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Banking on the productive sector

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The success of BCT throughout the years is based on the design and catering of financial solutions for two specific market segments: corporate and commercial banking, with a client base of medium and large-sized companies; and private banking, focused on serving high net worth individuals.

With it’s current credit allocations, BCT has a 10.4 percent of the market share in wholesale and retail sales, 7.1 percent of services, 9.7 percent of manufacturing and 12.5 percent share of agriculture loan placing in Costa Rica. Notably, its total deposits have risen 103.11 percent over the last four years.

A strong loyalty bond has been built over the years with key customers on the basis of superior service delivered consistently. The core client base of BCT consists primarily of repeat customers.

During the past four years, backed with an annual income growth rate of 32.50 percent, an average return on assets of 1.43 percent, and a return on equity of 14.02 percent. Corporación BCT has been able to build a solid infrastructure. The group now has 13 strategically located branches in Costa Rica and two in Panama. The key driver to open new branches has been to focus on the need to be close to where their client’s businesses are located. This effort now has the financial group present in all the major productive areas of Costa Rica. An aggressive branch development is also in place for Panama, where two more locations are scheduled to open in the near future.

Throughout the financial crisis, Costa Rica’s economy, highly dependant on exports to the US and Europe took an important downturn, falling at an annual rate of 4.5 percent during the last quarter of the year 2009. The economy’s main sectors all suffered significant corrections during this period, including agriculture (-6.8 percent), tourism (-3.9 percent), manufacturing (-14.4 percent) and construction (-4.4 percent).

In December 2008, many of the country’s financial institutions stalled, most of them stopped funding new projects, and even in some cases halted already approved disbursements altogether.

BCT took advantage of the market’s juncture and consolidated its position with the productive sectors. While most banks were closing their client’s credits, BCT was keen on keeping their lines and flow of funding, and even managed to widen its client base.

In spite of the financial turmoil, Corporación BCT remained unscathed. Mr Leonel Baruch, one of its founders and Chairman of the board explains:

“During those difficult times, BCT’s approach proved to be very successful in protecting the quality of its assets and, at the same time, supporting the clients whose business wellbeing and loyalty are key to the corporation’s long term success.

Our strategy was based on three basic elements that reinforced BCT’s already strict and consistent underwriting policies: An important increase in liquidity; an even more cautious approach towards risk management, close monitoring of asset quality; and the voluntary strengthening of it’s capital reserves in order to face eventual loan loses.”

The strategy paid off for BCT’s more than 400 shareholders. The net profit versus shareholder’s equity ratio is 33.5 percent, and the Corporation’s rate of past due loans is virtually 0.0 percent.

Over the years Corporación BCT has preferred quality over quantity, and excellence over size. With its 15 branches, and 258 highly qualified employees, it has the lowest administrative expenses versus profit (before tax) in the region and a remarkable efficiency ratio of 53.4 percent.

With its actual capital adequacy ratio, BCT can leverage the balance sheet to double its size with no additional capital requirements; so further growth should be expected. If the bank is able to maintain its efficiency ratios, this will contribute more to the bottom line.

A look at its capital base shows an increase of 70.8 percent, over the last fours years which demonstrates the commitment of the shareholders towards BCT, and also towards its clients.

Well positioned for growth, in countries that are developing fast in infrastructure, and have new free trade agreements with many counterparts all over the world; among them Latin American nations, the US, the EU and even China. BCT is well positioned to become a banking oasis for its clients in a region where big, multinational and mostly impersonal banks are becoming the norm.

PE firm targets transparency

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Managing change is a vital component of business success. The financial crisis and the ensuing economic downturn starkly illustrated the need to adapt quickly to a very different market environment. But success is based not just on reacting to changed circumstances, but on proactive action to adapt to emerging longer-term trends and the ability to recognise the value creation opportunities they present.

Pressure for change
In the post-crisis environment there is a stronger focus on the need for good governance and transparency, but this is also part of the long-term trend for businesses to take greater account of the wider social and environmental impact of their activities. In a competitive marketplace, companies must increasingly focus on environmental, social and governance issues (ESG), which cover a wide variety of challenges ranging from climate change, water security and carbon regulations to human rights, child labour and obesity.

Government rules and regulations – for example, on environmental issues such as the Carbon Reduction Commitment or employee relations issues encompassed in the Human Rights Act and the Employment Rights Act – are an important driver for the adoption of best practice. But the desire for companies to pursue a more socially responsible business model is equally evident in the pressure for action from all stakeholders, including customers, investors, industry bodies and the media.
 
Value creation opportunities
It is human nature to take pride in setting a high standard of social responsibility, but it is increasingly clear that initiatives to achieve this goal also yield economic benefits. ESG improvement programmes create value in many ways. They enhance a company’s reputation, enabling better relationships with other stakeholders such as governments, suppliers, customers and the wider community in which the business operates. Growth may be supported or enhanced through the innovation and new products developed in response to unmet social needs.

Risk management can be improved by creating a sustainable supply chain, enabled by engaging in community development. Meanwhile, through improved environmental considerations, companies may be better able to attract and retain workers and the resulting higher employee morale raises productivity, reduces staff turnover and recruiting costs and thereby increases return on capital.

From principles to action
BC Partners believes that these social and financial objectives reinforce one another and, with a successful track record stretching back more than 20 years, is attuned to the need to evolve its business model and practices to meet the latest challenges. The company is, therefore, updating some of its business processes to ensure that both social and financial goals are met. In some instances this involves formalising processes that are already part of the company’s existing business practice, while in other areas new action is being taken.

As an initial step, in March 2009, BC Partners signed the UN Principles for Responsible Investment (PRI), which aim to help investors integrate consideration of ESG issues into both investment decision-making and ownership practices. The key concept is to invest in a manner that meets the needs of the present without compromising the ability of future generations to meet their own needs.

But responsible investment requires more than principles: to create value they must be backed up with policies and action. Furthermore, before a private equity asset manager can credibly encourage its portfolio companies to improve their ESG standards, it must first implement those principles within its own company.

Change begins at home
BC Partners has introduced specific initiatives to recalibrate the firm’s investment decisions to consider ESG issues and embed them in the firm’s normal decision-making processes. An ESG checklist has been developed to assess new investment opportunities, which considers, for example, supply chain issues as well as site-specific environmental, health and safety issues. To ensure awareness across the entire company, the firm’s associates undergo a specific training programme to enable then to analyse the ESG issues that arise in the due diligence process and further on in the investment process, ESG criteria are integrated into BC Partners’ final investment memorandum documentation. Using these memoranda to formulate their investment choices, the senior managers on the firm’s investment committee have ultimate responsibility for ensuring ESG criteria are adhered to in investment decisions.

The ESG agenda, however, reaches beyond a relatively narrow focus on the investment decision-making process. BC Partners has also introduced initiatives to meet its responsibilities in the workplace and to the wider community. Partners and employees must follow the letter and the spirit of the ethical standards set by the BC Partners’ Integrity Code of Conduct and the company has appointed an internal ombudsman to deal with instances of non-compliance. The company is also establishing the BC Partners Foundation, a UK-based charitable trust funded largely by employee contributions and a percentage of the firm’s earnings, which will have a broad-based remit for the disbursement of its funds to achieve a wide range of social objectives.

From investment to ownership
These same principles are extended to BC Partners initiatives to incorporate ESG issues into its ownership policies. For example, to promote transparency and accountability within its portfolio companies, BC Partners is already rigorous in its use of traditional governance procedures, such as board-level audit committees to implement the highest accounting standards. The firm also works closely with its portfolio companies to raise standards further through additional governance measures – such as setting codes of conduct and appointing internal ombudsmen – similar to those already introduced within BC Partners itself. The firm does not mandate the precise form that a portfolio company’s ESG policy should take, as individual circumstances vary widely, but over the holding period of the investment, portfolio companies are required to reach a similar standard of governance to BC Partners.

Reviewing the portfolio
Over the last six months, to enable BC Partners to understand the priority currently given to ESG issues by the management of its portfolio companies and the extent to which they have established actions to manage risks and realise opportunities, selected portfolio companies have been surveyed by questionnaire and subsequently interviewed. Out of a current portfolio of 17 companies, to date six have been analysed in detail. Four portfolio companies are at different stages of an IPO process – three of which have very recently been listed – which entails its own ESG commitments, while others were relatively recent BC Partners investments and will be assessed in the coming months.

In a diversified portfolio, including a distributor of frozen foods, an estate agency business, a gaming company and a fitness club operator, the range of ESG issues faced is very wide, but the process of surveying and interviewing the companies has served as an effective method to raise their awareness of these issues. All the portfolio companies surveyed agree that ESG issues will grow in influence over business operations in the next three years. ‘Consumer preferences’ in relation to ESG issues are the most common area of concern, followed by climate change, energy use and waste.

Meeting the challenge
The large majority of BC Partners’ portfolio companies are addressing ESG issues. While each company’s response is tailored to its specific circumstances, a number of common themes emerge. One theme is the need to establish responsibility for ESG issues as part of the governance agenda and some portfolio companies have recently appointed an Environmental Sustainability Leader to address external stakeholders’ concerns.

Educating customers and clients is another important area, both to overcome pre-conceived ideas and misconceptions and as part of the continuous improvement process. Responses range from conducting regular customer surveys and conducting brand appreciation studies, including gathering feedback online, through to product education programmes. For example, one company has launched an ‘eco-conception’ project to investigate the environmental impact of its representative products over their lifecycle, (including the environmental impact of suppliers) to show how they generate fewer carbon emissions than is perceived.

Most companies are looking at improving their energy efficiency. Specific means to address this issue include evaluating methods of using the wasted heat generated from air conditioning to meet or even exceed other energy requirements and maximising the efficient use of daylight to reduce artificial lighting needs.

The large majority of BC Partners portfolio companies are working on improving their people management processes to improve employee fair treatment and thereby improve staff retention. Specific measures that have been introduced include proper employee assessments, allowing staff time for volunteering, helping with access to schools (including free places in some countries) and programmes to promote equal opportunities in the workplace.

Conclusion
BC Partners’ portfolio companies clearly illustrate the multi-faceted nature of the ESG agenda, which requires a response borne both out of the necessity to address business risks and the opportunity to achieve value-enhancing eco-efficiencies. But to meet the challenge of achieving both social and financial objectives a company must clearly articulate its ESG principles and back them up with well-defined policies and actions – as BC Partners has done. Only then can responsibility be truly reconciled with returns.

What recession?

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At the end of April the Copom, Brazil’s monetary policy committee, announced it was raising the country’s benchmark interest rate to 9.5 percent from a historic low of 8.75 percent, where it had sat for the previous nine months. The increase means Brazil stays top of the league table of countries with the highest real interest rates, now 4.5 percent a year. Meanwhile most of the countries in the rest of the world, still trying to cope with the massive effects of the international financial crisis, have their base interest rates close to zero. The decision to raise Brazilian interest rates reflects fears that, as the country recovers from just less than positive growth in 2009, of the danger of inflation.

Just three days earlier a leading Brazilian banker, predicting the rise in interest rates, had also forecast that Brazil’s economy will grow between 6.4 percent and 7 percent this year. This is more than the International Monetary Fund is forecasting: the IMF in April said it believes Brazil will grow 5.5 percent in 2010 boosted by strong domestic demand and investments in the private sector. However, this figure is almost a whole percentage point more than the IMF’s previous forecast for Brazilian growth, made in January. It is also a figure that the world’s maturer economies, hit hard by the financial crisis of 2008/09, must dream of.

Certainly the future continues to look bright for Brazil, a country with a huge labour force, abundant natural resources, and, since the economic reforms brought in by its then Minister of Finance, Fernando Henrique Cardoso, in 1994, a promising environment for foreign investment. The requirement to keep inflation under control in recent years meant that Brazil avoided the flood of cheap credit that led to the sub-prime crisis in the United States. What this does mean, however, is that with interest rates still, by Brazilian standards, lower than in the past, and with Brazilian households comparatively unleveraged compared to their European and American counterparts, banks in the country are looking to increase the sums they are lending out, countering the fall in income from lower interest rates.

March saw a leap of 17 percent in loans by Brazilian banks as the country’s economy accelerated, with the loans powered by subordinate bond sales as banks look to lift their credit levels while staying within regulatory limits. The attention overseas investors are paying Brazil has been reflected in demand for the country’s currency, with the real rising 9 percent against the US dollar between February and April, the best performance of any of the leading Latin American currencies.

For a country that has, depending on how you define it, either the eight or ninth largest economy in the world, and the second largest in the Americas after the United States, Brazil has a surprisingly large percentage of its population without access to any banking facilities, at some 40 million people out of a population of 192 million. This is where banks such as Banco BMG, one of Brazil’s leading regional banking operators, have a competitive advantage, since it has products that fit better the needs of much of the bulk of the country’s population than many of its rivals.

The privately owned Banco BMG, one of the top 25 banks in Brazil, was formed in 1930 as Banco de Credito Predial in Brazil’s third largest city, Belo Horizonte, the state capital of Minas Gerais. Six years later, after changing its name to Banco de Minas Gerais, the company began to diversify into areas such as property, manufacturing, service industries and agriculture, and today Banco BMG is the banking division of BMG Group.

Its speciality is what are known as “paycheque deductible” credit operations, where low-risk and highly liquid payroll loans are made that have the repayments taken automatically and directly from salaries or, in the case of  people receiving benefits from the Brazilian Institute of Social Security (INSS), their social security or pension payments. Paycheque deductible loans are ideal for that one fifth of Brazilians who do not have bank accounts, and are the fastest-growing form of consumer credit in the country, rising from 21 percent of total consumer credit in 2005 to just under 30 percent by the middle of 2009, according to figures from the Central Bank.

Banco BMG makes pay cheque deductible loans to public sector employees and civil servants from municipal, state and federal governments and military personnel, and also, though to an increasingly smaller extent, employees of private sector companies. The bank pioneered payroll deductible loans to public sector employees, beginning in 1998, and has stayed the market leader in the segment, with an 18 percent share in Brazil’s consigned credit sector, and a 10 percent share in the total credit market. Since September 2004 around 22 million INSS retirees and pensioners have also been able to take advantage of Banco BMG payroll deductible loans.

To service these loans, the bank has a large and loyal network of third-party correspondents and proprietary sales points, with its non-branch-based agency operating structure – the bank has only 12 actual branches – providing enviable business flexibility. BMG thinks its way of working is unique, operating through “correspondents”, typically retail shops, which use agents to target workers and retirees by visiting schools, hospitals and places of work. BMG’s chief executive, Ricardo Gelbaum, was quoted last year as declaring:

“We have a proactive, agent-based model while the national banks have a reactive, branch-based model.” Banco BMG also offers employees in private and public companies the BMG Card, and, for INSS beneficiaries, the BMG MasterCard.

In October last year, despite what were described at the time as “challenging” conditions, Banco BMG successfully sold $300m in Tier-2 bonds. The BMG was one of the pioneer in the market for subordinated debt. The Ba3/B issue, managed by Morgan Stanley, Santander, BTG Pactual and UBS, was priced at 98.15 with a 9.950 percent coupon to yield 10.25 percent. Banco BMG said it planned to use the proceeds for general corporate purposes, including increasing the size of its loan portfolio and to boosting its reference capital.

The company’s results for the first quarter of this year showed net income up more than three and a half times on the same quarter in 2009 to R$150.6m ($87.1m), thanks in large part to the rebounding Brazilian economy and higher credit availability. This was a drop of a third from the last quarter of 2009, however, a fall caused by, among other reasons, an increase in financial intermediation expenses. All the same, the return on average equity (ROAE) was 28.4 percent, 2.4 percentage points higher than the previous quarter. The total credit portfolio grew 35.8 percent over the previous 12 months to reach R$20.2bn at the end of March, with personal credit being the main driver of growth. The own credit and leasing portfolios on March 31 totalled R$7.2bn, 60.4 percent up year-on-year, mainly driven by the increase in loans to individuals. Total assets rose to R$9.9bn, just over 40 percent up on the first quarter of 2009.

The president of BMG, Ricardo Guimarães, believes that the strategy is the main reason for keeping the financial institution as the current leader of the national credit. He recalls that the payroll loans reached only 40 percent of market potential and BMG can further improve your results. Guimaraes remember that Banco BMG’s 80th birthday on July 31 with satisfactory results throughout its history.

Analysts have been predicting that the bank may sell more subordinated debt this year, although Mr. Gelbaum told Bloomberg at the beginning of May that while Banco BMG was “always looking at alternatives” in the market, it has made no plans “at the moment”. Late last year he told another journalist that as local financial markets recuperate, BMG was looking at all possibilities for fund raising, from debentures to an IPO. Raising funds would not only be useful for providing more money for loans to customers: observers believe that a booming Brazilian banking market is likely to see continuing consolidation, and there could be good opportunities for an operator nimble enough to seize them.

Certainly the rapidly rising Brazilian economy means it is increasingly a good time to be a lender: the buoyant labour market and income growth led to a 6.7 percent drop in consumer default in the first quarter of this year compared to the first quarter of 2009, according to the credit rating company Serasa Experian, while for just the months of March 2009 and 2010, the decline in the default rate was even steeper, at 9.1 percent. For an operator like Banco BMG, servicing just those people likely to benefit most from the booming Brazilian economy, the ordinary workers, things can only get better.

Trading global markets

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For more than 25 years, active traders have been finding their competitive edge in the world’s markets with the award-winning charting and market analysis in eSignal. Especially now, as exchanges around the globe point to economic recovery, subscribers to eSignal’s charting and market data can find profitable opportunities using time-tested technical analysis methodologies.

A comprehensive toolset for market success starts with information. eSignal provides reliable, fast, streaming, real-time stock, futures, forex and options prices from the world’s markets. Also available are market-changing, real-time news and commentary from respected global sources, such as Dow Jones, PR Newswire and Business Wire, Zack’s and MarketWatch.

Backed by one of the most sophisticated market data infrastructures in the world, with geographically diverse data centres and multiple co-location facilities run in tandem, eSignal’s real-time information is delivered no matter where users connect. All sites are staffed 7x24x365. In this way, traders are always guaranteed reliable network
performance.

Scanners, including one that looks for set-ups using the proprietary indicators in the Advanced GET edition of eSignal, search for opportunities that suit users’ individual parameters.

To see the markets from the pro’s point of view, eSignal makes available, not just volume, not just the buying and selling, but a close-up on the activity that really moves the market. Users can receive a breadth of market depth information from the NASDAQ, NYSE, CME, CBOT and on forex rates, as well as Canadian depth from the TSX, Euro-next and LSE Level II.

Weather maps, particularly useful in the commodities market, come in multiple packages, covering areas all over the globe, including US Agriculture, US Energy, Europe Energy and the World Coffee Crop.

For decision support, eSignal features charting and analytics that can satisfy every level of technical analyst.

Hundreds of studies, plus easily manipulated drawing tools and familiar charting formats, bring the data into focus and paint a picture of what the markets are doing.

Also included in the eSignal software is a scripting language, eSignal Formula Script (EFS), which allows users to create their own studies. The Formula Wizard, a special Bar Replay function and back testing assist in the creation of studies and aid users in verifying the viability of their market strategies.

To assist in back testing, historical data is constantly being added to the data feed, with as much as 10 years of extended intraday data available, depending on the exchange and the type of issue being traded.

eSignal’s compatibility with a myriad of third party applications and premium add-on studies (many integrated with the software) broadens the scope of decision support and risk management tools. In addition, eSignal integrates its charting and data software with the trade execution platforms of many respected brokers.

Education that can help traders use eSignal to their best advantage comes in the form of free online seminars, pre-recorded product training, new user orientation, manuals and other materials posted online for subscribers to view in the convenience of their home or office. Technical support is available online and by phone, as well as access to user forums where EFS formulas and trading strategies can be shared.

eSignal comes in several versions at a number of price points that appeal to every level of trader, no matter what form his or her trading takes – short- to long-term, stocks, indices, futures, options or forex – and offers real-time, streaming, as well as delayed and end-of-day data packages. eSignal OnDemand has specialised versions for mini futures and forex traders. The Advanced GET Edition couples eSignal’s charting and award-winning data with predictive indicators for a rules-based approach.

For those for whom it is important to keep track of world markets while on the go, QuoTrek is a wireless add-on at 40 percent off the standalone price and available via the trader’s favourite mobile device.

With its broad market coverage, analytics, back testing and integration with a choice of trade execution platforms, eSignal is an all-in-one desktop solution for designing and implementing effective strategies for today’s markets.

For further information tel (UK): +44 (0) 20 7825 8701; (US): 800-723-8260; www.eSignal.com

Driving technology solutions

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With an excellent understanding of local market dynamics, greater insights into the local user needs coupled with technical expertise and deep domain expertise, Pennant Technologies, the business driven technology solutions and services company, has emerged as one of the leading provider of technology services and solutions, through the strategic adoption of ACT (Adding business value, Cost optimisation and reduced Time to market).

What really matters for any global industry is the enhancement of business capabilities to keep abreast with customer expectations, and race ahead of their competitors. The exponential development of the technology driven business transformation enabled organisations to embrace the technological innovations to effectively converge their business objectives. Recognising the increasingly pivotal role of Information Technology, a growing number of CEOs have positioned their corporations to leverage latest technological advancements, thereby achieving competitive advantage.

This applies equally to the global banking industry where the line managements are increasingly looking at IT to deliver new and innovative solutions, raise their levels of performance and respond to the accelerated rate of change required to address the complex business challenges. Intense competition among the local players and international players pushes banks to explore every option to gain market share. Innovative products can often provide that edge, and technology is usually the enabler. In addition, as the market is growing extremely saturated, optimising technology is increasingly crucial. Thus the key business driver for the banks is to effectively utilise the latest technology advancements to offer innovative services cutting across the boundaries outpacing their competitors.

Technology solutions, as we know aim at enhancing internal banking operations and offering better banking services across various delivery channels like ATMs, Internet Banking, IVR etc. But, the success of any technology solution depends on identifying areas for innovation and thereby enhancing business capabilities. This becomes all the more crucial in the evolving markets like Middle East, where the regional banking industry is currently among the fastest growing markets in the world thanks to the economic boom fuelled by skyrocketing energy prices in the recent past.

The financial sector in the Middle East survived the crisis better than most; predominantly due to its limited exposure to global markets, efficient management and timely support from the local governments. As the dust begins to settle after the worst financial crisis in living memory, Prudence is the latest buzzword among the regional banking industry as organisations striving to manage the risk and resources in better manner.

With all this, banking industry is increasingly prudent in any investment that applies even to any technology investment amidst the growing requirement for sophisticated financial products and services to compete with their national and international counterparts. In order to address these challenges, organisations are increasingly looking for a technology partner who truly understands their business challenges and delivers business aligned technological solutions in line with their expectations quickly at affordable cost. Here, for technology companies, the greater challenge is in understanding local market dynamics, the technology requirements of banks particularly the end-user’s requirements, and thereby developing the right custom solutions without massive technological investments.

Pennant Technologies is pioneered by a team of entrepreneurs, who have more than a decade experience in the Middle East banking space. Starting from 2006 till today, Pennant has been working closely with nine leading banking majors of the Middle East delivering variety of technological solutions that truly addresses their business challenges.  Pennant’s association with a core banking Product Company based in UK, meant to gain first-hand knowledge of product life cycle management, greater insights to the product inherent behavior at the granular level.

A close observation of Pennant’s technology solutions for the Middle East banking industry makes one to realise how ACT could create the needful difference for any bank, to outrace its competitors. The company has emerged as a business enabler imparting benefits of cost optimisation and reduced time to market. The company’s passion to go an extra mile is the real motivating force for successfully integrating all the delivery channels (ATM, online banking, telebanking etc) with the core banking applications at multiple client locations across Middle East and Africa.

Pennant’s perfect project execution capability meant evolving a harmonious combination of diverse technology streams, Java, J2EE, .Net, iSeries and IBM Enterprise Application Integration Platform. Well, it is definitely Pennant’s profound domain knowledge and technology expertise that has endeared it to evolve as the choicest technology provider to the nine leading banking majors of the Middle East and Africa.

Learning from each technology project is sure to ensure greater readiness on the part of IT solutions providers, and to counter the challenges associated with each client-interface. For Pennant, learning is considered as a strong catalysing force to go an extra mile. In addition, the Management team’s association with various bank’s IT departments across the Middle East in the last decade provided greater insights on various critical aspects like the gaps between standard off-the-shelf applications and the actual requirements; and the importance of the traceability of the transactions in the later day in any banking environment are corner stone in deriving the ACT strategy and enabled Pennant to adopt innovative measures in all its service and solution offering fully aligned to the business challenges.

In life or in profession, success speaks for itself. But, success cannot be guaranteed unless built on strong convictions and values. Understanding the cherished convictions of the banking industry, and the immediate expectations of the end users, is the first step towards developing the right set of solutions. Pennant demonstrated its capability and competency with consistent delivery of its suite of right set of solution and services to various leading banks across the Middle East and Africa within short span of time.

“We have successfully delivered variety of application integration services and custom developed applications to various banking clients within the stipulated timelines and well within the budget always and we believe our understanding of local market dynamics coupled with our strong technical and domain expertise helped us to achieve this. In addition, our fundamental objective of ensuring the ACT in each and our every engagement did the rest. We can proudly say that we have always lived up to our client’s expectations and delivered the business capabilities in each and every offering” said Rama Krishna Raju, CEO, Pennant Technologies.

The conceptualisation and development of ATM host integrator and its successful deployment across multiple sites reflect on how the gaps in the off-the-shelf solutions can be addressed by the developing the right set of custom applications. The innovative concept of fully configurable accounting engine in its product enables the banks to add new products on the fly there by reduces the time to market.

Technology needs to be understood in its totality. Technology cannot be limited to offering of custom applications, but it also includes software product development. In one way, custom applications and software product development go hand in hand, to complement each other. Pennant seems to have not only understood the totality of technology experience, but also the greater integration of custom applications and product development.

In this context, Pennant’s association with UK’s leading banking software product company has helped in getting insights into product life-cycle management. Pennant’s strategic approach in developing the products that truly addresses the gaps in the off-the-shelf applications is rewarding as its product has seen multiple installations across the region itself. It seemed that, the thinking of Pennant in terms of product development was basically to identify white spaces in product development, and address the concerns of customers for greater user experience of enterprise applications.

Notably, even in the prevailing economic crisis situation, Pennant has sustained its good work in evolving the custom applications for the Middle East banking industry, and continues to work on new projects from repeat customers. With the balance sheet reflecting revenues that more than double each year, Pennant has proved that global businesses across domains and geographies can continue to improve their order books by identifying and catering to the end users needs and requirements.

“Building on decades of experience, Pennant is continually enhancing its service and solution offerings to provide our clients with new technologies that fuel performance and lead directly to improved business results”. A closer look at the pennant’s strategy reveals that Pennant is not sitting on the laurels of initial success but is determined to broaden the current offerings on the strong foundation of the excellent process framework, deep talent pool, proven offshore capabilities and solid financial backing.

For further information
email: ravi.datla@pennanttech.com
www.pennanttech.com

Asset manager targets responsible investment

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More and more investors demand ESG-compliant products. Good governance and transparency are crucial and increasingly investors are looking beyond the standard corporate governance issues to analyse how companies and boards manage environmental and social issues.

The emergence of the Principals for Responsible Investment (PRI), a joint initiative of the UNGC and United Nations Environment Programme Finance Initiative (UNEP-FI) has further increased the number of investors, both from the responsible investment and mainstream communities that are looking to better integrate ESG issues into investment decision-making.

Enhancing transparency, accountability and disclosure is something Pioneer Investments has always strongly promoted throughout its organisation. Pioneer Investments has been a member of European Sustainable and Responsible Investment Forum (Eurosif) since 2004 and is committed to the Eurosif transparency guidelines, which have clearly defined its search, investment, control and monitoring processes. It is also these beliefs that underpin Pioneer Investments’ commitment to the United Nation Principles for Responsible Investment (UNPRI), which was signed in March 2009.

The UNPRI are six aspirational best practice principles that suggest a policy of engagement with companies on ESG criteria, and indicate a voluntary direction to head in with regards to responsible investments. A policy of engagement means that the signatory should, where possible, participate actively, for instance at the shareholder meetings of the companies it invests in, to the decision making process on issues regarding ESG.

Further to the signature of the UNPRI, and in line with its Principle 1, Pioneer Investments has set up a working group with the task to evaluate how to implement ESG issues into investment analysis and decision-making processes. The first step and a work in progress is to make ESG information relating to the investment universe available to all equity investment managers alongside financial information. Pioneer Investments’ believes that ESG criteria will have an impact on long-term performances. By adding ESG criteria to the traditional financial criteria, the portfolio selection process will improve and will focus more and more on companies and business models, which are sustainable in the long run. Corporate sustainability and CSR reports can provide valuable forward-looking information about corporate operations, innovation, intellectual capital and management quality.

By looking forward with an eye on ESG, the investment team will be better positioned to find the companies with robust competitive advantages.

This is also very in line with Pioneer Investments’ Global Proxy Voting policy whose ultimate aim is to promote the best interest of its clients and to increase their portfolio value, considering both the short and the long-term impact and with a specific angle on the corporate governance theme.

Because Pioneer Investments is fully aware of the important role it plays, it has enriched its product offering with investment solutions designed to take into consideration ethical or sustainable criteria. The team at Pioneer Investments believes that responsible investing and good corporate practice help build trust and confidence in the markets. Pioneer Investments’ mission is to create sustainable value for its stakeholders: clients, employees, local communities, shareholders.

About Pioneer Investments
Pioneer Investments is a global investment management group with Ä185.421bn of total assets under management as at end March 2010. They provide a wide range of investment solutions including mutual funds and structured products to clients that include institutions, corporations, intermediaries and private investors around the world. With offices in 31 countries, the group employs approximately 2,000 staff.

The group has over 80 years experience in traditional investments, providing appropriate investment strategies to our clients and partners. Our flagship mutual fund, Pioneer Fund, is the third oldest mutual fund in the US and exemplifies Pioneer Investments’ history of consistently managing money and helping investors pursue their financial goals. From our global investment centres in Dublin, Boston and Singapore, we apply our bottom up investment process supported by our own internal fundamental and quantitative research capabilities.

We believe that the route to adding value is experienced portfolio managers working in concert with dedicated career analysts generating proprietary research; the addition of a strong quantitative discipline provides screening and risk management strengthens our process.

Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies (“PGAM”). PGAM is a wholly owned subsidiary of UniCredit S.p.A.

www.pioneerinvestments.com

After the crash

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The global recession brought about by the collapse in credit supply saw many of the globally accepted models of investment disintegrate as the pillars of their construct, the ready supply of cheap financing and ever increasing asset valuations, disappeared almost overnight with the collapse of Lehman Brothers in September 2008. The investment market is now a very different environment to that of the past decade, where we witnessed the rise of huge private equity houses, capable of raising multi-billion amounts for funds and made personal fortunes for many. The fall out from the global financial collapse and the resultant collapse has seen much recrimination between financial industry leaders, regulators, governments and the public as we seek answers and search for accountability. It is evident that with the financial services industry and its wider influence under greater scrutiny than ever, its very morality, or perceived lack of morality, in the pursuit of profit at all cost has become a question of our time.

The radical change in the investment dynamics of the market and a clear question of the morality of the investment industry signify a clear turning point in the development of regional and global investment markets.  Investments will necessarily be longer term, with higher levels of equity and lower returns compared to the frenzy of the recent past. Societies, particularly in developed markets, are now questioning the benefit and the licence of the wider investment industry, with extraordinary returns and profits made through cheap financing and high levels of leverage, with little of that economic return seemingly being reinvested into society.  It is this new environment, new market realities, the moral case for investment institutions in society – in essence, earning the right to operate – that will provide new impetus to the already burgeoning Islamic private equity and venture capital industries.

Even before the full onset of the global downturn, the characteristics of Islamic private equity and venture capital ensured the sectors enjoyed increasing attention from regional and global investors. The growing demand for Islamic financial services in general, driven by the forecast 15-20 percent annual growth in Islamic finance, saw many investment firms offering new Islamic private equity and venture capital products to meet the market demand. There is already a close connection between the Islamic principles of investing and private equity. In private equity, the investor shares both the risks and the rewards, which replicates the basic principles of Islamic investment. The realities of the new investment markets in which we operate will see a growing demand for a far more partnership approach to private equity and venture capital investment as the levels of equity for investment increase and the market sees an increase in the merger of companies as a means of meeting the operational and strategic challenges of the economic downturn. Islamic investment also tends to be made in largely infrastructure orientated projects, such as transport, energy, healthcare and education, as these sectors not only offer asset backed investment but also long term investment into societies, a key tenet of Islamic investment.  It is not about the profit alone and never should be. Islamic investment should be made on the basis of partnership and for the wider benefit of our communities. Islamic private equity and venture capital also invests in an ethical manner, which sees it applying often relatively conservative financial structures to investments, offering realistic return levels to investors.  With major private equity houses still suffering from their pre-crisis leverage levels, Islamic private equity and venture capital will undoubtedly appeal to more restrained market expectation about returns.

Given that there is a natural fit between providing risk capital to businesses and Islamic law’s profit and risk sharing principles, Islamic private equity and venture capital have become increasingly attractive asset classes to Islamic investors.  In a post-crisis market, a market that is far less exuberant, much more realistic and is searching for an ethically based approach to investment, they are products not only of the moment but also for many years to come.  

The opportunity exists for Islamic private equity and venture capital to grow strongly and secure their future as increasingly standard asset classes. Comparatively, the sectors have coped well with the effects of the downturn. Although levels of investment and exits have dwindled over the past 18 months, the asset-backed nature and conservatively structured deals mean that the sectors are generally better placed than many of the highly leveraged, debt financed conventional investments made over the past five years. The downturn itself has seen a reduction in asset valuations across industries. This provides Islamic investors with the opportunity to make investments at the bottom, or at least near the bottom of the market, offering additional reason for investors to consider these sectors for long term value opportunities in a post downturn market.  

As much as the sectors offer a potentially highly attractive model to investors, both in terms of structure and moral requirements of our new investment environment, both Islamic private equity and venture capital are still nascent industries, very much in their infancy. The industries are still only a small part of the overall Islamic finance growth opportunity.  Industry estimates suggest that global conventional private equity market was worth around $2trn in 2009.  Official figures do not exist for the Islamic private equity industry but estimates suggest that only $4bn of the entire $20bn Gulf private equity sector is accounted for by Islamic private equity. 

Consider this figure against the global value of the entire Islamic finance industry, estimated at $800bn, and we can see that Islamic private equity and venture capital is still a small player in the vast opportunity that the rapidly growing global Islamic financial market offers.

A number of challenges face the sectors; challenges that if not tackled will hold back the development of these important asset classes.  The perception of these industries is hugely important to their development.  Often they can be viewed as being a Muslim only product, complex and offering lower returns. The range of products compared to conventional products currently can sometimes be limited.  In addition, fee structures can seem relatively expensive compared to conventional products due to investment screening requirements, complexity and higher research costs due to the lack of research material.  Investment opportunities and acquisition finance options can sometimes be limited by the requirements of Islamic financing and the lack of uniformity in terms of accounting standards and the interpretation of Sharia’ah principles can add additional complexity to Islamic investment. Lastly, the number of qualified and experienced Islamic private equity and venture capital experts remains limited, holding back the development of the sectors. That being said, the industry has made significant progress over the past few years in overcoming some of these challenges. For example, fees and investment returns are now comparable with conventional products.  In addition, investment products are managed in a Sharia’ah manner, which complement the product promise and offering of many conventional “ethical investments” which have been available in the west for many years.

Many of these challenges are not uncommon across many aspects of Islamic finance in general as it remains a relatively young sector in comparison to the range of products and services, regulatory environments and financing structures offered by conventional finance. However, within the Islamic private equity and venture capital markets, the achievements of institutions such as Capital Management House and other leading regional Islamic investment banks are pushing the development of the industry.  Increasing innovation in terms of financing structures and screening procedures means that many more opportunities are available to Islamic investors than just a few years ago. An increasing number of highly trained and qualified financial experts are entering the Islamic investment market out of preference, keen to become part of what will continue to be a rapidly developing global market place. Accounting principles and Sharia’ah interpretation are becoming more standardised as the industry coalesces around the standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions.  All of these continuing developments will see the industries offering an increasing range of highly sophisticated, competitively positioned investment opportunities to Islamic investors over the coming years.

The aftermath of the economic downturn could well prove to be a defining moment in the growth of Islamic private equity and venture capital. Adjusted return expectations and a need to demonstrate the moral legitimacy of investment to society offer the sectors a golden opportunity to secure their future as long term asset allocation requirements for both Islamic and conventional investors. The Sharia’ah principles of Islamic private equity speak to our times, to the needs of the market. It offers investment in the real economy, as opposed to highly complex derivative instruments. Investing in the real economy not only offers potential returns for sponsor and investor but it also benefits society as a whole given the often infrastructure type investment typical of Islamic private equity. The GCC and wider Middle East region offers a massive infrastructure opportunity over at least the next 20 years.  Companies such as Capital Management House are ideally placed to secure value from this market opportunity and we have made substantial progress and investment into important markets and sectors in the Middle East. Our Libya Fund, established to invest in the forecast development of this oil rich and strategically important gateway market, is already investing in the energy potential of Libya. Over time the fund will also invest in other important markets, such as healthcare, in which we are already making progress with potential investment plans.  We are also investing in the energy needs of the region with investments such as our investment in the Al Dur power plant in Bahrain last year. Islamic investment is equity based and is made into stable companies, with these investments based on partnership models of agreed risk and return. Value is unlocked by Islamic private equity deals as the interests of all parties involved are aligned. Deals are also based on long term value propositions, rather than short term return horizons.

In the post recession world, the market, and society, is demanding that the investment industry provide a responsible form of investment.  Islamic private equity and venture capital are both ideally suited to meet this demand and to create demonstrable economic value not only for investors but also for society. An important part of the Islamic investment market has come of age.

Khalid Najibi is Managing Director and CEO at Capital Management House

For more information tel: +973 17510010; email: info@capitalmh.com

A mandate to expand

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Founded in 1952 by Bonaventura Mora, the BIBM business group is today made up of Banc Internacional d’Andorra, Banca Mora, the asset manager BIBM Gestió d’Actius and BIBM Assegurances (life and health insurance), AP insurance and Mora Wealth Management, independent wealth managers in Zurich and Miami.

“Andorra is an independent country with more than 700 years of history and a strong banking tradition. Three generations of the Mora family have been running the banking group within this context, managing it with thoroughness, enthusiasm and a mission to serve”, declares Francesc Mora Sagués, who became the new chairman of Banc Internacional d’Andorra, holding company of the financial group, on 28 April 2010.

With Assets under Management of Ä6.608m on 31 December 2009, profits of Ä50.1m and 277 employees, Banc Internacional Banca Mora is the second largest financial group in Andorra.

It has, in the last financial year, achieved a rate of return on equity of 20.5 percent, a Tier 1 ratio of 21.2 percent, a liquidity ratio of 101.6 percent and an efficiency ratio, including repayments, of 31.3 percent. These ratios, together with renewal of the ratings A2 long-term, P-1 short-term and C+ financial strength by Moody’s, and with stable prospects, clearly confirm the Andorran financial group’s strength and solvency.

Private banking
From the start, the BIBM group has maintained a strong tradition in the field of private banking, concentrating on client wealth preservation. BIBM’s private banking has been built on the cornerstones of conversation privacy, professional and expert advice, transparency, high standards and continual improvements in client service.

For Jordi Mora Magriñà, appointed chairman of Banca Mora on 28 April 2010, “the fact that we are pioneers in this country in attaining the ISO 9001 certificate for our work in investment fund design and marketing, structured financial products and client services in Personal and Private Banking, obtained in 1996 and renewed annually since, is a clear sign of the group’s soundness”.

BIBM is also Global Investment Performance Standards (GIPS) certified for investment fund management as well as wealth management, demonstrating that the group offers a very high degree of additional transparency for comparing and evaluating investments.

International expansion
One of BIBM’s major challenges for the future is international expansion, which set off to a strong start in 2009 with the creation of Mora Wealth Management (MWM) in Zurich, Switzerland. In July of the same year, the group acquired 95 percent of the wealth manager PRS Latam Llc, based in Miami, USA, which it converted into Mora Wealth Management Miami.

“This expansion”, adds Francesc Mora, “enables the financial group and affiliates of MWM to offer an exclusive wealth management service to our most demanding clients. At BIBM, we have a highly professional team and specialists in specific areas”. BIBM provides this assessment on a global, professional and personal basis, and can suggest the most suitable products for each investor profile thanks to our risk tolerance questionnaire and investment guide.

Based on this, the personal manager offers a wide range of our own and third-party investment funds, innovating alternative and structured products, alternative management funds and life and health insurance.

BIBM group
The group has received various acknowledgements, notably the prize for the Andorran Bank of the Year in 2009, awarded by The Banker magazine.

The group won the European Excellence Award (EFQM) in 1999 and 2002, becoming the only company in the world to win it twice and the Ibero-American Excellence Award in 2001.

Likewise, we have a commitment to the environment, illustrated by the fact that the group was the first national company and the second European financial body to obtain the ISO 14001 certificate in 2000.

“Here at BIBM,” said Francesc and Jordi Mora, “we would like to express our sincere gratitude to readers of World Finance for voting for us in this year’s awards for the best financial group, in recognition of our career and results”.

Maximising alpha

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Just a handful of experts in the sustainable investment community would associate LBBW Asset Management (AM) with being an ESG fund manager. At first sight other asset management houses in the European market could be better known as a typical ESG manager than the investment boutique based in Stuttgart, Germany.

This asset manager has been widely active in the field of sustainable investing for the past ten years. Personnel continuity, outstanding expertise and a solid and transparent sustainability investment strategy constitute the main drivers of their success. And that is exactly why an increasing amount of institutional clients have been seduced by this rising boutique for the past years.

LBBW AM is a 100 percent subsidiary of Landesbank Baden-Wuerttemberg. The company’s client base is broadly diversified with a strong focus on institutional investors ie pension funds, insurance companies, corporations, SMEs, savings banks and churches, among others. In January 2010 the firm was lauded with the highest ÄuroFinanzen award as ‘Fund Boutique of the Year’, winning additional prizes in six different asset classes. The company successfully manages mutual funds as well as segregated mandates (known in the German market as ‘Spezialfonds’) within their clearly defined core competencies. Their investment solutions comprise value-oriented European equity, fixed income with focus on European corporate bonds, commodities and sustainable responsible investment (SRI) portfolios both for equity and fixed income.

For bond and equity security selection purposes this investment house follows a rigorous fundamental active investment approach designed to maximise alpha. Within a framework of effective governance all of their fund managers both enjoy a high degree of freedom and assume a high degree of self-responsibility and self-discipline. Because of their expertise in the management of ESG solutions and while timely identifying the rising demand for sustainable investments, the company expanded already a few years ago its commitment to investment excellence into this field. To underline the importance of that decision, LBBW AM gained membership in FNG (The German, Austrian and Swiss Sustainable Investment Forum); one of the most important organisms regarding issues of sustainable investing in the German speaking area and Europe. In addition Landesbank Baden-Wuerttemberg adhered last year to the ‘Principles for Responsible Investments’ of the United Nations (UN PRI).

The history of this boutique provides a fascinating example of the conception and evolution of premium sustainable investment products. About ten years ago LBBW Asset Management first sought to address the topic in conjunction with one of their most important clients from the ecclesiastic sector. The outcome of numerous rounds of discussions took shape when a strategical partnership with a reputable rating agency was established, a solid catalogue of screening criteria was set and a comprehensive investment process was drafted to be then successfully implemented into a segregated mandate using a combination of negative screening and best in class approach. This long-dated partnership with the Munich-based rating agency oekom research AG provided indeed a quality seal that stands for trust and outstanding investment management capabilities in the field.

This is how the firm started managing numerous segregated mandates for institutional clients. And as it is usual in the investment management industry, success came with time. When performance figures confirmed the quality of their management, it was a logical step for the firm to establish in 2006 a sustainability mutual fund – the equity product ‘LBBW NachhaltigkeitsStrategie’. The fund is loyal to two core principles, on the one hand, it follows a best in class approach and on the other, it applies a consistent ‘negative screening’. The above mentioned best in class concept promotes a healthy environment of competition among companies for them to become the most sustainable firm within the peer group. As for the negative screening policy, it consistently guarantees the exclusion of securities from investment consideration based on a set of previously defined criteria including nuclear energy, armour and ammunition, alcohol, tobacco, agricultural genetic engineering and gambling. Companies that show evidence of social wrongdoing including corruption, child labour or human rights violation are to be excluded as well.

Investors have been attracted by the consistency and transparency of their investment management process. For that reason, the product LBBW NachhaltigkeitsStrategie was the first German fund to be awarded with the ‘European SRI Transparency Code’ by the European Sustainable Investment Forum (Eurosif) – organism created in 2001 to serve as an umbrella association addressing socially responsible investment issues in Europe.  

As international investment products have expanded, so have sustainability products. In the past couple of years the interest of investors for fixed income ESG funds showed evidence of a steady increase. If a general outcome of the most recent financial crisis is worth mentioning, it would be the overall lack of confidence in financial institutions or for instance, political regimes with dubious reputation and creditworthiness. As a result not only institutional clients want to profit from this type of responsible investing. Also high net worth individuals (HNIs) seek investment solutions that bear in mind environmental, social and corporate governance factors. And fortunately, for those rather risk-averse investor that prefer avoiding the embedded volatility of equities, financial markets have also engineered fine-tuned solutions, ie fixed income sustainability products.

These vehicles provide a more conservative risk-return profile while also considering environmental, social and governance factors, the so-called ‘double yield’.

Due to this market development LBBW AM  launched in 2009 an innovative mutual fund within this asset class: ‘LBBW Nachhaltigkeit Renten’. The fund invests in European sovereign, covered and corporate bonds that in addition to adhering to a best in class approach are also to meet a set of customized fixed income selection criteria.

For instance, only certain sovereign debt securities can be invested in – the negative screening extends to securities issued by governments that do not implement effective and sustainable policies against topics of concern such as nuclear energy, climate change, commodity shortage, corruption, above-average military budgets or possession of nuclear weapons, efficient water use and/or the burden of public debt. This investment vehicle has proved to be a fine example in managing fixed income funds with the additional ESG added value.

The last decade has seen with excitement the development of this market player and the correspondent evolution of its total assets, which currently amount to Ä23.2bn. Their ESG assets have recently reached the Ä0.25bn mark and promise an increasing rate of growth for the coming years.

All-in-all, LBBW AM has given a valuable lesson to the market by positioning itself as a premium ESG asset manager with an established track record of strong risk-adjusted performance and sufficient organizational resources to continue to support their investment efforts. This boutique has confirmed that a transparent and sound investment strategy for ESG portfolios consistently delivers alpha to investors.

Synergy through shared platform

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Since it’s establishment 15 years ago, Brunei’s Baiduri Bank Group continues to show impressive growth in business volume and activity, earning numerous international awards, the latest being, the World Finance award for Best Banking Group Brunei 2010. Pierre Imhof, General Manager at Baiduri Bank Berhad said: “Winning international recognition shows that Baiduri Bank is continually improving its products and services in line with the highest international standards and provides motivation to deliver excellent financial performance year after year.”

The group’s profit before tax in 2009 reached BN$56m ($40m), an impressive 65 percent increase over 2008 bearing testament to the group’s strong resilience to hostile market forces as the domestic economy paces itself through recovery.

Baiduri Bank came into existence in 1994, followed two years later with the establishment of Baiduri Finance, its wholly-owned subsidiary. How did the group manage to achieve so much in such short time?  The answer may lie in their shareholding.

The bank’s shareholders include three leading home grown corporations Baiduri Holdings, Royal Brunei Airlines and Royal Brunei Technical Services in addition to BNP Paribas of France. This strong combination of local commitment and global expertise, which has helped to drive innovation and pioneering activities.   

Groupwide alignment
Anticipating a slow domestic economic recovery in 2009, all sectors of the Group geared themselves for a difficult year and made conscious efforts to further improve operational efficiency with the aim to achieve cost efficency. This involved consolidation of key functions through organisational restructuring, retraining and redeployment of staff, and investments in technology leading to faster response to customer needs and stronger focus on key business segments. All these efforts resulted in a growth in Profit after Tax in 2009 of BN$42m ($30m), an increase of 62 percent over 2008 while Net income declined by four percent as forecast.

Group synergy
Close cooperation and strong synergy developed between business units has contributed to significant growth in business volume and activities, with solid performance recorded across the entire spectrum of the group.
Baiduri Finance, a wholly-owned subsidiary of Baiduri Bank came into existence in 1996.  After a few years of aggressive growth by capturing significant new market share of the automobile financing business, it is now the country’s leading finance company.  Among products offered by the company is a highly successful deposit product called the multi-tier savings account where interests are calculated daily and credited into the account monthly.

With a strong combination of local commitment and global expertise, the group has been acknowledged as one of the leading banks in the country with a track record of financial innovations and pioneering activities. Its core business includes banking services to institutions and corporations, retail banking, consumer financing and wealth management.

Financial products
Baiduri Bank’s card payment business has the largest card member and merchant base in the country. It is the first and only bank in Brunei to hold franchise for four major card brands, namely American Express, Visa, MasterCard and China UnionPay (CUP) offering the widest range of payment cards to meet the needs of different customer segments.

Multiple service delivery channels
The bank has a branch network consisting of 12 branches, a finance arm with two branches, and 28 ATM locations strategically located throughout the country to serve the Brunei population of 400,000 people spread across 5,765 sq. km of land. ATMs are equipped with cash and cheque deposit functions in addition to cash withdrawal, bill payment and fund transfer functions.  In addition to its wide branch and ATM networks and an enhanced internet banking service, the introduction of FAST, a mobile authentication and transaction platform for payment and value-added services, gives customers extra convenience to meet the needs of specific customer segments.

International operating standards
Baiduri Finance obtained the internationally recognised ISO9001 quality certification in 2003 and was recertified in 2006. In 2007, the bank’s Credit Administration Department became the first department within the bank to have obtained this prestigious certificate. These two units remain the only two bodies within the banking and finance sector in Brunei certified to ISO 9001.

CSR
The Baiduri Bank Group is strongly committed to helping community development. Among others, the group regularly provides financial support for child development programmes in the country. The annual Baiduri Masters charity golf event, the largest such event in the country, is a fundraising initiative in support to these organisations. Included in Baiduri Bank Group’s CSR calendar are the Universal Children’s Day, the World Blood Donor Day and an SME Partnership Programme which aims to nurture Brunei’s aspiring young SME’s.

The bank also provides educational grants to deserving children from under-privileged families to help them realise their education goals.

Baiduri Bank Group’s operating income has been growing consistently and rapidly since inception, with significant net profit growths each year. In 2009, the group’s total assets exceeded BN$2.5bn ($1.8bn), which makes it amongst the top banking groups in the country in terms of balance sheet size.

Baiduri Bank firsts:

» First to offer in-store and in-mall banking seven days a week.

» First to offer internet banking.

» First to launch the internationally accepted Visa electron debit card, MasterCard electronic CashCard and Ladies Card.

» First to offer co-brand credit cards with American Express and the country’s national carrier Royal Brunei Airlines.

» First and only bank to provide money remittance facilities under the Western Union Agency.

» First and only bank to introduce the next generation mobile suite of services which provides 24-7 banking services via the mobile phone.

» First and only bank to introduce multi-currency ATM dispensing US dollar, Singapore dollars, euros and Brunei dollars.

Trading places

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The internet has had a stupendous impact on the financial services industry. Disproportionately so, in fact, compared to most other business sectors. But despite the many technological advances, the traditional online banking remains a very limited offering for many investors. And the number of players offering a truly integrated range of services – forex, futures, equities, FX options, not to mention ETFs and CFDs – are truly thin on the ground.

One player though that brings all these services together in one ensemble multi-product platform is Saxo Bank. Patrick Mortensen of Saxo, a global investment bank specialising in online trading and investment opportunities across all international financial markets, says it’s not just about a much broader range of capabilities.

“It’s about the easy to use practical features that each platform offers investors: professional, sophisticated features that allow retail investors the kind of access only professional and institutional investors enjoyed, until very recently.”

Sound deal
When you look at what Saxo’s trading platforms offers investors, he says, it’s a very attractive deal. “We offer embedded streaming news, research price alerts; price boards with research and search functions built into them. There are around 20,000 add-on instruments on our website that any investor can use. It’s a very sophisticated yet practical offering.”

It’s also a very fast-growing business for Saxo Bank. “In the period between 2005 and 2009 Saxo Bank saw total client fund deposits increase more than four times. During 2009, alone, deposits increased in excess of 70 percent. We’re very pleased with this result, especially in such a tough environment.”

Indeed. Part of the reason for Saxo’s success has been spurred by the international financial community’s track record. Many investors lost huge amounts of their wealth during the credit seizure. Increasingly, investors are not happy to leave their financial future to so-called financial ‘professionals’ when platforms like Saxo Bank offer the trading tools, huge amounts of information and assistance at a far lower cost.

E-Trade expansion
Saxo Bank is truly multi-product. Take a look at its home page. All trading options are clearly listed with no preference or weighting tilted towards any type of trading vehicle.

There’s also market news and in-depth analysis, plus an education section. “We best describe ourselves, I would say, as a facilitator,” says Mortensen. “We aggregate liquidity. And offer access to different exchanges, wherever in the world they are. This is a combination by which we build a technology platform.”

Saxo Bank’s recent acquisition of E-Trade Nordic cements this bank’s expansion programme and place in the Scandinavian market place, broadening its product offering and widening substantially its client base.

Crucially, this means Saxo now offers pension products – a big gain – as well as online accounts, bond offerings and, at some stage, a funds supermarket too.

State of the art
For Saxo Bank is very clear that a constantly invigorated product line-up is part and parcel of the bank’s product offering. “We aim to continually deliver new products and channels for our clients and market them at a steady stream.” He adds: “We’ve developed CFD Commodities and FX options board and earlier this year we enhanced our cash/equity product with a lot of new features that combine trading simplification with fundamental information on more than 11,000 stocks. In addition, in the Nordic region we’re providing peer analysis on the Nordic Exchanges and by June this will be expanded to the 1,000 largest stocks globally so that the retail investor will have that access to information only offered to professional investors. That’s a very big draw for many of our clients.”

The cash-equity product offering is broad and deep, as well as completely state of the art. It’s a gap that needed to be filled for a while and Mortensen is very pleased how it has been absorbed into the product line-up so successfully. “Previously we didn’t have a traditional equity offering that was state of art. We had a very sophisticated platform targeting the actual active traders but the more conservative investor trading in cash equities… Well, we were a bit behind the curve there.”

In future, Mortensen says clients’ will be able to trade online funds, possibly through a funds supermarket. But for the moment, the cash/equity offering is a breakthrough development for Saxo Bank. “It really is all what an equity investor needs,” says Mortensen, “as well as being a very good complimentary tool for the professional investor. It allows investors to take far more informed investment decisions whether by company, sector or theme.

Saxo Bank is increasingly seeing the rise of the self-directed client, particularly in the aftermath of the credit crunch. “Many private investors lost faith in their fund manager in this period,” says Mortensen. “In Merrill Lynch’s wealth report of 2009, almost half of wealthy investors reported they had lost faith in their wealth managers. That’s a huge number.”

And these investors are now asking a lot of questions from offerings like Saxo Bank – which Mortensen welcomes. “I’m very proud of being a facilitator in this respect. From a pricing perspective and stability of execution, having several providers gives a lot of stability to the end client. Also for our partners, knowing that there’s always a very high level of security in the operation. That’s also very important.”

Core values
Saxo Bank’s success is built on a number of core values, amongst them rationality, independence and integrity. Values act as principles against which all their ideas and actions can be tested says Mortensen.

“At times, it is not necessary to go through the whole thought process when an opportunity is presented because, if a productive activity meets all tests against these values, it is likely to be a success. But if it is in breach of integrity or honesty, it can be disregarded. Even if it appears to be profitable, because that kind of profitability would not be sustainable long term nor be appropriate to pursue.”

These words are refreshing to hear from a financial services professional. Mortensen is alert to the accusations fired at the industry in the last 18 months. Saxo’s banking model is different to the type of carnage and greed seen on Wall Street and in the City of London claims Mortensen. “We carefully explain our services to clients as well as the risks and opportunities they face. Saxo Bank’s actions are thereby consistent with our values. We do what we say and say what we mean.”

Talking to Mortensen, you quickly get the idea that being up-front and clear about his product offering is very important. He’s proud and pleased that, as a financial facilitator, his business provides immense client stability.

“The same is true for our partners. They know that there are exceptional levels of security built into our offering. That makes me proud to be part of Saxo Bank. We’ve achieved an awful lot from modest beginnings.”

Looking ahead
The market has gone into a fairly complacent phase currently thinks Mortensen. Trading ranges could indeed incur a dip later in the year. “I think that by autumn, reality will have returned.” But Saxo is confident that trading conditions will continue to attract many, whatever the external conditions throw at Saxo Bank’s business model.

“Our model was very resistant to the credit crisis generally. Sure, we suffered to some extent, along with everyone else. But our platform has many, many risk management features built in, coupled with no engagement in traditional lending activities and no dependence on traditional loan financing business, our business model has proven successful for Saxo Bank and our more than 400 partners world-wide.”
 
What Saxo Bank does:
– Provides investment and trading services catering to investors and institutional clients.
– Using SaxoTrader, SaxoWebTrader and SaxoMobileTrader, the award-winning, multi-asset online platforms, clients trade FX, CFDs, Stocks, Fixed income, Futures, Commodity CFDs, ETFs, Options and other derivatives.
– Saxo’s white label partner program combines the Bank’s technology, resources and liquidity with partner local market knowledge, regional expertise and language skills.
– Large institutional banks and smaller brokers, can offer their clients the best trading platform without investing in developing their own IT solutions – simply by using Saxo Bank’s technology and support, to quickly launch, effectively market, run and optimise an online trading business.
– Has fast execution (streaming of 3-4 prices per second on 160 currency crosses) and a reliable trading environment (99.95 percent avg. uptime in 2009).

Saxo Bank – a brief history
– Founded in 1992 by co-CEOs Lars Seier Christensen and Kim Fournais.
– Saxo Bank was among the first financial institutions in the world to develop an Internet-based information and investment trading platform. From the outset, the Bank emphasised technology as a vital element for being competitive in the online trading industry. Saxo Bank has built a global base of white label partners, retail clients, corporations and financial institutions from its headquarters in Denmark and numerous regional offices. – Since receiving European bank status in June 2001, Saxo Bank has positioned itself as a leading player in online trading thanks to its superior client service, competitive pricing and its focus on developing industry-leading trading platforms.

Patrick Mortenson is a director at SaxoBank
For more information email: pmo@saxobank.com

Building for the future

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Founded in 1801 the London Stock Exchange (the exchange) has been one of the world’s leading international exchanges for over two hundred years. For much of that time, however, while the exchange has moved premises on numerous occasions, the basics of its business have remained largely the same. Indeed it is probably over the last 25 years, that the exchange has undergone its most significant changes.

Many of these changes have been in response to external factors such as increasing economic globalisation and widespread regulatory upheaval in financial markets bringing increased competition. In the face of such change, however, and characteristic of the resilience that has brought success over so many years, the exchange continues to adapt to ensure its long-term sustainability.

“Certainly, in the late 1990s, early 2000s, we moved into a period when exchanges became more global in their outlook, rather than being nationally focused as traditionally was the case,” says Doug Webb, Chief Financial Officer at the exchange. “And it was important for the London Stock Exchange to see how it could become a more global organisation.”

A global outlook
In October 2007, the exchange merged with Italy’s Milan based Borsa Italiana. The deal provided broader geographic exposure, as well as bringing a broad range of assets into the group, some in areas where the exchange had little exposure. These included post trade clearing and settlement businesses, and also a greater breadth of products in trading areas such as derivatives and fixed income.

“It also brought the benefit of scale allowing us to leverage IT investments across multiple markets, for instance, and move assets around between the two,” says Webb. “You see an example of that recently in the UK, with the launch of the new retail enabled bond market, which is about taking successful a model already running in Italy and replicating it in the UK.”

With trading speed and technology also increasingly important, in October 2009 the exchange bought Sri-Lankan based technology services group, MillenniumIT. The company is an established provider of exchange technology, including trading surveillance, smart order routing and post trade systems.

“Exchanges provide the infrastructure for financial markets, and infrastructure today is heavily dependent on the quality of information technology that you deploy,” says Webb. “In the past, both London Stock Exchange and Borsa Italiana have tended to have outsourced IT models, where the development was carried out by a third party.

So the primary focus with the Millennium acquisition was to gain full control of market leading information technology.”

One of the biggest changes in capital markets in recent years has been the impact of the Markets in Financial Instruments Directive (MiFID), providing harmonised regulation for investment in the European Union. By opening up cash equity trading to competition across the whole of Europe, the directive has created a market for new entrants. Since 2007, and the launch of Chi-X, there has been a spate of Multilateral Trading Facilities (MTFs) created which compete in equity trading with traditional exchanges.

As well as taking steps to make itself more competitive, the exchange also acquired a majority stake in the Turquoise MTF in February 2010, merging it with its Baikal dark pool platform. On top of the existing nine global investment bank shareholders, three additional global banking clients joined the venture as shareholders.

“The reason we purchased Turquoise is that it gives us exposure to pan-European trading,” says Webb. “While the exchange trades UK securities, and Borsa Italiana trades Italian securities, Turquoise trades securities across 23 markets throughout Europe and so for us it was a very efficient way to gain that pan-European exposure. If we had stayed in the UK and Italy only, we would be missing out on providing an offering for 65 percent of all European trading.”

The purchase also provided the opportunity for the exchange to work more closely with its customers. Previously, the exchange sometimes saw its customers more as competitors than clients, says Webb. But part of the firm’s key strategic focus over the last year has been getting much closer to its clients and working with them collaboratively.

“So we are working closely with our customers on Turquoise, through a joint model that puts us firmly in control of the operation, but positions them as partners, and potential beneficiaries of our success. We have already responded to one of their clear strategic messages by announcing that Turquoise will start to trade US as well as European equities.”

As for the future of MTFs generally, Webb points to the fact that all the MTFs are loss-making operations, and investors are growing more reluctant to continue investing in businesses with potentially unsustainable business models.

Diversification
As part of its strategic evolution, in order to create a more long-term sustainable business, the exchange continues to diversify its product and services offerings across the three main areas of capital markets, information and technology, and post trade services.

So in capital markets, for example, the exchange provides opportunities for investors to invest in the companies that raise capital at IPO and through further fundraising. It also allows investors to trade those companies’ shares as well as a range of other instruments. In addition the exchange owns derivative exchanges both in the UK and Italy. It also trades fixed income products, and has a majority stake in the leading wholesale electronic platform for government bonds.

Information and technology represents about a third of the exchange’s revenue. Activities can be divided broadly into two groups. Roughly one half is the provision of real time market information, to Bloomberg, Reuters and Proquote screens, for example. The rest is composed of a broad range of activities such as the FTSE index joint venture, which has achieved double digit annual growth recently.

“There is an ever increasing need for index products in a market that requires expanded benchmarking capabilities as passive investment strategies become relatively more popular,” says Webb.

As part of its move to diversify, the exchange is expanding the range of products and services it offers clients in the information and technology businesses. So, for example, as the speed of trading and latency are such important issues in modern trading, the exchange is providing a service that meets the demand from high frequency traders and major brokers to locate their trading engines in the exchange’s data centre.

The purchase of MillenniumIT is another example of the move to change the mix of exchange’s information and technology business. LSE bought Millennium primarily for in-house reasons. However, says Webb, with MillenniumIT well known for its technology, and already selling exchange and exchange related systems, the backing of the Exchange’s brand and reputation is already having a positive benefit on the Sri Lankan firm’s  order pipeline.

In post trade the exchange has very efficient businesses in Italy including clearing, settlement and assets it will continue to leverage. At the same time the Exchange has focused on reducing the cost of clearing in the UK.

“We have spent a lot of time recently, for instance, focusing on the cost of post trade services in the UK, which have become a significant barrier to trading growth,” says Webb. “As part of that effort we have managed to extract some beneficial changes from Euroclear to their tariffs, which will reduce the overall cost of trading to our clients by around £10m per year. And, of course, we continue to focus on how we can make post trade more efficient in the UK.”

A secure future
Great companies evolve and adapt to the times, and the Exchange is no exception. It has the advantage of being located in one of the world’s leading financial centres, but also maintains a truly international outlook as globalisation gains pace.

“London, as a financial centre, is very much international, that is one of the big advantages we have,” says Webb.

“We put together our offerings in a way that are very attractive to our customers, and are also part of a much wider community, which is a key advantage; the amount of international money which is managed in London, and the knowledge and expertise on hand relating to global companies and global markets, the leading lawyers and accountants located in the City of London, are really important.”

Indeed, as Webb points out, recent events have underlined the important role the LSE plays in the global economy. “Obviously we have just been through a period where companies have struggled to raise money with the debt markets closing and I think the worth of the equity markets became very clear, with record amounts of capital raised in rights issues to see companies through such a difficult period.”

And, in an increasingly uncertain world, experience, brand and reputation, also carry a lot of weight.

“You want to have a trusted and independent player providing the infrastructure that allows people to both raise capital and trade instruments in the market. We provide equal access – opportunities for companies of all sizes to raise money and equally for investors to invest in and trade the securities in those companies. And we are much focused on ensuring that the high standards that you have come to expect from the Exchange’s markets are retained.”

The exchange continues to thrive. With its well established brand, and increasingly global outlook, it is well placed to continue evolving its business and maintain its pre-eminent role in the global financial services market, says Webb.

“We are a market that is open to everybody, that you can rely on, that has been around over 200 years and will be around for the next couple of centuries at least.”

Reforming the TSE

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Every second counts, as they say. But in the fast-paced global financial markets, a second feels like an eternity. It’s milliseconds that are important now, a fact not lost on the Tokyo Stock Exchange, which launched a new trading system at the start of the year.

Arrowhead, as the platform is known, brings the TSE’s infamously creaking trading systems into the modern age. Indeed, it puts the market at the forefront of trading technology, on a par with the financial markets of New York and London.

The upgrade was badly needed. The antiquated nature of the TSE’s error prone former system was badly exposed in 2005, when a typing error by a broker at Mizuho Securities caused a botched trade and huge losses. The firm accidently tried to sell 610,000 shares in a company for one yen each, when it meant to buy one share for 610,000 yen. The TSE recently paid $121m in damages to compensate the firm.

Just a year after the Mizuho mistake, massive selling in the shares of one company overloaded the TSE’s systems, forcing the market to cut its trading day by 30 minutes for three months. Such errors are unacceptable for a share market that is second only in size to NYSE.

Superfast
Arrowhead should make problems like these a thing of the past. The automated system can process trades in five milliseconds, rather than the two or three seconds required previously. That 600-times acceleration in trading speed makes a huge difference. As the proportion of investors using computer-driven, automated dealing strategies continues to grow, execution speed is critical.

Such trading is now common in the US and Europe, where hedge funds and sophisticated investors try to exploit tiny spreads and market imbalances. But super-fast algorithmic trading has been slower to catch on in Asia. Only one in ten of the global financial firms that use high-frequency trading strategies are active in Tokyo, according to an analysis from Celent, the market research and consulting firm. Sniffing out the chance to seize a corner of this market, smaller, independent proprietary trading platforms have started to pop up, offering Asian investors the same opportunity to trade at speed. The launch of Arrowhead means that investors can now use their super-fast strategies on the TSE.

The Arrowhead system cost $140m to develop. When launched in January, it could handle over four million orders a day, an increase of around 70 percent on previous capacity. For now, capacity is scaled to handle twice the number of orders seen during peak times. But if needed, trading capacity can be expanded further within a week. To ensure business continuity, the system runs across 200 servers, housed in three separate locations.

Arrowhead increases both response times for order acceptance notices and the time taken to distribute stock prices and quote information.

The TSE made other important changes when it introduced Arrowhead. A sister system, called FLEX Full, provides accelerated market information and enables the TSE to significantly expand the content of market data provided to users. For example, the number of quotes disseminated to traders has increased from five to eight above and below the central price. All order book data is now provided in real-time.

The TSE has also changed some of its trading rules in an effort to promote smooth execution, better price discovery, and greater market liquidity. For example, the TSE is eliminating half-days, revising the price limits on bids/offers and quote renewals, and reducing tick sizes – the smallest increments by which a stock can move. Investors can now buy or sell Sony shares at one yen intervals, rather than five, for example.

Efforts to modernise the TSE go beyond improvements to its trading system; it is also introducing corporate governance reforms aimed at making the market a safer environment for investors.

Investor-friendly?
Corporate governance is hardly a new issue on the TSE’s strategic agenda. It issued a set of corporate governance principles for its listed companies in 2004 followed by a report on governance two years later. However, as a report that it issued on the topic last year noted, “Past efforts for improving and enhancing corporate governance in Japan are questioned to be genuine: an increasing number of listed companies have taken corporate activities which seriously damage the shareholder interests.”

It continued, “Under such circumstances and amid falling stock prices worldwide due to the recent financial crisis, some point out that investors are rapidly losing confidence and interest in the Tokyo market, and that our country as well as the market players including the listed companies are facing an urgent need to restore investor confidence and interest.”

To that end, the TSE created an advisory group to recommend a series of reforms that would improve the quality of corporate governance among Japan’s listed companies. It published a series of recommendations in April 2009 focusing on improving the rights of shareholders and encouraging better dialogue between listed companies and their shareholders.

The review said that the TSE should require listed companies to provide a more detailed explanation to shareholders if they want to make an additional private placement of shares, for example, as this might not be the best means of raising new capital and would dilute existing shareholders. It said that the TSE should ban private placements that dilute existing shareholders by more than 300 percent, as they “extremely or even unreasonably impair the rights of existing shareholders and materially affect market credibility.”

The review said the TSE should put investor protection measures in place to review transactions with shareholders who own a controlling stake in a company or those in which some investors receive new shares on especially favourable terms. And the review said the TSE should require that companies confirm and disclose the financial position of parties to whom they allocate shares under a private placement. It also called for the TSE to prevent reverse stock split issues that unfairly dilute the interests of some shareholders. “Listed companies are expected to respect their shareholder interests as much as possible,” it said.

On improving dialogue with shareholders, the review noted that “exercise of voting rights is the foundation of corporate governance” and, therefore, the TSE needed to make it easier for companies to use those rights. It said the TSE should create a system so that shareholders can get easy access to voting results, for example.

Regulatory action
The review group’s recommendations were well received, and Japan’s securities regulator, the Financial Services Agency, passed new rules recently requiring companies with a listing in Japan to disclose more information about their corporate governance practices and how much they pay their directors.

The new disclosures are aimed at giving investors more of the information they need to hold companies to account. Previously, Japanese companies were allowed to withhold information that would be taken for granted in, for example, the US and the UK.

Companies will have to reveal the names of any directors earning more than Y100m and give a breakdown showing salary, bonus, stock options, and pension payments. The same applies to “statutory auditors”, who are the Japanese equivalent of non-executive or supervisory directors.

Companies will also have to disclose the roles of their independent directors, whether they have any financial or accounting expertise, and the details of their relationship with the company’s internal audit function.

The FSA also wants to make companies report more about the outcome of resolutions put to their annual shareholder meetings. Currently, Japanese companies only have to report if a resolution was passed or not. In future, they will have to reveal the number of votes cast for or against and the number of votes withheld.

More detailed voting disclosures, “will give a clearer picture of the decisions made by shareholders, which will entail a better functioning of the market pressure over the management,” the FSA said.

Strategy
It’s important that the TSE gets Arrowhead and its other reforms right. The exchange suffered years of decline after Japan’s asset bubble burst in 1989 and was hit hard by the financial crisis. But the market has bounced back over the last 18 months, and trading volumes hit a record of 563.7bn shares in 2009.

There are plans to turn the TSE itself into a public company, via an initial public offering. Advisors were appointed years ago, but the float was put on ice after those trading system problems in 2005. There were plans to go for an IPO again last year, but the financial crisis lead to them being postponed. The latest talk is for an IPO some time this year.

When the TSE launched Arrowhead in January, its president, Atsushi Saito, said, “we will do our best to make the exchange a global financial centre.” It its reforms are successful and the IPO gets away safely, the TSE will be well on its way to achieving that goal.

Shipping sails out of the storm

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As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

And the global shipping industry is already learning from the storms that ripped through it over the last eighteen months. As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

Although some lines still struggle with high debt, idled ships, and nearly-completed orders for new ships they no longer want, others have used the crisis to shed unwanted subsidiaries, scout for distressed assets and streamline businesses that grew fat in the boom years.

And in general management has used the turmoil to reflect on how best to set sail again. Summing up the attitude of many a storm-weary shipping company management hoping for fairer weather, Akimitsu Ashida, chairman of Japan’s MOL (Mitsui OSK Line), told staff in late April in a spirited call to arms: “I believe that we will not fail to achieve success if we positively address our difficulties and fearlessly meet our challenges. Let us all unite and strive to reach high ground again.”

As global trade slowly recovers, Gianluigi Aponte, chief executive of Mediterranean Shipping, second-largest of the world’s container shipping lines, believes the industry giants will bounce back fastest. “I think that the big operators will all come out very strong, and I think that we will all recover our losses in 2010.”

Pick-up in Europe
Not everybody agrees with so upbeat a forecast. Although the industry is sharply divided over how exactly the rest of the year will work out, the consensus view is that things are definitely looking up. In Europe’s hard-hit container ports, for example, there was a surge in traffic between January and March that not even the optimists predicted.

Singapore-based Neptune Orient Lines, with the fourth-largest container fleet, posted a 60 percent-plus jump in cargo volumes in just the first six weeks over the same month in 2008. As a result it plans to charter another ten ships this year and take ten of its own ships out of mothballs.

In common with others, industry leaders such as Neptune Orient chief executive Ron Widdows attribute the bounce-back to a realisation among retailers and manufacturers alike that it’s time to invest rather than cut back through de-stocking. Thus they are rapidly buying in raw material and products.

Loss-making rates
Whatever the reason, the increase in business has translated rapidly into higher rates. According to industry insiders, the cost to shippers of freighting a 20-foot container from Asia to Europe has more than quadrupled, from $350 to $1,500 after a long period of under-charging to keep fleets afloat. At the lower figure, say sources, most box-carriers were losing money.

For industry leaders such as Widdows, the price hikes have come just in time. Many lines are “no longer burning cash,” he told Bloomberg in an interview in late March. “That’s a wonderful thing compared to last year.”
Another sure sign of the recovery is that companies are putting ships back to work. In just the first quarter of this year, the amount of idle capacity in the container industry fell by 18 percent, according to Paris-based shipping consultancy AXS-Alphaliner.

In beleaguered Greece, battling its public debt crisis, the recovery is particularly good news because of its heavy dependence on shipping. Indeed Navios Maritime Holdings, a company specialising in the acquisition of shipping and logistics assets, has announced it would invest nearly $458m in thirteen ships including product and oil tankers. Main shareholder and chief executive Angeliki Frangou cited “attractive market dynamics” for boosting the fleet.

New orders for Asian yards
Meantime ship-building yards, which in the long run depend on freight volumes for the strength of their order book, are signing new contracts at a rapid rate. In Japan, orders jumped 70 percent in March compared with the same month last year. In 2009 Japan saw a devastating slump in orders to a 17-year low, according to Japan’s Ship Exporters Association.

Similarly China’s yards, which have a disproportionately large share of the more profitable dry-bulk carriers, are claiming a quarter of new orders while South Korea booked a 195 percent jump in newbuilds. Korean giants like Samsung Heavy and Daewoo Shipbuilding are planning for between $8bn-$10bn each in new orders over the full year while rival Hyundai Heavy, which didn’t get one contract in 2009, is already working on a $1.6bn oil platform for Norway. According to the Korean government, its shipbuilders will this year share over half of all new orders of all types of vessels.

The ports were the first sector of the industry to feel the more favourable winds. Shanghai International Port has reported a nearly 40 percent rise in net profits between January and March for its second straight quarter of black ink after a loss-making 2009. The port’s revenue flowed from a 35 percent increase in total cargo. However container traffic – the jewel in the global industry’s crown – rose by only 15.5 percent.

Buoyed by a steady increase in spot prices, a profitable oil and gas industry is doing its bit for shipping’s turnaround. Average shipping rates for a very large crude carrier (VLCC), which can carry over 1.46m barrels, have jumped dramatically. In late April they were running at around $37,500 a day, up from $14,760 in the last three months of 2009.

Repair work needed
The storms have however taken their toll. According to Drewry Shipping Consultants, which covers the global industry, container lines lost about $20bn last year. One of the biggest loss-makers was Denmark’s APM-Maersk, which alone ran up $2.09bn of the total. Other lines such as Hapag-Lloyd, Israel’s Zim and Chile’s CSAV, tenth-biggest container company, required emergency injections of funds.

But every company suffered a battering. China Cosco Holdings’ container fleet reported a 39 percent collapse in sales, pushing the firm to a $1.09bn loss. And Neptune Orient posted losses of $741m, representing an $820m turnaround on 2008. And even that wasn’t a particularly good year because trade slowed in the run-up to the crisis.

As Neptune Orient’s chairman, Cheng Wai Keung, summed it up: “We witnessed a worldwide economic downturn of unprecedented scale.”

The car-carrier sector, which transports new and used vehicles, is another barometer of the industry’s health. In more normal times it is one of the most lucrative businesses but, with US automotive giants GM and Chrysler in taxpayers’ hands and other brands running down existing stocks, the sector fell by a catastrophic 60 percent. Some 100 car-carriers out of a global fleet of 560 vessels were tied up.

To describe the general chaos, MOL chairman Ashida uses a nautical metaphor: “The collapse of Lehman Brothers dramatically slowed our company’s business to one or two knots.”

The ports suffered along with everybody else. Not even the substantial emerging-market business of diversified DP World, the world’s fourth-biggest container terminal operator, could protect it from the storm. Last year it posted a 30 percent fall in profits, down to $370m.

Slow ships
The industry generally gets high marks for being quick to take evasive action when the storms hit. Most companies laid up ships as soon as they could. Others invested in IT systems to handle the ocean-going fleets more cost-effectively. As cargo volumes plummeted, ships deemed surplus to requirements were scrapped and charter vessels returned to their owners.

And many container lines literally slowed down their ships to cut fuel costs in what is known as slow steaming. According to shipping consultancy Det Norske Veritas, which measures the sea-worthiness of ships, even a ten percent reduction in speed can cut fuel consumption by up to 30 percent.

That’s why APL, the container division of Neptune Orient, is running three-quarters of its fleet on reduced speeds.

As well as saving fuel, the strategy also has the merit of reducing capacity because there’s more time between loading and unloading. It also keeps ships out of mothballs because extra vessels are required on standard routes to make up for the slower voyage times.

Although it may seem contradictory that the world’s container fleet is on a go-slow while land-based forms of freight transport are speeding up, the benefits are easily measureable. According to Jay Ryu, an analyst at Hong Kong’s Mirae Asset Securities, slow steaming has saved between two percent to three percent of the industry’s current active fleet from being tied up.

And there’s no immediate prospect of ships’ captains calling for full steam ahead. Until and unless volumes grow back to something like their pre-crisis level, much of the world’s container fleet will be crossing the oceans at less than designed speed. As Neptune Orient chief executive Widdows predicts, “Slow-steaming is going to be with us for a very long time.”

Apart from slow boats to China and elsewhere, one of the most successful crisis strategies was implemented by Japan’s MOL. It was already a highly diversified shipping company through what chairman Ashida describes as a “centipede” system of management that gives the business numerous robust divisions – or “legs” – that support each other through hard times.

However MOL is also structured as a sakaro – that is, like a double-ended boat that can go forwards or backwards according to the prevailing conditions. Surely food for students of management in times of turbulence, sakaro strategy is based on a 1300 year-old wartime tactic. In a clever example of foresight, MOL pushed it through the company five years ago when the shipping market was still booming.

Chairman Ashida told divisional managers to put plans in place for hostile weather such as a sharp decline in cargo volume, higher bunker prices, stronger yen or other setbacks beyond the line’s control. When the crisis hit, MOL was quicker off the mark than most, for instance cutting its fleet by ten percent. Thus MOL was the only one of Japan’s big-three shipping companies to post a profit.

However the setback was so severe, the chairman admits, that MOL has run up against the limits of its sakaro strategy and can’t back up any further. The new recovery plan is known as “Gear up! MOL”. Under this, says Ashida, the line will accelerate “from two to ten knots”.

Idle ships
The $20bn question is how robust is the recovery. CC Tung, chairman of Orient Overseas International remains gloomy. Having posted $401m in losses last year, he fears the big risk lies in bringing idle ships, currently accounting for ten percent of the global container fleet, back into service too quickly.

“An imprudent reintroduction of capacity currently idling or laid up, if mismatched to demand, could see fresh rounds of rate cutting,” he warns.

There’s also a number of new ships in the pipeline, which will only serve to increase capacity beyond demand. As Nils Andersen, chief executive of APM-Maersk, explains, recovery all depends on improvement in the US and western European economies. “Until that happens, I think it’s hard to accept the tough time’s over”, he regrets. Meantime he’s allocated substantial funds to buy distressed assets, of which there are plenty. The industry has taken a severe battering across all sectors and repairs will take time. According to Divay Goel, head of Asia operations at consultants Drewry. “The industry may take at least two to three years to recover to pre-crisis levels.”

The worst may be over but the mid-year negotiations over container rates will answer a lot of questions. The annual contracts are settled from May onwards and, among other negotiations, lines are asking for another $800 per 40-feet container on benchmark US west coast routes. If they get that, it really does look like calmer waters.

Rebuilding Wall Street

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Easily the most significant of a mountain of laws now being drawn up in the backrooms of Congress and the Senate with the vigorous intervention of the White House is one that decrees no bank will be so big that it will not be allowed to fail. In short, no more bail-outs.

The so-called “resolution authority” described in the banking reforms working their way through the Senate will see to that. As the US Treasury’s trouble-shooter on banking reform, deputy secretary Neal S Wolin, said late April, this authority means: “No firm will be insulated from the consequences of its action, no firm will be protected from failure, and taxpayers will never [again] foot the bill for Wall Street’s mistakes.”

Here’s the future scenario for firms that get themselves into trouble, as described by Wolin. They will be shut down or broken up and sold to competitors. Management will be kicked out. Creditors and shareholders will suffer losses, just like in a normal commercial failure. And the average citizen will hardly notice a thing.
Given the determination of the White House, Treasury, Fed Res and every other relevant authority to make this happen, it’s a done deal that the Obama financial-sector reforms will go through in the US and that they will set the model for the rest of the world.

The process for the euthanasia of troubled firms is only part of the reform process that will surely reshape big, interconnected firms. Also in the legislative pipeline are specific procedures for the regulation of derivatives – the credit default swaps that nearly brought down AIG, for the management of systemic risk through a council of regulators, for much higher capital and liquidity standards especially for the biggest firms, and for the prohibition against banks investing in hedge or private equity funds.

Not much, if anything, is left out. On top of all this, there will be obligatory provisions allowing shareholders to claw back bonuses deemed to be unjustified. The credit rating agencies will have their very own watchdog in the form of a special division inside a much more aggressive SEC.

Although the big picture won’t change, negotiations are still going on over the detail as the reform package enters the final stretch. Wolin, a veteran Treasury official and former CIA staffer, is monitoring every meeting, every objection and every move by Wall Street.

“I think this is picking up momentum,” he told reporters in April. “There’s a clear understanding of the importance of enacting legislation sooner rather than later.”

Loose ends tying nooses
Actually, there are two separate legislative packages. The House of Representatives version known as the Wall Street Reform Act is already done and dusted while the Senate is refining its Restoring American Financial Stability Act that runs to over 1,300 pages. The debate is occurring along party lines, with Obama’s Democrats in one corner and the Republicans in the other. The main sticking point, especially with the Republicans, is whether big firms should be reduced to a size that doesn’t threaten innocent parties. Namely, whether banks should be shrunk under law before they turn into King Kongs that can destabilise an entire economy.

The next stage is for the two versions have to be harmonised. A highly symbolic date for the president to put his signature to the laws would be around the time of the collapse of Lehman Brother in October 2008.

Meantime Wolin is very much on a mission, reminding audiences of the damage done far beyond Wall Street.

When Obama took office in January 2009, he pointed out: “Americans were losing jobs at a rate of 750,000 a month. Home prices were plummeting. Businesses large and small were closing their doors. At the height of the crisis, American families had lost trillions of dollars in household wealth. Median losses at public and corporate pension funds in 2008 exceeded 25 percent. “He’s been hitting key constituencies with the message: “I believe we have an historic opportunity to fix the broken rules that govern our financial system,” he says.

Balancing books
As the figures come in, the true and staggering cost of supporting the financial sector becomes clearer. The bill will run to nearly $3.5trn over the next three fiscal years, according to Treasury’s office of debt management which has had to be extremely nimble-footed to find the funds. Last year, for example, it had to raise nearly six times the sovereign debt of 2008 in order to keep the economy going and to stabilise the banks.

And this came at a time of collapsing government receipts, with corporate taxes slumping by 55 percent, and fast-rising welfare costs. As Treasury points out, it “had to manage a $950bn financing swing in just one year.”

As the laws take shape, Wall Street is mounting an unprecedented offensive. According to Treasury sources, there are four lobbyists walking the corridors of Capitol Hill for every Congressman while the trade associations are spending $1.5m a day in lobbying costs to thwart, block or at least soften the terms of the legislation. The big-banking sector has not invested so much money, time and resources on legislation since the Gramm-Wiley laws of just over a decade ago that effectively annulled the 50 year-old Glass-Steagall Act and made it legal once again to combine commercial (retail) and investment-banking activities under the one roof.

Wall Street’s main fear is that the big firms will be reduced to the equivalent of boutique operations specialising either in plain-vanilla deposits and lending, or in investment banking’s M&A, non-proprietary trading, securities and other fee-building business. And if this were to happen, America would lose its banking dominance and may be destabilised all over again.

Regulators take a different view, pointing out that big firms can’t be trusted not to get themselves into trouble. Indeed before the crisis the average capital to assets ratio of the world’s 50 biggest institutions was a skimpy four percent. None had a ratio above eight percent. This, they argue, is manifestly too low.

Shapiro Shapiro
While the Treasury leads the charge, the SEC under tough-minded Mary Schapiro is very much on song as its recent bombshell action against Goldman Sachs process. The case alleges the firm deliberately designed a mortgage-based product – a synthetic CDO or collateralised debt obligation – so that it would fall to the benefit of third parties that wanted to short it. Whatever the merits of the case (and Goldman Sachs is vigorously defending it), it came as a shock to Wall Street and can safely be seen as the White House firing a shot across the bows of the big banks in the run-up to the reforms.

And clearly the SEC under Schapiro, who’s only been in the job a year, is on the warpath. New York-born Schapiro is a regulatory veteran who has served on the SEC commission under three presidents. Although Bernard Madoff once described her as a “dear friend”, the feeling isn’t mutual. In just one year at the helm, she has turned the commission into an offensive weapon. For instance, she strengthened the investigative division that was so infamously hoodwinked by one of the oldest tricks in the investment book – the $50bn Ponzi scheme run by Madoff Securities and the $7bn one of the Stanford Financial Group. Among other reforms considered overdue, the SEC has also proposed specific rules for credit rating agencies – another White House target because of their indiscriminate use of triple-A credit ratings.

Outside Wall Street, the new-look SEC gets high marks. “We’re seeing a resolve in the enforcement division that was lacking a year and a half or two years ago, and even 10 years ago,’’ says James D Cox, a Duke University law professor.

Behind all these offensives by the White House, Treasury and SEC is the conviction that the financial sector can’t be trusted to regulate itself. The guiding light of earlier administrations when Alan Greenspan was chairman of the US Fed, “regulation lite” has gone the way of toxic assets.

As Schapiro observed: “I think everybody a few years ago got caught up in the idea that the markets are self-correcting and self-disciplined, and that the people in Wall Street will do a better job protecting the financial system than the regulators would,’’ she said. “I do think the SEC got diverted by that philosophy.’’

One new face that Wall Street can expect to see a lot is Robert Khuzami, the SEC’s director of enforcement. A former federal prosecutor, he was parachuted into the commission in January from a top position at Deutsche Bank and he clearly means business. In his first speech to a packed Bar Association of New York, he dropped a number of bombshells, among them the revelation that his division will henceforth have the power to subpoena documents without the consent of the SEC’s five commissioners, a long-standing inhibition to the agency’s nimble-footedness.

Khuzami clearly wants to speed up the search process. If defence counsels aren’t “complete and timely in responses [to SEC requests for information]”, he warned, “there will likely be a subpoena on your desk in the morning.”  

Right on cue, skeletons keep coming out of the cupboard. According to yet another congressional investigation issued in April, this time into Washington Mutual, the firm continued to hustle high-risk mortgages despite its own reports showing that many of these securities were “likely to fail”. One internal probe estimates fraud rates of up to 83 percent in these securities – and WaMu and its affiliates securitised over $190bn of these loans in various forms.

The investigating committee is also on the warpath as it continues a round of hearings on the role of investment banks, regulators and credit rating agencies in the crisis. We must “hold perpetrators accountable,” insists its spokesman. So far, he lamented, blame had been attached to “very few people”.

Mainly behind the scenes, legendary central banker Paul Volcker has emerged as the president’s big thinker on banking reform. It was Volcker who first raised the “too big to fail” issue when he addressed the House of Representatives banking and financial services committee last September with the ominous observation:

“As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets.

Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. There are deep-seated, almost unmanageable, conflicts of interest with normal banking relationships.”
In so many words he was foreshadowing the repeal of Gramm-Wiley and a new era in big banking.

The president is determined to set the global agenda for banking reform and the new rules are certain to trickle down to other nations in the dollar zone as well into western Europe where regulatory thinking broadly coincides with that of US Treasury secretary Tim Geithner.

There’s no doubt this is a sea-change, as UK regulatory specialist and academic Peter Hahn points out. “This [reform process] is no longer a technocratic exercise. By proposing legislation, the American authorities and government are taking an axe to everything that has gone before,” he explains. “The discussion about the future look of global banking has been brought out of the closet.”

The last time this debate raged was in 1933 when Glass-Steagall split the banks in two. Oddly enough, for the next 50 years the US banking sector as a whole never performed better. And apart from occasional lapses like the savings and loan debacle, it stayed honest.