Month: August 2014

Stamping out security threats: NASDAQ protects the financial services industry

Posted on by Ashton Wenborn

As businesses move more of their operations online, the importance of a strong and reliable security system has become an essential part of a company’s strategy. With highly valuable information being exchanged, businesses are investing more and more into ensuring that such data is properly secured. Nowhere is this more apparent than in the financial services industry, where vast quantities of money and classified information are exchanged constantly throughout the day.

World Finance spoke to Mark Graff, Chief Information Security Officer (CISO) at NASDAQ OMX, which is one of the world’s leading providers of trading and exchange technology, about the challenges facing businesses in the online world.

What is NASDAQ OMX’s approach to information security?
There are a couple of principles that we follow. The goal is to develop and execute a comprehensive, multi-layered plan. One of the things that we pride ourselves on is doing that based on an analysis of threats and we also work very hard to design and position security counter measures with a clear eye towards risks. Our goal is always to deploy multiple sets of counter measures, and to invest our security resources proportionately to the risks associated with the specific assets. There’s a certain baseline of best practice and of due diligence. Then the art comes in anticipating where an attack or compromise might be attempted and tuning that baseline to protect against them.

There are criminal organisations that would love to be able to influence what we do

What are the biggest cyber-threats facing your industry?
We break threats down in terms of confidentiality, integrity and availability. Those are the three things that we’re trying to preserve. The confidentiality of client data, the integrity of information – such as orders and trades – and then there is the availability of the system. We are very focused on protecting the confidentiality of the information that’s been entrusted to us. Therefore, what we look for is who might try to disrupt those things, such as the markets.

There are criminal organisations that would love to be able to influence what we do, there are nation states that might want to be able to influence markets. Those are the sorts of factors that get our attention when we plan our counter measures. When you talk about specific threats, there have been many attacks against the US financial industry. I’m also in contact with the security experts at stock exchanges around the world. We’re all seeing the so-called Distributed Denial of Service (DDoS) attacks, where somebody throws a vast amount of data at outward-facing websites, in an attempt to disrupt those services. 

The first thing I would say is that those outward facing websites are not connected to the market or trading systems. We do however, supply real time services to our customers for these outward facing websites. All around the world, the financial industry has been subjected to these floods of data, and so we’ve had a good record of withstanding them compared to our peers. We’re always working to understand the threats better, and to hone our defences.

What steps can companies take to protect themselves against such threats?
There are proven concrete measures, and some of them aren’t too complicated or expensive. I think good threat intelligence will really help you plan. The fundamentals today, with regards to anyone that has a website that provides real-time services, are that they want to work with internet service providers or other specialist firms to provide extra buffers that make it difficult for someone to successfully attack the availability of those servers.

If you’re talking about somebody trying to break into your network, which is different to a DDoS attack, then today the most popular element is for people to send ‘phishing’ emails. These try and convince somebody to click on a link that will take them to a website that will compromise their system. We have lots of layers of technical protection that make it extremely difficult to succeed in breaking into the network, but I really put a lot of faith in good training. This involves making people aware of particular threats.

We also rather enjoy sending fake phishing emails from inside our company to our own employees, trying to lure them into clicking on a link. If they do click on it, they’ll get a nice cheery message saying they really shouldn’t have done that, here’s how you can tell how that message was fake. Everyone slips up every now and then.

There’s a layer of technical protection that’s enterprise wide. There’s a baseline of practice of technical detection that can be done at very high speed, but there’s no substitute for an alert user population that are aware of some of the tricks people might try. All these years I’ve been doing this – going back decades – there’s nothing more useful than a person noticing that something looks suspicious. That’s still the pivot of a good security program.

What are the benefits of board portals and how are they typically used?
The crux of so much of what board members do is information sharing. They need to have a safe way to store and share with the right people any sensitive and private data. In the old days, it was very difficult as people would go back and forth through emails, which weren’t encrypted very well. I’ve lost count of the number of times I’ve been called on to cleanse a system that’s been contaminated with highly sensitive information that somebody emailed and didn’t encrypt properly first.

What risks do online solutions present?
Really everything is online today. We’ve done a lot of work in NASDAQ OMX with the cloud and we think we’re leading the way. People ask if their stuff is safe online, and I want to show them that the distinction between inside and outside the network has really dissolved in the last 10 or 15 years.

So the paradigm for so many years of there being an inside and outside of the network has gone. With the business-to-business connections and the very active customer portals in websites, it’s really more a matter of mediating that access and the ability of manipulating that information.

How can companies ensure that board portals, such as NASDAQ OMX Directors Desk, offer optimal security?
The only way to produce a secure portal is to start with security as the motivator. Once you begin the design with security in mind, you can then identify the features that need to be there. The most important is a holistic, integrated approach to security throughout the product. In terms of the way that the information is managed and stored [we ask], have you got real time backups, if there is careful segregation of customer data, is there good testing of the security periodically. We test Directors Desk in multiple ways. Our staff to analyses the security as well as third parties, to try to break through it.

How has the threat landscape evolved over the years?
I’ve been defending enterprises for over 30 years, and when it started you would think about somebody stealing passwords. Then I saw the emergence of automated tools, the rise of computer viruses and worms. For many years the focus was a particular PC virus or worm that would be transmitted through email or floppy disk. For a long time it was a case of whether they could get their software into your enterprise and through the firewall.

Now, with data flowing so easily across these semi-permeable boundaries, I think we’re moving more and more towards automated threats. We get thousands and thousands of probes and attacks every day. The important thing is to build things that can respond, in the way the human immune system responds. The enterprise will always, in some way, be under attack. The question is how do you respond to those attacks.

Bilateral free trade agreement to boost South Korea and China’s economies

Posted on by Ashton Wenborn

South Korea and China are making strides towards a bilateral free trade agreement, each country keen to speed up the process in order to tap into the other’s markets. China’s economy has slowed down in recent years, particularly because its industrial development is taking a hard hit now that developed markets are recovering. Meanwhile, South Korea has weathered the financial crisis well, with shipping and tech industries leaping forward in growth forecasts and contributing billions of dollars to the country’s GDP.

In the past two decades, China and South Korea have expanded bilateral economic cooperation and furthered development in their respective markets. Cross-border trade increased by about 35 times from 1992 to 2012: from $6.37bn to $220.63bn. Currently, China is South Korea’s largest trading partner and South Korea is China’s third largest, prompting both to push harder for an established bilateral trade agreement. But obstacles remain before a broad deal can be made, as both parties are still looking to protect their markets from each other.

At the 11th round of trade talks held in China in May, the two countries exchanged a second list of items they seek to exclude from market liberalisation, in addition to an earlier agreement which had seen the two economies protect several of their industries. Of particular concern for South Korea were farm goods, including fishery products, while China is protecting its manufacturing and petrochemical industries. Nevertheless, the countries have already agreed to eliminate import tariffs on 90 percent of all products they trade.

[A] series of bilateral conflicts and entanglements have served to increase South Korean discontent with China and have slowed down negotiations

Easing competition
A bilateral trade agreement between the two countries would open up competing exporters of manufactured products to each other, allowing for the trade of key components for markets such as technology and automobiles. For China’s slowing growth, a more open Korean market could be a crucial recipient of goods that are otherwise being hit by the resurgence of the developed markets. Similarly, South Korea’s booming growth will not continue indefinitely, according to economic analysts. China and South Korea’s economies need each other.

“A trade deal between China and South Korea has economic significance firstly. Bilateral trade and investments has developed rapidly in recent years, and both sides want to push forward with this deal. But more importantly, a bilateral trade agreement will have a strategic aspect, in that it will affect East Asian regional dynamics on a security and economic level,” said Professor of International Politics Yongjin Zhang from the University of Bristol in an exclusive interview with World Finance.

A bilateral trade deal could significantly stabilise the Chinese and South Korean economies, which are both largely dependent on exports and have been shaken by the recent improvement in developed markets. China’s exports have fallen significantly according to HSBC’s purchasing manager’s index, which revealed a decrease in growth since the beginning of the year. Conversely, Korea’s PMI has improved slowly but surely since the end of 2013 as improving demand from developed markets is boosting exports and has offset the slowing output to China and other emerging countries.

However, domestic demand and faith in the economic recovery still has some way to go, according to analysts from HSBC and BNP Paribas. In recent investment notes, both firms said that domestic demand would not be strong in 2014 due to a slow recovery of the housing market, making a trade deal that would lower consumer prices and boost exports even more necessary for South Korea.

“Korea’s stronger manufacturing conditions show that its economy remains on track for a gradual recovery. One promising sign for the trade-dependent economy is stronger export orders from China, which is Korea’s largest export market,” said HSBC economist Ronald Man, with reference to the easing of Sino-Korean trade tariffs.

Key sectors
At the recent five-day negotiations, the two countries agreed to open up their online commerce sectors and a series of regulations on competition, according to Korea’s Ministry of Trade, Industry and Energy. With both parties stating that they wished to accelerate the process, the completion of the free trade agreement could be as early as the end of the year.

“It is our hope to reach final agreement by the year’s end. After the March summit, China started to show a more active attitude regarding negotiations in many aspects,” said Woo Tae-hee, Assistant Minister for Trade and chief FTA negotiator, at a press conference following the May negotiations.

Following the most recent trade talks and an improved outlook on exports, the Korean economy has picked up. Junho Ko, Chief Investment Officer at Shinhan BNP Paribas Asset Management, said the South Korean economy will grow 3.8 percent in 2014, as a result of export growth to China in particular.

“The automotive, shipbuilding and banking sectors are likely to outperform on the back of further export growth and consumption recovery,” he said. “South Korean carmakers are planning… to launch new volume-sales models and expand their global production capacity to maintain their top-line growth. Another promising export-related sector is shipbuilding. As the economic recovery continues and shipping finance normalises, new orders of domestic large-sized shipbuilding companies in 2014 are expected to be similar to those in 2013, which totalled $46bn, the second-highest level on record,” explained Ko.

Obstacles to overcome
However, despite talks progressing in recent months, a series of bilateral conflicts and entanglements have served to increase South Korean discontent with China and have slowed down negotiations, which have been underway since 2007. Among the political hurdles is a series of tariff disputes arising from the Chinese flooding of South Korean garlic markets in 2000; the Chinese bombing of Yeonpyeong Island in 2010; Chinese fishermen’s illegal fishing in Korean waters; border and land disputes; as well as China’s North Korean ties. Very few of these issues have economic significance, but they’re definitely taking their toll on the negotiations, which are being held back by domestic opposition to furthering connections between the two countries.

This is exemplified in reports by the East Asia Institute and Asia Research Institute which revealed that South Koreans feel apprehensive about China’s growing influence, despite acknowledging its importance for Korea’s future economic prosperity. Along with North Korean security threats, South Koreans rank China’s continued rise, and their country’s increasing dependency on the Chinese economy, as potential security threats in the mid- to long-term.

“There is a very strong lobby against China in South Korea, and because it’s a democracy, it has to take domestic interests into account,” says Zhang. “This is a deal that is still very much in progress. Whether they can negotiate their very high thresholds remains to be seen, as each country will try to protect [its] economy as much as possible. Manufacturing is still an extremely competitive sector for both countries, and it will be difficult for them to overcome any disagreements on tariffs in this area for instance.”

Pressing ahead
That said, Zhang maintains that South Korea and China will push forward with the FTA despite strategic differences and their somewhat complicated economic relationship. If anything, to help further larger trade deals that could foster much needed economic integration in East Asia.

Ongoing negotiations on a tri-lateral free trade deal between Japan, China and South Korea are currently moving at a glacial pace, with all parties warring over border disputes such as the Senkaku Islands and unresolved issues pertaining to atrocities committed during WW2.

“It would be unnatural if these countries don’t come together, given that they’re neighbours and are so economically dependent on each other,” says Zhang. “They are huge problems with this deal though, especially on a political level.”

And this is exactly where a bilateral agreement between China and South Korea could have an impact beyond their economies. According to Zhang, an intergovernmental trade agreement between the two would make it easier to overcome hurdles in the trilateral talks, as well as promote regional integration and economic development in East Asia which, up until now, has been largely market driven.

A trade deal would make it easier to negotiate bigger deals with Japan and in the future, the Trans-Pacific Partnership. Such deals would provide the East Asian region with economic stability and a greater resilience towards market shocks, ensuring economic development for years to come.

Banco Multiva flourishes as Mexico becomes an investment haven

Posted on by Ashton Wenborn

Over the past 12 months pundits have hailed Mexico as a haven for investment. In an atmosphere of strong consumer and investor activity, confidence is at an all time high, and returns are soaring. It is therefore no surprise to see that the Mexican banking industry has grown into a solid and competitive environment. Since taking office seven months ago, President Enrique Peña Nieto has been on a crusade to undertake the structural reforms the Mexican economy needs in order to continue flourishing. Though the new leader is tackling everything from telecoms to education, none of his reforms are as wide-ranging or have more significant immediate effects than the banking and lending regulation overhaul.

According to Ricardo Delfin, an audit partner at KPMG and lead author of The Role of Mexican Banks in Economic Growth, Mexico remains a largely untapped resource for banks. “While they benefit from and contribute to Mexico’s strong economy, Mexican banks could reap impressive growth by targeting the still under-served consumer and business markets,” he says. For the auditor, Peña Nieto’s sweeping reforms have led to increased FDI which is benefiting the economy and the consumers. “The banking sector has thrived in Mexico’s favourable macro economy, characterised by six years of stable inflation and interest rates and rising GDP. Mexico has also outshone most western nations in terms of fiscal balance and low public debt. Under these conditions, Mexican banks have achieved solid capital levels and reserves, in excess of regulatory requirements,” says Delfin.

One of the biggest growth markets is internet and mobile banking, which is allowing institutions like Multiva to reach a wider client-base

In many ways, these reforms have been long overdue; ever since the wave of privatisations that swept through the country in the 1990s, banks have gradually been developing their models by shifting from smaller enterprises to larger financial services conglomerates that offer a wide variety of top of the range solutions and services to their clients. These new institutions needed appropriate regulatory support. Over the years, a slew of reforms have helped to strengthen the industry in a number of ways, with the goal of developing a resilient industry.

“On the one hand, the Mexican banking capitalisation index is 15.6 percent – healthy and strong, and on the other, the default rate is among the lowest international level, at 2.6 percent,” explains Banco Multiva’s CEO Carlos Ignacio Soto Manzo. “Additionally, the new financial reforms aim to offer more credit at a lower cost, to promote credit through the Mexican Development Banks, and maintain a solid and prudent financial sector.” Through the Basel III banking agreement the government has sought to strengthen regulation, supervision, and risk management for the entire financial industry. “These measures intended to improve the financial industry’s ability to handle occasional instability from a variety of economic factors,” he added. “As well as to improve risk management and the corporate governance of banks.”

The role of SMEs
The new regulatory environment has helped Banco Multiva flourish, according to the CEO. “We took advantage of some of the new opportunity business lines like government banking, private banking, and agricultural banking,” explains Soto Manzo. “The consequence of these actions is that in just seven years we have become the 12th-largest bank in Mexico out of more than 40 domestic banks. There is a proliferation of new banks in Mexico; this is a constant challenge to continued growth and to maintaining a top 10 ranking.”

Though the sector is expanding fast, and there is a lot of competition, it is a golden opportunity for Banco Multiva. “Today, 80 percent of the market is concentrated in global banks. We see an opportunity to compete by creating a different business model which includes personalised customer service,” explains the CEO. “We have traditional banking lines. We have also developed strong technological channels; secure access to ATMs, electronic banking via PCs, laptops, and mobile devices, including the first soft token in the market.”

One of the biggest growth markets is internet and mobile banking, which is allowing institutions like Multiva to reach a wider client-base. “Users and clients have broader, better and faster access to transactions thanks to mobile banking. Multiva Bank is among the leaders in allowing users to conduct transactions without going to a local branch,” says Soto Manzo. The CEO cites the many conveniences of online banking, like time-saving and lower cost, as one of the chief reasons why clients are looking to Multiva for their banking needs. “Our online platform, Multivaccess, is a comprehensive, innovative solution that allows customers to accept credit card payments via their mobile phone. The service includes a card reading device, for both magnetic band and chip-based cards. It is also the first certified solution in Mexico to accept cards – perfect for new market niches that currently don’t have access to point-of-sale terminals or commercial bank accounts.”

This increased flexibility that Banco Multiva offers has been vital to bringing in SME business clients – a vital segment for banks in Mexico. According to National Statistics and Geographic Institute (INEGI), there are approximately four million businesses in Mexico, 99.8 percent of which are SMEs, which collectively generate 52 percent of GDP and 73 percent of jobs; 46 percent of jobs come from micro enterprises alone. “Micro, small and medium-sized enterprises constitute the column of our national economy, due to commercial agreements that Mexico has made in the last few years,” says Multiva’s CEO. “They have an enormous impact on national production and employment creation. They are an important engine for economic development and are highly mobile; allowing them to easily adjust production levels, as well as adapt their technical processes.”

Expanding credit payments
Banco Multiva has invested a lot of time and energy in developing its services for smaller business clients, in order to effectively tap into this market. The bank fosters their growth by offering credit for working capital or infrastructure in the industrial, commercial and service sectors. “We have special programmes like IT SMEs that support software and communication innovators by providing them with credit for working capital and equipment acquisition,” says Soto Manzo.“Similarly, we have credit for government suppliers. Furthermore, Multivaccessis principally aimed at businesses and sole proprietors that need a solution that adapts to their working conditions. Our placement strategy includes marketing to profitable enterprises such as independent stores and shops.”

Another growth market for Mexican banks is in the advancement of credit and debit card payments. Currently, 80 percent of all payments are made in cash, which amounts to $530bn annually, and only 570,000 businesses accept credit card payments, which amounts to approximately $963bn in billing per year. Of the four million registered businesses, only 11 percent of them accept credit card payments. “As a result, we support SMEs by offering them new services, such as payment solutions that facilitate their growth, and accessible credit,” says the CEO. “These are important for us to keep supporting this market niche.”

Through technological innovation and the exploration of underdeveloped market segments, Banco Multiva will doubtlessly fulfil their aspirations. “In the near future, we will be in the top 10 banks in Mexico,” says Soto Manzo. “We will achieve this though strengthening growth in products and channels. Other aims include: being open to mergers and/or acquisitions in order to increase our market share; to strengthen Multiva’s technological innovation; to increase profit levels and market share and margins; and finally to maintain a capitalisation index ratio over 15 percent.”

The future certainly looks bright for Banco Multiva as it continues to reap the rewards of clever strategy. In the wake of Peña Nieto’s reforms, and as Mexico continues to establish itself as a shining beacon of growth in the region, Banco Multiva will continue to propel itself forward by taking advantage of the many opportunities for development that will present themselves. Banks like this and their rapid yet solid growth are a sign of the shifting global tide in favour of solid emerging economies like Mexico. As long as intelligent investment continues to be made, there is nowhere for Multiva to go but up.

Murex’s risk management technology improves capital efficiency

Posted on by Ashton Wenborn

In the aftermath of the financial crisis, banks are revisiting their policies and systems infrastructure to adapt to new regulations, primarily focusing on optimising their cost of capital. Major changes are happening in the domains of market risk, credit risk, liquidity risk and collateral management. The changes are transforming the trading value chain, with a stronger need for integration in data and business processes. There are several examples of this.

The fundamental review of the trading book, a consultative document first published in 2012 by the Basel Committee, is a complete overhaul of market risk and regulatory capital. Its implementation dates are not yet specified, but banks have started designing solutions for the new standardised approach and are reviewing their internal models. It has profound implications for operations and technology, and it pushes further the need for integration between systems. For example, firms need to assess the model performance through a P&L attribution process that determines if risk models are properly capturing risk factors driving the trading desk P&L.

Many firms are setting up CVA desks for hedging counterparty risks that require technologies able to deliver near real time calculations of CVA and CVA sensitivities. A large group of banks is also including funding value adjustments in the pricing of uncollateralised trades. Other pricing adjustments (referred to as xVA) are finding their way into derivatives pricing and increasing its complexity.

It has become apparent that integration between multiple systems is complex, costly and increases operational risk

With the development of central clearing for OTC derivatives, dealers need to optimise their trading decisions by calculating Initial Margin and determining the best trading venues for their house or client trades. These calculations may include cross-margining of listed and cleared OTC derivatives.

In a move to promote further central clearing, the Basel Committee published in September 2013 a final set of recommendations for ‘Margin requirements for non-centrally cleared derivatives’ that will apply to all transactions that involve either financial firms or systemically important non-financial entities. This poses an immense challenge to reconciliation between players.

Collateral optimisation has taken a central stage and firms have revisited their collateral solutions in order to adapt to the new paradigm and build a global view of their assets.

These changes can hardly be looked at in silos. They have fundamentally altered the dynamics of trading derivatives from pre-deal analysis down to risk management and banks need to implement holistic solutions that optimise their trading activities while reducing their operational cost.

How Murex found a solution
With a massive investment in research and development, Murex has focused its energy on building its integrated risk management solution. We designed a risk engine that delivers high performance analytics for complex simulations and data aggregation (for xVA, PFE, initial margin and high throughput real-time VaR) using technologies such as in-memory aggregation and GPUs.

The fast processing of massive volumes of data is a key requirement as well. A CVA desk centralising hedge calculations for hundreds of thousands of trades needs to produce, aggregate and manipulate terabytes of data, including CVA sensitivities grids on thousands of counterparty agreements. Leveraging the latest innovations in data management is vital in order to deliver a solution.

Addressing costs and regulations
It has become apparent that integration between multiple systems is complex, costly and increases operational risk. To deal with this, banks have grown their IT departments considerably. With its integrated platform, Murex’s strategy is to deliver a complete range of trading, risk and processing functionality that clients can choose from. Some of our clients use the integrated solution (front, back and risk), while others use it for enterprise risk management such as counterparty credit risk and market risk. In both cases, clients benefit from obvious synergies and considerably lower their technology bills.

Reducing the total cost of ownership has been one of our main focuses over the last few years. Thanks to the packaging of best practices and our battle-tested implementation methodology, we have been able to deliver high-end functionality at reduced cost, time and operational risk. With our integration team and our implementation partners, we are also continuously helping our clients reduce their integration costs by packaging and delivering interfaces with their systems. Yet our MX.3 solution offers a high level of flexibility, facilitating the integration of new processes and business requirements as they emerge.

BDP’s contribution to Dominican tourism bolsters country’s prospects

Posted on by Ashton Wenborn

On January 2 2014, Banco Popular Dominicano (BPD) celebrated 50 years of service to its clients and its country. Since its foundation, the institution has initiated its trajectory by providing accessibility, diversification, and modernisation of its products and services, while also supporting entrepreneurs and creating thousands of direct jobs. With almost 7,000 employees full of confidence and merchantable skills, the institution has strived for greatness.

Since its beginnings, BPD has made a social compromise to improve the Dominican nation through smart and sustainable investments, as well as inclusive community programmes. In addition, the bank is financially involved in various programmes of corporate social responsibility (CSR) in areas such as education, health, art, culture and environmental care.

The bank has always been a pioneer in the industry. From the moment the institution opened its doors to the public, it has brought innovative services to the Dominican Republic. In 1964, it became the first private Dominican bank. It was also the first to offer chequing accounts with personal cheques. BPD reinforced its position as a bank with international calibre in 1980 when it became the first Dominican bank to run an international operation. For the first time in the country, a financial institution represented and distributed Visa and MasterCard credit cards. In 1987, BPD initiated Telebanco Popular, an innovative banking service via telephone, unique within the country at the time. The service proved to be extremely effective by allowing clients to consult their accounts from the comfort of their own homes.

$1.4bn

the financing granted to Dominican tourism by BPD in the last decade

App Popular

160,000

downloads

340,000

transactions in 2013

Mirroring the national economy
An important aim at BPD is to facilitate loans to its clients. In December of 1998, the bank launched Autoferia Popular: an automobile fair that offers car loans and car sales all in one location. The fair is now celebrated every year in its headquarters Torre Popular and has, over the past three years, disbursed more than DOP2.5bn ($62.5m) to families and businesses. It is considered the main auto fair in the Dominican Republic and a mirror of how the national economy is going. Continuing with this spirit of facilitating loans to families, BPD launched Feria Hipotecaria in 2005, which assists families with the mortgage loans to help them become homeowners.

The bank offers aid to the fastest growing industry in the country – tourism. In 2003, BPD distributed the first loan in euros in the Dominican Republic to meet the increasing demand of hotels in the country. In 2013, the institution was awarded the title Bank of Tourism, by the Association of Hotels and Restaurants of the Dominican Republic.

Dominican tourism and BPD have had a close relationship that continues to strengthen. In 2013, the bank granted $1.89bn in commercial credits to Dominican companies. The tourism sector was one of the principal beneficiaries of this financing – with the credits representing 61 percent of the total loans received by the national tourist industry last year. In less than a decade, the financing granted to tourism has amounted to more than $1.4bn

Game-changing innovation
For 50 years, BPD has focused its efforts to bring breakthrough services and investments to promote growth in the Dominican Republic. To do so, it has been at the vanguard of innovation, offering security, trust, and unparalleled service.

The bank has brought that innovation by heavily investing in technology. Since 1988 it has been the financial institution with the most technological resources and services. BPD launched the most extensive ATM network in the Dominican Republic in 1989, and integrated the ATM network with Visa and MasterCard services just one year later. Today, the bank’s network consists of over 800 ATMs – a third of all the ATMs in the country.

In 1995, BPD became the first Dominican bank to join the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The integration with SWIFT allowed the bank to quickly process international transactions. It also allowed credit and debit cards issued by Visa, MasterCard, Cirrus, and Plus to do international transactions on 220,000 ATMs all over the world.

By the turn of the millennium, BPD had a state of the art server, and today, the bank’s technological platform is one the most advanced in Latin America. In 2001, its avant-garde development allowed BPD to venture into internet banking via its website, popularenlinea.com. With this foundation already in place, it was also the first Dominican bank to fully incorporate the use of social media to promote tips on savings, community programmes, and transparency. Soon enough mobile banking was launched, allowing clients to quickly access the bank on their smartphones through the mobile app, App Popular. It was the first of its kind in the country and facilitated mobile transactions, while increasing the customer’s security. The mobile app has been downloaded over 160,000 times, with over 340,000 transactions completed successfully in 2013.

In 2011 the bank took the next step in increasing its security by implementing a security token, known as Token Popular. Just two years later, keeping up with the trends of the international industry, the financial institution became the first bank in the Dominican Republic to offer the EMV chip in its debit and credit cards, offering even more security to its clients. The credit and debit cards issued by BPD account for more than 55 percent of the transactions in the market.

Along with the commercial banking services, the financial entity also has a recognised corporate banking team, which offers the right answer to businesses and institutional corporations’ needs in areas such as investment banking, cash management solutions, local supply chain finance or export and import services.

This year, BPD, following the implementation of strategies from previous terms, invested heavily on technological infrastructure to improve the financial inclusion of more Dominican people, launching Sub-agent Popular, a new service that allowed users to have a virtual account with their mobile phones. Clients are able to send and receive payments along with other services in an efficient and simple way. This platform, along with other initiatives, is being developed in order to accomplish the purpose of giving access to financial services to unbanked individuals.

Community values
For generations BPD has made a special commitment within the community, offering scholarships and promoting better education levels in the country. The institution places a huge effort on ecological sustainability in key reforestation projects such as Plan Sierra. This opens an ecological network of branches that runs on solar energy and helps to save over 80 percent of the utility bill. It also generates awareness about the use of the limited natural resources and the importance of a recycling and financial saving culture. In addition, the bank makes contributions to improve the health of new-borns and their mothers, as well as the elderly, and also supports on-going microcredit foundation focused on northern rural regions.

Besides this, the institution is well known for its support to art and culture programmes and its contribution to strengthen its Dominican values. That’s why BPD is synonymous with integrity, trust, and opportunity in the country. In accordance with this, the bank was chosen as the most admired company by the Dominican people, in a survey by Mercado magazine last January.

As a socially responsible company, BPD also works for small and medium businesses, trying to make an impulse of this important segment of companies that create such a huge value for employment and the entire economy, providing them with accurate financial services, on-going training and digital initiatives.

During May last year, after evaluating the results of the previous year, Feller-Rate improved BPD’s, S.A. rating to AA (dom) long term with a stable outlook and AA- to subordinated obligations. Furthermore, Fitch reaffirmed the rating for BPD at AA- and for both subordinated debt issues A+ (dom).

Last year, thanks to its preponderant role, the bank managed to post significant quantitative achievements. Among the most important were: a 6.27 percent increase in total assets, a 2.53 percent increase in the net loan portfolio, a 0.75 percent increase in overall market share, a 8.9 percent increase in private sector market share and a 16 percent increase in users of internet banking, amounting to more than 300,000 users.

These statistics highlight the vital role the bank has had in Dominica over the past year, but they are also symbolic of the positive impact it has had at the heart of the country for over 50 years. And as the economy continues to grow, so must its financial institutions such as BDP, as they will be important pillars in the country in the years to come.

Technological innovation becomes a key focus for ActivoBank

Posted on by Ashton Wenborn

In this world, nothing’s more permanent than change and never has this been more true for the finance industry. As the world and overall economy changes, so too do customer’s interactions with their banks, and, essentially, this is why banks are going further to accommodate the individual and changing needs of their clients. ActivoBank, a Portuguese bank designed to the very last detail to make peoples lives easier, is driven by a goal to simplify customer relations with the bank and offer them exactly what they want. To this end, ActivoBank customers find value for money and pay only for what they get – this includes no esoteric or complex commissions. This value proposition of maintaining a dynamic and modern banking offering is considered essential for the bank’s growth and development.

“Innovation remains our focus, while our customer acquisition strategy is more and more intense, even as we work to retain customers and further strengthen brand awareness,” says Luis Magro, Head of Marketing for ActivoBank. “We also focus more and more on easier access and interaction with customers. Our online strategy is crucial for customer acquisition and retention. Despite the physical presence through our 14 branches, our main goal is to keep a strong online presence, through our website (both transactional and investment offer) and through social media: Facebook, Twitter and YouTube. Here the key word is convenience.”

And this strategy of ensuring a multimedia-banking offering has proven popular with clients. From the first quarter of 2013 to the first quarter of 2014, ActivoBank had a record 211,935 transactions made via mobile banking, reflecting continued steady and significant growth during thee last year. In March 2014, the number of transactions reached 22,515 compared to the 13,932 in 2013 – a 61.6 percent increase. Not surprisingly, the number of customers using mobile devices and the number of logins made for ActivoBank’s banking offerings continues to grow, as mobile customers surged from less than 9,000 in 2013 to more than 13,000 by the end of the first quarter of 2014. During this period, customer growth was constant, averaging two to five percent every month, and with log-ins to ActivoBank’s mobile banking surging 57.1 percent since March 2013.

61.6%

increase in activobank mobile transactions 2013-2014

57.1%

increase in mobile logins since March 2013

“Our clients can manage all their accounts from anywhere (home, office, restaurant, while travelling, etc) and 98 percent of our products are available online,” says Magro. “That reflects our belief that the online banking strategy is crucial for attracting and retaining customers. ActivoBank bases its strategy on new technologies and innovation. And that’s why ActivoBank continues to invest heavily in developing new services and features to keep up with trends and to evaluate the best opportunities.”

Simple banking
Essentially, this is why ActivoBank maintains simplicity at the core of all its processes, products and services – the aim is for all offerings to be as simple as their customers’ daily lives. This is expressed in the way the customers access the bank, but also in the way the bank itself communicates to customers from the very first minute. Crucially, this is why it only takes 20 minutes to become a customer at ActivoBank, allowing clients to open an account and immediately receive their cards. This is unique to the banking sector in Portugal, where cards typically arrive via post at home, days, weeks or sometimes months after opening an account. In comparison, ActivoBank’s innovation allows for customers to receive their cards in the branch office – right then and there. What’s more, this simplicity and broad accessibility is apparent across all the bank’s services, which are available 24/7, as banking is possible through ActivoBank’s website, on the applications made for smartphones and iPad, or by means of a call centre – regardless of when the physical bank branches have closed.

“Wherever ActivoBank is, so is innovation,” says Magro. “It’s in the application for smartphones, iPhones and iPads, in the image of the branches, on the website and social networks. Even more than the customers going to the bank, the bank goes to meet the customers. Another particularly important channel for ActivoBank is mobile banking. This responds to the positioning of the bank and its target customers: the self-directed, young-at-heart, intensive users of new technologies, who are in favour of a banking relationship based on convenience and innovation. This is why tablets and smartphones are essential for accessing ActivoBank, using the application.”

Mobile innovations
A pioneer in Portuguese mobile banking, ActivoBank was the first bank in the country to develop apps for such platforms and, currently, the firm is working hard to strengthen its identity as an innovative, forward-looking bank that uses technological advances to increasingly simplify its customers’ lives.

Accordingly, the firm has renewed its mobile apps and currently also offers versions for Android and iOS with new tools and a new overall image. The app, launched in June, features a new layout and a more intuitive navigation tool, and new menu options, grouped by function areas with options for several types of consultations and the carrying out of banking operations. This navigation is based on collapsible groups.

“In ActivoBank we want our customers to be totally informed regarding their assets. Hence, we created the ‘My Bank’ area, where customers personalise their access to the bank and visualise what they want swiftly using different graphic options for their assets,” says Magro. “In this area, it is also possible to personalise current accounts, savings, securities and loans using the customer’s image gallery pictures.”

With self-directed customers as a main target, ActivoBank has developed the self-making of bank operations as much as possible, ensuring customers can subscribe and reinforce their savings with only one euro, now and in the future. This channel also features the bank’s commercial offerings, presenting, in a systematic and periodic manner, products and services that better fit each customer’s individual profile. In addition, the bank app has a geo-localisation function, which enables customers to search by current location for the nearest branch.

In addition, a new investments app is being developed, set to be launched soon for Android. In the meantime, the main alterations added to the existing iOS version include the addition of a virtual portfolio synchronised with the website, providing information on new stock exchange indexes and the possibility of trading shares in those stock markets.

Sustainable processes
Along the track of investing in technology and making banking simpler, ActivoBank is also making a conscious effort to reduce its use of paper and become a significantly sustainable bank.

“Complying with our mission of simplifying the lives of our customers, ActivoBank always defined itself as a paperless bank,” says Magro. “The opening of an account was, until very recently, the exception in a number of interactions that the customers established with ActivoBank, since the reading of the general conditions and their subsequent agreement by means of a signature implied the use of paper as the only way to initiate the customer-bank relation.”

However, recent optimisations of the account-opening process led to the launch of “Project Paperless” in January, which aims to drastically reduce the use of paper in the bank’s processes. In essence, the process has now switched from ‘real paper’ to digital documents that the customer signs on an iPad using a special pen that guarantees a secure and sustainable account-opening experience.

Currently, more than 80 percent of all current accounts are opened using this system, and it has allowed the bank to further simplify its back-office processes as well as its offerings to customers, who have generally reacted positively to the new digital experience. In this respect, keeping customers happy is key to ActivoBank, which maintains that its success depends on the way the bank openly establishes relationships with its clients, as well as the efforts it makes in order to construct a truly different bank that can accommodate different people. In simple terms, foreseeing the future and changing needs of customers, and meeting them in the simplest way possible.

Low-cost banks challenge Czech conservatism

Posted on by Ashton Wenborn

New low-cost banks entered the Czech market three years ago, breaking through the country’s legendary conservatism and motivating clients to change banks. One of these new banks is managed by Petr Řehák, Managing Director and Chairman of the Board of Directors of Equa Bank.

How can the Czech banking market best be described?
The Czech banking market is one of the most stable in the region of Central and Eastern Europe. This is mainly because of the legendary Czech conservatism, which is expressed as a very circumspect attitude to banks and risk (which was particularly positively manifested during the last crisis), and also the high degree of loyalty clients have towards their banks and their reluctance to move to another bank.

Only three to five years ago, the Czech banking market was controlled by just three banks, which jointly held a 70 percent share of the market. Although there were other banking subjects active along with these three major banks, their product offer did not deviate from the average offered by the dominant banking houses, nor were they forced to consider innovations and effectiveness. This situation on the Czech banking market was unique and difficult to explain in comparison to other countries in Central and Eastern Europe. If we compare the situation with neighbouring Poland for instance – most of the market there was originally divided between six major banking houses. But at the beginning of the decade, a whole number of other institutions – who based their strategy on offering simple, comprehensible and transparent services, and on communication with the client through direct channels, such as low-cost banking – originated in this country. The volume of deposits per person in Poland was significantly lower than in the Czech Republic, but, in spite of this, there were more players fighting for the Polish client.

Czech banking

45

banks

40,159

employees

4,363

atms

2,102

branches

CZK 4791.1bn

total assets

CZK 2411.7bn

total loans

CZK 3235.2bn

total deposits

Nothing happened for a long time and then three banks suddenly entered the market. How did these banks convince clients they did not have to fear change?
These banks entered the market at a time when the world was slowly beginning to recover from the global financial and economic crisis. In spite of the fact that this crisis had minimal impact on the Czech Republic, it did influence the behaviour of consumers to a specific degree. Czechs began to save more and borrow less. The newly arriving banks offered modern low-fee banking, attractive interest rates on savings products, as well as refinancing of consumer loans, for instance – as a result of which, clients were able to make significant savings on their existing loans. Furthermore, these banks offered a simple and transparent price policy conversely to the dominant banks. Clients were consequently able to accurately calculate what they would be paying for, which had not been the rule on the Czech market until that time. It was the Czech population’s desire to save on ordinary services, and its desire for clear and transparent prices that caused the breach in the conservative behaviour, and motivated clients to change banks and move to low-cost banks. To date, the five new banks have acquired 1.25m clients, during which time over two thirds of this number have moved to the new banks from the three largest banks.

Your bank entered the market in the middle of the worldwide crisis and not even the domestic economy was developing positively. What are your observations and expectations with regards to economic revival?
Reduced economic activity was manifested in the past by the falling demand for loans, by both retail and corporate clients. Since 2013, we have observed signs of economic revival, not only in macro-economic indicators but also in the structure and volume of demand for loans. Households are utilising low interest rates to a greater degree for reducing costs on mortgage loans. They reduce their burden of payments similarly by refinancing their consumer loans. As the family budget situation improves, interest in new loans increases. Corporate clients have also responded to the increased demand for housing and have launched many developer projects in the residential field, which has increased interest in the financing of these projects. More growth in loans can also be observed in the field of operation financing, where companies react to the increasing volume of orders.

How do you perceive the impact of the new stricter regulation of the Czech banking market? Do you expect changes to be made to bank strategies and impact on changes to their business models?
The Czech banking market is in a very good state and is very well prepared for the stricter regulation of requirements for capital facilities, liquidity and also in regards to the quality of loan portfolios in the balance sheets of local banks. This is also one of the reasons the Czech National Bank (the local regulator) has decided to apply the Basel III rules effective immediately, without utilising temporary provisions – that is, without their gradual implementation by 2019, as the remainder of Europe has done.

The new Basel III requirements, particularly in the field of capital and capital adequacy, undoubtedly increase pressure on the higher bank profitability. This, together with the requirements of caution linked to higher cost demands, is creating new challenges for banks. In this regard, the situation does not differ in any way from the rest of Europe. A new phase of achieving higher productivity by modifying the business model is approaching. As a new bank, we have the undoubted advantage that we are not as encumbered by the burden of old infrastructure and we can establish our business model primarily on the use of the latest information technologies.

The differences of the Czech banking sector include a high surplus Crown liquidity. Recent steps by the central bank (application of exchange rate intervention for monetary easing) have emphasised this situation even more. We have been in an environment of low to zero rates for several quarters. The basic rate by the national regulator is on the level of 0.05 percent, the three month interest rate is on the level of 0.35 percent, yields from five-year government bonds are on the level of 0.63 percent, variable five-year bonds are actually only 0.06 percent. This situation is linked to the limited offer of investment opportunities for placement of free short-term liquidity in risk-free instruments on the monetary market, which again places greater pressure on the ability to increase the value of short-term deposits with paid interest, and chiefly on the ability of individual banks to retain the growing volume of their loan portfolios. The ability to grow the loan side of the balance sheet becomes even more crucial because the revenue from fees can no longer be as strong a contributor to the bottom line as it was in previous years. And if we have hit the bottom in terms of the prices of loan products, then we are back to changes to the business model, for instance by offering completely new products, more easily comprehensible and simpler methods of operation, and innovative distribution instruments.

Has the behaviour of clients changed following the entry of low-cost banks?
The behaviour of clients has changed, not only because of the entry of low-cost banks, but also because the attitude to new forms of communication between the client and the bank is changing through the generations. Czech clients are much more demanding today thanks to increasing competition. They compare offers by banking houses more, not only from the aspect of interest and fees, but they also base their decisions on the range of services the bank can offer them in addition. Internet and mobile banking is gaining more and more popularity, which is why most banks have recently been forced to expand the sale of their products through these channels. But there is still a certain degree of conservatism rooted in most Czechs. In spite of increasing interest in modern communication channels, a significant percentage of the banking clientele continues to prefer a personal visit to their bank branch. However, low-cost banks usually operate with a very limited network of business premises, which limits their potential for addressing a wide spectrum of clients in relation to the Czech conservatism. This is why, if low-cost banks wish to continue the expansion in progress and continue to acquire more and more clients, mainly from the major banks, they will also have to invest in development of their branch network so that they have representation in all regional and district towns and cities in the Czech Republic. This is the only way to address a wider spectrum of potential clients and increase their share in the market.

Temenos on data’s ‘fundamental’ role in banking

Posted on by Ashton Wenborn

With regulatory changes and concerns abounding the banking sector, companies are facing imminent pressure to change with the times. One company that is helping others to adapt is Temenos, a banking software systems provider. World Finance speaks to Product Director of the firm’s Business Intelligence unit to find out more.

World Finance: Now Todd as I mentioned, banks are inundated with all of these pressures. How important is data to their overall priorities?

Todd Winship: Well firstly we see banks actually making data a priority, and some people are saying it is the new oil of this generation. But like oil, you need to mine and refine that data to get value. And data is fundamental to a lot of the solutions that our customers are asking us to build.

Two main solutions there, are risk management and customer analytics. So from a risk management stand point, banks across the world are required to be regulatory compliant, they have Basel II and Basel III compliance requirements. And to me that is fundamentally a data issue. So they need the right solutions to be able to extract, cleanse and standardise that data to feed their risk solutions.

[S]ome people are saying [data] is the new oil of this generation

Once that’s complete they can further leverage that data for internal analytics, to further manage risk and to increase bank profitability.

World Finance: So Todd, tell me about some of the challenges that banks face in leveraging their data into a value added entity.

Todd Winship: Well first of all, data without business intelligence and analytics is just data; it has limited value. So fundamentally banks have a problem at the platform level in terms of dealing with that data. And I’ll use some big data terms, in terms of framing those challenges.

The first one is volume. So the data is moving from terabytes to petabytes. Data in the world is doubling, and financial companies are responsible for about 25 percent of that growth. So they need the right solutions in terms of being able to store that volume of data in a cost effective manner.

The next platform problem or challenge is variety. Most banks have hundreds of different data sources across a number of different platforms. So they need to be able to extract, consolidate, transform and standardise that data, so that it has consistent definition and consistent – what we call – mastered data, across the enterprise.

The last one is velocity. From a velocity stand point, we are seeing data move from a batch perspective to real time. So that opens a whole new opportunity for new types of solutions and new capabilities using this real time data.

World Finance: So tell me about some of the other key trends that are taking place in the retail-banking sector.

Todd Winship: The first one is around mobile business intelligence, and the research is very compelling around the use of mobile business intelligence (BI). It’s actually telling us that decisions are made six times faster using mobile BI. And if you consider that it’s your c-level executives, your senior management and your board that’s typically using those solutions; that’s game changing, given the ability to make decisions six times faster.

Data in the world is doubling, and financial companies are responsible for about 25 percent of that growth

What’s also interesting is we see mobile BI driving adoption across the entire enterprise, up to 27 percent. It’s our view that everyone who works in a bank is both a knowledge worker and a decision maker; so giving them that analytical capability to make decisions faster and more accurately, is definitely game changing and should increase bank profitability significantly.

World Finance: Finally, can you tell me about some of the other factors that contribute to a bank’s success in the digital era?

Todd Winship: I think that you’ll see banks adopt BI analytics as a key capability across the entire enterprise. We see a trend in moving analytics right to the front line. I’m personally excited about what we call the ‘analytical bank’ where daily banking processes are enhanced with data and analytics.

An example of this is enhancing the customer experience through deeper understanding of customer behaviours and trends. At our community forum in May of 2014 we demonstrated how a customer’s segment, which is derived from our Insight BI solution, could change the entire experience.

For instance, a Gold customer, when logging into their bank, would be presented with a particular look and feel and set of banking features and functions specific for a Gold customer. If that customer was a platinum customer, they would be presented with an extended set of features and functions, as well as a totally different look and feel. And this also includes tailored product and pricing. So it is very very tailored from a customer perspective to exactly their needs. Banks need to harness this data to leverage that in all areas; including becoming more customer-centric.

World Finance: Todd, thank you so much.

Todd Winship: Thanks for having me.

From 1994 to 2020: the economic legacy of the World Cup

Posted on by Ashton Wenborn

The FIFA World Cup allows the host nation to showcase itself globally for a whole month. It attracts vast television revenues, legions of visitors and impressive ticket sales. However, as Brazilians have learnt, the event also puts the host nation under economic strain and a merciless spotlight.

1994

The US World Cup launched a new era of slick commercial management. Hosted in several cities and supported by big-brand sponsors such as Adidas and Coca-Cola, it delivered a total profit of $620m to LA alone during the final – $440m more than the Super Bowl made in the same year. Overall profits are estimated at $1.45bn against total costs of $5.6bn. Even better, the US leveraged long-term gains by establishing its successful Major League Soccer.

1998

The 16th FIFA World Cup was held in France for the first time, and featured 32 teams instead of the usual 24, with the final staged at the new Stade de France in Paris. The organisers promised an economic bonanza based on 500,000 extra tourists. In fact, fewer visitors came to France than in a normal year, suggesting that non-football fans stayed away. The tournament was actually won by France, making it the sixth country to win on home soil.

2002

In an economic experiment the tournament was staged in two countries – Japan and South Korea – and it worked. This was also the first World Cup to be held in Asia, and the last one in which the golden goal rule was implemented. An accommodating FIFA promised each country $110m for hosting the event and allowed them to keep all the revenue from ticket sales. With over three million live spectator tickets on offer, the host nations split $1.2bn.

2006

The World Cup in Germany would mark a turning point for FIFA. A huge commercial success, it pulled in 15 million more visitors than forecast and sponsoring companies sold about $3bn worth of products. Similar to the US, Germany pumped its €56.6m in profit into the German Football League to the long-term benefit of the game, but a year later FIFA took back ticketing rights. The final game attracted an estimated 715 million viewers worldwide.

2010

FIFA was the big winner from South Africa’s World Cup, taking home a massive $3.36bn in revenues. But the event was disappointing for the host nation, which invested $3.9bn on staging the event, including $1.3bn on stadiums and most of the rest on rail, airports and highways. It attracted half the number of expected tourists at an average cost, according to economists, of $13,000 each. Economic growth also slowed from 4.6 percent to 2.6 percent during the event.

2014

Brazil scored several own goals in the lead-up to the World Cup. Stadiums were finished at the last minute, allegations of corruption were rife, promised projects in light rail and other transport – key elements of the winning bid – were scrapped, and protests over the $14bn price tag only served to highlight glaring inequalities in living standards. On the bright side, England – a big contributor in terms of tickets, television rights and tourists – qualified.

2018

The budget for Russia’s World Cup has already been set at $2.1bn, but, in the light of the runaway costs of the Sochi Winter Olympics in 2014, few expect organisers to stick to that figure. Meanwhile, FIFA’s reserves have swollen to $1.43bn, boosted by US interest. In April, Fox Sports paid between $400 and $500m for English-language television rights. “The financial outlook is very positive,” FIFA Financial Director Markus Kuttner said in June.

2020

Liberal politician Boris Nemtsov claims Qatar has already started spending the $70-100bn earmarked for its gold-plated tournament in eight years time. But will the oil-rich Gulf state actually be allowed to stage the event following accusations of corruption? FIFA’s special investigator Michael Garcia is due to report his findings before the Brazilian tournament ends, but many commentators are sceptical about the depth of his research.

Banco Multiva on the strength of Mexico’s banking industry

Posted on by Ashton Wenborn

Mexico’s banking industry is strong, with private banks being mostly profitable and well capitalised. One institution that has tuned into this success is Banco Multiva. World Finance speaks to its representative Carlos Soto Manzo to find out what the bank is doing to promote, and exploit, growth.

World Finance: Well Carlos if you could start by telling me about Mexico’s banking industry, and how it’s changed of late? 

Carlos Soto Manzo: Well the Mexican banking industry has become solid and competitive over the last few years. There has been a transformation to financial groups, which offer all kinds of services and solutions to their clients.

We also can tell you that the Mexican banking capitalisation index ratio is about 15.6 percent right now: it’s very strong and healthy. We have had a very important increase in strength regulatory terms.

We also can tell you that the Mexican banking capitalisation index ratio is about 15.6 percent right now

There are changes on the long portfolio ratings. Also we have a new brand financial reform and a secondary legislation. These changes are generating important needs for the bank’s capital and research.

World Finance: Well Banco Multiva has over 30 years experience in the Mexican financial market. How has your company adapted to the recent changes to the industry?

Carlos Soto Manzo: We are looking at new opportunities. For example we have gone into government banking, private banking and also agricultural banking. The consequence of these actions is that in just seven years, we have become the 12th largest bank in Mexico, out of more than 40 domestic banks.

There is a proliferation generation of new banks in Mexico, but also 80 percent of the market is concentrated in global banks. We see an opportunity to compete by creating different business models, including personalised customer service.

We also have traditional banking lines, but we have developed strong technological channels. We have secure access to ATMs, electronic banking via PCs and laptops, and mobile devices. One product is called ‘Multiva touch’, which was the first software in the market.

World Finance: How is technology transforming Mexico’s banking environment, and why is it important for banks to embrace new technologies?

Carlos Soto Manzo: It’s very important because the market is changing a lot. Multiva has progressed to being a highly technological bank. Our core system has been implemented in over 1,800 banks worldwide. And actually we are running the latest version of this solution.

We want to be a bank with open and full services, with no limitations. It’s more than just checking balance accounts; it is about the possibility to trade, work and have a very strong banking platform.

World Finance: How important are small and medium sized enterprises for the country moving forward?

Carlos Soto Manzo: In Mexico the small and medium enterprises are very important. I can tell you that they provide more than 72 percent of employment in Mexico. And probably of the four million enterprises in Mexico, almost 99 percent are small and medium enterprises: so it’s a very important sector to us.

I can tell you that we are receiving funding from development banks to tend these sectors. Right now we are in some IT solution enterprises, and I think it’s a very good opportunity to be in that market.

World Finance: How does Banco Multiva cater to SMEs?

Carlos Soto Manzo: Well as I have told you, we have tried to get funding guaranteed for all these enterprises, through the development banking in Mexico. It’s a very liquid structure column for our economy, so it’s very important to be in that sector.

We also can tell you that the Mexican banking capitalisation index ratio is about 15.6 percent right now

World Finance: Well finally, how do you see Mexico’s banking industry developing, and what are Banco Multiva’s ambitions for the future?

Carlos Soto Manzo: We have got a lot of opportunities in Mexico. What we are seeking is to be in the top 10 banks in the near future. Over the next two years we would like to become within the top 10 banks. We want to strengthen our growth in products and channels.

We are open to mergers and acquisitions, in order to increase our market share. And also, it’s very important to strengthen our technological innovations. We are really into increasing our profit levels, market share and margins. And also it’s very important for us to maintain our capitalisation index above 15 percent.

World Finance: Carlos, thank you.

Carlos Soto Manzo: You are welcome – thank you very much.

Dunn Loren Merrifield: Nigeria’s housing problem presents opportunities

Posted on by Ashton Wenborn

Nigeria is the most populous country in Africa, making it a huge consumer market (see Fig. 1). Invariably, Nigeria remains a key investment destination, further strengthened by the recent GDP rebasing exercise as the country surpassed South Africa to become the continent’s economic powerhouse. Despite higher growth rates and a larger GDP, Nigeria has a significant infrastructure deficit – necessary to accelerate inclusive growth and development.

While the country’s ‘new status’ of being the 27th-largest economy in the world and the biggest in Africa is encouraging, one of the key socio-economic challenges is its housing deficit. As the global population continues to dramatically rise and a significant percentage of urban growth is expected to occur in developing countries, it is unsurprising that there is a significant influx of people into cities in Nigeria, given the country’s strategic position within the region and its advantageous GDP figures.

This growth in urbanisation has outpaced the capacity to deliver adequate housing and urban infrastructure, resulting in a huge housing deficit in Nigeria. However, the problem remains real, and will need addressing if the country is to continue on its upward economic trajectory. World Finance recently spoke to Kate Isabota, an analyst at Lagos-based investment house Dunn Loren Merrifield (DLM), about Nigeria’s housing deficit and the opportunities that it may present investors.

Urbanisation of the land
The rapid rate at which Nigeria is becoming urbanised mirrors the way many other developing countries are experiencing a shift towards city living. According to research by the United Nations Population Fund (UNPF) and DLM, of the 7.2 billion people in the world, more than 50 percent currently live in urban areas. In the coming years, the proportion of people living in urban areas will largely come from developing nations, as those countries accelerate towards economic prosperity. In particular, cities like New Delhi and Mumbai in India, Karachi in Pakistan, and Lagos in Nigeria, are seeing the most rapid rates of annual population growth.

The consequence of this rush towards urban living is the distinct lack of adequate housing to cater for the large influx; with people now living in slums on the outskirts of cities. According to Isabota: “We are of the opinion that rural-to-urban migration, in addition to the increase in population growth, in the face of increasing poverty and income inequality aggravates the problem of housing deficit largely reflected in the formation of slums. The absolute number of slum dwellers in the world is currently estimated at about 1 billion and has been projected to grow to about two billion by 2030.This emphasises the need for intensive action by governments around the world, particularly through the development of a deep mortgage market to increase access to low-cost housing.”

Source: World Bank, DLM Research estimates
Source: World Bank, DLM Research estimates

In Nigeria, this problem is also evident, largely due to an estimated population of about 168 million people, which has been growing at an annual rate of around 2.8 percent. According to the Population Reference Bureau, Nigeria will have around 240 million citizens in 2025, and more than 440 million by 2050, which would make it the third most populous country in the world (see Fig. 2).

Isabota says that the population growth offers Nigeria some advantages, but also presents significant concerns. “While we agree that the large population size puts the country at a comparative advantage compared to smaller markets, particularly in terms of attracting investment, we also highlight that the significant increase in population relative to economic growth has placed higher pressures on existing infrastructure. The pressures on infrastructures can be seen in the rise in number of slum dwellers due to both high natural population growth and rural-to-urban migration. This is on the back of the premise that cities offer opportunities which hold the key to escaping rural poverty.”

Indeed, the number of Nigerians currently living below the poverty line has grown sharply over the last three decades, according to Isabota. “The fact that population growth significantly outstrips “real” economic growth is further buttressed by the proportion of Nigerians living in poverty, which has been on the increase. In our analysis, we observed that the population of the poor rose significantly from 26 percent in 1980 to 71 percent as at 2011.”

Unemployment and housing shortages
As Nigeria’s population grows, so too does the number of people out of work. DLM says that while the economy grew by around seven percent between 2008 and 2011, unemployment rose significantly during the same period. All of this amounts to heightened pressure on the infrastructure of cities like Lagos, and shows the need for improved infrastructural development. “We highlight that the increase in urban growth has its attendant costs as more individuals compete for limited resources which inadvertently exacerbates unemployment, poverty and increases the housing deficit. Consequently, we expect to see an increased pressure on resources, particularly in Lagos, the commercial hub of the West African sub region, as well as Abuja and Port Harcourt. This underpins our argument for pro-growth policies to be maintained by governments to ensure urban sustainability,” says Isabota.

DLM confirms this sentiment: “Recent statistics show that Nigeria has an estimated housing deficit of about 17 million housing units. As at 2012, it was estimated that about 42 percent of its population were not living in “proper housing”. This is particularly reflected in fast-growing cities, as the high demand for housing is met by low investment on mass housing.”

With home-ownership at about 25 percent, the percentage of homes owned by their occupants in Nigeria still remains low in comparison with some developing countries, such as South Africa, Brazil and India, who all have rates upwards of 70 percent. DLM says that the reason for the low level of home-ownership is the lack of funding available to Nigerians.

“Generally, this is attributed to the fact that a large percentage of housing units is self-financed through personal savings for periods of about five to ten years. We hold the view that the non-availability of long-term funding to aid low income earners in accessing affordable formal housing has driven the growth in housing deficit in recent times. This is equally exacerbated by the high interest rate obtainable on available long term financing options, which makes mortgage an unattractive funding option for the average Nigerian worker.”

With reportedly an average of 20,000 mortgages issued in Nigeria, the market only accounts for 0.55 percent of GDP, compared to 73 percent in the US, 81 percent in the UK, 32 percent in South Africa and 5.5 percent in Brazil. DLM feel that to create effective demand for housing, it is critical to develop a strong and efficient mortgage market to provide affordable housing finance. The strengthening of the primary mortgage market creates avenues for a greater pool of funds, so primary mortgage institutions can then originate more mortgages. In addition, the intensity of housing activity is directly a function of mortgage rates. This underpins the argument for lower interest rates in a bid to aid housing affordability.

Source: World Bank, DLM Research estimates
Source: World Bank, DLM Research estimates

Delivering on the deficit
DLM suggests that the cost of financing the shortfall of housing would be about NGN85trn ($5.48bn), and the best way of getting this finance will be through foreign direct investment (FDI) and public private partnerships (PPP). “This translates to a yearly investment of about NGN 5trn, 1.83 percent higher than the current size of the national budget – NGN 4.91trn estimated for 2014. The country requires additional provision of about a million housing units per annum for the next 17 years to substantially reduce the deficit. Sole reliance on government revenues is insufficient to fund these infrastructural needs; this supports the argument for an efficient capital market to aid active private sector participation. With the wide housing gap in the country and the significant funding required, increased PPPs accompanied by FDI may just be the way forward.”

To this end, DLM is upbeat about the commencement of operations of the Nigerian Mortgage Refinance Company (NMRC); a PPP arrangement with the key role of providing funding to banks so that they can provide more mortgages to individuals with longer tenors at a more sustainable interest rate than what is currently obtainable within the domestic mortgage market. The idea is to refinance portfolios of mortgage lending institutions by raising long-term funds from both the domestic capital market and foreign markets.

The NMRC was promoted by several multi-lateral agencies, government agencies and private sector companies. The multi-laterals include the World Bank/IFC, while the government agencies include Nigeria’s Ministry of Finance, the Central Bank and the sovereign wealth fund, among others. In addition, the private sector companies include three commercial banks and 17 mortgage banks.

Housing delivery is a critical part of the country’s infrastructure base, which has the potential to accelerate economic development, says DLM. By boosting housing supply, other industries will in turn see an upswing in business. “We believe that the housing sector has the potential to be one of Nigeria’s key economic drivers. Growth in the nation’s housing sector would directly impact on the construction sector through increased demand for building materials, thereby generating employment.”

Ultimately, this will not only improve the standards of living of the population, but drive economic growth for a country with huge potential. “We hold the view that the impact of housing investment in an economy is more ‘economic’ than ‘social’ in nature. While the provision of adequate housing leads to an improvement in the standard of living of the populace, it is also a major driver of job creation, poverty reduction and increased business activities, which would have a multiplier effect on the economy.”

SGBL enhances regional presence to become flagship Lebanese bank

Posted on by Ashton Wenborn

Banking is Lebanon’s most renowned service sector and a pillar of its economy. The sector has weathered major domestic, regional and international crises over the past two decades, particularly the global financial crisis of 2008.

Société Générale de Banque au Liban (SGBL), one of Lebanon’s leading commercial banks, celebrated its 60th anniversary last year, and we are aiming to enhance our regional presence so as to become a flagship bank in the region.

Established in 1953 in Beirut, the bank has built on the successful experience of Société Générale’s long-lived universal banking model, which has proven its robustness in a challenging environment. SGBL offers an array of services under retail, corporate and private banking. The bank’s objective is to target a wide range of customers, while maintaining a balance between business lines, and promoting synergies.

Our aim is first and foremost to have clients – whether individual, professional or corporate – who are satisfied and who truly feel that their bank backs them in their endeavours. This target fits into our broader commitment to actively support sustainable economic growth in the countries where we are present.

Fuelling growth
Lebanon is a relatively small market and the banking sector is highly competitive. Nevertheless, although the domestic market still offers big opportunities that should materialise with time, leading banks have been actively developing their business abroad in a move to diversify revenues.

Regional markets such as Jordan, Iraq, and Egypt offered what could qualify as ‘natural’ market expansion opportunities. Even some countries in Europe, such as Cyprus, Turkey and even Switzerland and the UK, have also offered opportunities for expansion. Lebanon’s wide diaspora also represented development opportunities for Lebanese bankers. At the top of the list are a number of African countries with large Lebanese communities, which have been tapped by Lebanese banks seeking to broaden their business networks.

$137m

Net profit (2013)

18.9%

Return-on-equity ratio (2013)

SGBL group operates banks in Lebanon, Jordan and Cyprus, representing a retail network of 90 branches. In addition to banking, the group encompasses specialised subsidiaries in industries such as life insurance, financial brokerage, wealth management, and leasing.

The bank places a lot of focus on its client relationships, on a comprehensive offering of products and services, and on an efficient international network. And the model has been yielding good results. Getting closer to our customer is one of our main growth drivers. Customer satisfaction is at the heart of our strategy, and we believe a bank should be perceived by clients as a partner, which entails proximity as well as availability. Our clients – both retail and corporate – appreciate that, as much as they do our international network, which ensures them access to financial solutions and expertise across markets. This gives us a competitive edge that is appreciated by our clients, especially when it comes to trade finance, project finance and private banking.

Tapping new markets
The group has witnessed substantial growth over the past three years, despite a highly challenging environment in all of Lebanon, Jordan and Cyprus, and we have managed to weather the storm. SGBL’s balance sheet has grown almost three-fold over the past five years, reaching $13bn by the end of 2013. Profitability followed: net profit reached $137m in 2013, and the bank boasts a return-on-equity ratio of 18.9 percent. In conjunction with this growth, equity was strengthened both through fresh money and incorporation of profits. In the aftermath of the global crisis of 2008, clients, and stakeholders in general, became very keen on dealing with a bank whose financial strength was unquestionable. SGBL’s capital ratio of 11.18 percent at 2013 year-end exceeds Basel III’s international requirements, as well as domestic regulations.

Looking beyond 2014, our group is in a position to seize growth opportunities, particularly by expanding into new geographic markets. Despite the tough competition that characterises the Lebanese banking sector, we are confident that growth can still be achieved in some sectors in our home market. New opportunities emerge regularly and some represent huge potential. Oil and gas exploration and extraction, for instance, is a whole new market for us to tap into. Such growth opportunities will obviously depend on developments on the political and economic front, but we expect Lebanon’s economy to regain momentum in the medium term.

Looking beyond our home market, diverse opportunities are still out there in the Middle East for Lebanese banks to capitalise on.

At SGBL, we are confident that our experience, broad network and flexible business model are invaluable assets for tapping new markets and new businesses.

Portugal’s economic adjustment programme stimulates growth

Posted on by Ashton Wenborn

In June, Portugal formally concluded the three-year economic and financial adjustment programme agreed with the EU/ECB/IMF, under which it received financial assistance in the amount of €78bn, subject to a process of fiscal adjustment, economic reforms and financial sector rebalancing.

The challenges posed to the Portuguese economy were massive, and while the environment under which the adjustment took place was also far more adverse than initially envisaged, a significant improvement has taken place at all levels. Nevertheless, challenges remain, with the adjustment required to continue in the near future.

In 2011, Portugal faced massive twin deficits, fiscal and external, at around 10 percent of GDP. An unbalanced growth model meant Portugal was unable to defend itself from the impacts of the Great Recession, with the subsequent fiscal stimulus resulting in a deterioration of the situation that blocked it from acceding wholesale markets and requiring financial assistance (see Fig. 1)

There were three main objectives to be achieved under the programme:

  • contain the fiscal deficit and bring public accounts to a sustainable path;
  • implement structural reforms, in order to change the growth model and increase the growth potential;
  • deleverage and strengthen the financial system.

Repaying the debt
The conditions under which the programme was implemented were harsh, as the euro area fell into a recession, also contributing to a deeper recession in Portugal, which, in turn, had side effects on economic, financial and fiscal developments.

It should be noticed that, unlike other countries, Portugal’s financial sector was not at the heart of the crisis – even though it contributed to the overall leverage – but rather, it fell victim to the deteriorating environment: loss of market access impacting funding; worsening economic conditions resulting in deteriorating credit quality; and the need to deleverage all impacted the banking sector, which faced severe losses.

Portugal's fiscal deficit
Source: Ameco

In 2014, however, banks had reduced the loans-to-deposits ratio to 120 percent as requested, mainly through increased retention of deposits, which didn’t face any flight during this period. This eased the pressure on the banking sector, which is gradually becoming more focused on lending to the non-financial corporate sector.

Banks had to recapitalise, partly using some of the €12bn recapitalisation fund created under the programme, complying with a 10 percent core Tier 1 capital ratio (under BIS II). By the end of June 2014, a significant part of these funds had been repaid or banks had committed to repay them before year-end, as improved market conditions allowed them to raise equity from private investors.

As for the non-financial sector, the adjustment is well reflected in the correction of the external imbalance, which moved from a current account deficit of 10 percent of GDP in 2010 to a surplus of two percent of GDP in 2013. The non-financial private sector moved from an elevated borrowing requirement to a lending capacity, which more than covers the general government borrowing requirements (which have also narrowed).

Journey into external markets
Households are becoming more focused on savings, despite the impact that the crisis and the austerity measures have had on disposable income. Reforms to the unemployment benefit (implying lower benefits, for shorter periods) in the context of elevated unemployment and to the pension system (lower transformation ratio between last wage and pension, in the longer run) are forcing households to increase savings for precautionary reasons. This will likely result in a stable – yet more moderate – growth of private consumption in the future, contributing to a more sustained growth model.

Non-financial corporates also reduced their borrowing requirements, as they tried to improve their financial conditions during the crisis, by restructuring and postponing some of the investment projects until demand conditions improved. An objective of this restructuring by non-financial corporates was to improve their competitiveness, in a process that had begun already in the early 2000s, when European markets opened to Eastern European and Asian products.

This largely accounts for the Portuguese companies’ capability to expand their sales to new markets as domestic demand subsided. Apart from 2009, when export volumes fell all around the world following the Lehman bankruptcy, Portuguese exports have grown every single year, always above demand, resulting in the recovery of market shares that had been lost.

This switch into external markets, partly resulting from an already ongoing adjustment process, has contributed to the desired change in the growth model, more based on external demand. Many companies were, this way, ‘forced’ into getting exposure to external markets, which they will likely wish to hold and even reinforce.

This calls for investment, in order to expand capacity, as domestic demand begins to recover, and also to improve productive processes, reinforcing competitiveness and the differentiating products in a more competitive environment.

Source: Statistics Portugal
Source: Statistics Portugal

Putting people back to work
Some indicators show that the investment cycle may be turning. On the one hand, the more recent survey on investment, by Statistics Portugal, shows that capital expenditure is forecast to grow in 2014 in nominal terms, especially in manufacturing, and more dominantly in exporting sectors. On the other hand, investment has indeed picked up at the level of machinery and other equipment, as well as in transportation equipment. Since the early 2000s, investment as a share of GDP has fallen from almost 30 percent to around 16 percent. At these levels the economy is still reducing its capital base, in net terms.

Part of this investment, still characterised by smaller scale projects, is self-financed, as access to credit – despite recent improvements – is still tighter and more expensive than before the crisis. A part of the adjustment by the non-financial corporate sector is reflected in the improvement in the ratio between gross operating surplus and gross value added, which has recovered to pre-crisis levels, but which is still low in relative terms.

But improvements in the credit markets are being seen also. Spreads are narrowing, and the survey on conditions in the credit markets do show that the banking sector is both easing standards on loans and reporting an improvement in demand. Data on new production of loans to the non-financial corporate sector show that there has also been an improvement, with a slight increase, to around €4bn per month, up from roughly €2.5bn during 2012.

This improvement in capital expenditure is also having some impact on the labour market, with the unemployment rate decreasing to 14.6 percent in April 2014, down from 17.5 percent in the same period in 2013. While factors such as emigration can play a role, between Q1 2013 and Q1 2014 there has been a decline in the number of unemployed and a similar increase in the number of employed people (around 100,000 people). Still, the unemployment rate is almost double of that pre-crisis and threefold that of the early 2000s.

The challenges ahead
Reducing the unemployment rate is one key challenge for the coming years. Even though GDP growth is forecast to accelerate to around 1.7 percent in 2016-17, unemployment is forecast to remain at double-digit levels, putting further strains on the economy (fiscal pressure, both from lost revenue and increased expenditure; and the destruction of human capital, as long-term unemployment lingers). Therefore, structural reforms remain fundamental so that Portugal can improve its growth potential and contribute to a steeper decline in unemployment (see Fig. 2). ­­

A second challenge is to ensure fiscal sustainability. While the deficit has been contained, it remains elevated, and further progresses are required to generate a primary surplus that contributes to reducing the debt-to-GDP ratio from the current inflated levels. This call for the continued reform of the general government should focus on the streamlining of services and processes, reducing bureaucracy and contributing to an easing of the tax burden, which has increased significantly during the crisis.

This challenge will be an ongoing process, as the operating reality and needs of public services change, but also because ageing will bring further increases in expenditure, in the form of pensions and healthcare. It should be noticed this is a Europe-wide trend, and Portugal is among the least affected countries, given past reforms of the pension system.

A reform of the tax system is under way, which aims to bring down the Corporate Income Tax rate from current levels (25 to 18 percent in 2018). Presently, the Personal Income Tax policy is being analysed, with reform due later this year, possibly in time to be adopted with the 2015 state budget.

A lesser appropriation of income by the general government would add resources for the private sector, so that it can continue to invest and reinforce its competitiveness, adding to the growth potential, to improved exports, and ultimately contributing to further improvements in the fiscal situation.

European corporates continue to falter

Posted on by Ashton Wenborn

By the standard of recent years, 2013 was a calm one in the European corporate credit arena. The first half saw the eurozone still in recession, although this was offset by a 0.3 percent increase in GDP in the second half. Meanwhile, only four long term sovereign debt ratings were downgraded, down from nine in 2012.

Indeed, on an international level, the credit quality and stability of corporates improved in 2013. The ratio of downgrades to upgrades decreased relative to 2012 and, by the end of December 2013, the global speculative-grade default rate had fallen to 2.23 percent from 2.52 at the end of 2012.

Despite this increased stability, however, the percentage of defaulters from Europe hit an all-time high with nearly 20 percent of the total global default count in 2013. Indeed while other major regions’ proportions of the total were roughly in line with 2012 levels, Europe saw 16 defaults in 2013 – an increase of nearly 80 percent from 2012, when nine corporates defaulted.

At S&P, we believe that the eurozone sovereign debt crisis, starting in 2009, played a crucial role in the faltering creditworthiness of European corporates – especially for those in the financial sector – and continues to have an impact.

Europe’s performance against international regions
For the most part, major regions saw declines in their annual speculative-grade default rates in 2013. Europe, however, was the exception. In the full year, 81 speculative grade global corporate issuers defaulted, relatively unchanged from 83 in 2012. Regionally, the default rate dropped to 2.12 percent in the U.S. and 1.96 percent in the emerging markets from 2.58 percent – against 3.33 percent in Europe, up from 2.2 percent a year earlier. Indeed, in the fourth quarter of 2013, the majority of defaults internationally stemmed from Europe.

So, while the overall global default rate fell, Europe’s default rate increased – a performance that reflects our view that there remains continued challenges in some parts of the region despite improvements in overall economic stability.

We believe that the eurozone sovereign debt crisis, starting in 2009, played a crucial role in the faltering creditworthiness of European corporates

The euro sovereign debt crisis
Despite the decline in sovereign downgrades, ripples from sovereign debt crisis remained apparent in 2013. Peripheral European countries again provided the region with most of its drama in 2013, notably Cyprus. The nation’s banking sector was eight times the size of the overall economy when it began running into financial troubles. After initial refusal, the Cypriot parliament accepted a bailout package provided by the Eurogroup, the EC, the ECB, and the IMF. The €10bn deal came in return for the country agreeing to close the second-largest bank, Cyprus Popular Bank.

Certainly, the sovereign debt crisis has had a significant impact – not least because it led to a depreciation of the euro. This had a direct influence on corporates’ ability to pay their debts, furthering our view that the prevailing sovereign debt crisis has contributed to the downward trend for corporate creditworthiness.

That said, the ECB and euro area governments moved decisively to support the single currency in 2012 – saving Europe’s economy from depression. This had a beneficial impact on corporates, helping staunch further downgrade activity in the Eurozone. Certainly, the downgrade-to-upgrade ratio across all European companies was 1.47 percent last year, which is markedly lower than the 3.25 percent ratio in 2012.

Europe is still a work in progress
Yet it is not all bad news. Despite the sharp hike in defaults, overall stability among European corporates became more apparent in 2013. The percentage of unchanged ratings increased to 72.04 percent, which is a notable improvement from 62.08 percent in 2012, and demonstrates that creditworthiness is rebalancing throughout the Eurozone. Also, the volume of debt affected by defaults has decreased. In 2013 it totalled $17.8bn, down from $19.7bn in 2012 – a considerable improvement from the $38.7bn in 2009.

What’s more, Europe’s non-financial sector experienced an impressive percentage of upgrades. The number of upgrades in the non-financial sector outstripped those in the financial sector, and the rising stars of the year – corporate entities who we have upgraded to investment grade from speculative grade – were all non-financial companies.

The inherent volatility of the financial sector
Conversely, the financial sector underperformed in 2013. We saw eight fallen angels, which are entities downgraded to speculative grade, four of which were financial institutions. Generally speaking, financial institutions are sensitive to sudden declines in investor confidence, which can result in a relatively fast descent into default – something particularly apparent since the financial crisis.

Credit ratings and their continuing significance
To date, S&P default studies have found a clear correlation between ratings and defaults: the higher the rating, the lower the observed frequency of default, and vice versa. Over each timespan, lower ratings correspond to higher default rates, which means that the ability of corporate ratings to serve as an effective measure of relative risk remains intact.

Furthermore, transition studies have repeatedly confirmed that higher ratings tend to be more stable and that speculative-grade ratings generally experience more volatility.

S&P’s ratings analytical methodology divides the task into several factors – first, analysts examine a company’s business risk profile, then its financial risk profile before combining those to determine an issuer’s so-called ‘anchor’.

To determine the assessment for a corporate issuer’s business risk profile, the criteria combine our assessments of industry risk, country risk, and competitive position. Cash flow/leverage analysis determines a company’s financial risk profile assessment.

The analysis then combines the corporate issuer’s business risk profile assessment and its financial risk profile assessment to determine its anchor. In general, the analysis weighs the business risk profile more heavily for investment-grade anchors, while the financial risk profile carries more weight for speculative-grade anchors.

After determining the preliminary anchor, analysts consider additional factors to modify it. These factors are: diversification/portfolio effect, capital structure, financial policy, liquidity, and management and governance. The assessment of each factor can raise or lower the anchor by one or more notches – or have no effect.

After that, comparable ratings analysis is the last analytical factor used to determine the final Stand-Alone Credit Profile (SACP) on a company. The SACP is then considered alongside any relevant external support – e.g. from the public sector – to determine the final Issuer Credit Rating. The full corporate ratings criteria are available here.

Corporate ratings depend on stabilisation
In conclusion, despite measures to strengthen monetary union and the region finally emerging from recession, it is clear Europe’s corporates continued to face downward pressure in 2013.

The performance of Europe’s corporate default and transitions against its international counterparts certainly demonstrates the continent’s stunted growth. In our view, it is clear that the subsequent downgrading of Europe’s sovereigns in 2013 reflects the continued challenges in some parts of the region. And despite improvements in overall economic stability, the success of its corporates – particularly in the financial sector – is closely correlated with the recovery from the sovereign debt crisis.

Electrolux and Coca-Cola press for two major deals

Posted on by Ashton Wenborn

Wanting to streamline its business, General Electric is now in talks with Sweden’s Electrolux on the sale of its home appliance business, which is now on the chopping block for the second time this year.

Electrolux confirmed ‘it is in discussions regarding a possible acquisition of the appliances business of GE,’ but that ‘no agreement has been reached, and there can be no assurances that an agreement will be reached,’ as the discussions are still in early stages.

The century-old division is up for grabs after GE Chief Executive Officer Jeffrey Immelt earlier this year announced that the firm would focus on industrial operations. If sold, the unit could fetch at least $2bn.

If sold, the unit could fetch at least $2bn

“GE is evaluating a wide range of strategic options for our appliances business including discussions with Electrolux and other interested parties,” Seth Martin, a GE spokesman told Bloomberg.

Despite GE having a strong hold on the US market with historic inventions such as the electrical toaster in 1905, the firm has been bleeding red since the financial crisis. Electrolux, on the other hand, is number two in US sales of appliances such as dishwashers, cooktops and refrigerators, according to research firm Statista and is looking to boost revenue in Europe and the US, its largest single-country market.

Coca-Cola buys Monster
In similar news, Coca-Cola, the world’s largest beverage company, agreed to swap some brands and buy a 17 percent stake in Monster Beverage Corp for about $2.15bn, increasing its focus on energy-drinks.

According to a statement, the deal will include the transfer of Coca-Cola’s energy drinks NOS, Full Throttle, Burn, Mother and Play to Monster, while Monster will shift Hansen’s natural sodas and juices, Peace tea and Hubert’s lemonade to Coca-Cola. The two companies will share marketing, production and distribution. Coca-Cola, which already distributes Monster in the US and Canada, will expand the arrangement globally, helping the energy brand grow overseas, the statement said.

Coca-Cola has previously showed interest in buying a controlling stake in Monster as it looks to expand its brand into healthier drinks markets that are seemingly more profitable at a time when health trends are bringing down sales in soft drinks. Such a deal has not yet been made possible, but Coca-Cola does have the right to purchase as much as 25 percent of Monster, whose directors would have to approve any larger investment.

Earlier this year, Coca-Cola made a similar move when it said it would boost its stake in Keurig Green Mountain to 16 percent, making it the coffee brewer’s largest shareholder.