amount of Chinese development finance given to all subnational administrative regions within Africa. Source: AidData

AidData has nevertheless assembled a project-level dataset of Chinese development finance to Africa. For our working paper we have geocoded 1,955 Chinese development finance projects from this dataset for the years 2000-2012. These geo-coded figures, which are also freely available on AidData’s webpage, allow us to track the amount of Chinese development finance given to all subnational administrative regions within African countries. The attached map (See Fig. 1) shows the amount of aid that comes with these projects.

As can be seen, China is active across the African continent. The only African countries not receiving Chinese aid are those that officially recognise the Republic of China (Taiwan). More importantly, this figure also documents significant variation, not only across but also within countries — a difference that previous research could not track.

We have then used our geocoded data to investigate where Chinese aid goes within African countries. Our empirical results demonstrate that a disproportionate share of Chinese official financing goes to the birth regions of African political leaders. This is true even after controlling for a large number of other factors that might affect the location of a project. Specifically, our results indicate that the average African leader’s birth region receives nearly four times as much (270 percent more) financial support from China during the period of time when he or she is in power.

Interestingly, financial support to a politician’s birth region drops quickly when the politician gets out of power. These results suggest that the subnational allocation of Chinese aid is driven to a considerable degree by politics, rather than by poverty or economic potential. They confirm that African political leaders misuse Chinese “aid on demand” approach.

East versus West

To see whether aid from Western donors suffer from the same type of politically driven subnational aid allocation, we have replicated our analysis with data from the World Bank. The World Bank is one of the largest sources of development finance in Africa, and the only Western donor for which subnational data is available for the entire African continent during our sample period.

The results suggest that the subnational allocation of Chinese aid is driven to a considerable degree by politics, rather than by poverty or economic potential

We do not find a similar pattern of politically driven subnational aid allocation for World Bank development projects. World Bank projects are no more or less likely to end up in the home region of the political leader than any other region in the country. A possible reason is that the World Bank grants less discretion to recipient governments and evaluates proposed projects more rigorously.

Hence, while Beijing’s principle of non-interference and its ‘aid on demand’ approach may be motivated by good intentions, they seem to make Chinese aid particularly vulnerable to misuse by African political leaders. This misuse may obviously come at the disadvantage of people living in communities with greater need, and might have detrimental developmental effects.

In a follow-up project, my co-authors and I will therefore compare the regional growth impacts of Chinese and World Bank development projects. The results will be interesting and are hard to foresee. Sure, the fact that politics drives the subnational allocation of Chinese aid is likely to hamper its growth impact. But Chinese aid may also turn out to have a more positive growth impact, given that China often focuses on infrastructure projects and is well known for actually getting projects done.

One practical way to encourage need-based targeting of Chinese (and other) aid is through greater transparency. Development finance institutions can do much more to publicly disclose where they are situating their aid projects and investments. Indeed, careful scrutiny of China’s ‘aid on demand’ approach to foreign aid will become even more important in future years, as China scales up its own bilateral aid program and assumes a leadership position in new development finance institutions, including the Asian Infrastructure Investment Bank and the New Development Bank.