Author: Helen

Responding to customer needs will give a boost to Australia’s pensions system

Posted on by Helen

In the early 1990s, the governments of developed economies started to worry about the pressure that ageing populations would put on their retirement systems. In response to these concerns the Australian Government made it compulsory for all income earners to contribute to retirement funds. These reforms and tax incentives have driven huge growth in the size of the retirement fund market over the past two decades.

This growth offers great opportunity and responsibility for retirement funds, and is accompanied by a number of challenges. Industry competition has led to greater choice and reduced fees for members, but it has also resulted in a margin squeeze for many funds, as they are meeting the costs of regulatory reform and improved technology. A compulsory contribution system has also created an ongoing challenge for funds in terms of engaging members.

Retirement opportunities
Asgard’s Infinity platform holds $10bn of Australia’s savings, and has been recognised this year as Australia’s Best Advised Product by Chant West. Asgard has also been named Best Pension Provider 2016, Australia by World Finance. This success is due to Infinity’s customer-centric design, enabling members to pay only for the features that suit them. This focus on the customer has allowed Asgard to respond to some of the challenges inherent in the Australian retirement market.

Australia still operates under the three-pillar retirement system introduced in 1992. At its core is the social security ‘aged pension’, which is funded and administered by the Australian Federal Government. This is supported by a second pillar of compulsory contributions to retirement funds, a scheme in which employers are required to contribute to a registered retirement fund on behalf of their employees. The third pillar is the additional savings of self-funded retirees, which can also be contributed to these retirement funds. This system is known as ‘superannuation’, and registered retirement funds are referred to as superannuation funds (or super funds for short).

Infinity’s modular design allows advisors and members to tailor the product to their current investment needs and only pay for what they use

Compulsory contributions have driven huge growth in the size of these funds. Total assets in super funds grew from $110bn in 1992 to $1.5trn in 2015. Australians currently contribute a minimum of 9.5 percent of their income to a super fund, and this is due to increase to 12 percent over the next decade. KPMG estimates total assets in super funds will grow to $3.5trn by 2025.

Ageing difficulties
Australians are free to choose their super fund and, if they do not nominate a fund, their contributions are directed to a super fund chosen by their employer. This presents a significant opportunity for private retirement funds. Australia is the third-largest private pension fund market in the world, and retirement savings are Australians’ largest assets outside their family homes.

While Australia’s retirement system has created huge opportunities for retirement funds, mandatory contributions to retirement have also created significant challenges for the industry. Compulsory retirement savings mean super funds have a large proportion of members who are not actively engaged with their fund. This lack of engagement and the importance of super funds to household and national savings has made the system a focus of regulatory reform. Technology costs and complying with changing regulations have been part of the ongoing expense pressure on super funds. At the same time, competitive forces have reduced fees in the industry, further decreasing the margins of some funds.

Despite the huge increase in the size of super funds in Australia, there has only been a small decrease in fees. Economies of scale have been largely offset by expense pressures. Rice Warner found that super fees, as a proportion of funds under management, decreased from 1.4 percent in 2004 to 1.2 percent in 2014. Over the same period, the firm estimated that margins reduced by 0.15 percent for super funds due to price competition.

Customer-centric solutions
Another challenge for super funds, as previously noted, is how to create products that engage members, while simultaneously managing the cost of technology and regulatory change. This also has to be balanced with competitive price pressures and maintaining margins.

In 2011, Asgard began building the Infinity retirement product. Like other super funds in the Australian market, Asgard faced the challenge of developing products to engage members while managing technological constraints.

To solve this problem, Asgard adopted a customer-centric design approach. Instead of starting with the scope of the product being dictated by technology and cost constraints, Asgard began the design process with the needs of super fund members and their financial advisors in mind.

Asgard used research houses and interviewed members and advisors to map their needs. It was found that price and flexibility were the most important features to Asgard members and their advisors. Members’ investment needs differed greatly based on their stage of life, account balance, investment strategy, and preferences when trading off between risk and return. It was clear from speaking to customers that they did not want to pay for investment options they did not use, but wanted the flexibility to change what they used as their needs changed.

$10bn

Held by Asgard Infinity

$1.5trn

Held by Australian super funds

$3.5trn

Forecast to be held by 2025

Asgard then looked at different design options to address this customer need within existing technological and budget constraints. Customers were brought into Asgard’s design process to give feedback on and refine these options. From this process, Infinity’s innovative modular structure was born. Infinity takes a full ‘supermarket’ of investment options – managed funds, direct shares, term deposits, insurance, and margin lending – and packages them into modules around a central cash account. The idea is similar to a cable TV offering, where a customer can purchase packages of channels and only pays for the channels they want to use.

Infinity’s modular design allows advisors and members to tailor the product to their current investment needs and only pay for what they use. The flexibility to use modules in any combination, and add or remove modules at any time, makes Infinity a product a member can use throughout different stages of life.

Infinity starts with a central menu of managed funds, named Core. Core was built to suit members with lower balances, members with higher balances requiring simpler investment strategies, and those with risk-averse preferences. In July 2015, Asgard relaunched Core so that it offered a choice of fund managers across a suite of index and diversified managed fund options.

For no additional administration costs, members can add term deposits and insurance to the Core menu of managed funds. Members can also pay a higher administration fee to add direct equities to Core, providing a value-for-money way to implement a strategy incorporating a share portfolio. Members and advisors can also adjust their admin fees to add access to the Select menu of more than 90 managed funds and the Full menu of more than 400 managed funds.

The customer-centric design of Infinity runs deeper than its modular structure and flexible pricing. Asgard communicates with its members through tailored correspondence. The focus is always on the customer, and on providing the right tools at the right time. For example, the application process does not require the member to post any paper forms to Asgard, and accounts are activated instantly.

The proof of Infinity’s customer-centric design is its popularity with members and their advisors. This year, Infinity reached $10bn in size, less than five years after it was launched, and continues to receive industry recognition.

Legal notice
BT Funds Management (ABN: 63002916458, AFSL: 233724, RSE Licence: L0001090) is the trustee and issuer of Asgard Infinity eWrap Super/Pension (Asgard Infinity). A product disclosure statement (PDS) or financial services guide (FSG) is available for Asgard Infinity, and can be obtained by calling 1800 731 812 or by visiting Asgard.com.au.

You should obtain and consider the PDS or FSG (as required) before deciding whether to invest in Asgard Infinity. Awards are opinions only, and not a recommendation to invest in Asgard Infinity. The information provided above is general information only; it has been prepared without taking into account your personal objectives or financial situation, and so you should consider its appropriateness before acting on it.

Maamba Collieries aims to bridge the power shortfall in Zambia

Posted on by Helen

Maamba Collieries was incorporated in 1971 under the ownership of the Zambian Government, and has since become the largest coal mining company in the country, boasting an opencast coal mine situated near the village of Maamba in the Sinazongwe district of Zambia. The original mine was operational for many years, but low-grade coal was left to stockpile as waste. This resulted in severe environmental pollution and health hazards, both water and airborne, due to spontaneous combustion and acid mine drainage.

As Zambia is a country with growing energy needs – and, indeed, a lack of energy in many areas – the government devised a strategy: in order to mitigate the environmental risks and to enable Maamba Collieries to effectively exploit its resources, the government decided to establish a thermal power plant that could make use of low-grade coal. Consequently, this project was able to kill two birds with one stone, by cleaning up the environmental mess left by the stockpiles of coal while providing much-needed energy to the country.

The project is the first of its kind in Zambia, as it provides a dependable and sustainable base-load power source, which is crucial to the country’s energy security. It also provides Maamba Collieries with infrastructure that is ready to scale-up in line with the growing demand for power, not only in Zambia, but also in the entire sub-Saharan region.

There are two key elements to the project: the first is a coalmine revival programme, which includes the establishment of a coal handling and processing plant. The second and most important feature is the setting up of a 300MW mine mouth (composed of two 150MW sites) coal-fired power plant, along with a 48km, 330kV double circuit transmission line and raw water pump house with a 21km-long pipeline.

The Maamba Collieries project would bridge the current power shortfall, especially at a time when the lack of reliable power is hampering the region’s development

Safeguarding the project
The Maamba Collieries project is being implemented by Maamba Collieries Limited (MCL). A project of this size, scale and significance of course requires a huge capital investment, and so the Zambian Government decided to bring in a strategic partner with the necessary technical experience, financial strength and track record to ensure its successful completion. Following a global bidding process in 2010, Nava Bharat (Singapore) (NBS) was selected. NBS acquired a 65 percent shareholding in MCL, while ZCCM Investment Holdings held the remaining 35 percent.

NBS is a wholly owned subsidiary of Nava Bharat Ventures, an Indian-listed business conglomerate, while ZCCM is a company mainly owned by the Government of Zambia. It is a unique and collaborative project in Africa, wherein the sponsors are from Singapore, India and Zambia, the principal contractors are from China, and lenders come from across the globe.

To guarantee the completion of the project, MCL signed an engineering, procurement and construction contract with SEPCO – one of the largest thermal power construction groups in China – to bring much-needed expertise to the project. MCL has also employed circulating fluidised bed combustion technology for the power project, which is known and recognised as an environmentally friendly technique with the additional ability to use thermal-grade fuels of diverse origins and qualities.

To ensure a long-term customer base, MCL has secured long-term purchase agreements: the firm has signed a 20-year power purchase agreement (PPA) on a ‘take or pay’ basis with ZESCO, the local state-owned utility. The tariff payable to MCL is denominated in US dollars and is subject to indexation based on US producer prices. As a security mechanism over PPA receivables, MCL has also entered into an escrow agreement with ZESCO, which regulates the flow of revenues received under the PPA. The Zambian Government has also provided a guarantee that will remain in place until the escrow account mechanism is operational to the satisfaction of MCL and its lenders.

The Government of Zambia has acted as a strong supporter of the Maamba Collieries project, as it is strategically important for the Zambian economy, providing a reliable energy supply for the country. MCL has therefore entered into an implementation agreement with the government to support the obligations of ZESCO, covering standard clauses on compensation in case of a change in the law, political force majeure or government default. It also provides customary buyout rights and termination compensation, designed to cover senior debt and equity. MCL has also signed an investment promotion and protection agreement with the government, wherein it is entitled to specific rights, such as: employing local and expatriate employees; security interest over project assets to the lenders of the project; designated tax and duty exemptions; and assistance in obtaining permits, including the licenses and consents required for implementation of the project.

Financial aspects
The power plant’s capital expenditure is estimated at $738m, and the coalmine’s capital expenditure – including mine establishment expenditure – is estimated at $105m, creating a total capital expenditure of $843m. The project achieved financial closure in July last year, making it the first independent power project of this size in entire sub-Saharan region to achieve this status. However, before financial closure itself, sponsors committed their entire equity, and construction was 80 percent completed.

The project is being funded on a debt-equity ratio of 70:30. Sponsors have contributed equity of $253m, while debt totalling $590m has been raised from a consortium of lenders comprising large international commercial banks and development financial institutions on a limited recourse project finance basis.

Maamba Collieries’ coal handling plant
Maamba Collieries’ coal handling plant

These banks include the Industrial and Commercial Bank of China, Bank of China, Standard Chartered Bank and Absa Bank, which have been secured on the basis of the insurance cover of Sinosure, the export credit agency of China. This is the first private power project in the sub-Saharan region to receive export credit agency insurance cover from Sinosure. Furthermore, the domestic bank Barclays Bank Zambia is also contributing, along with a number of developmental financial institutions, including Development Bank of Southern Africa, Industrial Development Corporation of South Africa and Africa Finance Corporation.

Future challenges
Zambia’s reliance on hydropower to meet current and future electricity demand faces significant challenges, such as: increased economic development leading to growing demand for other water uses; increased water needs to address conservation goals in light of the potential impact of climate variability on water supply; and increased power demands requiring additional water for hydropower. With Maamba Collieries being the only thermal power plant of its size in the country, the project diversifies Zambia’s energy sources from 96 percent hydropower and offers reliable base-load power.

Due to drought conditions, hydro projects in Zambia are underutilised, resulting in the country facing a power deficit of 760MW as of April this year, which constitutes about 40 percent of total demand. There are power cuts in the country for between eight and 12 hours per day. The imminent completion of the Maamba Collieries project would bridge the current shortfall, especially at a time when the lack of reliable power is hampering the region’s development, making the project of significant strategic importance to Zambia.

The project will also help Zambia grow on a socioeconomic level, in terms of health, education and vocational training, in addition to supporting the industries upon which the country’s economy relies – most notably, mining and agriculture. Presently, these industries are operating at very low capacities due to the country’s frequent power cuts.

Now in an advanced stage of completion and scheduled for commissioning in July this year, the project offers hope to other African nations that large-scale projects can take off without real movement of precious raw materials such as coal and minerals. Overall, the project has resulted in significant economic empowerment and growth in the under-developed Southern Province of Zambia.

Project data

Category
Power

Cost
$843m

Financial structure
Equity – $253m
Debt – $590m

Start date
April 2012

End date
July 2016

Designers
SEPCO, China

Concession period
Until July 2036

Project type
Integrated coalmine and thermal power project

Location
Maamba, Zambia

Objectives
Power generation and sale of high-grade coal

Key partners
• Sponsors – Nava Bharat (Singapore) and ZCCM Investment Holdings
• Lenders – Bank of China, Industrial and Commercial Bank of China, Standard Chartered Bank, Absa Bank Limited, Development Bank of Southern Africa, Industrial Development Corporation of South Africa, Barclays Bank Zambia and Africa Finance Corporation

CEO
Rear Admiral Venkat Shankar

Why factory farming is no longer sustainable

Posted on by Helen

The proliferation of factory farming is as much a feature of the industrial age as fossil fuel production. In only the last half-century, rapid population growth, quickly rising incomes and intense urbanisation have given rise to a sharp spike in meat consumption. Between 1950 and 1997, production rose from 44 million to 211 million tonnes, and once-cumbersome agricultural processes have been consolidated to the point where high-volume, low-cost methods have won through.

“Looking at the industry through an ESG [environmental, social and corporate governance] lens produces alarming results that should raise a red flag to mainstream investors across the world”, wrote Jeremy Coller, Founder of the Farm Animal Investment Risk & Return (FAIRR) initiative. With the global population on course to swell a further third by the year 2040, there is a general expectation that worldwide demand for animal protein will skyrocket 70 percent by the century’s halfway point, with much of the responsibility resting on the shoulders of industrial-sized farms.

Double-edged sword
In Asia, demand for animal protein is soaring, and while the trend has been held up as proof of the continent’s rising prosperity, it is far from without consequence. See China, where a doubling of the population has, on the one hand, resulted in a substantial increase in meat consumption, and on the other stretched its food system to breaking point. According to Alan Briefel, Executive Director of the FAIRR initiative, China now has the world’s largest pig and poultry industries, is the world’s largest consumer of pork, the second-largest producer of poultry, and the third largest milk-producing nation. Meat consumption there has quadrupled since 1971, and while some see it as positive, others, PwC included, believe it will “place enormous burdens on an already challenged domestic food system, and have significant ramifications on international trade in agriculture”.

This same dependence on animal protein feeds into much more prescient issues concerning land use, resource scarcity and climate change, all of which threaten to unseat China as a shining beacon of prosperity and wreak havoc on its population’s health and wellbeing. As damning a situation as China’s is, it is but a glimpse of the long-term implications associated with industrialised meat production, and the practice itself could well become the next big risk for investors.

In only the last half-century, rapid population growth, quickly rising incomes and intense urbanisation have given rise to a sharp spike in
meat consumption

Steven Heim, Director of ESG Research at Boston Common Asset Management, cites methane emissions and antibiotic use as the two issues most deserving of attention on the investor front. Speaking to World Finance, he emphasised that these risks and others must be taken into account if investors wish to avoid future damages. More than anything, the scale of the industry and the extent to which it has been allowed to grow unchallenged should give people – investors in particular – reason to feel anxious. The industrialisation of farming has only recently been subjected to the same pressures as items such as fossil fuels.

To date, more than 70 percent of the world’s farm animals reside in factory farms, and larger feedlots are known to contain upwards of 100,000 cattle or 500,000 broiler chickens living in close proximity. The share in the US is closer to 99 percent, and as demand for animal products in developing countries increases at a rapid pace, we should expect to see the global percentage climb higher still.

A number of ‘advances’ in farming since the mid-1970s in particular have made the practice itself more ‘efficient’ and effectively transformed the old image of farming into something that resembles a sprawling, windowless machine. The use of antibiotics from that point onwards has facilitated the crowding of animals into tighter and tighter spaces, and the realisation that these same drugs facilitate faster growth again means antibiotics have become an integral part of the process.

These ‘innovations’ and others mean the average US dairy cow today provides more than 2,300 gallons of milk a year, compared to 665 gallons in 1950. Chickens now reach slaughter weight at 47 days of age as opposed to 70. As much as profit-hungry companies have welcomed these ‘new and improved’ methods, they carry a number of risks for investors.

A recent report by FAIRR outlined these risks on the investor side, which – willingly or not – have a stake in factory farming and could lose out to its very many uncomfortable truths. On a macro level, the livestock sector accounts for 14 percent of global GHG emissions – more than the transport sector – and, in the US, 80 percent of all antibiotic use. It is the number one consumer of water in drought-stricken California and the topmost reason for the spread of bird (H5N2) and swine (H1N1) flu – with the former responsible for a staggering $3.3bn in industry losses.

On a smaller – albeit still significant – scale, the issue of antibiotic overuse has investors rightly concerned about the rise of drug resistant bacteria. The farms in question provide the perfect conditions for new strains to develop and spread, and without measures to protect against the spread of disease, large-scale epidemics and human infection could ensue.

What to do?
All in all, the FAIRR report identified 28 ESG issues that threaten to exert a negative financial impact on any company with connections to factory farming. The repercussions can be colossal, ranging from safety scandals to environmental fines and an overreliance on government subsidies. Regardless of this, however, the risks tied to factory farming seldom register with offending companies, and efforts to raise awareness in the past have largely come up short.

UK television chef Hugh Fearnley-Whittingstall in 2008 failed to drum up enough support among shareholders of the supermarket chain Tesco for a motion to improve animal welfare standards. This year, shareholders at Tyson Foods rejected a resolution that would have required the company to institute a ‘water stewardship’ policy, following findings that it dumped almost seven times as much surface discharge as Exxon between 2010 and 2014. These motions and many more like it are founded on the assumption that improved governance or welfare standards require a returns trade-off. Countless studies show this not to be the case.

US Mexican restaurant chain Chipotle has demonstrated time and again that prioritising animal welfare can boost both sales and share price. The company’s CEO Steve Ells implemented a sourcing policy stipulating animals be fed a vegetarian diet, not given antibiotics or growth hormones, and allowed to roam free in pastures, following a visit to a factory farm in 1999. Further to this commitment, Chipotle’s switch to sustainable sourcing and the resulting $1 per pork burrito price rise did not, as many predicted, lead to a sudden drop in sales – quite the opposite in fact.

Speaking about the challenges of engaging investors, Briefel claimed it was first about raising awareness, and conceded that, while investors are increasingly concerned about sustainability issues, there is a knowledge gap when it comes to intensive farming and farm animal welfare.

“It’s about convincing them that this is about materiality, not morality”, he said. “Mention ‘animal welfare’ to most investors and they immediately think this is the preserve of NGOs, or specialist ethical investors – not, by and large, big mainstream investors. But they couldn’t be more wrong. The issues at stake are core business issues that can have a major material impact if not adequately dealt with.”

An investigation into meat-packing company Hallmark Westland in 2008 shed light on animal cruelty and health concerns, forcing the company into the biggest meat recall in US history – 65 million kilograms (equivalent to the weight of 195 jumbo jets) – and a subsequent class action that bankrupted the company. More recently, medical research firm Santa Cruz Biotech suffered a $3.5m fine and had its license revoked after allegations of mistreatment of animals.

For now, the issue is not how much money is exposed to any one or more of these 28 ESG risks, but rather what investors concerned about factory farming risks can do to drive change. The FAIRR report itself is proof big names are beginning to take note, and the support of ShareAction, Boston Common Asset Management, Farm Forward and others should bring the issue of factory farming to the fore.

Heim conceded the conversation could soon turn to the issue of divestment, though he reiterated the important thing for now is to ensure investors are as informed about factory farm investment risks as they are, say, fossil fuels. Assuming the discussion around factory farming investment risks stays lively, less risky alternatives could emerge as investors look to preserve and grow their wealth.

“Investors have a big role to play”, said Briefel. “They sit at the top of the value chain and, as ultimate owners of companies, they have the influence and motivation to make the changes that are required. There are other elements of society that need to be engaged – namely consumers, regulators and businesses themselves – but investors are a key part of the chain and one that can take a lead.”

Lebanon’s banking sector continues to thrive in spite of economic instability

Posted on by Helen

Impacted by the uncertainty that continues to loom over the surrounding region, the current outlook of the Lebanese economy seems blurred. Nevertheless, despite all these challenges, Lebanon has maintained positive growth, albeit at a lower rate than in previous years.

In fact, amid a prolonged political stalemate caused by a two-year presidential vacuum and paralysis within the executive and legislative branches, challenges for the Lebanese economy have been considerable. Likewise, the high influx of refugees instigated by the fallout of the war in Syria, the security challenges triggered by mounting regional tension, and a lack of reform in public institutions and investment infrastructure have also taken their toll on the economy.

Within this context, Lebanon’s real economic growth has undergone a gradual decrease over the past five years to reach a rate of one percent in 2015, marking a significant slump from its previous nine percent average rate recorded in the years 2007–10 (see Fig. 1). The recent economic slowdown mirrors weakened investor sentiment and a change in consumer confidence, which have been challenged by the rising uncertainty in view of the delicate political and social conditions locally and regionally. As a matter of fact, the fertile soil for healthy economic growth in Lebanon depends on political stability and favourable security conditions within the country and its surrounding region. Once these conditions are met, economic activity is expected to rebound and move on a higher-growth path.

Surely, a tangible economic improvement is tied to a major development in the local and regional climate. Lebanon’s economic growth will be sustained in large part by the Lebanese banking sector. Yet one may ask to what extent the Lebanese banking sector will continue to weather shocks faced by the economy today.

Characterised by high liquidity and solid capital adequacy, the Lebanese banking sector plays a pivotal role in sustaining the country’s economy

An economic anchor
Characterised by high liquidity and solid capital adequacy, the Lebanese banking sector plays a pivotal role in sustaining the country’s economy by simultaneously funding the public deficit and a very dynamic private sector.

While other vital sectors have unfortunately taken a back seat amid unstable domestic conditions and prolonged regional disturbances, the banking sector continues to exhibit a recognised ability to weather domestic shocks and withstand risks initiated by regional developments. Over the past five challenging years, banking sector assets have witnessed an average annual growth of 7.6 percent and private sector deposits have grown at an average annual rate of 7.2 percent, while loans to the private sector have recorded an average annual growth of 9.7 percent.

In fact, the progress realised by the banking sector can be attributed to several factors. First, the sheer size of the banking sector, with assets in excess of 360 percent of Lebanon’s GDP. This domestic growth of assets has been further enhanced by Lebanese banks’ expansion, mainly into the Middle East and Africa.

Secondly, banking sector activity is driven by core customer deposits, which constitute the main source of funding and account for around 82 percent of total liabilities, reflecting the stable funding source with low reliance on capital markets. The large deposit base is accredited to the widely diffused Lebanese diaspora that remain loyal to the Lebanese banks. In 2015, the World Bank estimated inflows of remittances to Lebanon at $7.2bn – a figure equivalent to 14 percent of the country’s GDP – ranking Lebanon as the 16th largest recipient of remittances globally and the second highest among Arab countries.

During the same period, non-resident private sector deposits, which mostly belong to Lebanese citizens living outside Lebanon, grew by five percent annually despite the fragility of the conditions that dominated the political and economic scenes. The resident private sector deposits also grew by the same annual rate. This aspect underpins the confidence both the Lebanese diaspora and residents have in the banking sector.

Highly liquid and well capitalised
The strength of the Lebanese banking sector is largely attributable to its liquidity, capital adequacy and stringent regulatory foundation. Banks in Lebanon remain highly liquid with a private sector loans-to-deposits ratio of 32 percent (recorded at year-end 2015), indicating the ample liquidity available within the sector. Moreover, loans to the private sector constituted 94 percent of Lebanon’s GDP in 2015, as banks were the main financial intermediaries supporting the needs of the private, as well as the public, sectors.

In terms of capitalisation, Lebanese banks have exceeded the requirements of Basel III with a ratio of 14.4 percent recorded in 2015, both exceeding the global standard and the minimum requirement set by the Central Bank of Lebanon (BDL).

Banks in Lebanon conduct their activities within a rigorous regulatory framework and under close supervision, operating under the jurisdiction of BDL and the Banking Control Commission. BDL has been instrumental in supporting the banking sector and reinforcing its role and position. Through its sound governance and stringent rules and regulations, it has shielded the Lebanese banking sector from major financial crises and set forth a solid foundation for prudential banking activity in the country. Besides, through its large foreign reserves base and gold holdings, BDL has long been able to absorb adverse shocks with the potential to negatively impact the Lebanese economy.

Furthermore, BDL has played an influential role in pushing the economy forward by launching incentives to stimulate lending activity in important sectors, while simultaneously enhancing spending power and social wellbeing of Lebanese consumers. BDL also introduced incentives to support unexplored opportunities that lie within certain sectors, such as the knowledge economy as well as SMEs, with the aim of encouraging investment in these sectors, thereby promoting overall economic growth.

Sustained growth and performance
Despite the volatile political and economic environment that has been present in Lebanon and neighbouring countries in recent years, Bankmed sustained its growth momentum throughout 2015, capitalising on a prudent strategy, a balanced-risk approach and sound corporate governance. In fact, the bank’s diversified business model and its expansion into regional markets have positively stimulated its healthy progression. Over the past five years, Bankmed’s net profit increased by a cumulative average growth rate of six percent, with a cumulative growth of seven percent for the bank’s total assets.

LebanonAs per Bankmed’s 2015 financial results, the bank’s net income increased by 4.2 percent to a record $139m, while its total consolidated financial position stood at $15.6bn at the end of the year. According to the bank’s balance sheet, loans reached $5.1bn, while customer deposits were recorded at $12.1bn. As such, the loans-to-deposits ratio stood at 42.1 percent, while the provisions coverage ratio exceeded 159.4 percent, indicating Bankmed’s rigorous strategy in safeguarding its assets.

In terms of liquidity and capitalisation, the bank’s liquidity ratio stood at 31.59 percent – way above the 10 percent regulatory requirement – and its capital adequacy ratio reached 15.28 percent, exceeding the regulatory requirement of 12 percent, which is set by BDL. High liquidity and strong capitalisation remain among the fundamentals that Bankmed’s management focuses on.

On the expansion front, Bankmed’s strategy has always been based on selectivity and prudence. The bank pursued a well-planned regional expansion in parallel with its locally driven growth objectives. In this regard, Bankmed has been focusing on identifying opportunities in markets that have sustainable growth potential, such as: Turkey, where the bank was one of the first MENA entrants into the market; Saudi Arabia, where the bank operates an investment banking arm; and Iraq, where the bank conducts activities through three branches in Baghdad, Basra and Erbil.

Driven by the success it has realised in regional markets, Bankmed and its fully owned subsidiary MedSecurities established a presence in the Dubai International Financial Centre (DIFC) in 2015. Through this step, the bank became the first bank in the MENA region to operate in the DIFC under a category 1 license, the most comprehensive license granted by the Dubai Financial Services Authority.

As for MedSecurities, it received a category 3 license, which entitles it to address the evolving needs of customers and to offer a wide range of financial services within a world-class regulatory framework. Moreover, Bankmed’s presence in the UAE enhances the synergy created by the bank’s group throughout the region.

Moving forward, Bankmed will continue to seek rewarding opportunities in the local and regional markets. In addition, positive developments in the political scene and economic conditions in Lebanon and the region at large will provide banks in the country – in general and Bankmed in particular – with great growth opportunities.

Nigeria enters the e-banking age

Posted on by Helen

The market for e-banking and e-payment platforms in Nigeria has grown in recent times. However, this isn’t to say there aren’t challenges, and the perception of e-banking among Nigerians must itself change before the country’s banks can capitalise on this opportunity to good effect.

World Finance spoke to Segun Agbaje, Managing Director and CEO of Guaranty Trust Bank (GTBank), about the way in which the banking landscape in Nigeria has evolved and what GTBank is doing to spearhead some of the latest developments in e-banking and e-payments.

How have e-banking and e-payment platforms in Nigeria developed recently?
Not only have the platforms rapidly expanded in size and scope over the last couple of years, they are now critical to Nigeria’s efforts in building a strong and modern economy. By lowering the cost of onboarding new customers for banks, and at the same time reducing the cost of banking for customers, these platforms have evolved into potent tools for driving financial inclusion. This is most evident in the mobile banking segment, where the high mobile penetration rate has been successfully leveraged to extend the frontiers of banking in terms of service delivery and financial inclusion.

What is the biggest challenge for e-banking in Nigeria?
At one time, I would have said the reliability of networks, but right now we have the technology and technical knowhow for the operational growth and stability of e-banking platforms. Perhaps the biggest challenge is the customer’s perception of the ease and security of e-banking platforms, and this is primarily a knowledge gap issue. While we have recorded significant improvements in changing customer perceptions, and therefore acceptance, this knowledge gap still exists among a significant segment of the market.

However, within this challenge are immense opportunities for growth. According to the March 2016 subscriber statistics from the Nigerian Communications Commission, we have over 148 million mobile phone users in Nigeria and, going by bank verification number data, we have just about 24.5 million bank customers. Ours is by no means a mature market, and that presents immense opportunities for us. We will continue to leverage the opportunities mobile technology can offer to drive growth (see Fig. 1) and financial inclusion.

How has GTBank taken advantage of developments in this field?
We initially launched Bank 737 as a one-click airtime top-up service, which enabled existing customers to top up their mobile lines directly from their bank accounts. We quickly became the leader in this segment, and we now control 70 percent of transactions for airtime top-up.

GuarantyInspired by the success of the one-click airtime top-up service, we expanded the service into an all-encompassing mobile bank that offers a wide range of traditional and unorthodox financial services. Bank 737, which runs on USSD technology, does not require data and allows our customers to transfer money, check account balances, pay bills, purchase airtime and open accounts directly from their mobile phones, among other services, by simply dialling *737#.

We introduced Bank 737 to drive financial inclusion and to deliver quicker, cheaper and more efficient services to our customers. We have recorded success on all fronts, with more than 1.5 million active users, about $5bn in transactions via the platform, and an average monthly growth rate of 100,000 new users.

Why is an emphasis on customer experience important for the continued development of e-banking and e-payment platforms?
E-banking removes the human element of service delivery. It is, therefore, imperative that customers have a seamless experience when using these services. To this end, we are developing our e-business products with a keen focus on simplicity and interactivity, in order to enable customers to ‘do it themselves’, with a convenience relative to being guided by a customer care assistant.

Can you expand on how GTBank has worked to develop e-payment platforms?
The user experience is the key component of the design architecture of our platforms. We maintain an omnichannel approach in the development of our e-payment platforms, in order to ensure maximum interaction and satisfaction at all touchpoints of the customer journey. From making it possible for customers to open bank accounts without walking into a banking hall to creating stress-free avenues for payments and collections, we are leveraging e-banking to redefine the customer journey into one characterised by swift, convenient and seamless service delivery.

The 100% mortgage returns to the high street

Posted on by Helen

In early May, Barclays announced it would be the first high street bank to reintroduce the 100 percent mortgage loan. The news sent shockwaves throughout the banking world. Though different to the notorious 100 percent mortgages offered prior to 2008, and widely blamed for triggering the financial cirsis, numerous experts have condemned an action they still deem all too reminiscent of the high risk lending that catalysed the global recession.

Barclays’ new initiative allows buyers to take out a 100 percent loan upon the condition that a family member or guardian pays 10 percent of the value of the house into a holding account. The loan is competitive, with a fixed rate of 2.99 percent interest until June 2019, and will be reimbursed to the family member in three years, along with the interest earned on the amount in that time.

Getting help from the family
Just the day before Barclays’ new product (named ‘Family Springboard’) was revealed, L&G published a report stating that parents lending to children in order to help them purchase a property is at an all-time high. In fact, the total sum expected in 2016 is £5bn, which would account for 25 percent of all mortgage loans granted in the UK this year. Barclays’ new scheme, therefore, cleverly leverages a growing trend of parents fronting the deposits that have become practically impossible for their children to afford.

Barclays’ new scheme cleverly leverages a growing trend of parents fronting the deposits that have become practically impossible for their children to afford

“It could also be an attractive option for parents who are fearful of loaning money to their children and never seeing it again”, said Charlotte Nelson of financial advice website Moneyfacts. “However, as with all guarantor loans, if the borrower defaults on their mortgage, the parents could be penalised as well.”

Although having a guarantor can provide the missing link between first-time buyers and a home of their own, the agreement should not be entered into lightly. “There are risks for the individuals taking them out, as well as for the wider economy”, said Alice Martin, Researcher at the New Economics Foundation. “For the individual borrowers, though 100 percent mortgages might relinquish the need for a deposit, they will do nothing to make buying a home more affordable once the monthly payments kick in.

“If there is an interest rate rise or the borrower experiences a shock to their income – for example through losing their job – they are likely to default on their payment and the money put into the savings account by the helper will be lost. Essentially, Barclays has shifted the risk of defaults away from themselves, onto the borrower’s family.”

According to Martin, house prices in the UK have risen five times faster than the rate of wages since 2011, which is what prevents people saving the amount needed for a deposit. As fewer people are able to access existing mortgages, banks are feeling the loss from a shrinking market. “Products like these are introduced to expand the potential customer base for banks, but they add more fuel to the fire of the affordability crisis and pave the way for the introduction of further risky products”, she said. As such, a mounting concern is that, in today’s highly competitive market, more and more lenders are likely to follow suit with similar products. In fact, several building societies are already offering their own versions of a guarantor-backed 100 percent mortgage, including Aldemore, Bath, Tipton & Coseley, and Vernon.

“By increasing the access to mortgages in this way, effective demand for home ownership increases, meaning that, without a corresponding increase in housing supply, house prices will be pushed up further”, Martin told World Finance. “Banks are then inclined to introduce more products like these, to ensure their markets.”

Should this continue – particularly at an aggressive rate – a crash in the housing market could ensue, which would plunge thousands of properties into negative equity. “This is a particular concern for first-time buyers, who are likely to outgrow their first home the fastest, if they start a family for example. Those with 100 percent mortgages are starting out with zero percent equity, and so their chances of going into negative equity are the highest”, Martin said.

Caution required
Recent data released by the Bank of England revealed that households are currently borrowing at rates last seen right before the financial crash. Worryingly, if people become incapable of making regular debt repayments, mortgage defaults could cause house prices to slide, which will greatly enhance the risk of a recession akin to that of 2008.

While Barclays’ new product is aimed at those struggling to step onto the property ladder, it sets a precedent that is highly risky, a precedent that harks back to the aforementioned mistakes of not so long ago.

What’s more, the loan itself is available only to those with parents who can afford to contribute some £20,000 to £50,000. By helping those from wealthier families, the scheme further widens the growing gap between the haves and have-nots – already a significant problem in the UK housing market for which Barclays is offering its new product.

Although various entities are now taking advantage the current state of the housing market, with prices far exceeding income levels, the wider economic issues that have caused this state of affairs remain unaddressed and continue to grow. The result? History may repeat itself with even more dire consequences than before.

Tracking the progress of Latin America’s corporate bonds

Posted on by Helen

After some years of not being on any financial radar, the Latin American stock and bond markets jumped into the spotlight again when the prices of commodities began to rebound after last year’s lowest levels in 15 years. There are several reasons that can be attributed to this rebound, including the shift in the Chinese Central Bank’s approach towards its exchange rate, as well as the rebalancing growth policies it introduced in February.

Even so, investors around the globe were caught off-guard when Latin American stocks and corporate bonds began to exhibit stellar performances in February, reaping profits of 20.1 percent and 12.4 percent in USD (as of May 31), according to the MSCI EM Latin America Index and JPMorgan CEMBI Broad Latin America Index respectively.

“Despite this recent recovery in Latin America’s financial assets – which is still overshadowed by its mediocre performance over the last five years – we at Bci Asset Management decided to review Latin America corporate bonds from a more fundamental point of view”, said Gregorio Velasco, Head of Institutional Fixed Income Funds and Portfolio Manager at the company. “In order to achieve a comprehensive analysis, having in mind this commodities super cycle that went on from 2002 and began to revert by 2011, we organised this review from four different angles: macroeconomic, corporate fundamentals, performance and valuation.”

Macroeconomic review
The impact of commodities in Latin America’s economies is undeniable, particularly given 53 percent of its exports are related to some type of commodity. Commodities in aggregate – as measured by Thomson Reuters’ CRB Index – rose 213 percent from 2002 up until June 2008, and only stopped as a result of the financial crisis that year. During this period, Latin American economies grew at annual average rates that ranged between five and seven percent. Just a year after the crisis unravelled, Latin America started heading upwards again, achieving growth rates of seven percent in 2010 in a V-shaped recovery of its aggregate domestic product. However, in 2011, commodity prices started to slow again, causing a negative impact to the region in various ways.

The impact of commodities in Latin America’s economies is undeniable, particularly given 53 percent of its exports are related to some type
of commodity

Economies in Latin America therefore began to bear the consequences from the slump in commodities (see Fig. 1), firstly through lower exports, but also via the impact of central governments lowering their fiscal spending, due to lower income from commodity-related government-owned companies.

The exchange rates in Latin America played a pivotal role in helping the private sector adjust in the last few years, by exhibiting depreciations in the range of 25 and 70 percent, from December 2012 to date.

“This FX adjustment came with an extra cost, and domestic inflation levels experienced elevated pass-through effects. Last year, Brazil, Colombia and Chile saw their domestic inflation indices reaching 11, 7 and four percent”, said Velasco. Domestic inflation also implied less manoeuvring for local central banks, which in most cases within the region were forced to raise their rates and implement more restrictive monetary policies, which ultimately resulted in lower private consumption and activity.

“In sum, the region is growing its product today at an average rate of minus five percent (two percent excluding Brazil), far below the four to six percent average range from the previous 15 years. Countries are running current account deficits between two and six percent, while public sector budget deficits in the north of 2 percent and 10 percent”, Velasco told World Finance.

Despite this challenging environment, it can be argued the region faces difficult times with sound macroeconomic fundamentals, and is also weathering the turbulent scenario reasonably well. “First, public sector debt levels are considerably lower than in previous crises. While Peru and Chile enjoy public sector debt levels of around 20 percent of their GDPs, Colombia and Mexico show levels at or below the 50 percent mark”, he said.

The only exception is Brazil, whose public debt is reaching 70 percent of its GDP, which, naturally, has become a focus of concern for local authorities and an issue that garners consensus in terms of the necessity of a resolution.

Another relevant point is the disciplined and market-orientated policies countries are implementing in order to address the region’s slowdown through flexible exchange rate regimes, the autonomy of central banks and central governments that focus on reducing public sector deficits. This combination of factors now allows regional central banks to afford the maintenance of foreign reserves in the coffers of around 15 to 30 percent of their GDPs, something never seen before in Latin America.

The task of rebuilding the history of Latin America’s companies over the last 15 years is not as complex as some argue, especially when considering 42 percent of the corporate issuers are directly related to the metals and mining, and/or oil and gas sectors, according to figures published by JPMorgan. “When analysing financial indebtedness of companies soon after the Argentine default in 2001, together with the previous Brazilian and Russian crises, it was possible to find average net financial debt over EBITDA ratios, also known as the ‘net leverage’, a metric commonly used in credit analysis, above 3x”, Velasco said. “Five years later, by the end of 2006, this same financial ratio was below 1.4x”.

The main driver for this dramatic decrease in leverage can be seen when looking at the companies belonging to the metals and mining sector in the region, which shows that, if by December 2001 their net leverage ratio was about 2.9x, by December 2006 this same measure registered levels below 0.7x. “The explanation is pretty straightforward: it’s all about commodities”, said Velasco. “But as the commodities super cycle came to an end by 2011, indebtedness for issuers within the metals and mining segment started to increase, and today, using the latest available information, one can observe net leverage ratios for this group of companies above 3.5x, while for the whole industry – including companies in all sectors – it is at 2.9x”.

Latin americaDespite the abrupt fall in commodities over the last three years, debt metrics for corporate issuers remain at reasonable levels and, most importantly, they are not higher than before this super cycle period began. Furthermore, companies are much larger, so they generate operating cash flows at significantly different scales, while many are competing on a global scale. All these factors point towards a greater quality of credit.

Reviewing performance
“Despite the poor performance of Latin America corporate bonds in recent years, the story from the last 15 is remarkable: an annualised return in USD of 7.6 percent, with an average annual volatility (standard deviation) of 9.1 percent”, said Velasco. “But again, the story told from the commodities standpoint has two marked chapters. While the annualised return of Latin America’s corporate bonds during the expansive phase of commodities – from 2002 until 2010 – was 8.2 percent, which can be explained by the 12.4 percent average annual return experienced by the metals and mining bonds, the performance since 2011 and up to date has been an annual return of 3.5 percent, with the bonds within the metals and mining sector delivering an annual average of four percent.”

According to JP Morgan, an average corporate bond in Latin America currently trades at a spread of 559bps, which is roughly around 200bps below the levels seen prior to December 2001. During the peak of commodities’ expansive era in 2007, Latin America’s corporate bonds priced an average spread of almost 200 basis points, yet a year later, during the financial crisis, spreads reached levels close to 1,000bps. Right after, in 2009, the compression trend was resumed, and spreads went back to a range between 250 to 300bps during 2010. And then from 2011 onwards, corporate spreads in Latin America started to widen along with the systematic fall seen in commodities.

“Going back to the beginning, Latin America’s corporate bonds have recently bounced back significantly in terms of returns, showing a relevant compression in spreads. In Bci Asset Management’s view, from a long-term perspective, we still believe today’s situation offers a very attractive entry point”, Velasco said. “Fundamentals in the region are sound from a macro perspective and also from the companies’ individual point of view, despite the collapse in commodity prices. In the short term, we see an opportunity in bonds within the investment grade category in the region, which offer spreads close to 360bps, compared to the 170bps of their equivalent counterparties in the US”.

Facilitating international business through global trade

Posted on by Helen

Global trade faces a number of challenges. The World Trade Organisation (WTO) predicts only modest growth in cross-border trade for this year, at just 2.8 percent. This marks no improvement on 2015’s growth rates, and the fifth consecutive year of growth under three percent. Meanwhile, 2017 looks set for a mere 3.6 percent growth.

Such growth rates are particularly sluggish when compared to the expansion recorded before the 2008 financial crisis, when world trade grew at an average of seven to eight percent per year. In fact, growth in world exports and imports has remained very disappointing over the years since the 2008 crisis and the 2010 rebound. Rather than expanding faster than world GDP – a sign of economies opening up, new investment and growing globalisation – trade has performed about in line with the expansion in world GDP (see Fig. 1).

In such a testing environment, recovery in trade and sustained globalisation depends on the banking industry more than ever. For a bank like Commerzbank – established in 1870 to facilitate international trade – this is a prime concern. If it is to ensure another 150 years of trade, it knows that it must prioritise close relationships with its corporate clients, following them wherever their trade takes them.

Pursuing such a relationship-driven, customer-focused approach means a bank must be prepared to take a globalised attitude to business. Not only does this mean serving trade across established, developed markets in Europe; it also means branching further out across the globe, in order to help its customers benefit from considerable new opportunities in Asia, Latin America and Africa.

Clearly, a bank needs to be able to provide adequate support to these companies as they navigate their new opportunities worldwide. It must have access to the necessary global correspondent banking networks to facilitate cross-border trade, and it must provide tailored expertise to corporations in order to secure them from risk, advise them on local markets, and optimise their strategies. Lastly, it must ensure that the banking infrastructure offered to corporations is modern, digitalised and future proof.

Growth in world exports and imports has remained very disappointing over the years since the 2008 crisis and the 2010 rebound

A new trading base
Facilitating international trade since 1870 has given Commerzbank a great deal of experience when it comes to working with exporting companies. In an export-led country such as Germany, corporations are, unsurprisingly, shrewd when it comes to choosing banks that can meet their foreign demands. With its ethos having stayed true to its origins, Commerzbank’s client-focused approach means the bank has become the go-to choice for corporations.

The numbers reflect Commerzbank’s drive to serve the needs of the export-led economy: working from 150 locations, the bank has become the strategic partner for over one million corporate customers in Germany alone. The bank finances more than 30 percent of Germany’s foreign trade, and it has the trust of more than half the country’s SMEs – not to mention over 90 percent of its large corporations.

But, just as Germany’s integration with its European neighbours has grown, business itself has become more European, and so Commerzbank has followed suit: in order to help facilitate corporations’ business, the bank now sees Europe as a whole as its core market. In fact, in addition to enjoying a leading position in foreign trade business, Commerzbank is a market leader when it comes to dealing with export letters of credit in the eurozone, with a figure of over 18 percent.

Austria, for instance, is just one piece of Commerzbank’s European puzzle. With 700 German clients working in Austria, it was a logical step for Commerzbank to follow. Indeed, with the ambition to be the bank of choice for international corporate banking in Austria, Commerzbank has already made a good start; posting double-digit growth in earnings, expanding the Vienna office to around 40 employees, and supporting both SMEs and large corporations.

Switzerland is another example of Commerzbank’s drive to be Europe’s international bank. Like Germany, this exporting nation – with its highly productive and skilled workforce, and top-class infrastructure – provides a thriving opportunity for Commerzbank to help corporations grow their international business. Working in the country for nearly three decades, Commerzbank now enjoys a relationship with over three quarters of the top 200 Swiss companies, as well as its thriving SME sector, having expanded its presence with six new local offices and over 140 staff.

Going global
Of course, globalisation means European businesses are increasingly expanding beyond established markets in Europe to seek new prospects overseas. The WTO has noted that, despite facing a challenging 2015, emerging economies have driven the rise in global trade volumes over the past 30 years. While developed countries once drove about 70 percent of global trade, today they account for no more than 57 percent.

Eager to tap into the potential of such worldwide shifts, corporations have looked to trade in emerging and maturing markets in Asia, Africa and Latin America. However, this causes companies’ global supply chains to become more complex, meaning they must deal with ever-increasing numbers of unfamiliar trading and banking counterparties.

This is why Commerzbank regards global expansion as essential in order to be the key bridge between these counterparties. Indeed, it has been a driving theme in the bank’s growth story. Now with branches and offices in over 50 countries worldwide and more than 11,000 employees outside of Germany, Commerzbank’s goal is to meet its clients’ demands as they expand to take advantage of critical markets in Asia, the Middle East and Latin America. For instance, it facilitates trade flows in key growth markets and countries such as Bangladesh, Brazil, Egypt, Nigeria and Turkey.

European springboards
Experience and presence in European countries, however, remain key to this growth. This is because highly connected bases in Europe can serve as important hubs for corporate clients’ overseas business.

In particular, Commerzbank has found the Iberian Peninsula to be a springboard from which companies can seek new opportunities in South America. This is why the bank sees Spain – Germany’s second-largest trading partner – as a key location: not only is the country home to subsidiaries of 1,200 of Commerzbank’s German clients, it also hosts 600 of the bank’s Spanish and Portuguese corporate customers.

This lays the groundwork for Commerzbank to follow trade to Brazil, for example. With the establishment of a new branch in São Paulo this year, Commerzbank will be able to offer the full range of corporate and investment banking to medium and large businesses – both for European companies working in the country, and Brazilian companies looking to trade with Europe. In fact, around 1,600 German companies already operate in Brazil – the largest stock of German corporations abroad – of which the majority are customers of Commerzbank.

CommerzbankTools of the trade
There are several unique assets on which internationalising corporations can rely that are key to the success of Commerzbank’s global growth. Chief among these is Commerzbank’s global correspondent network, which provides the bank with a strong presence in international markets and allows Commerzbank to cover 70 percent of global export markets and trade flows for its corporate customers.

Commerzbank also thinks it essential every client has a dedicated relationship manager to navigate them through these international networks. Acting as a corporate client’s first point of call, the relationship manager oversees the customer’s business, helps them through projects and offers crucial advice on strategy and financing.

Taking a proactive, relationship-based approach – offering a trusted second opinion on strategic opportunities worldwide, and alerting corporate clients to regulatory changes – relationship managers also help firms set up overseas business accounts, and liaise on their behalf with various specialist Commerzbank teams for the right solutions and products. For instance, they can direct a globalising client to debt and equity capital markets, cash management tools, commodities hedging, and M&A and corporate financing.

Undoubtedly, the risks of entering new, exotic markets can be significant. But this is why Commerzbank operates one of the most active risk mitigation desks in the world, in order to sustain trade and help corporate customers remain competitive in challenging markets.

For instance, a recently established major representative office in Abidjan, the economic capital of the Ivory Coast, is also set to serve as an innovative research hub for Africa, channelling insights and information on risk and building knowledge, trust and contacts for new trade opportunities in Africa’s long-term development.

Another asset Commerzbank sees as essential to its corporate clients is digitalisation. Recognising a digital-driven experience is the new normal for modern and efficient corporate business models, Commerzbank has invested heavily in technology for its corporate clients. By fostering the development of financial technology as part of its ‘digital agenda’ the bank has made it a priority to adapt to the digital economy.

A notable example is the pioneering use of trade processing centres. With two already established – in Poland and Malaysia – and more in the pipeline, these centres allow corporations to do business around the clock, every working day, with their trade unaffected by global time differences.

Certainly, following the client’s business is a something to which all banks aspire. But supporting corporate customers across the globe – from Germany to Brazil, and from Bangladesh to Nigeria – requires a relationship and technology-driven commitment few financial institutions can muster.

UK and US in talks for trade deal

Posted on by Helen

The UK and the US have begun early stage discussions on how to secure a trade deal following the UK’s exit from the European Union.

Speaking at a media breakfast organised by the Christian Science Monitor on July 15, the US trade representative Mike Froman revealed he had spoken with senior UK politicians Sajid Javid and Mark Price concerning the possibility of a bilateral trade deal.

The exact details of any trade deal with the US are still unclear. At the media breakfast, Froman noted: “What precisely they negotiate with their other trading partners will depend in part on what model they develop in their relationship with the EU.” Until the UK’s exact relation with the EU post-Brexit becomes clear, he argued “it’s hard to determine precisely what kind of trade relationship they might be able to negotiate with others”.

The fact that preliminary talks have already started appears to be a positive sign for the UK’s economic future

However, the fact that preliminary talks have already started appears to be a positive sign for the UK’s economic future. It is a reversal of the Obama administration’s previous claim that negotiating a trade deal with the UK would not be the US’ immediate priority: in the lead-up to the EU referendum, President Obama warned the US’ priority was to negotiate trade deals with larger trading blocks, and that a post-Brexit UK would “join the back of the queue” in negotiating a trade deal.

Campaigners for Brexit regularly claimed that being part of the EU constrained the UK’s ability to forge trade deals with economies outside the single market. David Davis, now the UK’s Secretary of State for Exiting the EU and a prominent voice from the Brexit campaign, has argued the UK will be able to secure bilateral trade deals of greater value than the single market within two years, while also maintaining access to the single market.

Tencent plans online music takeover

Posted on by Helen

On July 15, Chinese internet giant Tencent revealed its plans to merge with China Music Corp (CMC), the country’s top music-streaming firm, in a deal worth approximately $2.7bn. The strategic move will see Tencent increase its current stake in CMC from 16 percent to 60, thereby becoming the leading player in China’s online music industry.

CMC is a vital piece in Tencent’s puzzle to form a dominant digital music platform in China, given that CMC owns two of the three biggest mobile music apps in the country (Kugou and Kuwo, with market shares of 28 and 13 percent respectively). Having the two widely successful apps in tow, together with the second biggest – QQ Music, which Tencent already operates – the merger will enable Tencent to own 56 percent of the total market. The new, combined company will also own 60 percent of all music rights in China.

The merger will enable Tencent to own 56 percent of the total market

CMC had been preparing for an initial public offering (IPO) in the US later on this year prior to the announcement, a decision that has now been put on hold. However, there is some talk of Tencent proceeding with an IPO the near future, with estimates of the capital that may be raised ranging between $300m and $600m.

According to iiMedia, as reported by the Wall Street Journal, there were almost 500 million users of mobile music services in China in this quarter alone, a figure far exceeding the total population of the US. Being the world’s biggest mobile market, China’s potential for continued growth in various areas – such as social media, online games and of course, music streaming – is enormous.

With Tencent now being the market leader in all three industries, its dominance of the mobile industry continues to swell at an exponential rate along with the uptake of mobiles by the country’s bulging population.

Central banks on trial, again

Posted on by Helen

In 2006, when Alan Greenspan retired after his 18-year reign as Chair of the US Federal Reserve Board, his reputation could hardly have been higher. He had steered the US economy through the dotcom boom and bust, had carefully navigated the potential threat to growth from the terror attacks of September 11, 2001, and presided over a period of rapid GDP and productivity growth. At his final Board meeting, Timothy Geithner, then-President of the New York Fed, delivered what now seems an embarrassing encomium, saying that Greenspan’s stellar reputation was likely to grow, rather than diminish, in the future.

Davies-COMMENT
 
Only three years later, the Nobel Laureate Economist Paul Krugman, borrowing from Monty Python’s parrot sketch, was able to say that Greenspan was an ex-maestro whose reputation was now pushing up daisies. Central banks were widely seen to have been dozing at the switch through the early years of this century. They allowed global imbalances to build up, looked benignly on a massive credit bubble, ignored flashing danger signs in the mortgage market, and uncritically admired the innovative but toxic products devised by overpaid investment bankers.

Learning lessons
The early reactions by central banks to the deepening crisis were also unsure. The Bank of England (BoE) lectured on moral hazard while the banking system imploded around it, and the European Central Bank (ECB) continued to slay imaginary inflation dragons when almost all economists saw far greater risks in a eurozone meltdown and associated credit crunch.

When governments around the world considered how best to respond to the lessons of the crisis, central banks – once seen as part of the problem – came to be viewed as an essential part of the solution

Yet, despite these missteps, when governments around the world considered how best to respond to the lessons of the crisis, central banks – once seen as part of the problem – came to be viewed as an essential part of the solution. They were given new powers to regulate the financial system, and encouraged to adopt new and highly interventionist policies in an attempt to stave off depression and deflation.

Central banks’ balance sheets have expanded dramatically, and new laws have strengthened their hand enormously. In the US, the Dodd-Frank Act has taken the Fed into areas of the financial system that it has never regulated, and given it powers to take over and resolve failing banks.

In the UK, bank regulation – which had been removed from the BoE in 1997 – returned there in 2013, and the BoE also became for the first time the prudential supervisor of insurance companies – a big extension of its role. The ECB, meanwhile, is now the direct supervisor of more than 80 percent of the European Union’s banking sector.

In the last five years, central banking has become one of the fastest-growing industries in the western world. The central banks seem to have turned the tables on their critics, emerging triumphant. Their innovative and sometimes controversial actions have helped the world economy recover.

But there are now signs that this aggrandisement may be having ambiguous consequences. Indeed, some central bankers are beginning to worry that their role has expanded too far, putting them at risk of a backlash.

Working together internationally
There are two related dangers. The first is encapsulated in the title of Mohamed El-Erian’s latest book: The Only Game in Town. Central banks have been expected to shoulder the greater part of the burden of post-crisis adjustment. Their massive asset purchases are a life-support system for the financial economy. Yet they cannot, by themselves, resolve the underlying problems of global imbalances and the huge debt overhang. Indeed, they may be preventing the other adjustments, whether fiscal or structural, that are needed to resolve those impediments to economic recovery.

This is particularly true in Europe. While the ECB keeps the euro afloat by doing “whatever it takes” in ECB President Mario Draghi’s phrase, governments are doing little. Why take tough decisions if the ECB continues to administer heavier and heavier doses from its monetary drug cabinet?

The second danger is a version of what is sometimes called the ‘over-mighty citizen’ problem. Have central banks been given too many powers for their own good?
Quantitative easing is a case in point. Because it blurs the line between monetary and fiscal policy – which must surely be the province of elected governments – unease has grown. We can see signs of this in Germany, where many now question whether the ECB is too powerful, independent and unaccountable. Similar criticism motivates those in the US who want to ‘audit the Fed’ – often code for subjecting monetary policy to Congressional oversight.

There are worries, too, about financial regulation, and especially central banks’ shiny new macroprudential instruments. In his new book The End of Alchemy, former BoE Governor Mervyn King argues that direct intervention in the mortgage market by restraining credit should be subject to political decision. Others, notably Axel Weber, a former head of the Bundesbank, think it is dangerous for the central bank to supervise banks directly. Things go wrong in financial markets, and the supervisors are blamed. There is a risk of contagion, and a loss of confidence in monetary policy, if the central bank is in the front line.

That points to the biggest concern of all. Central banks’ monetary-policy independence was a hard-won prize. It has brought great benefits to our economies. But an institution buying bonds with public money – deciding on the availability of mortgage finance, and winding down banks at great cost to their shareholders – demands a different form of political accountability.

The danger is that hasty post-crisis decisions to load additional functions onto central banks may have unforeseen and unwelcome consequences. In particular, greater political oversight of these functions could affect monetary policy as well. For this reason, whatever new mechanisms of accountability are put in place will have to be designed with extraordinary care.

© Project Syndicate 2016

China welcomes GDP growth

Posted on by Helen

China’s GDP expanded by 6.7 percent in the three months leading up to June, according to the National Bureau of Statistics of China.

The rate climbed past the 6.6 percent prediction, and analysts said the data shows that the second largest economy in the world could be stabilising. The firm growth was maintained following rapid state sector investment in infrastructure.

Industrial output and retail sales also beat forecasts, and are said to be contributing to China’s economic growth. Industrial output grew by 6.2 percent, compared to forecasts of 5.9 percent amid concerns about overcapacity. Retail sales rose by 10.6 percent, beating forecasts for 10 percent growth.

However, fixed asset investment missed expectations, growing by nine percent from January to June, while economists estimated a growth of 9.4 percent.

Many expected China’s economy to collapse this year, following last year’s stock market crash and the depreciation of the yuan

Many expected China’s economy to collapse this year, following last year’s stock market crash and the depreciation of the yuan. Some economists, including Willem Buiter, Chief Economist at Citigroup, discussed the possibility of China falling into a recession in mid-2016.

However, the country proved critics wrong, as the government successfully smoothed out growth trends across a multitude of sectors. Infrastructure has surged, the property market has had a strong first half, and personal consumption – including sales of cars and electronics – has been buoyant.

In order to continue this growth, the country will have to maintain investment from beyond the state, as in recent months China’s growth has been powered almost entirely by the government.

The decline in the private sector – shrinking from growth of more than 40 percent in 2011 to just 2.8 percent in the first half of this year – does not bode well for the economy, according to The Economist. Meanwhile, the state has doubled its investment in the country since 2011.