Author: Helen

Rolls-Royce is driving the progress of the business aviation market

Posted on by Helen

The rapid growth in market share of Long-Term Service Agreements (LTSA) has caused a paradigm shift in the business aircraft aftermarket. As such, aircraft owners no longer need to take on the risk of managing maintenance on a time and materials basis. Instead, Original Equipment Manufacturers (OEMs), namely, designers and manufacturers of aircraft and engines, now proactively offer and share the benefits of LTSAs with aircraft owners. LTSAs therefore enable the aircraft owner to experience an outstanding level of service at a fixed price, which is far less expensive than the traditional time and material business model that had the aircraft owner assume all maintenance risk and volatility of cash flow.

This transition coincides with the growing popularity of the business aircraft market: “Business jets allow busy people to get more out of their day – meet more people, accomplish more business, and resolve the balance between life at work and at home”, said Stephen M Friedrich, Vice President of Marketing and Sales for Civil Small & Medium Engines at Rolls-Royce. “That is achieved by getting more out of their aircraft, such as flights tailored to individual schedules, with the flexibility to change timings as circumstances or locations change”.

Large cabin customers, for aircraft including Legacy650, Cl605, Falcon 2000, 900, 7X, Globals, G450/G550/G650, are increasingly demanding as they require the best performing aircraft in terms of range, speed and comfort. “They also demand exceedingly high levels of reliability and service in order to meet schedule requirements. To maximise the availability of a business jet, and retain its residual value and sales liquidity, an aircraft needs service support – and that is where Rolls-Royce can be trusted to deliver excellence”, Friedrich told World Finance. Large Cabin customers are always searching for faster, larger, more luxurious ways to travel and with the ability to travel even further than before with less down time. To this end, Rolls-Royce is working closely with airframe partners to address these desires and provide market-leading products and levels of service that can accommodate them.

Power by the hour
Rolls-Royce has maintained its position as the market leader in business aviation engines through its trademarked CorporateCare – the industry’s most comprehensive and cost effective engine maintenance programme. As well as offering flexibility, being available for both new and in-service BR725, BR710, Tay and AE 3007 engines, it also provides operators with significant financial benefits, including predictable maintenance costs, reduced capital investment and, perhaps most importantly, increased aircraft residual value.

“We are continually evolving and enhancing CorporateCare”, explained Friedrich. “Recent additions to the coverage include labour for line replaceable units and borescope inspections required under the air-framer maintenance manual.” Not only do these enhancements entail a more comprehensive service for the customer, they also provide Rolls-Royce with a greater volume of service engine data, which in turn further supports what the industry refers to as ‘Engine Health Monitoring’ and enhances the company’s ability to forecast costs.

“We have a dedicated operational service desk that is open 24/7, which has drastically improved our responsiveness and operational availability. We already see the benefit of this service as we have significantly improved averted missed trips to over 97 percent, while our average AOG response resolution time is now under 24 hours”, Friedrich added. Along this vein, Rolls-Royce is also making a strong push to develop its network of Parts Distribution Centres in order to exceed customer expectations and improve the time needed to ship.

“We continue to evaluate our needs, and expand where necessary. In terms of parts centres, we are opening new stores in the Middle East, Asia, and South America, and we are also establishing a globally distributed provision of On Wing Care specialists and loaner assets.” The company hopes that the service will enable customers to benefit from having specialists located at closer hand, together with all the tooling and materials needed to return an AOG to service in the shortest time possible. “We are also expanding our global authorised service centre network – at present, we have over 50, and we continue to grow this figure by attracting new partners.”

Being the only programme for Rolls-Royce powered aircraft that fully transfers the risk of engine maintenance from the owner to the OEM – which also entails immediate tax benefits – CorporateCare continues to experience impressive growth. Almost 1,900 aircraft around the world are now covered by CorporateCare and more than 70 percent of new delivery Rolls-Royce powered aircraft are enrolled in the programme. “Rolls-Royce is committed to delivering global support and ensuring that business jet travellers continue to benefit from the comfort, speed, privacy, flexibility and reliability that a time machine brings”, Friedrich commented.

This popularity is also explained by the fact that Rolls-Royce was responsible for creating the concept of services on a fixed-cost-per-flying-hour basis in the first place. As such, the heritage of CorporateCare stretches back to 1962, when Rolls-Royce transformed business aviation with the launch of its trademark service Power-by-the-Hour (PbtH), in order to support the Viper engine powering the de Havilland/Hawker Siddeley 125 business jet. “PbtH pioneered an approach to engine management that aligned the interests of the engine OEM fully with those of the aircraft operator. The engine manufacturer therefore became rewarded only for engines that performed”, Friedrich explained to World Finance.

Additionally, what made PbtH so unique was that it offered a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis, which enabled the operator to forecast costs with great accuracy, thereby enabling the mitigation of maintenance cost risk and avoiding the necessity of investing in stockpiles of engines and accessories.

By 2002, that service was renamed and became CorporateCare; today it covers the Rolls-Royce BR725, BR710, Tay and AE 3007 engines. In addition to addressing unscheduled events and managing costs, CorporateCare delivers an advantage at the time of asset sale. “Aircraft buyers increasingly recognise the benefits of risk transfer and asset liquidity that CorporateCare brings in a market where pre-owned aircraft sales are very busy. Brokers have confirmed to us time and time again that CorporateCare-enrolled aircraft actually sell quicker, and with greater residual value, than those outside the programme.”

Technological evolvement
With over 50 years of experience in serving the market, Rolls-Royce knows its customers well. What’s more, being number one in the market to power wide body commercial airliners enables the company to utilise leading edge propulsion technology in its business jet products. “We have a deep understanding of business jet customers, and so we recognise the importance of providing high performing engines that are supported through an industry-leading support network”, said Friedrich. With this in mind, Rolls-Royce recently implemented an overhaul of its technical publications in order to provide clear, comprehensive and up-to-date guidance for its customers. And taking that one step further, the entry of the BR725 engine into the service came with the introduction of 3D technical publications. This technology is now being rolled out to other engines also, including the highly popular BR710.

In 2012 Rolls-Royce introduced its automatic Engine Health Monitoring data downloads for the G650 aircraft, and has recently extended this well-received service to the G450 and G550. As such, there is an ongoing focus for the company to reduce the need for manual downloads, while also improving its overall data acquisition from in-service aircraft. “Having real time data available further enhances our ability to monitor the performance and behaviours of our engines, which will improve our ability to react proactively and quickly to any issue that may arise.” This applies also to CorporateCare, where the network of Authorised Service Centres that are approved by Rolls-Royce continues to grow in order to ensure that customers are never far from the right people that have the right tooling and parts, wherever they fly.

Naturally, there is a mobile app to add further convenience to the service – MyAeroengine Support provides essential maintenance information to aircraft owners and operators on the go. From an iPad, iPhone or Android device, customers can immediately email or call any Rolls-Royce support location from within the application, or save contact information to the device’s address book. The app also offers detailed directions to any support office using the device’s GPS and map functionality.

With technology and customer care at the forefront of the business model at Rolls-Royce, this historic company continues to set new precedents and trends, thereby consistently taking the market into unchartered, but much-welcomed, territory.

CommInsure admits to failing heart attack victims

Posted on by Helen

Four Corners and Fairfax have accused CommInsure – the insurance arm of the Commonwealth Bank and one of Australia’s biggest life insurance providers – of pressuring doctors to alter their opinions, while cherry-picking evidence in order to deny insurance claims.

Following a joint Four Corners-Fairfax investigation, allegations point to widespread unethical behaviour within CommInsure. A whistleblower who worked for CommInsure between 2013 and 2015 said there was a culture within the organisation of putting profits before people.

Specific allegations centre on the definition of a heart attack as employed by CommInsure, wherein claims were refused if a victim’s blood did not contain enough of the protein Troponin. Speaking to the Australian Broadcasting Corporation, Professor Andrew MacIsaac, President of the Cardiology Society of Australia and New Zealand, said that simply looking at a victim’s level of Troponin in isolation was not sufficient to diagnose the severity of a heart attack.

Chief Executive of the Commonwealth Bank, Ian Narev, said in a statement that his organisation had failed its responsibility to deal with some claims: “I am saddened and disappointed by the handling of these cases. I will personally write to the customers concerned to apologise and offer to meet with them face to face.” The statement also read that CommInsure now plans to update its definition of a heart attack as soon as possible.

Shadow Financial Services Minister, Jim Chalmers, said that the government must consider a royal commission when examining the claims.

This is not the first time the Commonwealth Bank has been the centre of controversy: in 2014, the bank faced allegations of fraud, forgery and a management cover-up in its financial planning unit after clients’ money was put into high-risk investments without their permission. Narev apologised at the time and the bank launched a programme to compensate people who were affected.

Why family offices are growing in popularity

Posted on by Helen

As the term ‘family office’ is unregulated, its definition can vary and, as a result, it’s over-brandished these days. The family office was created to look after the wealth of an extremely high net worth family – but more than mere guardians of capital, those trusted with the duty would also assist in various personal matters. They would act as mediators between squabbling siblings and governors of trusts, while keeping all aspects of family life organised – from education to domicile and travel.

“Fundamentally, we actually provide one place for everything a wealthy individual requires”, said Martin Graham, Chairman of Oracle Capital Group. “That can be anything from help with immigration, help with finding a property to live in, help getting children into school, help setting up charitable foundations, specialist insurance or help with people’s companies, like project finance. And then, critically, we do a lot of wealth structuring: preserving wealth within and between generations by using things like family trusts and foundations. And on top of that, we also do asset management, so that’s partly mainstream asset management, which is, as most of our clients are self-made people, having made all of their money in one country or one sector, they need to diversify globally”.

A proliferation
Some say the roots of the family office can be found in the 18th century, where they emerged from Europe’s private banking system; others argue they first took shape during the Crusades to preserve the fortunes of merchants and traders. Either way, though the origins were clearly European, the concept was developed in the US by the House of Morgan in 1838, and the Rockefellers soon after.

“A lot of the European offices started providing concierge services, day-to-day management of families’ affairs, and then they evolved into doing more investment activity”, said Graham. “In the US, it’s probably more sophisticated and there are a lot of old families with old money. The other big difference is that the US offices are primarily about US money, whereas the ones you get in Europe, and London in particular, are genuinely international.”

We’ve had a dislocation between market value and fundamental value – and that isn’t sustainable

Out of the original concept of the family office, two variants have emerged: the single-family office and the multi-family office. While the former fits in neatly with the paradigm of a traditional family office, the latter, as the name suggests, branches out to include numerous families. Multi-family offices are quickly growing in number and popularity. So much so that a number of single-family offices have transformed into multi-family versions – even the Rockefeller family office now has over 250 clients.

According to a source interviewed by The Wall Street Journal, the number of family offices in the US has increased by 33 percent to over 4,000 in the last five years. A big cause for this rapid increase in demand was the 2008 financial crisis, which led more people to seek astute investment advice and asset management. Adding to this upsurge in interest is the growing number of first-generation affluent individuals.

“We saw a growing demand for advice and expertise arising from direct investments”, said Michael Maslinski, Partner and Group Head of Strategy and Know How at Stonehage Fleming, the largest family office in Europe, the Middle East and Africa. “This was compounded by increasingly complex regulations, a more litigious society and the risks of an unstable global economy, all of which impacts the day-to-day management through escalating administrative costs and by increasing the need for specialist advice.

“From an advisor perspective, we witnessed an increasing recognition that financial capital cannot be managed in isolation and that the wider legacy of families is crucial to long-term wealth preservation. This has a major impact and family offices need to develop a broader skill base to address these wider needs.”

In recent years, there has indeed been an increasingly high level of global uncertainty in both the political and economic spheres. Contributors to this tentative atmosphere in the worldwide system range from the proliferation of terrorist organisations to sanctions against Russia. Then there are nose-diving oil prices, the collapse of the Swiss franc, and the ongoing overhaul of the international regulatory framework. All of these factors continue to have deep repercussions for the global financial system.

“We’re trying to guide our clients through that”, said Graham, “and the way we do that is to have a very long-term structured approach, so making sure you’re managing wealth in a way which is around asset protection for most of it, and also generating income.”

This assistance is particularly important when it comes to preserving wealth between generations. “For most families, the biggest risks they face are in the management of succession and intergenerational transfer”, said Maslinski. “The practicalities of handover frequently impact both on the decision-making process and on the decisions themselves, particularly where specialist assets are involved.”

4,000

family offices in the US

33%

increase in the last five years

With disappointing economic growth in the global system – particularly in Europe and developing states – governments have implemented policies in the hope of providing an impetus.

“In the last year, we had a big problem – which, in my view, we’re now seeing the fallout from – which is that a lot of governments have been throwing liquidity into economies to spur economic growth”, said Graham. “So instead of actually helping the real economy, a lot of that has gone into markets, and you’ve had some bubbles in all sorts of places and now we are beginning to see some of those bubbles burst. We’ve had a dislocation between market value and fundamental value – and that isn’t sustainable.”

Survival of the fittest
Given the growing popularity of family offices, a number of changes can be expected in the sector. “We will see a move towards greater professionalisation of the family office”, said Maslinski. “Family offices today must prepare to give advice on an ever-broader range of issues and, as such, need to ensure that they have the appropriate resources to meet this new demand. The objectives and role of the family office will need to be much more precisely defined than in the past, clearly specifying the division of responsibilities between the family, the family office and external professionals. From an operational standpoint, reporting and transparency will be an important theme in 2016 and families will need to ensure that they comply with the new common reporting standard as the new requirements will start to kick in.”

There are certainly challenges ahead for the industry. “I’m convinced that a lot of people won’t be in this business in the long term because they don’t follow a client-led approach”, said Graham. “The key to success is having very deep, sophisticated relationships and understanding of clients, and being able to provide increasingly sophisticated services in a way that is totally tailored to client needs.”

As such, enterprises that are in fact family offices – as opposed to general asset managers – must stay true to the core of what it means to be a family office. What makes this type of organisation unique is exactly what customers seek when employing its services. Such individuals need more than just a wealth manager, and they need more than just a concierge service: they need everything all in one place, a holistic approach and the efficient management of all their affairs.

As the climate of global uncertainty persists in the coming year – together with more newly wealthy families from emerging economies and beyond – the demand for family offices will indeed continue to grow. Whether all the players currently in the game can maintain their current courses is another matter entirely.

Digitalisation is set to simplify the banking process

Posted on by Helen

No business is exempt from the wave of digitalisation currently sweeping the global economy, and while the trend was mostly contained to the youth segment in years past, its influence has now extended much further afield. In banking, where new platforms have given rise to a new breed of customer, digital is the new frontier – although this isn’t to say that the human element has been removed from the experience.

“The result of this evolution is a new kind of customer – a multichannel one”, Paolo Di Grazia, Deputy General Manager and Head of Direct Bank at FinecoBank, told World Finance.

In answer to the latest market developments, the Italy-based bank and member of the UniCredit Group has developed solutions that directly respond to the increasing use of digital platforms and mobile apps for banking and brokerage services. More than that, Fineco extends the support of the bank’s financial advisors to customers when it comes to managing their investments. “We’re the only player in Italy and also in Europe combining a fully integrated offer of banking, investing and brokerage services through a truly direct, multi-channel approach”, said Di Grazia.

The emergence of digital banking has given rise to countless innovations in banking

Driven by innovation
Speaking about the bank’s contributions to financial services in this new era of digital banking, Di Grazia said that this commitment to technological innovation can be traced right back to Fineco’s roots. “With regards to this”, he explained, “we have a very clear approach: innovation is useful only when and if it matches our customers’ needs. It’s nonsense to introduce sophisticated services when there is no demand for them.”

With this, Di Grazia puts to bed concerns among some in the financial services sector that banks are introducing digital services without a thought for how they ally with wider strategic or operational objectives. “Every day we think about how to improve our platform, how to release new products and services and aim for excellence”, he said. “But our main goal is still to make our customers’ everyday life easier and easier. That’s why the key message of our advertising campaign says ‘Fineco: the bank that simplifies banking’.”

The emergence of digital banking has given rise to countless innovations in banking, though the danger is that new products and services complicate, as opposed to simplify, the process for consumers. Too often, banks devise a plan to digitise their services, though fail to recognise the opportunity to streamline existing systems. Fineco represents a prime example of how banks can do just that, and to good effect. Di Grazia said: “The first challenge is to transform a single current account into a true one-stop solution, creating an offer able to cover all the financial needs of customers, ranging from pure banking services to financial planning and brokerage activity.”

Speaking on where he thinks Fineco and the industry at large are headed, he said: “For the future, the path of our industry is clear: it will increasingly be based on the mobile channel and paperless services. We see a huge potential in this evolution, as it will make the banking services even more user friendly. We have been a forerunner in Italy in these areas, being aware that the first thing to do in order to simplify our customers’ life is to simplify our internal processes and organisation.”FinecoBank

Proof in numbers
Irrespective of the ways in which technology has transformed the banking landscape, successful banking is essentially a question of customer experience. Since the beginning, Fineco’s philosophy has always been to stay customer-orientated; a goal Di Grazia called “more than rhetoric”. As a bank that prides itself on its attention to detail, Fineco’s level of customer satisfaction is an important driver – and indicator – of its growth and success (see Fig. 1).

According to TNS Infratest 2015, a survey of the bank’s customers, 99 percent of Fineco’s customers are satisfied with the bank’s services. “Their enthusiasm makes them the perfect advocate of our bank”, said Di Grazia. “In fact, according to a recent report compiled by the Boston Consulting Group, Fineco is the most recommended bank in the world through word of mouth: a point of great pride for us.”

Undoubtedly, the transition to digital has put a great deal of strain on banks in what remains a difficult climate. However, the example of Fineco is proof that technology has a positive effect on customer satisfaction.

Change is afoot in Pakistan’s banking sector

Posted on by Helen

Now that Pakistan stands at the cusp of socio-political and economic change, it is the ideal opportunity for the banking sector to redress the lack of outreach towards sections of the population that were hitherto excluded from the formal financial sector, or did not have the knowledge to utilise banking services.

Indeed, it is a very real appreciation of impediments at the grassroots level that has driven Habib Bank Limited (HBL) to expand its product line to especially cater to the low-income population of the country, which would have otherwise remained disenfranchised from the national economy.

Hence, HBL has made a conscious effort to ensure delivery of financial services to this segment by streamlining products, policies and procedures to enable financial inclusion. As such, most of the initiatives HBL has undertaken have been ground breaking in both scope and outcome, and their key focus has been easing the transition from conventional methods of money handling towards more reliable, convenient and trustworthy avenues.

Getting banks up to speed
Another shift that has been witnessed by the industry is the exit and scale down of various foreign banks operating in Pakistan. This provides an opportunity for local banks to reach out to global corporates that seek a certain standard of service and technology.

HBL has been very successful at capitalising on this market opportunity with a majority of large local and multinational corporations now utilising HBL banking services. HBL has also strategically acquired the retail operations of Citibank, and recently the entire operations of Barclays Bank in Pakistan.

As far as performance is concerned, the banking sector is one of Pakistan’s best performing industries, with its assets rising to approximately $129bn between Q2 and Q4 of 2015. Its profitability remains high and the industry’s key performance indicators for nine months of 2015 displayed a robust picture.

The capital adequacy ratio, a measure of solvency, stands at 18.2 percent, which is well above the benchmark of 10 percent set by Central Bank of Pakistan and international standard of eight percent. All in all, the sector is going from strength-to-strength, with this trend likely to continue into 2016 and beyond.

Islamic financing
Pakistan was among the first three countries to attempt to implement Islamic financing at a national level, and its origins date back to the 1970s. Today, Pakistan has six dedicated Islamic banks and almost all the commercial banks have Islamic divisions that provide sharia-based solutions to their customers. The emergence of Islamic finance in Pakistan has led to greater financial inclusion for a large segment of the population awaiting sharia-based products.

The emergence of Islamic finance in Pakistan has led to greater financial inclusion for a large segment of the population awaiting sharia-based products

Sharia compliant financial products and services are more acceptable to this segment of the population and as these products are becoming popular and more common, there has been remarkable migration of accounts from the conventional banking system to the Islamic mode of financing along with the opening of new accounts.

Islamic finance’s emphasis on asset-backed financing and its risk-sharing feature also means that it could provide support for SMEs, as well as investment in public infrastructure. Very recently Pakistan has launched an Islamic Index at the Karachi Stock Exchange (Pakistan’s largest stock exchange), so as to enable trading of shares according to sharia.

The Central Bank has also laid out a separate prudential regulatory and supervisory framework and a Sharia Advisory Board, which approves broad policy, regulatory framework, and new Islamic finance products. HBL has also actively pursued the development and availability of Islamic sharia compliant products through its Islamic window operation, and in a short span has become the second-largest Islamic banking provider in the country.

Tech injection
Globally, the financial services industry is undergoing massive change in response to the challenges posed by the regulatory environment and the exponential evolution of technology. Regulators across the world are becoming more sophisticated and intrusive, while simultaneously becoming less tolerant of gaps, forcing banks to invest heavily in compliance resources and systems. This is causing a drag on returns and taking significant management time as they comply with stress tests, respond to regulatory investigations or manage increasingly punitive fines.

Amid this pressure, non-bank financial institutions – especially start-up technology firms that are not subject to the same financial pressures or regulatory supervision – are offering competing services to bank clients. This has created opportunities for new challengers, who are nimble, more efficient and have niche specialisations to disrupt traditional business models and penetrate new markets with highly targeted products
and services.

This is creating pressure for the unbundling of the traditional universal financial services model, and disaggregating customer relationships, in direct contrast to banks’ objective to capture an ever-increasing share of the average wallet. Traditional banks run the risk of being left with the ownership only of manufacturing products.

Emerging innovations based on leveraging advanced algorithms and computing power are automating activities that were once highly manual, allowing cheaper, faster, and more scalable products and services. They are giving customers more visibility into products and more control over choices. Social media companies with a huge user base are moving into the financial sector, bringing new sources of capital and investment.

Customers are now interacting with financial institutions online, using social media to connect, communicate or complain. They do not have traditional customer loyalties and banks will be forced to rethink their interaction with this growing target segment.

HBL has been spending heavily on upgrading internal systems as well as providing customers with new ways to interact with the bank, and we expect to be able to continue to provide reliable, low cost, and innovative solutions to customers throughout the banking spectrum.

An economic corridor
The China-Pakistan Economic Corridor (CPEC) is of huge significance to both countries not only in terms of its impact on the Sino-Pak polity but also through the multitude of economic benefits that it seeks to provide for both countries. The CPEC entails construction of textile garment parks, ventures in the energy sector, development of coal mining projects, construction of dams, installation of nuclear reactors, and creating a network of roads, railway lines and oil and gas pipelines.

Earlier in the year Pakistan signed agreements with China to secure investment for the CPEC, which would be to the tune of $46bn. There are around 51 agreements, out of which work on eight projects has commenced and the foundation stones of five have been laid. One obvious benefit of the CPEC is a reduction in unemployment, once the Gwadar Port is functional and once trade commences business activities in Pakistan will get a much needed boost.

It has also been reported that once the corridor is functional it would generate significant transit fees (estimated at approximately $70bn per annum) on Chinese cargo transported through CPEC on the Kashgar-Khunjrab-Gwadar route.

HBL was the first to realise the importance of the role that China has to play in the development of Pakistan, and has been working to get necessary approvals for opening a branch in China, which is expected before the end of 2016. HBL’s investment banking team is the recognised project finance and advisory team for CPEC transactions, and this is evident in the number of CPEC transactions that are at an advanced stage of development and execution by the team. We feel that CPEC will be a major driver for growth in the five to 10 year horizon, both in terms of GDP as well as banking sector growth.

Taking a further look ahead
With a dynamic strategy that is continuously addressing the changing customer needs, over time HBL has improved its branch infrastructure, broadened its product offering and focused on customer experience. Training and improving the bank’s service are key elements of its culture. The bank’s vision of “enabling people to advance with confidence and success” is embedded in every communication platform and is central to building the bank’s brand across its global network.

HBL has recently launched a female finance initiative called HBL NISA, in collaboration with the International Finance Corporation (IFC). The objective of the programme is to increase female financial inclusion, to help advance and elevate women in Pakistan’s society. The company leads the way in rural financing and is focused on continually expanding its asset base.

Over the last two years, HBL has achieved year-on-year growth of 20 percent in rural banking, with a well-managed credit quality. Its long-term objective is to create banking awareness and promote savings culture among the rural communities, and to provide banking solutions to the rural customers as per their needs and financial aspirations, and to establish a mutually beneficial banking relationship with rural customers.

The Corporate and Investment Banking Group continues to be one of our core focus areas, emerging as a crucial tool enabling HBL to forge a pioneering path in the local banking industry of Pakistan. The company has established and maintained a leadership presence in the local equity and advisory, debt, syndications and project finance markets.

Innovative, ground breaking, and unique financial solutions for multiple business segments are the key reason why HBL remains the bank of choice for major local and multinational companies doing business in Pakistan.

Jordan’s banking industry is leading the way in Islamic finance

Posted on by Helen

People around the world are becoming more receptive to the idea that Islamic banking, more so than traditional banking, is a safe and ethical option. With approximately 400 banks spread across 60 countries, Islamic banking is fast filtering into the mainstream, and commentators are confident that the sector will continue to flourish in the months and years ahead.

Proof of Islamic banking’s recent success lies in the fact that the total number of assets under management, as of 2014, numbered around $2trn, having grown 10 to 20 percent in each of the past five years, and the figure is forecast to reach an impressive $3.25trn by 2020. Clearly, the demand for Islamic banking is on the rise, and observers needn’t look much farther than Jordan for proof of its ability to improve economic and social wellbeing.

Speaking at the Administrative Governance of Islamic Financial Institutions, Sheikh Saleh Kamel, Chairman of the Council of Islamic Banks and Financial Institutions, said: “Islamic finance has become a major pillar of economic systems, and continues to achieve success and geographic expansion. Taking the economic message of Islam based on the principles of justice and fairness to the new industrial wheels for development and progress.”

Origins of prosperity
In 1978, three years on from when Islamic banking was first established in Dubai, Jordan Islamic Bank (JIB) started the country’s first Islamic bank in Amman, and laid the foundations for what is today a major economic driver. Speaking at the same conference, Musa Shihadeh, CEO and GM of JIB, said the bank not only put Islamic banking on the map, but has also contributed to the consolidation of the sector in Jordan and the surrounding region.

In the years since, the bank has consolidated and deepened the values of the Islamic sharia by means of dealing with all people according to the teachings and principles of Islamic law. Committed to serving all parts of society equally and the latest innovations in banking, JIB numbers among the country’s most trusted companies, and an important part of the economic landscape.

“We are very committed to applying the latest innovative products and services in the banking and technology [sectors].” In keeping with its status as a pioneer in Islamic banking, JIB commits to new products and services as customers demand them, keeping to the latest innovative advances in banking.

Important decision makers across the globe have publically backed Islamic banking, owing to its ability to post positive results in times of a crisis. On average, Islamic banks have racked up growth rates of between 15 and 20 percent as a result of prudent policy decisions, and, at the last G20 Economic Summit, policymakers recommended the use of Islamic financing instruments as a mean of improving performance.

Important decision makers across the globe have publically backed Islamic banking, owing to its ability to post positive results in times of a crisis

The sector, according to Islamic law, offers services with a commitment to ethical purposes and refuses to deal in any transactions involving interest. Islamic banks refrain from financing any service that causes harm to people, society and the environment, which means they will not deal in derivatives, speculation or gambling. The growth of the sector therefore, is closely in keeping with the growth of real economy and benefits the many as opposed to the few in society.

Going back to JIB, the bank has a sharia supervisory board consisting of three expert scholars, and their job is to review any transaction in order to make sure no interest is involved, and that the bank’s products and services comply with Islamic law. Likewise, it’s the priority of JIB management to keep adequate liquidity in order to meet the requests of customers in serving both the public and private sector.

With a 60 percent share of the local Islamic banking market and strong assets (see Fig. 1), JIB operates in excess of 90 branches and 160 ATMs, in addition to its I-Banking system, and presides over an experienced staff of 2,000. Of all the banks in Jordan, JIB has the best ROE and one of the best NPL percentages.

Proud of its recognition in local and global circles as a pioneer of Islamic banking, JIB has received a long list of awards for its contributions to the industry, not to mention distinguished ratings from international rating agencies. S&P gave JIB a BB-/Stable/B rating, whereas Fitch awarded the bank a BB- for its long-term obligation in foreign currencies and a B for its short-term obligations in foreign currencies with a negative outlook.

Socially responsible programmes
Going beyond financial performance, JIB’s contributions to society and the environment number among the most impressive in the region, and earned the bank a reputation as a responsible corporate citizen. The banks’ articles of association states that it is committed to providing banking and social services to all people in compliance with sharia principles. In the spirit of doing just that, it has established not one but two social responsibility committees.

The job of the first committee – which is comprised of board members – is to implement policy plans, while the second – comprised of management – will implement a strategic sustainability plan. In recognition of the bank’s commitments, the International Organisation for Standardisation (ISO) sent a letter in appreciation of the pilot organisation’s participating in the ISO project on uptake and use of ISO 26000 guidance on social responsibility within the MENA region.

The letter also thanked JIB for its active participation in achieving positive results for sustainable, environmental, social and economic development. Essentially, the bank’s social responsibility commitments are of an international standard and set a precedent for Islamic banking in the region and beyond.

The bank’s emphasis on community development can be seen at work in a number of social projects. In choosing to finance small projects focusing on the twin issues of poverty and unemployment, the bank’s emphasis on local development goes beyond its customer base and extends to the wider community. JIB has committed to community development since it was established, and will continue to do so by supporting and financing SMEs, craftsmen and professional sectors. JIB graph

JIB has offered free-interest loans (known as Qarad Hassan) since its first began, and remains the only bank in Jordan to do so. In short, the social service helps Jordanian citizens by financing education, medical treatment and marriage. The loans are then repaid to the bank without any interest whatsoever, as the service is a product of the bank’s desire to help those in need.

The Social Responsibility committee has also been hard at work when it comes to implementing a strategic sustainability five-year plan from 2014 to 2018. In it, JIB has pledged to boost its reliance on renewables by 50 percent over the next five years and reduce water consumption by 20 percent before the end of 2018.

More generally though, the bank has made ambitious promises to protect the local environment, and will continue to finance projects led by the ministry of environment and ministry of agriculture. Inside the bank, JIB has arranged an annual awareness session for senior management and subsidiary companies with a view to improving company culture.

Outside, the bank’s plans consist of sending between 3,000 and 10,000 SMS messages to customers about key sustainability issues, and representatives from JIB management will speak about sustainability during at least one relevant conference or seminar per year.

In a climate where consumers the world over are pushing for greater commitment to sustainability, JIB is a shining example of what can be achieved by not just Islamic banking, but by financial services in general. Banks remain an important part of the community, with many of them uniquely positioned to influence people’s lives for the better or worse, and with the right strategy in place, the sector can have an important hand in bettering people’s lives.

JIB’s plans for the future are to diversify and develop its banking services in the broadest possible sense. This means expanding both its portfolio and market share, expanding its branch network, and boosting relations with investors and clients.

Within this remit, JIB will also seek to expand and continue to finance SMEs to support the local economy, and help solve the enduring issues of unemployment and poverty in Jordan. The bank also has plans to issue an Islamic bond (or sukuk), which, while popular all over the world, is yet to grace Jordan’s Islamic banking sector.

Should JIB make good on its ambitions, both generally but also with regard to its five-year sustainability plan, Islamic banking will build on its reputation as a key contributor to social and economic development.

Exploring the boom in the luxury goods market

Posted on by Helen

The Silk Road is the name given to the long, meandering network of desert trade routes that once connected the West to China, India and the Mediterranean. Those willing to make the journey could amass great fortune, bringing valuable goods and materials home with them to be sold for a handsome sum.

This stretch of road later played a hugely important role in the development of civilisations across the European and Asian continents, where trade has always facilitated improved social, political and economic relationships between nations. The Silk Road, therefore, not only allowed for the transport of goods from country to country, but for different religious and philosophical ideas to permeate the collective consciousness. So significant is the contribution of the Silk Road to ancient and modern global development that UNESCO named the Chang’an-Tianshan corridor a World Heritage Site in June 2014.

Working with the family jewels
Alisa Moussaieff, CEO and Creative Director of Moussaieff Jewellers, explained how the Silk Road contributed to her family’s unique history.

“In the 1850s, my husband’s grandfather (Moussaieff Senior) was a pearl merchant with a fearless passion for gems, and he would search for the most ravishing pearls from the Persian Gulf”, Moussaieff told World Finance. “He handed his business over to his son, Remo, who established himself as a stone dealer in Paris during the Belle Epoque period in the 1920s, where he dealt with all the fine jewellery houses, such as Cartier and others. His son – my husband – and myself then opened the first Moussaieff showroom in 1963 in the Hilton Hotel in Park Lane. That boutique is still open today. Since then we opened a beautiful flagship showroom at 172 New Bond Street in 2007, and we also have stores in Geneva, Hong Kong and seasonally in Courchevel.”

When asked about how she guarantees the finest diamonds for her jewellery, Moussaieff said, “When purchasing diamonds, I always follow my instinct. I started collecting coloured diamonds in the 1960s, long before they were considered beautiful: in the 1970s, the Gemmological Institute of America (GIA) was teaching its students that colour in a diamond is a flaw. Then only in the 1980s they were appreciated for their exquisite beauty and rarity.”

There will always be a demand for diamonds, and there will always be a need for portable wealth

Since then, Moussaieff has accumulated one of the most outstanding collections of coloured diamonds available. Her knack for spotting truly beautiful specimens has put her in a unique position within the company.

“I find myself in a truly unique position, free to combine unconventional colours, textures and shapes according to my particular aesthetic sensitivities and perceptions – accountable to no-one. I take pleasure in creating designs which at first glance may seem whimsical, but which in the end always achieve a positive response. I am not afraid to use new materials and manufacturing techniques, and I love to give people an item of jewellery they’ll cherish for a lifetime.”

Rock-solid sales
Moussaieff continued: “As for coloured diamonds, the major auction houses have recently posted record prices. Because of the huge amount of information readily available on the topic, more and more people now are more knowledgeable about the subject of coloured diamonds. Not only that, but the luxury market is booming at the moment and more people than ever before can afford rare, high-quality pieces. This has led to a surge in the coloured diamond market, with the industry attracting strong levels of investor intrigue.”

Within the Moussaieff collection there are also some of the most unique and rare coloured gemstones, from a lustrous and limpid blue 180ct star sapphire to a necklace containing a multitude of 20ct and 30ct perfectly matched Colombian emeralds. The company showcases many other gemstones, such as vibrant neon-coloured Paraiba tourmalines, natural pearls and naturally colour-changing purple sapphires.

When asked about the coloured gemstone market, Moussaieff explained how this market is quite different from that of diamonds: “They do not compete with each other. Fine coloured gemstones are for the collector who has got everything else. If you consider synthetics, the media loves to talk about lab-grown diamonds. Nowadays, clear stones of larger crystals are produced and marketed as ‘conflict free’ or ‘socially and environmentally conscious’ diamonds. This may well have an impact at the commercial level but not on gem quality – after all, there have been synthetic emeralds and cultured pearls on the market for a long time, but the price of natural pearls has skyrocketed in the meantime, and so too has the price of emeralds.”

As she finally turned to the white diamond market, Moussaieff talked about how the prices have dropped because of the current dip in demand from Russia and China. “However, there will always be a demand for diamonds. There will always be romance, eternity and purity symbolised in a natural diamond. And there will always be a need for portable wealth.”

Japan sells negative yield bonds

Posted on by Helen

Following its central bank’s venture into negative interest rates, Japan has sold its first long-term bonds with a negative yield.

After a $19.4bn auction, the 10-year benchmark bond was sold with a -0.024 percent average yield. This means that holders of this bond will be paying the Japanese Government for the privilege of lending it money.

As a result of Japan’s expansive monetary policy, which has led to interest rates falling below zero, Japan’s 10-year bond yield started to decline, dipping into negative territory. However, the recent sale marks the first time that such a bond has been sold at auction with a negative yield.

Yields on Japanese bonds had been steadily in decline, leading to a weaker demand for them. However, the most recent auction saw bids at 3.2 times more than the amount of the securities offered, marking the first rise in demand since December 2015.

Behind this seemingly counter-intuitive demand for negative yielding bonds is speculators taking short positions. These traders are, the Financial Times noted, covering “short positions’ built-in expectation of the yield dropping into negative territory”.

Koichi Sugisaki, a fixed-income strategist at Morgan Stanley MUFG Securities, told the Financial Times that “going into the auction, most dealers believed that it wouldn’t make sense to investors to buy” at negative rates. As a result, “they took out short positions, and today’s auction would have seen them buying to short-cover”.

However, some major investors, such as pension fund managers, have largely stayed away from the auction, no longer seeing Japanese bonds as stable investment vehicles.

Anticipating future industry challenges is vital for wealth management firms

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

SFB boxout 2

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

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

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

The importance of energy efficiency beyond COP21

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merger talks could create giant European trading house

Posted on by Helen

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

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

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

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

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

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

 

 

 

 

Eurobank has emerged from the Greek financial crisis stronger than ever

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

€73.8bn

Eurobank’s total assets, 2015

16,662

Employees

8

The number of European countries where Eurobank has an established presence

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

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

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

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

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

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

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

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

First electronic exchange for bullion markets is launched

Posted on by Helen

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

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

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

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

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

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

 

 

How shareholders were able to best the financial crisis

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Education in the new financial landscape

Posted on by Helen

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

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

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

A more complex business environment

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

The International Chamber of Commerce’s (ICC)

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

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

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

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

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

The need for global education

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

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

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

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

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

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

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