Month: March 2014

Dubai Islamic Bank eyes strong global presence

Posted on by Ashton Wenborn

Globally the Islamic finance industry is worth close to $2.3trn and is expected to grow to $3trn by 2015. Dubai has long nurtured a desire to become the international hub for sharia-compliant banking, and recently an official mandate has been issued to that effect to position the emirate as the global capital of the Islamic economy.

Since it was established in 1975, Dubai Islamic Bank (DIB) has been trailblazing through the industry, setting new standards in the area of Islamic finance and paving the way to further the progress of this sector, which is fast gaining global acceptance. Recognised for its rich heritage and vintage, DIB is seen as a school of Islamic banking and finance, having received various accolades for innovation and advancements in this arena, giving a modern face to the industry over the last forty years.

Dr Adnan Chilwan, DIB’s CEO, is keen to capitalise on the bank’s four-decade-strong position in the industry. Appointed to the post in July 2013, Chilwan has immediately actioned the second phase of a two-pronged strategy of consolidation and growth. The first phase of consolidation was initiated in late 2008 with the aim to build a robust balance sheet and platform that would allow the springboard when the market and the economy rebounded.

With Dubai and the UAE economy clearly back on track, the bank is now moving on a clearly defined growth agenda, which not only focuses on the domestic market, but also on expansion into other parts of the Middle East, Asia and East Africa. Over the coming years, the UAE – and Dubai in particular – will be hosting a number of international events of considerable prominence and the Islamic finance sector is well established to play a key role in this development. Chilwan has spoken to World Finance exclusively about the challenges and opportunities ahead for Dubai and DIB.

Why is Dubai emerging as the global capital of Islamic finance?
Dubai is uniquely positioned, especially when you consider it from the perspective of banking and finance. Located right at the centre of the east and the west, Dubai has huge potential to provide continuity to financial entities across time zones as the markets open and close around the world.

With DIB pioneering Islamic banking here in Dubai in 1975, there can be no doubt of the ability of the emirate of Dubai to establish itself as the global capital of the Islamic economy. The achievements of Dubai and the UAE are now being recognised across the world.

Tourism, hospitality, transportation, trade and infrastructure are the backbone of this thriving nation, and today the residents enjoy possibly some of the best quality of life anywhere in the world. With the way the Islamic economy is progressing, I see this as an opportunity as well as a responsibility of leading players like DIB to support this ambition.

Over the last decade, the UAE as a nation has made huge advances in the Islamic finance industry, making the sector an integral part of general economic activity. Innovation in products and offerings coupled with the development of the necessary legal and regulatory framework across all financial sectors from banking, capital markets, and insurance has positioned us at its forefront.

The government itself has been a strong advocate of promoting and growing not just the Islamic financial sector but also the Islamic economy including the halal food industry, family-friendly travel and tourism, fashion and clothing, cosmetics and personal care, pharmaceuticals, and media and recreation. These different sectors that have developed and grown over the years are helping to establish Dubai as a major Islamic hub.

With regards to Expo 2020 in particular, how will future events change infrastructure investment in the region?
Dubai is fast becoming not just an event hub for the region, but is in a position to compete head-to-head with major cities around the world. Though the infrastructure to host such events successfully is already in place, the Expo2020 will give a further boost to civil works and development, tourism, transportation and logistics, technology and even alternative energy sectors adding to the already world class setup existing in Dubai.

UAE-GDP-and-total-investment

Local and international investment – both financial and intellectual – will have a positive effect on trade, investment, technology, construction and other related sectors, not just in Dubai but in the UAE as a whole. Bank of America Merrill Lynch estimates Expo 2020 could boost GDP by $23bn or 24.4 percent between 2015 and 2021 (see Fig. 1) with an additional growth of 0.5 percent between 2016 and 2019, and two percent by 2021.

It is expected that around 300,000 new jobs will be created during this period, particularly in the area of construction, hospitality, transportation, logistics, retail and services. The already growing Dubai brand value will also get a significant boost, and is expected to grow by $8bn to $257bn, according to Brand Finance.

To what extent has the advent of Islamic finance helped boost the growth of SMEs in the region?
While Islamic jurisprudence encourages entrepreneurship to vitalise the economy, Islamic banks still lack offerings to actually support start-ups, especially small and medium size businesses. This is also due to the fact that Islamic banks could not finance start-ups in certain situations where assets are not available.

Islamic banking needs structured products such as quasi capital or hybrid structures for start up finance in order to limit the risk while simultaneously supporting ventures to flourish without mounting serious pressure on the venture itself. That said, DIB is committed to promoting this key sector of the economy and has recently launched a focused need-based SME solution based on the liquidity management and working capital finance requirements of this segment. We will continue to further refine our products and services to this sector, which we believe is key to the growth of any economy in the world.

How has Dubai Islamic Bank evolved during the recent boom in Islamic finance?
Given the impact of the global financial meltdown since 2008, we established a two-phase strategy spanning a period of eight years. The first five years (2009 to 2013) focused on consolidation, where the aim was to ensure that the fundamentals of the bank were strengthened from within as it navigated the turbulent markets during this period.

The key objectives of this phase revolved around strengthening the balance sheet, enhancing capitalisation, ensuring robust liquidity, arresting NPL growth and improving asset quality. Though, at the time, we were unable to predict the depth and tenor of the crisis, we had faith in the bank and Dubai, that both would rebound strongly when the markets improved. We executed the consolidation strategy like clockwork and this has now allowed us to initiate the second phase, which is growth.

We have established a strong franchise, particularly on the consumer front, which has helped to diversify our exposure significantly while continuing to maintain probably the best liquidity in the banking sector. This, combined with strong capitalisation, provides us with a robust platform to take advantage of the greatly improved and positive market conditions and trends.

DIB is a pioneer of Islamic banking and as the world’s first fully-fledged Islamic bank, we have nearly four decades of experience. Over the consolidation period, we have greatly expanded our product suite, enhanced our core systems utilising the latest technology and totally revamped our customer service platform. Innovation is at the centre of everything we do and will continue to play a key role in our drive to be the most progressive Islamic financial institution in the world.

What are the bank’s local and international expansionary plans?
Going forward, DIB is looking to expand its franchise not only in the UAE but also across some select and identified international markets. Locally, we will continue to enhance our consumer and wholesale business focusing on key sectors like SME, tourism, hospitality, trade and infrastructure development – all of which are expected to see a boost with Dubai’s EXPO 2020 win.

While we will be reviewing and rationalising our existing international presence in Pakistan, Sudan, Jordan, Bosnia and Turkey, we have already identified new geographies in Far East, Middle East, East Africa and the Indian subcontinent where we are looking to enter with an individually tailored strategy for each country.

JPMorgan and Madoff’s epic Ponzi scheme

Posted on by Ashton Wenborn

In the summer of 2009, a freshly convicted Bernie Madoff cut a forlorn shape on the courtroom floor, as he was finally held accountable for crimes that, in his own words, would leave a “legacy of shame” for those bearing his name. “I am embarrassed and ashamed,” read a statement from his unsuspecting wife. “Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.”

At no point during his trial did the former Wall Street executive meet the unceasing stares of his victims, who proceeded to express their disdain for the fraudster. “This jail should become his coffin,” said Michael Schwart, a 33-year-old victim whose life was profoundly affected by Madoff’s scheme. The ruling judge Denny Chin then revealed that not a single friend or family member had sent a letter attesting to his character, saying that Madoff’s crimes were “extraordinarily evil” and “took a staggering human toll” on those affected. After the 71-year-old’s 150-year sentence was read out, the courtroom welcomed it with applause.

Madoff and JPMorgan
The Ponzi scheme that saw Madoff defraud his clients of $65bn is commonly considered to be the largest single financial fraud case in US history; however, the involvement of America’s largest bank has only recently come to light. “JPMorgan – as an institution – failed and failed miserably,” said Preet Bharara, US Attorney for the Southern District of New York, immediately after he announced criminal charges against the bank.

“JPMorgan – as an institution – failed and failed miserably”

The extent to which JPMorgan was complicit in Madoff’s crimes has been contested for some time now, namely by Madoff himself. “They had to know… But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know,’” he told the New York Times in 2011. Nonetheless, it has taken until this January to reveal the scale of JPMorgan’s involvement, which in turn has brought to the fore an awareness of the scheme, otherwise known as the ‘702 Account’, that stretches back just shy of three decades.

Documents filed in the Manhattan Federal Court trace the fraudulent link between Madoff and JPMorgan back to 1986, at which time the schemer selected the bank as the primary vehicle by which he would run his Ponzi scheme. Investigations have since unearthed a series of warning signs that went unchecked through the decades, despite numerous individuals at the bank becoming suspicious of the now infamous 702 Account.

Suspicious behaviour
In the mid-1990s JPMorgan, along with a client of JPMorgan’s Private Bank, clocked on to a series of cheque-kiting transactions, as weighty sums of money were being lofted back and forth between Madoff’s accounts for no discernible reason. These actions were enough to prompt suspicions on the part of JPMorgan’s client Norman Levy, who lodged a Suspicious Activity Report (SAR) against Madoff and closed off his account as a consequence. However, JPMorgan stopped short of these measures and chose instead to foster the transactions for another decade, failing to file a single SAR or notify its anti-money laundering compliance group at any time, and allowing the transactions to reach $6.8bn.

These circumstances marked only the first in a series of misdemeanours which, through 1986 to 2008, saw approximately $150bn fed in and out of Madoff’s accounts – none of it being used to purchase or sell securities, as was claimed at the time.

Questions were later asked by the bank of Madoff’s ability to consistently yield returns of 20 to 30 percent year-on-year, leading one JPMorgan banker to suspect that he “might… have been smoothing out returns.” An internal bank document obtained by authorities questioned how Madoff was able to secure high returns through stints of market volatility, and in 1998 a bank fund manager conceded that his performance was quite possibly “too good to be true,” in light of there being “too many red flags.”

The bank even went so far as to invest a significant sum of its own money in Madoff’s funds, regardless of ongoing reservations about their legality. However, when in 2007 the returns were believed to “be part of a Ponzi scheme” and Madoff had a “well-known cloud over” his head, the bank reduced its exposure so as to escape any associations with the schemer himself, pulling out $275m of its own money.

On December 11, 2008 Madoff’s crimes were finally revealed to the rest of the world, and the bank could not help but accept certain responsibilities for its failure to make public Madoff’s misdemeanours at an earlier date. “In this case, JPMorgan connected the dots when it mattered to its own profit, but was not so diligent otherwise,” said Bharara at a press conference after the charges were filed.

Criminal charges
“JPMorgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards,” added the FBI Assistant Director-in-Charge George Venizelos. “In order to avoid these types of disasters in the future, we all need to be invested in making our markets safer and more equitable. The FBI can’t do it alone. Traders, compliance officers, analysts, bankers, and executives are the gatekeepers of the financial industry. We need their help protecting our markets.”

The bank even went so far as to invest a significant sum of its own money in Madoff’s funds

As a consequence of having facilitated Madoff’s Ponzi scheme, JPMorgan faces a forfeiture of $1.7bn made payable to the scheme’s victims, as well as two felony counts for violating the Bank Secrecy Act. “Institutions, not just individuals, have an obligation to follow the law and to police themselves. They must exercise due care not only with their own money but with other people’s money also,” said Bharara on January 7. “The bank has accepted responsibility and agreed to continue reforming its anti-money laundering practices. Most importantly, the victims of Bernie Madoff’s epic fraud are $1.7bn closer to being made whole.”

The investigation culminated in a deferred prosecution agreement between JPMorgan and the authorities, which, alongside a strict financial penalty, will see the bank make good on its promise to reform its internal controls in place of a criminal prosecution. The agreement is certainly an uncommon action to take against a financial institution; however, authorities clearly believe the penalties and promised reforms to be preferable to a prosecution.

The sum imposed by the Department of Justice will also come accompanied with a further $350m for the Office of the Comptroller of the Currency, $325m for Madoff’s bankruptcy trustee Irving Picard, and $218m for plaintiffs in class-action lawsuits, bringing the total payment to $2.6bn. If the bank succeeds in fulfilling both parts of the bargain then the case will be dropped in two years time.

Leniency precedent
The charges are reminiscent of those brought against HSBC last year, after the UK bank violated the Bank Secrecy Act on two counts. Similarly to JPMorgan, HSBC was left with charges equating to near $2bn and an agreement that promised to improve on its reporting procedures. However, unlike JPMorgan, HSBC’s term is set to span five years and is subject to scrutiny by an independent party, whereas JPMorgan is monitored only by the US Attorney’s office, with any details of the changes hidden from the public eye.

Regardless of the seemingly lenient charges, the Madoff case has succeeded in damaging JPMorgan’s earnings in a way that previous scandals have failed to do. Over the past year, the bank has paid around $20bn to regulatory authorities as a consequence of various misgivings pertaining to the financial crisis and beyond, among them the Libor and ‘London Whale’ scandals. Figures released by the bank in January showed that overall earnings clocked in at $5.28bn, representing a 7.3 percent shortfall on the previous year and falling somewhat short of analysts’ expectations.

Olympics catalyst for Rio redevelopment

Posted on by Ashton Wenborn

Like most other cities that have hosted important international events over the years, Rio de Janeiro is hoping to cash in on its skyrocketing profile. The Cidade Maravilhosa has been working tirelessly to shed its party-town image and emerge on the other side of the 2016 Olympic Games as a credible cultural and business centre. Museums designed by ‘starchitects’ have been commissioned, poor neighbourhoods are being redesigned, and a multi-billion dollar commercial centre development has been announced.

Perhaps inspired by the success of London’s Canary Wharf business district, Rio policymakers have revealed plans to redevelop the currently derelict port zone into a luxury business district complete with mirrored skyscrapers and its very own Norman Foster creation.

Revellers march through the port district in Rio. It is hoped the redevelopment can help shed the area’s party-town image
Revellers march through the port district in Rio. It is hoped the redevelopment can help shed the
area’s party-town image

According to Rio’s Mayor’s Office, the project consists of the “reurbanisation” of five million square metres, including the construction of four tunnels, 17km of cycle-ways, three sewage treatment facilities, and the refurbishment of 70km of sidewalks.

Works have already started in what is being dubbed the Porto Maravilha (Marvellous Port) development. The Museu do Amanhã, a cutting-edge museum designed by lauded Spanish architect Santiago Calatrava, has already broken ground. Another cultural space, the Museu de Arte do Rio (MAR), a gallery dedicated to the art and history of the city, opened its doors to the public in 2013. Public squares are being spruced up and there is a plan to plant over 15,000 new trees in the area. But the project remains years away from actual completion.

A pivotal aspect of the urban regeneration proposal was the demolition of a four-kilometre-long suspended road known as the Perimetral. Opened in the 1960s, it ran along the shore of the Guanabara bay offering drivers riding on it phenomenal views, but rendering the area underneath it a wasteland of abandoned buildings and dangerous streets. In January, the Perimetral was finally torn down, in preparation for the real work to begin.

From the ground up
To describe Rio’s port region as a pleasant place would be to stretch the truth to breaking point. It is true that the area – like much of the rest of Rio – has been blessed with natural assets and is surrounded by spectacular forested mountains in the background, and the placid bay stretching before it. But decades of neglect and mismanagement by successive administrations mean that to rehabilitate the region, it is cheaper to tear everything down and start again.

But decades of neglect and mismanagement by successive administrations mean that to rehabilitate the region, it is cheaper to tear everything down and start again

This scorched-earth policy, favoured by the current mayor Eduardo Paes, offers plenty of opportunity. The port region is adjacent to the city’s already established downtown and the business district. It is a piece of prime real estate, with sweeping views over the bay and the mountains, and it makes sense for the mayor to want to tear it to the ground and start again – preferably by flogging the land to business developers at sky-high prices. And that is where the Marvellous Port project was born.

According to the Marvellous Port website, the whole regeneration project is scheduled for completion by 2016, at which point construction will begin on the many luxurious skyscrapers. The Brazilian media has reported that over the next eight years, the region will gain close to one million square meters of real estate, worth BRL 8bn (approximately $4bn).

This is only one of the key projects planned for the area, though, and is being led by Westfield, the company behind the vast majority of developments connected to the London Olympics. Westfield is working with Related, an American real estate developer, and BNCORP, a Brazilian developer.

Locals have been trumped
The plan is to build a mega-complex that will include a luxury shopping centre, high-spec business towers, hotels and apartment blocks, collectively known as Porto Cidade (Port City).

“We were looking for an opening in Rio, and the Marvellous Port fit, as it is both an extension to the downtown area and is gaining new infrastructure,” Daniel Citron, President of Related for Brazil, told the O Globo.

“The complex will be located where all new transportation converges, including the new VLT (trams). It is a region that was previously unviable because it was not properly integrated [with the rest of the city].”

The Mario Filho (Maracana) stadium in Rio de Janeiro. It will host the upcoming Confederations Cup, the 2014 World Cup and the 2016 Summer Olympics
The Mario Filho (Maracana) stadium in Rio de Janeiro. It will host the upcoming Confederations Cup, the 2014 World Cup and the 2016 Summer Olympics

Construction is expected to begin in 2014 and will be completed in phases, finishing in 2022. Not far from Porto Cidade, Brazil will gain its very first Trump Towers complex. Consisting of five AAA skyscrapers, 150m tall and boasting 38 floors of office space each, Trump Towers Rio will occupy 450,000 square metres along the Avenida Francisco Bicalho, a traditional – and pivotal – traffic artery that connects downtown Rio to the suburbs and to Ipanema and Leblon – the luxury residential neighbourhoods.

Work on the Trump complex is not expected to begin until after the 2016 Olympics, by which time several tram lines connecting the Marvellous Port area to the rest of Rio will already be complete, making the complex’s location very desirable indeed.

“There is a tremendous need for a project of this size and calibre as Rio de Janeiro has one of the lowest office vacancy rates in the world,” Donald Trump Jr told Bloomberg Newsweek. “With extensive research conducted by our leasing agent, Cushman and Wakefield, we are pleased to confirm that Trump Towers Rio is currently the largest [planned] urban office complex in the BRIC countries.”

Far from inclusive
But all of this development comes at a cost, and not just in terms of capital investment. The port region is the rightful birthplace of the city, and has always been densely populated. Furthermore, some of the buildings that have been allowed to fall into disrepair through lack of investment from the city, are some of the oldest and most beautiful in all of Rio, and also of extreme historical significance.

The majority of the colonial buildings, factories and old farm mansions in the area are scheduled for demolition to make room not only for infrastructure developments but for the likes of the Trump Towers and the Porto Cidade.

One of the most oft-cited complaints is the lack of room for affordable housing to be developed in the area; current residents would be moved on and their dwellings torn down.

“The fact is that this is a central area, historically occupied by low income families,” explains Lilian Amaral de Sampaio, a local architect and urbanist. “Very little of the Porto Maravilha proposal was designated for social and lower-income housing or for residential developments in general.”

Children in front of a building which houses 82 families in the port district of Rio. Residents will be relocated to new housing ahead of the 2014 World Cup
Children in front of a building which houses 82 families in the port district of Rio. Residents will be relocated to new housing ahead of the 2014 World Cup

There are also questions about how the project was de facto developed, and with what interests in mind. “In London, before the re-urbanisation of the Docklands was initiated, a number of studies were carried out that sought to define the guidelines for the use of the space,” explains Roberto Anderson M Magalhães, an architect with the Rio de Janeiro State administration.

“In Rio de Janeiro, the project for the re-urbanisation of the port zone, was concerned exclusively with transport ways and constructive indices. There is not a single study that identifies the lines of dominance in the landscape of the area, nor what should be preserved.”

For Anderson, the development is a waste of the last opportunity to build a mix income neighbourhood in a city that already suffers from overcrowding. For him and many other critics the project will simply push the current, poor, inhabitants further into the suburbs, speeding up the process of gentrification in an unhealthy way.

The original plan for the urban regeneration of the region proposed a redevelopment of the region not as an extension of the nearby business district, but as a mixed model neighbourhood with commercial, corporative and residential properties as well as refurbished public infrastructure. That has since been replaced with the current model, and not everyone is pleased with that.

“This development is part of a larger trend in which cities compete with each other in global market,” hoping to attract business and tourism explains Amaral de Sampaio. New York, London and Barcelona, have all gone through similar processes with varying degrees of success.

Amaral de Sampaio is not holding her breath. “The real question that remains is whether or not Rio has the robust business health that will create the demand for all of that converted corporate space.”

Eight great heads of the Fed

Posted on by Ashton Wenborn

Dec 1913

A painting of 10 stiff-necked politicians and bankers, all grouped around president Woodrow Wilson (pictured), commemorates the founding of the US Federal Reserve 100 years ago. Pen in hand, Wilson sits at a large desk poised to sign into reality America’s first central bank. The inaugural chairman is Charles Sumner Hamlin, first and last lawyer to head the organisation. The creation of the Fed was largely a reaction to financial uncertainties of the time.

Sep 1930

Eugene-MeyerAs Wall Street collapses and factories shut down, Eugene Meyer (pictured, right) takes control of the Fed. A financier and newspaper publisher, he’s decidedly the wrong man for the job. Resisting the advice of economists, he allows banks to fail in their thousands, taking the savings of ordinary people down with them. When his tenure ends in 1933, he buys The Washington Post, where he would prove to be a great deal more successful.

Feb 1951

William McChesney Martin

William McChesney Martin (pictured) begins a still-unmatched 19-year stint. Martin serves five presidents, developing policies to protect the almighty greenback from multiple threats including Vietnam War-induced inflation. Once described as ‘the happy Puritan’, Martin did not hesitate to tighten money when he saw fit. His most famous saying was: “We are the people who take away the punch bowl just when the party is getting good.”

Mar 1978

William-MillerThe brief and turbulent term of William Miller (pictured) was the last time a president appointed a businessman to head the Fed. Former boss of industrial conglomerate Textron, Miller inherits fast-rising inflation – and allows it to go even higher on the much-criticised grounds that it’s not a problem. The dollar plummets in value and has to be rescued with the help of the IMF. Remembered mainly for trying to ban smoking at Fed meetings, he lasts less than two years.

Jun 1979

Paul-VolckerPresident Jimmy Carter appoints the six foot seven inch Paul Volcker (pictured) to an embattled Fed. ‘Stagflation’ – a new term at the time – has bedevilled the US for most of the decade. ‘Tall Paul’ decides drastic measures are necessary and he lifts the federal funds rate to an unprecedented 20 percent. The prime inter-bank rate rockets to a sky-high 31.5 percent amid general fury, but Volcker stands firm. Within two hectic years, the economy returns to health.

Sep 1987

Alan-GreenspanTwo months after taking office, Alan Greenspan (pictured) faces a baptism of fire in the form of the 1987 stock market crash. He goes on to guide the economy through the bursting of the equities bubble, a credit crunch, the massive Russian default and the aftermath of the attacks of September 11, 2001. America would enjoy the longest peacetime economic expansion in its history. Only the 2008 crisis, which happened after his watch, would hurt his reputation.

Feb 2006

Ben-BernankeHanded a booming and prosperous America, Ben Bernanke (pictured) has a rude awakening with the onset of the 2008 financial crisis. Working on several fronts at once, he keeps the money flowing at the Fed’s discount window while printing money furiously under his quantitative easing programme. Although some critics fault him for not printing more money, he plays a major role in stabilising and restoring to health a distressed economy.

Feb 2014

Janet-YellenJanet Yellen (pictured) is sworn in as the first woman to head the Fed. Touted as a potential leader in the past, only to be denied when President Barack Obama decided to reinstate Bernanke in 2009, she ascends to the top job at a time when the US economy seems to be on much firmer ground, albeit with only hints of an overall recovery. Now Yellen has to figure out what to do with the $3trn in bonds in the Fed’s vaults and its legacy of quantitative easing.

The 5 biggest settlements on interbank rate rigging

Posted on by Ashton Wenborn

1. UBS

A logo of Swiss banking giant UBS is seen on a building in Zurich

UBS is by far the bank that has paid the biggest fine for interbank rate rigging, since the first investigation into Libor manipulation began in 2011. On December 19, 2012, the Swiss bank agreed to pay regulators $1.52bn ($500m to the US Department of Justice, $700m to the US Commodity Futures Trading Commission (CFTC), $259m to the UK Financial Services Authority (FSA) and $64m to the Swiss Financial Market Supervisory Authority) after investigations revealed that UBS traders had conspired to manipulate the Libor rate as well as the Japanese Yen Libor, in addition to colluding with other panel banks.

2. RBS

RBS

Over two settlements in February and December 2013, Scottish banking group RBS was fined a total of $1.14bn for successfully manipulating the Euribor, Libor, Yen Libor, and the Swiss franc Libor. The bank paid $530.6m to the European Commission, $137m to the UK FSA, $325m to the US CFTC and $150m to the US Department of Justice after pleading guilty to felony wire fraud, colluding with other banks to manipulate the interest rates, as well as continuing misconduct after a CFTC probe into the matter.

3. Rabobank

Rabobank

Utrecht-headquartered Rabobank settled a $1.07bn fine in October 2013 after UK regulator, the FSA, said it had found more than 500 instances of attempted Libor manipulation. The US CFTC also said that the bank had lacked internal controls and ignored conflicts of interest amongst traders. As such, the bank paid $475m to the CFTC, $325m to the US Justice Department, $170m to the FSA and $96m to the Dutch public prosecutor’s office.

4. Deutsche Bank

Deutsche-Bank

In December 2013, Deutsche Bank was ordered to pay a fine of $984m to the European Commission, for colluding to manipulate the Euribor and Libor interest rates. Recently, the US Federal Deposit Insurance Corporation has sued Deutsche Bank along with 15 other banking groups for manipulation, which the regulator said caused “substantial losses” to 38 US banks, which became insolvent during and after the 2008 financial crisis.

5. Societe Generale

Societe-Generale

The fifth greatest interbank rate rigging fine belongs to France’s Societe Generale after it admitted to manipulating the Euribor and paid $604.7m to the European Commission in December 2013. SocGen is also among the 16 banks sued by the FDIC. So far, financial institutions have paid about $6bn to resolve criminal and civil claims in the US and Europe that they manipulated benchmark interest rates.

Will unconditional basic income solve Europe’s problems?

Posted on by Ashton Wenborn

Unemployment is high on the agendas of ruling governments the world over, yet the sad fact remains that jobless rates in many jurisdictions are spiralling out of control, and will continue to do so for as long as glaring structural inefficiencies remain. Nowhere else on Earth can this be better seen than in Europe (see Fig. 1), where last year’s news of the continent’s barely perceptible recovery is threatening to stifle an appetite for much-needed structural reforms.

Austerity has loomed large over many of the region’s leading players, though it would appear the cuts of recent years are beginning to pay dividends. But whatever the prospects may be of a full-fledged recovery, there is still a great deal to be done about Europe’s hordes of under and unemployed – typically those in the youth bracket – who continue to suffer as a consequence of labour market inflexibilities.

Based on this year’s World Economic Forum, it would appear that leading industry names, politicians and economists alike are inclined to agree. Harvard’s Professor of Economics, Kenneth Rogoff, described the region’s employment situation as “horrific” and those seated alongside him on the panel made no secret of having the same opinion.

Among them was Eni’s Chairman, Giuseppe Recchi, who said, “It is difficult for a company to hire a 30-year-old person without work experience,” offering an insight into the challenges facing employers, as well as those affecting 30-something stuck-at-home jobseekers.

One of the most prominent issues to have surfaced out of Europe’s lacklustre jobs market is income inequality, given that candidates, no matter how skilled, are being forced to concede lowly pay rates or else face joblessness. It’s an ultimatum that not only serves to underline the current system’s structural inefficiencies, but one that threatens to inch otherwise well equipped candidates towards the brink of poverty.

What is the alternative?
The issue has riled the masses to such an extent that the Swiss populace last year attempted to redress the imbalance by taking a number of related proposals to referendum. First came the 1:12 initiative, which sought to stop monthly executive pay at no more than 12 times what the lowest paid staff member earns in a year – which could have given rise to quite considerable changes given that Roche, Nestlé and ABB’s CEO-to-worker pay ratios stand at 261, 238 and 225 respectively. The campaign failed to bear fruit, however, when in November Swiss voters overwhelmingly rejected the cap. The result was surprising to some, considering that the same electorate voted in favour of strict executive pay laws as recently as March.

Unemployment-in-Europe
Source: Eurostat

Last year’s most well-supported Swiss initiative was the proposal for an unconditional basic income to be brought into being, which would see every Swiss national given a CHF 2,500 ($2,756) monthly pay cheque, no matter their circumstances. “The benefit of a basic income is that it provides all members of a society [with] the means with which to be truly free,” claims Almaz Zelleke, Secretary-Treasurer for the Basic Income Earth Initiative (BIEN), whose confidence in the system’s capacity to bring about positive change and close the inequality gap is unshakeable.

Although the proposal is unlikely to pass, the very fact that the initiative has gotten this far is not only a credit to Switzerland’s democratic system, but a startling indication of the lengths to which Europe’s citizens are willing to go in order to instruct systematic change in the jobs market.

Basic income
The debate on basic income is far from exclusive to Switzerland, however, with a great many around the world positing it as a legitimate solution to the unemployment issues that have surfaced on European shores. “A basic income provides the means to meet one’s basic needs, but also a floor on which one can build with other sources of income,” says Zelleke.

The European Citizens’ Initiative (ECI) for an Unconditional Basic Income, an organisation seeking to bring the system to ballot, writes, “As a result of current employment patterns and inadequate income maintenance systems (conditional, means-tested, not high enough), we regard the introduction of the unconditional basic income… in order to guarantee fundamental rights, especially a life in dignity, as set forth in the Charter of Fundamental Rights of the European Union.

“Above all, the unconditional basic income will help to prevent poverty and grant freedom to each individual, to determine his or her own life, and strengthen the participation of all in society.”

Critics have been quick to point out the various pitfalls of implementing such a system, namely with regard to financial feasibility and work disincentivisation. However, both issues are ones that have been addressed at length by the policy’s proponents and dismissed out of hand. The Citizens Income Trust, which has studied basic income for 30 years, claims the full integration of the tax and benefits system would make possible a payment to every UK citizen equivalent to that of the current tax threshold, while numerous others argue that proceeds from VAT could do much the same.

Although the proposal is unlikely to pass, the very fact that the initiative has gotten this far is not only a credit to Switzerland’s democratic system

As far as disincentivisation goes, various trial runs of the system have revealed nothing of the sort. The so-called Mincome Programme of 1974-79 saw the system implemented in Dauphin, Manitoba, in order to ascertain whether or not guaranteed income would inhibit productivity. The results showed that only two groups were affected negatively, these being new mothers, who spent more time with their children, and teenagers, who largely dedicated more time to studies and further education.

“Basic income would support the vital unpaid work most people already do in terms of care for families, volunteering in communities, creation of internet content. If basic income were instituted throughout Europe, it would slow down, if not stop, migration due to economic distress from poorer to wealthier countries within Europe. It would relieve the social tensions caused by income inequalities. It would support consumer demand in times of recession,” argues Barb Jacobson of the ECI.

What can be said with a reasonable degree of certainty is that Europe’s labour markets are failing in the face of ever changing conditions, whether this be on an economic or technological basis, which in turn is strangling the potential of Europe’s millions upon millions of under and unemployed. Moreover, there exists a glut of university graduates whose skills are too often laid to waste in dead-end jobs and seemingly endless spates of joblessness, many of whom could well possess the skills necessary to boost the continent’s recovery.

Out of date
One preoccupation inhibiting Europe’s leaders from instating structural change, however, is the enduring memory of a post-WWII economic boom, where economic growth was then largely reliant on labour. Skip forward to the present day and this is certainly no longer the case. “Since the 1970s, we’ve seen repeated economic crises as obstacles on the road back to that kind of post-war growth. The reality is that economic growth is now less dependent on labour, and more dependent on technological innovations,” says Jacobson. “This is a wonderful thing for society as a whole, but if the gains are to be shared by all we need to decouple income and labour.

“The recent attention to inequality, from the street-level activism of the Occupy movement to the academic work of scholars like Thomas Piketty and Emmanuel Saez, has made us more receptive to once-radical ideas, because it’s clear the old solutions don’t work anymore. There is more attention in rich nations, like Switzerland and Germany, which clearly can afford a basic income, but also in developing nations, like Kenya (Give Directly) and India (SEWA’s basic income pilot in Madhya Pradesh), where the idea of giving money directly to individuals and bypassing corrupt governments has great appeal.”

The continent’s unemployment deficiencies are due not to a skills shortage, but to regimes that fail to accommodate willing workers to a satisfactory degree. As such, the benefit of a basic income above all else is that it frees up workers to do whatever they please with whatever skills they have, without the financial pressures that come with the age-old and inflexible markets of today.

Obama’s minimum wage increases will jeopardise American economy

Posted on by Ashton Wenborn

‘Workers need a McLiving Wage – not lovin’ it,’ read a printout placard late on last year, as hundreds of America’s $7.25 per hour earners grouped outside their respective retail outlets and fast food chains, buoyed by the President’s stated intent to bump up the federal minimum to as much as $10.10.

Talk of the minimum wage and how raising it could well lift millions out of poverty has gathered momentum for some time now (see Fig. 1), with many keen to make clear their thoughts on the matter and the various ways in which the world’s largest economy could benefit as a result. The issue is one that has most certainly divided opinion between Liberals and Conservatives, with both sides equipped with reams of research to back up their respective claims.

Proponents claim a wage hike would lift millions of Americans out of poverty and close the widening income inequality gap; a sentiment that is echoed by those receiving the sum, who represent 2.8 percent of the nation’s workforce. “Evidence suggests that raising the federal minimum wage from its current level would not destroy many if any jobs and would benefit low-paid workers who are struggling to maintain their living standards,” says Alan Manning, Professor of labour economics at the London School of Economics.

“The rise in wage costs are, to some extent, offset by a likely fall in turnover and absenteeism costs as work becomes more attractive.” However, critics argue that raising the minimum wage could well prompt employers to cut staff numbers, increase costs and illegally skirt additional expenses. “It’s difficult to see how forcing businesses to increase their labour costs would be good for them,” says Jonathan Meer, economist and research fellow for the National Bureau of Economic Research. “There’s no free lunch: someone has to pay the increase in labour costs.”

Costs of doing business
“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9 an hour,” said President Obama last year in the State of the Union Address.

History of California minimum wage

While it’s easy to theorise about how a raise could well afford unskilled workers a better standard of living, this school of thought is but to ignore the consequences for business. “Any government action that jacks up costs is negative for business,” says Bill Poole, senior fellow at the Cato Institute, Senior Advisor to Merk Investments and, as of fall 2008, Distinguished Scholar in Residence at the University of Delaware. “Businesses that employ a lot of minimum wage labour will be disadvantaged relative to other businesses.”

Critics argue that doing away with this advantage could have wider consequences for labour markets, as was very much the case in the early 1900s, when the US minimum wage was first introduced and rendered certain candidates unemployable, destroying both jobs and businesses in the process.

Even so, proposals to raise the minimum wage have received support not just from low-paid employees but also from small business owners themselves, according to a survey of 600 published by Wells Fargo and Gallup. The results show that 47 percent of respondents are backing the raise; despite 60 percent claiming the hike would hinder the majority of small businesses, which only serves to illustrate the complexity of the issue at hand here.

The implications of a raise, far from confined to employees, extend to employers, as those without the finances to accommodate change are likely to fall by the wayside, these being smaller businesses that are unable to compete on quite the same scale as larger more established firms.

In the near term, firms employing a lot of low-paid workers could pass on prices to consumers, reduce employment opportunities or take a profit hit, whereas long-term they might outsource work or mechanise labour intensive processes. “Everything depends on the level at which the minimum is set – if it is set too high it will destroy jobs as well as profits,” says Manning, who emphasises above all that the repercussions are dependent on the amount by which the minimum is raised.

“During an adjustment period, profits may well suffer. Some marginal firms will have to close, such as fast-food restaurants in poor locations. It is also worth noting that many non-profit businesses hire minimum wage labour. For example, some inner-city day care centres may be forced to close because the families they serve cannot or will not afford the higher fees,” says Poole. While fierce proponents of the hike may argue that those affected largely equate to economic deadwood, the importance of small businesses as an economic driver should not be underestimated in the current climate.

Another likely consequence of the rise is that those illegally undercutting the federal minimum could benefit from the hike, while those abiding by the legal amount will be forced to concede higher costs and cut staff numbers. “Businesses paying the minimum may be undermined by competition,” says Len Shackleton, Professor of Economics at Buckingham University and author of Should We Mind the Gap?

“Another more serious problem arises if legitimate minimum-paying businesses are undermined by competition from the ‘shadow economy’ where employers avoid taxes and the minimum wage. In most countries construction and house repair are areas where this happens to a degree.”

Who works for minimum wage anyway?
With US labour markets in the fragile state they are right now, the country can ill afford to stymie the prospects of a population still reeling from financial crisis. “Right now about 20 percent of young workers are unemployed, as are about 10 percent of the least-skilled adult workers. Raising the minimum wage raises the cost of hiring these workers, and it seems to me that in a labour market as weak as ours that is an unwise thing to do,” said Michael Pratt, economist and resident scholar at the American Enterprise Institute.

Granted, the arguments on both sides are underpinned by sound economic theory, however the real world consequences are highly uncertain no the matter the decision. While discussions of minimum wage are so often accompanied by talk of income equality, there is evidence to suggest that those on the rate are far from those worst affected by poverty. “I don’t regard the minimum wage as an effective anti-poverty device as most of the people it benefits are not in poverty,” says Shackleton.

[C]ritics argue that raising the minimum wage could well prompt employers to cut staff numbers, increase costs and illegally skirt additional expenses

“Many are students and young labour market entrants who need experience if they are to progress. To the extent that it reduces demand for labour, with fewer jobs and/or less hours offered, these groups lose out. There is some evidence that minorities in particular lose out.”

Heritage Foundation calculations gathered from the US Census Bureau data reveal that just over half of the country’s minimum wage earners fall between the ages of 16 and 24, and that most are not under threat of falling below the poverty line whatsoever. Of the 16-24 sample, 79 percent worked part-time jobs and 62 percent were enrolled in school during non-summer months.

For this reason, further consideration should be paid to who exactly would be affected by the rise, and whether reeling a select few out of poverty is worth the potential consequences of raising unemployment and reducing the ease of doing business. “The effect on employment is unambiguously negative,” says Poole. “How large the effect will be depends on how large the increase in the minimum is,” with the scholar here making reference to an opinion held by some, claiming a small hike in wages would have little to no impact on unemployment.

For instance, the efficiency wage hypothesis theorises that employee productivity will gain alongside wages, as higher pay somewhat reduces the chances of unionisation and increases efficiency.

Many remain unconvinced by this textbook style of economics, however, Poole among them, who argues, “Why would the effect of a small increase be literally zero when the effect of a $50 minimum would obviously be large? Large increase, large effect; small increase, small effect, it’s Just that simple.”

Ultimately, the consequences of a raise will align with the extent by which the minimum is changed – if at all. Having said this, regardless of whether the affects are nominal or not, it’s important that a more thorough understanding is ascertained as to the actual repercussions, before the federal minimum is changed at the expense of American business and unemployment

Post-Lehman: are derivatives still a risky business?

Posted on by Ashton Wenborn

For every action there is a corresponding reaction and if the world’s major banks – collectively in the dock for having blown up the global economy in the late noughties – could be sure of one thing, post-Lehman Brothers, it was that the ‘business as usual’ approach, in terms of how they conduct their OTC (over-the-counter) derivatives operations, was never going to be a serious runner – legislators and regulators on both sides of the Atlantic are seeing to that.

Politicians haven’t taken their eyes off the ball entirely, however, and some of the measures now being put in place build on pre-Lehman legislation. Yet in their quest to accelerate what amounts to a significant clampdown on the derivatives industry, the net has not only been cast wide, as legislators attempt to snare the major banking fish, it is also potentially scooping up lesser players along the way, such as industrial and trading companies. Even if the latter can subsequently gain exemptions from the various emerging regulatory frameworks, they are still going to incur additional costs for their troubles.

Core to the new post-Lehman approach has been implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) in the US, along with the EMIR (European Market Infrastructure Regulation) and MiFID II (Markets in Financial Instruments Directive) initiatives being rolled out across Europe.

MiFID II, which is likely to come into full effect in 2016, is designed, from a trading standpoint, to ensure specified OTC derivatives contracts are migrated onto recognised exchanges.

[The DFA] was seen by many outside the financial industry as a necessary evil that would not only improve the
monitoring of risk

EMIR, meanwhile, is focusing on the clearing and reporting aspects of trading, while in the US, exchange trading, clearing and reporting are contained within Title VII of the DFA.

Risk monitoring
When the DFA was signed into law in July 2010, it was seen by many outside the financial industry as a necessary evil that would not only improve the monitoring of risk within the financial system, as well as the transparency of OTC products, but also provide greater consumer protection more generally. The requirements for central clearing, an increase in capital adequacy requirements and greater regulation of the major banks, were also seen as positive developments for an industry long viewed as being out of control.

Historically, derivatives have allowed users to protect themselves against everything from moves in interest rates to the cost of raw materials. However, more complex derivative products such as swaps have generally been traded away from exchanges. Under the new regime, derivatives must be traded either on open, regulated exchanges, or via similar systems known as swap execution facilities.

Trades, in what amounts to a $600trn market, will be publicly recorded and backed (in most cases) by clearing houses who will ensure traders post money as a cushion against losses – and take fees in the process to ensure trades go ahead. Clearinghouse members will similarly be required to set aside sufficient capital to share the risk.

In part a response to claims that the clearinghouses themselves could end up becoming the next set of ‘too big to fail’ institutions, the US government has provided clearinghouses the guarantee of emergency access to Federal Reserve borrowing if required.

Trades not going through this system will be those by (non-financial) companies that have earned exemptions having proved they’re only involved in hedging risk related to their main business activity. The issue is still shrouded in uncertainty, though – for example, it is still not entirely clear whether companies running commercial leasing operations will be exempt. Of far greater certainty, however, is the likelihood of major institutions passing the increased costs involved down the food chain to customers. Institutions will not only need to spend money to determine how and if they’ll be impacted by the new legislation, they could also incur higher costs in their everyday trading activities, whether they’ve been granted exemptions or not. In addition, if the credit rating agencies opt to re-rate companies due to changed circumstances, any downgrade (if given) will likely impact in the form of higher borrowing costs (to those companies) in the wholesale markets.

In its note Dodd-Frank’s Title VII – OTC derivatives reform – Important answers for board members as companies begin the road to reform, EY argues that the new regulatory requirements will have a substantial impact on the front-to-back transaction work flow for many market participants. Tellingly, the exceptions that may apply to non-financial companies aren’t free passes either, because it will still cost money to determine whether the said exemptions do actually apply or not.

Under the new regime, derivatives must be traded either on open, regulated exchanges, or via similar systems known as swap execution facilities

It adds that while end users may be exempted from clearing and trading requirements for certain transactions, Title VII’s provisions will require modifications to their derivative-related policies and procedures and may have an impact on their working capital and liquidity. For example, the posting, by end users, of collateral under a ‘credit support arrangement’ for their uncleared trades, would require both new documentation and new operational procedures for many. ‘New record-keeping requirements still apply and some end users may need to report the terms of certain trades to ‘swap data repositories’ on a trade-by-trade basis,’ it adds.

EY further notes that while companies must meet certain criteria in order to qualify for available exemptions, they will also need to be aware of any activities that could preclude them from qualifying for these exemptions in the future.

In short, policies and procedures will need to be updated to reflect compliance with the new regulatory requirements, while new tasks will need to be completed on an ongoing, periodic basis that will incur additional costs.

The derivative landscape
At the coalface itself, latest (Q3 2013) available data in the US from the Office of the Comptroller of the Currency showed a total of 1,417 insured US commercial banks and savings associations reporting derivatives activities during the period, an increase of 17 from the previous quarter.

Derivatives activity in the US financial system continues to be dominated by a small group of major institutions – the four large commercial banks (JP Morgan, Citibank, Bank of America and Goldman Sachs) representing 93 percent of the total banking industry notional amounts and 81 percent of industry net current credit exposure.

Meanwhile, notional derivatives increased $6.2trn, or three percent, to $240trn during the period and have now increased for three consecutive quarters (see Fig. 1), after a decline in five of the previous six quarters.

Derivative contracts remain concentrated in interest rate products, which comprise 81 percent of total derivative notional amounts. Credit derivatives, meanwhile, which represent five percent of total derivatives notionals, decreased four percent from the second quarter to $12.8trn.

Derivatives-traded-on-organised-exchanges

If the banking industry looms large in the US, its importance was underscored in October when it won a temporary political victory of sorts after the House of Representatives approved a bill allowing banks to trade certain derivatives.

Critics quickly charged that it represented a rollback of the Dodd-Frank legislation because it undermined the so-called swaps push-out rule that had required banks with access to deposit insurance or the Fed’s discount window to move their derivatives operations to separately capitalised businesses. The rollback would impact equity, some commodity and non-cleared credit derivatives. However, asset-based derivatives – chiefly to blame for the banking system implosion in 2008 – would still be banned.

Indeed, far from reducing risk it would theoretically increase it, given banks would be able to move their derivatives operations to units less subject to regulation, which in turn would impact customers further down the chain, such as farmers. Subsequently, a senate version of the House Bill has failed to advance (though may yet be revisited) and the Federal Reserve has pressed on by completing a rule giving foreign banks the chance to delay having to erect barriers between derivatives trades and their US branches.

The rule, effective January 31, treats uninsured US branches of foreign banks in the same manner as branches that have government backing, including deposit insurance.

In 2013, foreign banks, such as Standard Chartered and Société Générale, had been granted a two-year delay (until July 2015) to implement the rule. US banks, meanwhile, were given a two-year transition period to move their derivatives trading operations out of deposit-taking units.

Like Dodd-Frank, EMIR (European Market Infrastructure Regulation) brings in new requirements aimed at improving transparency and reducing the risks associated with the derivatives markets. It also imposes requirements on all types and sizes of entities that enter into any form of derivative contract, including those not involved in financial services, as well as applying indirectly to non-EU firms trading with EU firms.

EMIR brings in new requirements aimed at improving transparency and reducing the risks associated with the derivatives markets

While EMIR entered into force in August 2012, most of its provisions will only apply once technical standards go live. The new regulation requires entities entering into any form of derivative contract – including interest rate, foreign exchange, equity, credit and commodity derivatives – to report each contract to a trade repository. It also calls for new risk management standards, including operational processes and margining.

All standardised OTC derivatives contracts must be cleared through central counterparties (CCP). However, it is up to ESMA (the European Securities and Markets Authority) – with input from national regulators – to determine which contracts should be defined as ‘standardised’ and therefore subject to the clearing obligation. Meanwhile, non-standardised contracts, i.e. contracts that are not cleared centrally, will be subject to higher capital requirements in order to reduce risk. While much of EMIR’s timetable will be complete by December 1 2015, it does stretch out until December 2019 in the case of margining requirements, for example.

Investor protection
The other major piece of the EU’s regulatory jigsaw, MiFID II (Markets in Financial Instruments Directive), builds on the original MiFID, which came into effect in November 2007, and which had the primary objectives of increasing competition, improving investor protection and allowing for the EU passporting of financial products. Although it pre-dates the Lehman Brothers meltdown, like the FDA and EMIR, the updated MiFID takes account of the post-Lehman landscape by introducing a range of measures, such as improving investor protection.

It also takes account of commitments made by the G20 to improve the transparency and regulation of more opaque markets, such as derivatives. For example, MiFID II grants the authorities the right to demand information from any person regarding positions held in derivative instruments; intervene at any stage during the life of a derivative contract; take action that a position be reduced; and limit the ability of any person or class of persons from entering into a derivative contract in relation to a commodity.

In a further boost to transparency, EU member states will be required to make public a weekly report detailing the aggregate positions held by the different categories of traders for the different financial instruments traded on their platforms.

These transparency requirements will be calibrated for various types of instruments, notably equity, bonds, and derivatives and apply above specific thresholds.

While these limits and restrictions, aimed at targeting excess speculation, will be determined by ESMA and applied on a net position basis, they won’t be imposed on those positions built for hedging purposes by non-financial services firms. However, these exempted firms could still be significantly impacted due to an overall decrease in demand and supply for commodity derivatives as a result of the position limits.

EU member states will be required to make public a weekly report detailing the aggregate positions held by the different categories
of traders

If implementation of MiFID II is on a slower trajectory than EMIR, for example, it will eventually serve as a significant buttress for it.

Business as usual?
The larger question, though, is the degree to which banks on both sides of the Atlantic will be thwarted in their attempts to carry on ‘business as usual’ when it comes to derivatives trading. Given the banks’ propensity for financial innovation, the jury is still out on this, despite the attempted clampdown by regulators.

In theory, the migration of trading to regulated markets, along with increased transparency requirements, should boost competition, cut spreads and foster a higher volume, lower margin, more commoditised market. In the meantime, institutions will continue to absorb additional (and ongoing) compliance costs. It remains to be seen whether these costs will be shunted down the food chain.

However, as EY points out, greater transparency could lead to some investment banks not even bothering to make quotes, thereby driving liquidity away from the market and concentrating the business on a smaller number of pricemakers, which in turn would be less beneficial for buy-side customers. Only time will tell.

Türkiye Finans GM predicts ‘fluctuating year’ for Turkey

Posted on by Ashton Wenborn

Turkey’s economy grew 2.2 percent in 2012, and its sovereign rating rose to investment grade for the first time in 18 years. The Turkish economy grew by three, 4.5 and 4.4 percent respectively in the first, second and third quarters of 2013, making it the 17th-biggest economy in the world that year.

The banking sector is among the industries driving the Turkish economy. Lingering uncertainty was cleared away recently after the FED’s decision in mid-December to decrease asset purchases. The fact that the speed of asset purchases depends on the macroeconomic performance of the US suggests there will be increasing fluctuations in the coming years. This may slow the capital inflow to emerging economies.

Meanwhile, European economies continue to recover despite fragilities. If this recovery gains a healthy and sound momentum, Turkey will be positively impacted by foreign trade and fund inflows. On the other hand, efforts to pull the Japanese economy out of deflation may be perceived as a factor that could affect global capital flows.

[I]t is critical that emerging economies keep up with the recovery rate of the developed economies

Structural problems have begun to stand out more due to the cyclical slowdown experienced in emerging economies. At this juncture, it is critical that emerging economies keep up with the recovery rate of the developed economies. Otherwise, capital flow to emerging economies may lose momentum.

Based on the trends in the second half of 2013 in Turkey, it is possible to say that a general expectation has unfolded with regard to how 2014 will turn out: it will be a highly fluctuating year. The measures that have been taken by the regulatory authorities and the emerging macroeconomic trends may both be understood as signs of slower growth in the banking industry in 2014 compared to 2013.

Among the possible causes may be the actions of the regulatory authorities, rapid increase in costs and non-performing loans. But most of the actions that could be done in terms of regulatory measures have now already been done; therefore, no significant surprises are expected in 2014.

As a result of continuing uncertainties, a rising pressure may be expected in foreign and domestic funding costs in the banking industry. On the other hand, the gravity of the effect that increasing costs will have on economic activity could be crucial in terms of managing credit exposure. If the depreciation that the Turkish lira experienced in 2013 becomes permanent, a better analysis will have to be done to understand its impact on the balance sheets of industry players.

Another pressing issue to watch out for will be the impact of the depreciation of Turkish lira on the profitability and capital adequacy ratio of the banking industry in general.

We at Türkiye Finans project a modest GDP growth of 3.5 to four percent in 2014, due to both foreign and domestic risks and the measures taken by the economic administrators. In the current climate, there is a downward trend regarding the risks on growth. Nevertheless, if the factors that are considered risks do not have as much of an adverse effect on economic activities as feared, the growth may be close to historic averages.

Steady growth
Türkiye Finans improved its growth and profitability figures over the course of 2013. We started initial preparations to issue lease certificates in Turkish lira and US dollars, and successfully completed our first Sukuk issue.

Turkey’s economy

17th

Biggest economy in the world, 2013

4.4%

Growth in 3rd quarter, 2013

Through Sukuk issuances and syndicated murabaha facilities, we continued to support small- and medium-sized enterprises (SMEs), the building blocks of our economy, and introduced numerous innovative products to the industry. These included Finansör Card and Siftah Card, which were firsts in participation banking.

In addition to entering into agreements with chambers of commerce and industry, we also sped up efforts to improve customer satisfaction. Our accomplishment was acknowledged once again with the significant awards we have won. Türkiye Finans placed emphasis on technology investments in 2013, as was the case in previous years. The mobile banking application we developed was chosen in a survey as the most liked in its field.

As of September 2013, the asset size of the bank climbed to TRY 23.3bn – a 32 percent growth year-on-year. Attaining high growth rates without compromising profitability is the strategy we are implementing. The bank’s net profit for the period was TRY 236.8m.

As of the end of 2012, our loans total had reached TRY 17.1bn, while the size of the non-cash loan portfolio grew to TRY 7.8bn. There was also a 21 percent improvement in deposits, amounting to TRY 13.8bn, and the number of branches increased to 250.

Türkiye Finans has a five-year strategy in place: we are aiming to reach an asset size of over TRY 40bn by the end of 2016. Our priority is to grow in the SME and retail segments. We are also planning a similar international Sukuk issue in 2014. We issued Sukuk in the amount of TRY 100m for the domestic market in January 2014. We also funded the first ever corporate Sukuk issuance in participation banking in the country.

Participation banking
Türkiye Finans believes there is significant potential in Turkey’s young population, development of innovative products and a relatively low penetration rate compared to other countries. Thus, we think that growth dynamics will develop even more in the coming term. Our opinion is that new players in the industry are going to bring fresh momentum to participation banking.

Türkiye Finans believes there is significant
potential in Turkey’s
young population

We see continued profitability as well as sound return on equity in comparison to similar countries. There is a critical relationship between the market share of personal deposits and the share of banks with more branches. This fact makes it clear that increasing the number of branches is crucial.

Furthermore, we also see banks opting for the bond issuance route in order to obtain non-deposit funds – a trend that is going to continue, in our opinion. We project that efforts to provide funding through lease certificate issuances are going to swell compared to previous years.

We can assume that monetary policy, which will be operated according to a medium-term programme cyclically, is going to remain a consequential parameter for the banking sector.

In our opinion, the project to turn Istanbul into a financial centre will help put Turkey among the top-10 economies in the world by 2023. We feel that Istanbul’s geographical location will be a major contributor in helping the country become a global financial centre. Currently, Turkey is one of the biggest economies in the Middle East, Eastern Europe and Central Asia regions. Thus, it has the potential to become the financial centre of the region.

The golden hello: the politics of CEO bonuses

Posted on by Ashton Wenborn

In the wake of the global financial crisis, executive pay packages have come under far closer scrutiny than ever before, and as a consequence, support for those that detach pay from performance is quite understandably beginning to fall by the wayside. Among the worst received executive extras are sign-on bonuses; otherwise known as the ‘golden hello’, which has quietly crept into the vernacular of executive recruitment and, in recent years, far too often flagged irresponsible and disastrous appointments.

Far from a simple sign-on bonus, a golden hello is a more specific mechanism intended to draw candidates, typically senior executives, away from competing companies and to the fray. The thinking behind this method quite plainly is that the value the incoming candidate will bring to the company will exceed the initial sign-on sum by some degree.

In the boom years preceding the crash, sign-on bonuses were part-and-parcel of a buoyant job market, acting as a means of distinguishing one employer from another in times of labour shortages. Nowhere was this more so the case than in the thriving IT, finance and consulting sectors, as employers then scrambled to acquire the very best of the bunch and in that same vein pay whatever sum was required to secure their services.

Skip forward a good few years and the sign-on age of yesteryear has served to exasperate the financial pressures that already loom large over companies in the present climate, not least of which being bonus incentives that have since spiralled quite out of control.

Failed at the first hurdle
Boards today are without the luxury of what were previously bottomless budgets, and given that those in power are encouraged to keep an ever-watchful eye on the bottom line, executives are far more unlikely to be welcomed with a fat pay packet than they were previously. “New executive pay reporting requirements mean that companies have to be more explicit than they were previously about their policy and practice regarding recruitment arrangements. In this context, the prevalence of recruitment bonuses may decline further at the executive director level,” said Richard Belfield, Director for Towers Watson’s UK Executive Compensation Practice.

Johnson was ousted by shareholders after having instigated a 25 percent fall in sales

That’s not to say that the practice has ceased to be, only that sign-on bonuses for top executives have arisen only in exceptional instances, and often with less than exemplary results. “Unfortunately, these payments are often a sort of Hail Mary, where a struggling company is looking to make a big hire and offers an enormous inducement package to lure the executive aboard,” says Greg Ruel, Senior Research Analyst at GMI Ratings, an independent governance and accounting research firm.

The casual observer need only look as far as Middle America’s JC Penney for an example of how golden hellos can expose companies to financial risks. In November 2011 the department store secured the services of Apple’s then hugely influential Ron Johnson with a view to rejuvenating its brick-and-mortar sales and advancing its digital offerings.

However, the executive did not come on the cheap, and the company was forced to roll out a $52.7m in shares sign-on bonus to secure the retail guru’s services and spearhead the company on to bigger and better things. A mere 17 months on from his appointment and Johnson was ousted by shareholders after having instigated a 25 percent fall in sales, a 50 percent drop in stock, and incurred $1bn worth of losses.

A further few months on and Johnson has been all but wiped from the company’s memory, as the newly instated Myron Ullman has since reversed the overwhelming majority of his failed contributions and meandering initiatives.

Another company that fell foul of the golden hello was Hewlett-Packard, which cut Leo Apotheker’s term short 10 months in after it paid out a hefty $8.6m sign-on bonus. It was here that, despite HP’s shares slumping 46 percent under his reign, Apotheker was entitled to $34.7m in cash and stock for less than a year’s worth of work.

While these circumstances are unusually tragic, they should act as a sobering lesson for onlookers; proving that pay without performance can have disastrous consequences. “I see nothing but difficulties on pay detached from performance.

Payments outside of performance benefit only the executive and not shareholders, those who truly own the company,” says Ruel. “At GMI Ratings, we have seen that many companies paying sign-on bonuses are the same companies that pay bonuses for performance below company peers, lack sufficient disclosure of performance targets, and pay golden parachutes – large payments upon termination that are untied to company performance.

“We note 107 North American companies that have paid a golden hello within the last 12 months and about half of them have below average ESG Ratings. That could be because golden hellos are often a symptom of a compensation policy that is comfortable rewarding executives even when company performance is not strong.”

It’s true that golden hellos appear to be a lesser concern for shareholders in general, in stark contrast with golden parachutes, which have assumed a far more visible position on shareholder agendas worldwide, yet the practice should be assumed only in exceptional circumstances.

“Recruitment bonuses for executive directors can be unpopular with shareholders and as a result they tend to come under a lot of scrutiny from the investor community,” says Belfield. “In general, shareholders expect any such recruitment arrangements to be linked to performance.”

Shrewd decision-making
Many believe golden hellos to be in part responsible for disincentivisation and an overly zealous job-hopping mentality at top level; this aside from the obvious financial risks. It may well sound sentimental but the incentive should instead be that once the executive in question has performed well, they will be rewarded accordingly, whether that be financially or otherwise.

Having said this, there are certainly situations in which sign-on bonuses are unavoidable, and must be seen instead as par for the course. In select instances, those hiring cannot help but concede to a golden hello as a means of compensating executives for any losses incurred on leaving their current position.

At a very basic level, the question of a sign-on bonus boils down to an issue of supply and demand, and no small amount of foresight on the part of recruiters to identify the right talent for the right job. Although the circumstances under which the bonuses are awarded are far from ideal, golden hellos can turn a profit in certain instances, as can be seen in the case of Best Buy and Hubert Joly.

The American consumer electronics corporation baited the former Carlson CEO with a cash bonus of $3.5m, on top of equity and options worth around $13m in what later proved a shrewd gamble on the company’s part. Best Buy has since gone on to rank amongst the world’s hottest stocks, making JPMorgan’s list of nine companies forecast to outperform growth stocks this year and exhibiting gains of 255 percent through 2013.

Best Buy’s reasons for offering a sign-on bonus are in part illustrative of the legitimate reasons why a company might tempt executives with a welcome bonus. Golden hellos can act as a means of bridging the gap between the pay a candidate wants, and the wage the organisation can offer. Alternatively, if the executive in question will be missing out on stock that hasn’t quite matured or any annual bonuses, a golden hello can be utilised as compensation for any losses in this department.

The biggest problems with golden hellos arise when there is little to no retention incentive for the executive in question

The biggest problems with golden hellos arise when there is little to no retention incentive for the executive in question, although this is something can be combatted by staggering sign-on payments through a specified term. Instead of issuing a fat sum on the first day, shrewd companies are resorting instead to awarding incoming executives with a percentage of the agreed-upon bonus, only for the rest to follow once they have performed certain duties or stayed for a specified amount of time.

However, this is broaching the issue of golden handcuffs, which relates more specifically to retention incentives and is so often detached from a golden hello.

What must be avoided at all costs is the introduction of a CEO whose appointment depends entirely upon pay. If a candidate is unwilling to join simply because of monetary matters, then questions should be asked about whether they are the right person for the job in the first place.

Provided that those appointing incoming executives can accurately assess the long-term benefits to be gained from an incoming candidate, a golden hello, as was the case with Best Buy, can be good value for money. The fundamental problem with the practice, however, is that the resulting benefits are near impossible to calculate with any reasonable degree of certainty, which in essence de-couples performance from pay and should be seen as unnecessary risk-taking by all accounts.

Top 5 countries with billionaires

Posted on by Ashton Wenborn

1. US

The US is by far the country with the most billionaires in the world. For 27 years it has outranked all other countries when it comes to wealth, with the percentage of global billionaires hailing from the US constantly hovering just under one third, 31 percent. The US’s 492 billionaires are worth a combined $1.87tn, representing just over one third of total billionaire wealth in 2013.

The world's richest man, Bill Gates, is just one of many billionaires to call the US home. Several other wealthy Americans have also made their riches in the tech industry, such as Google's Larry Ellison and Facebook's Mark Zuckerberg
The world’s richest man, Bill Gates, is just one of many billionaires to call the US home. Several other wealthy Americans have also made their riches in the tech industry, such as Google’s Larry Page and Facebook’s Mark Zuckerberg

2. China

China has climbed wealth rankings in recent years following the country’s explosive economic growth. In 2013, the amount of wealthy in China pushed the country into the second spot in global billionaire rankings. As such, a total of 152 Chinese people residing in China had a total net worth of $1bn or over. That’s a 25 percent increase in the past year.

Wang Jianlin, Chairman of Dalian Wanda Group, is China's richest man
Wang Jianlin, Chairman of Dalian Wanda Group, tops Forbes’ China Rich List. He is closely followed by Zong Qinghou, who made his money in beverages, and Robin Li, an internet search mogul

3. Russia

Russia, with its 111 billionaires in 2013 came in third in the global ranking of billionaires per country. The Russian billionaires are worth a combined $422bn, equivalent to one-fifth of Russia’s GDP. The majority of these billionaires have achieved their wealth by privatising former Soviet assets in steel, oil, coal and mining, which are now worth billions.

With a net worth of approximately $18.6bn, Alisher Usmanov is Russia's richest man. He made his fortune in metals and now has his fingers in more than a few pies, from telecommunications to fencing
With a net worth of approximately $18.6bn, Alisher Usmanov is Russia’s richest man. He made his fortune in metals and now has his fingers in a few pies, from telecommunications to fencing

4. Germany

Of the 1,645 billionaires in the world, 85 are German. The highest placed German is the 94-year-old supermarket king Karl Albrecht, valued at $25bn. The wealth of the German billionaires amounts to $364bn. This compares to the total wealth of billionaires across the world, which at $6.4tn grew 18.5 percent last year – an all time high.

Susanne Klatten is Germany's richest woman, largely thanks to inheriting her father's business - the car company BMW
Susanne Klatten is Germany’s richest woman, largely thanks to inheriting her father’s business – the car company BMW

5. India

India is home to the fifth largest group of billionaires in the world – 56 – amounting to a staggering collective net worth of $191.5bn. This is a slight decline from 2012, as the wealth of Indian billionaires has weakened along with the country’s economy and falling rupee. Mukesh Ambani, chairman of pharma firm Reliance Industries, is the country’s richest man with a personal fortune of $18bn.

Mukesh Ambani's fortune may have declined along with India's economy, but the country's richest man is still a billionaire and doesn't look to wind back any of his businesses any time soon
Mukesh Ambani’s fortune may have declined along with India’s economy, but the country’s richest man is still a billionaire and doesn’t look to wind back any of his businesses any time soon

Zoltán Áldott on economic development in Croatia | INA | Video

Posted on by Ashton Wenborn

As Croatia is developing, business is key in driving its economy forward. Zoltán Áldott, President of the Management Board of INA, the top oil company in the country, talks about investment opportunities in Croatia and how to succeed in this market.

World Finance: Zoltán, INA has over 50 years of experience, tell me, what has been the key to your success?

Zoltán Áldott: [INA] is Croatia’s leading oil and gas business, it’s also strong in the whole former Yugoslavia regions, south-eastern European territories, and it’s predominantly accumulated experience in the oil and gas exploration and production, in oil refining, and oil product marketing. Our fate has been an experience accumulated as coming from a transformation from a former national company, and becoming from a national player, basically inter-regional, strong actor, with transacting big on different markets and extending it’s presence in the downstream business in the region and in upstream internationally.

World Finance: How has your company contributed to Croatia’s development?

Zoltán Áldott: INA is not only the largest industrial company in the country, and one of the largest in the region, but at the same time is also the largest investor in the country. Just last year we invested around $350m into the development of our upstream and downstream businesses, and we are set to grow that figure in the future.

We are, at the same time, one of the leading exporters, especially in the branch of crude oil largest markets surrounding Croatia, Bosnia and Herzegovina, as well as Slovenia and to the Mediterranean market in general. And at the same time, we are by nature of the business one of the largest contributors to tax payments in the country, as well as one of the largest employers into the country. Through the investments we also give work to a lot of Croatian and other enterprises.

World Finance: Well clearly INA is a leading company when it comes to economic development in Croatia, but what potential is there for future development in the country?

The onshore Croatia is a well explored area, but new technology and new ideas can bring new results

Zoltán Áldott: Our business is a vertically integrated oil and gas business. Of course, the investment operators differ in the different branches of the business. The leading activity of ours, and the most significant is the upstream activity, so exploration and production, and all of Croatia is a relatively well explored area. Still, with new technology, new ideas, new concepts, new partners there is the possibility to do more, so therefore we are focusing on the upstream to run projects which basically in the shorter term and medium term increase our production.

At the same time, we also intend to increase our exploration effort. In exploration efforts, basically we can talk about two important basins, the onshore Croatia is a well explored area, but new technology and new ideas can bring new results, and the relatively less explored area, which is the Adriatic Sea, where there is some existing joint production with Italian partners, but still there is the possibility to do more.

World Finance: Can you be more specific about INA’s upstream activities in Croatia and abroad?

Zoltán Áldott: Today we produce around 40,000 barrels today of oil and gas equivalent. We would like to increase it significantly, around 20-25 percent in the coming years, based on certain projects that we already have initiated, so these things are very tangible. These include in-house recovery projects and new gas development projects. There is a good gas and oil market in the Croatian region to take this product, so I think this is very feasible. And also applying new technologies, basically which previously were not available, and today they can stimulate more of the oil from our fields. We also try to test unconventional potential, but this is still in infancy in our region.

Basically our intention is to grow, besides the already existing portfolio, in new investments primarily in the Mediterranean region, where we have a broader knowledge and a lot of experience, but also potentially in other countries. It could be greenfield exploration activities, it could be also some acquisitions.

World Finance: Considering your business optimisation program, what do you think is the key to surviving an economic crisis?

We don’t know how the market competition will develop, so therefore it’s very important that we keep our ambitions set to the maximum

Zoltán Áldott: Commodities, oil and gas is maybe more resilient than some other sectors to economic rise or stagnation. It’s not immune to it, people have less money to spend to travel in the cars, so therefore we also see a pressure on our top line, which means we cannot grow the revenue so easily. Sometimes even year on year we see some declines. So in those circumstances it’s very important to manage the costs of the business.

We have been running in order to achieve objectives of running efficiently a three year cost optimisation program, driving out around $400mn from our cost base. It was a very successful and essential program. At the same time it was also very important to manage our balance sheet, to retain enough financial flexibility, so if even tougher circumstance come or there are some new opportunities, we have enough firepower on the market.

World Finance: INA also has a very impressive corporate governance structure, what does it involve and why is it so important?

Zoltán Áldott: Corporate governance and the business structure is very important, to be flexible enough and give the right answers in an environment, whether it’s staff, whatever it can be. Our corporate governance is resembling, given size of the company, very similarly to let’s say Anglo Saxon oil and gas businesses, so we have the three levels.

We are a supervisory board, which in our case basically is a body which ensures the representation of the largest shareholders, we have two large shareholders, basically one is a regional oil and gas group which owns about 49 percent of the shares, and the government of Croatia, which has 44 percent of the shares. Both sending a representative to the supervisory board, and this body selects the management board.

The management board, you can imagine like a board of directors, in Anglo Saxon terms, so it’s a body which is responsible for strategy directions, major projects, selection of lower level executives. And below this basically there are professionals, who we call executive directors, who are responsible for a given branch of the business, upstream, downstream, retail, finance, and they are responsible to run the operations.

World Finance: Finally, looking forward, what are going to be some of the key challenges that INA has to tackle?

Zoltán Áldott: The first, as we can call bread and butter part of the operation, is to continue to be efficient. We don’t know how the market competition will develop, so therefore it’s very important that we keep our ambitions set to the maximum, we drive out further costs that are not necessary to run the business and carry out business optimisation in our assets. That is number one.

The other is of course growth. In our business it’s very important that you find the right venue for the right project. Our growth will be based, as far as we foresee, in the upstream activity, exploration and production, in Croatia and abroad. And we need to find the right projects and the right partners there to create value for the shareholders. And of course, at the same time, it’s very important to develop the company culturally, to be able to tackle new challenges as a freshly transformed business, from a state-owned, state-managed operation, into a market driven operation.

World Finance: Zoltán, thank you.

Zoltán Áldott: Thank you also.

Vietnam State Bank cuts rates to boost lending and growth

Posted on by Ashton Wenborn

Vietnamese officials have announced plans to cut refinancing rates in order to support businesses. This is the latest in a series of measures announced to help boost the country’s floundering economy. The rate will be reduced from the current seven percent to 6.5 percent on March 18, according to Le Duc Tho, Chief Administrator at the State Bank of Vietnam.

The idea is to stimulate lending to business, in order to support more sustainable growth. The refinancing rate is at the level at which the State Bank loans money to other Vietnamese financial institutions, and by reducing interest Le is hoping to boost the flow of capital into the economy. It is a direct response to Prime Minister Nguyen Tan Dung’s request that the central bank step up its efforts to lower lending rates.

This is the latest in a series of measures announced to help boost the country’s floundering economy

Le will also be cutting rediscount rates to five percent, after lowering them to six percent at the end of March. “The government is more active in pushing for credit and growth,” Le Dang Doanh, a former advisor to the Prime Minister, told the WSJ.

The World Bank has recently announced it expects the Vietnamese economy to grow 5.4 percent this year, much lower than the government’s original target of 5.8 percent. Weak domestic demand has negatively impacted inflation expectations, and credit only grew around 1.4 percent in the first quarter.

The local government is aiming to stimulate demand, particularly in the property market, as a number of new property developments remain unsold as access to credit remains limited. According to its website, the State Bank will be making 30trn dong, around $1.44bn, available as affordable credit to homebuyers.

Though the economy grew 4.89 percent in the first quarter- more than the same period last year- it is still significantly slower than the 5.44 percent expansion recorded in the last quarter of 2013. However, the number of business closures has soared by 12 percent in February. As a result the government has revised growth estimates to 5.5 percent for 2014.

Vodafone snaps up Ono in €7.2bn deal

Posted on by Ashton Wenborn

Months after UK telecom multinational Vodafone announced it was retreating from its US operations, the company has made an effort to refocus its expansion plans on Europe. This morning a deal to buy Spain’s Ono telecom firm added to a number of strategic acquisitions across Europe in recent months.

The deal, worth €7.2bn, comes almost eight months after Vodafone announced it was selling its stake in US giant Verizon Wireless for a colossal $130bn, and six months after Vodafone bought Germany’s largest cable firm Kabel Deutschland for €7.7bn.

The company is looking to press ahead with expansion throughout mainland Europe as it tries to wrestle back control of the telecom market from a number of competitors that have sprung up in recent years.

CEO Vittorio Colao has told reporters that the Ono deal represented an “attractive value creation opportunity” for his firm. “Demand for unified communications products and services has increased significantly over the past few years in Spain, and this transaction – together with our fibre-to-the-home build programme – will accelerate our ability to offer best-in-class propositions in the Spanish market.”

The company is looking to press ahead with
expansion throughout
mainland Europe

While Vodafone has cut its ties with Verizon, another US telecoms giant has been rumoured to be looking at buying a stake for many months. AT&T was reportedly set to take a position in Vodafone as a result of its Verizon sale, but in mid-March the firm’s CEO, Randall Stephenson, played down the prospects of such a bid.

He told an investor conference that time is running out for his firm investing in European wireless operators, after UK regulators forced it to rule out making a bid for six months earlier this year. He pointed to the number of operators boosting their LTE operations in recent years, meaning there was little value to be found for US investors. “Europe way underinvested for quite some period of time in terms of LTE. What we had always believed was going to transpire is now transpiring.”

He added, “As you see these investments happening, you may kind of begin to think the window may be closing on perhaps owning wireless assets.”

Alibaba looks set to become largest US IPO of all time

Posted on by Ashton Wenborn

Alibaba, the world’s largest e-commerce company, is readying itself for what many believe could be one of the largest US IPOs of all time. Realistically, analysts expect the Hangzhou-based internet group to seek approximately $15bn as part of the share sale, which would put the business’s value at somewhere in the region of $150 and $200bn.

Assuming the valuation comes in at the upper limit of analyst expectations, the company would rank second-only to Google in terms of the most valuable internet companies worldwide. As a means for comparison, the world number one is valued at $394bn whereas both Amazon and Facebook are valued at a lesser $172bn.

Realistically, analysts expect the Hangzhou-based internet group to seek approximately $15bn as part of the share sale

‘Alibaba Group has decided to commence the process of an initial public offering in the United States,’ reads a statement released by the company. ‘This will make us a more global company and enhance the company’s transparency, as well as allow the company to continue to pursue our long-term vision and ideals.’

Alibaba’s efforts to extend its presence overseas have long been anticipated by analysts, and come as the internet group last year lost precious market share in China to some of its smaller rivals. The company, therefore, will be hoping that a stronger overseas presence will bump up its international renown and bolster its reputation at home. ‘Should circumstances permit in the future, we will be constructive toward extending our public status in the China capital market in order to share our growth with the people of China’, continued the statement.

London-based market intelligence firm Euromonitor estimates that China’s e-commerce market will be worth over $300bn by 2018, representing a threefold increase on its 2012 equivalent, and owing predominantly to increased smartphone penetration.

A huge number of international firms have made it their mission to penetrate the lucrative Chinese market, and it would appear that the introduction of developed Western players is beginning to spook the internet giant somewhat.