August | 2014 | World Finance

Argentina only has itself to blame for debt, says banking and finance law professor

Posted on August 1, 2014August 4, 2014 by Ashton Wenborn

The Argentine sovereign debt saga came to a head yesterday when the country defaulted on it in last minute talks in New York. With a colossal $1.3bn to pay back to bond-holders, the country’s economic forecast looks bleak. World Finance speaks to Rodrigo Olivares-Caminal, Professor in Banking and Finance Law at Queen Mary University in London, to discuss what the situation means for Latin America’s third largest economy.

World Finance: Well Rodrigo, Argentina is no stranger to debt, and this is the second time it’s defaulted in a century. So now the dust has settled somewhat; where does this leave the country?

Rodrigo Olivares-Caminal: It leaves the country where it was almost 10 years ago.
Argentina has a history of defaulting more or less in cycles of 10 years. It happened in 1982, 1992, December 2001… then restructuring was open until 2005, and now we’re in 2014, almost 2015, finishing another cycle.

Argentina is playing
with fire

World Finance: Well what are the consequences of this particular default?

Rodrigo Olivares-Caminal: Still to be seen, because as you know there have been lots of complications.

Basically Argentina claims that it has made payment to its creditors, which is not accurate. So basically the 30 day grace period expired. Argentina has been given a golden opportunity by the judge entertaining the claim, appointing a special negotiator to settle any differences. Argentina came back to the table only 48 hours before the deadline, and on top of that, with the same proposal that was already rejected three times by the distress investors!

Today, at 11am New York time, there will be a meeting to determine whether there has been a trigger on the CDS. And the problem is, Argentina is playing with fire. They’re claiming it would be difficult to enforce anything, because the bonds need to be accelerated by 25 percent of the bond holders. But the reality is you do not know which other debt instruments are out there with cross-default clauses. And basically when we talk about cross-defaults, sometimes things get confused between cross-defaults and cross-accelerations. There might be some differences there.

World Finance: How did Argentina get into this situation?

Rodrigo Olivares-Caminal: Argentina has been labelled in international forums as a serial defaulter. Basically there’s no reputational cost, and sometimes it’s cheaper for Argentina to default rather than honour its debts. It’s a situation that is recurrent, and it’s put off many investors.

Basically Argentina has been nationalising companies, defaulting, not engaging in negotiations, incurring big amounts of debt, that then someone else would be in office to face the problem.

World Finance: So what happens now? What choices does Argentina have?
Rodrigo Olivares-Caminal: There’s only one: sit at the table and negotiate with the creditors.

There’s a District Court ruling, there’s a Court of Appeal ruling, there’s even a Supreme Court ruling. Basically the District Court has passed an order whereby nobody can engage in helping Argentina, because it will be aiding and abetting. So basically Argentina has to sit down to the table and negotiate. There’s no other way out.

World Finance: The country is still solvent, so how is this situation likely to impact its economy?

Rodrigo Olivares-Caminal: The central bank reserves of Argentina have been decreasing lately. Argentina is not in a very comfortable position. That’s why Argentina has been forced to settle with YPF. And also Argentina reached an agreement with Paris Club. Because Argentina was paving the route to come back to the capital markets.

Argentina needs to obtain international financing to be able to pay some of their obligations. It’s very rich, has many resources, but they need to get access to finance.

World Finance: Well since the default, Argentina has called the US mediator “incompetent”, and has actually blamed the US for its default. Is this fair?

Rodrigo Olivares-Caminal: Of course it’s not fair. And not only them, but now they are blaming the whole universe! ‘There’s a plot against Argentina, there’s a conspiracy…’ Basically yesterday they were blaming absolutely everyone: Standard & Poors, Fitch, District Court, three judges in the Court of Appeal and the Supreme Court…

They’re wrong. It’s completely wrong. It’s only Argentina’s fault, because they are regularly breaching the rule of law.

So basically Argentina has to sit down to the table and negotiate

If you ask me, the story of Argentina, and again if we look backwards, every now and then we have one of these episodes. And of course it’s simpler to blame someone else than assume its own responsibilities. Mainly at the political level.

World Finance: Well looking at vulture funds now, and according to reports, US hedge funds stood to gain 1600 percent in profits in just six years. Now the Argentine president Christina Fernandez has called this extortion, but surely they knew what they were getting into?

Rodrigo Olivares-Caminal: Definitely. And Jenny if I may, I would prefer to refer not to vulture funds, but to distress investors. Because essentially what they are doing is taking a risk, like anyone else.

These individuals assume a huge amount of risk. And you know the basics of finance: the higher the risk, the higher the returns that you would expect.

Many people claim that this practice should be prohibited, but basically as long as there’s an offer and an acceptance, that’s it!

You go to an antique market, you buy a cheap painting, then you go to an auction house and discover it’s a Monet, a Van Gogh? Are you going to sell it for the discount price you bought it for? Or do you wish to get the highest hammer price?

World Finance: Well the hedge fund manager Paul Singer is very much seen as the villain of this piece, but surely he’s just an incredibly shred businessman?

Rodrigo Olivares-Caminal: Definitely. And to a certain extent, he’s pushing the boundaries, he’s making all of us who are in distress investments or debt issues, try to oversee the whole system: how it interplays, and where our judgements are needed.

World Finance: Well previously I spoke to Jubilee USA, which said that these hedge funds would set a precedent for sovereign debt recovery. What do you make of this?

Rodrigo Olivares-Caminal: I don’t think that this is an issue, because I personally think that Argentina is a one-off. Argentina is unique in many aspects.

First and foremost, Argentina has been very aggressive from day one. Second, Argentina has not been willing to engage in meaningful discussions.

Third, the reason why we ended up with these rulings from the US courts is mainly because Argentina passed a law subordinating some of the creditors. One group of creditors had been subordinated vis-a-vis the other. And basically this has been the breach of the pari passu clause.

[T]hey are blaming the whole universe!

What I’m trying to tell you is that in reality, if Argentina had not subordinated, we would not be here.

World Finance: So how is defaulted sovereign debt dealt with? Because a country can’t go bankrupt, or be forced to pay, can it?

Rodrigo Olivares-Caminal: A sovereign cannot go bankrupt because there are usually two definitions. One: when you cannot meet your obligations when they fall due, and the other: when the value of your liabilities exceeds the value of your assets.

This second one does not apply to sovereigns. So at the end of the day, if they do not meet their obligations when they fall due, it’s because they don’t want to.

The reality is the sovereign is solvent. They can increase taxes. And eventually – it’s not a 21st century concept, but – if they want, they can sell a piece of land.

After the payment plan, there have been a few restructurings. Last time there were 37 or 38. All of these have been successful, all of them with a percentage rate of about 90 percent, which is a very high percentage for a restructuring where there is no insolvency court, or no insolvency law that combined or ground down dissenting creditors.

So I think they have been very successful. I think there have been only two litigious episodes, one of them being Argentina.

World Finance: Rodrigo, thank you.

Rodrigo Olivares-Caminal: My pleasure.

‘We are growing in excess of the sector’s growth rate’: Turkiye Finans on exceeding industry expectations

Posted on August 1, 2014October 17, 2014 by Ashton Wenborn

The Turkish banking sector has been plagued by instability since the global financial crisis, but one institution that has stayed on top is Turkiye Finans. World Finance speaks to its CEO, Derya Gürerk, to find out how the bank has prospered in difficult times, and what impact regulation has had on its performance.

World Finance: Now Derya, when we spoke last year you told us how Turkiye Finans was exceeding industry expectations, in terms of talent management, network distribution and customer footing – how have the last 12 months treated you?

Derya Gürerk: We replicated our previous year’s performance. Again we are growing in excess of the sector’s growth rate – in terms of branch network expansion, human resources, balance sheet growth, as well as profit growth.

To put them in numbers: profits grew over 16 percent last year, asset size grew 43 percent and non-portfolio size grew 40 percent

To put them in numbers: profits grew over 16 percent last year, asset size grew 43 percent and non-portfolio size grew 40 percent. Also on the deposits side we grew 32 percent, and in the first quarter of 2014 our profit grew 15 percent, versus the Turkish banking sector’s profit reduction by 14 percent. So we are heading in the totally opposite direction – and so far everything is very good for us.

World Finance: So you grew 15 percent compared with the banking sector in Turkey, over all, decreasing by 14 percent. That’s an incredible result – can you tell me a bit more about that?

Derya Gürerk: It is coming from the business model mostly. We are a true SME bank, as we call ourselves. In the Turkish banking sector our long portfolio of market share is about 1.7 percent. Our market share in SME business is over three percent; it is our core business, it is where we have the muscles and it’s where we punch above our weight.

SME business is a long-term relationship driven business. It is a long term financing installment-based repayment – so our long-term investments on SME business is basically paying of these days – this is how we differentiate ourselves from the market. But all the Turkish banks are now inventing SME business; so it will be fun.

World Finance: Let’s talk in more detail about the regulations that are impacting you then – what changes have been made and are they negatively impacting on banking in Turkey – on customer experience?

Derya Gürerk: The reason why the banking sector lost momentum in terms of profit, is because of the over-regulation, or heavy regulation, on consumer financing recently. That caused the banks to lose a lot of momentum, margins and spreads on retail banking.

Also the Turkish banking system lost a lot of momentum because of the decline in interest rates firstly – then the suddenly increasing interest rates at the beginning of the year on the securities portfolio. So we haven’t been active on those fields.

For that reason, we haven’t been impacted as the others have. The only glitches are the pricing – when you have the negative volatility then you pay an extra price – this is what we are concentrating on at the moment.

World Finance: What can be done to ease out that volatility, if anything?

Derya Gürerk: The government has been trying to motivate savings, as well as also trying to curb the spending of the individual – so that they are guided to saving rather than spending.

We have been coming from a very high inflation environment. I remember the per annum inflation was about 90 percent; the average was over 60 percent. From that extreme, in less than 10 years time, we went to the other extreme, of a low interest rate environment.

And these two extremes are giving this one same result, which is spending. So this is our dilemma.

World Finance: Would you like to see any changes in the government’s plans?

Derya Gürerk: No. The rate cut of the central bank of course gave a good and positive boost to the Turkish banking bottom line, suddenly and immediately.

Also towards the end of the year, the Turkish banking sector will be able to recover some of the lost momentum on that profit generation. And for that reason, we saw around 20 to 30 percent rally on the stock exchange stocks.

The rate cut of the central bank of course gave a good and positive boost to the Turkish banking bottom line, suddenly and immediately

World Finance: I want to touch on quite a milestone for Turkiye Finans earlier this year – a $500m sukuk issuance in May – tell me about that.

Derya Gürerk: We received an incredible amount of interest and attention; the demand was over three times the demand on our insurance.

And for the first time there was tangible interest from Asia; 15 percent has been allocated to Asian investors. We are in the process of issuing a Malaysian ringgit sukuk and it will be the first in Turkey – tapping this source in Malaysia.

World Finance: Do you think that the growing international acceptance of Islamic finance is really helping Turkiye Finans and Turkey as an economy?

Derya Gürerk: That’s true. Islamic banking in Turkey has been growing steadily; we stand for 5.5 percent of the banking sector. When you consider it was only less then two percent 10 years ago, we have basically been growing at a speed of twice that of the banking sector’s growth.

And of course Turkey is capital short and savings short; for that reason we are depending on foreigners’ savings to fuel the growth. So your savings with your banks are basically fuelling our growth – so thank you very much – because 15 percent of our sukuk has been financed by investors in London.

World Finance: Derya, thank you.

Derya Gürerk: Thank you.

Saudi Hollandi Bank sees retail banking blossom in Saudi Arabia

Posted on August 1, 2014July 11, 2014 by Ashton Wenborn

At the heart of any healthy economy lies a strong banking sector, enabling individuals, families and companies to finance their ambitions and realise the opportunities presented to them. From loans and payments to acquisitions and flotations, access to the complete suite of banking services is a growing expectation for customers of all types across all countries.

All of that certainly holds true in Saudi Arabia, where a growing economy (see Fig. 1) is creating especially strong demand for retail financial services. This demand is not just being felt in the major cities, but throughout the kingdom, and technology is playing an increasingly important role in providing the new channels that are enabling customers to manage their finances in ways most convenient to them. This is an area of strategic importance for Saudi Hollandi Bank (SHB). We are the longest-established provider of financial products and services to citizens and leading companies in the kingdom, and we are increasingly applying technology to enhance our service offerings for all of our clients.

Government support
The sustainable growth we are seeing in retail banking has been prompted by two catalysts: an active government programme of investment in the kingdom, and a banking sector that is willing to engage and support individuals and families across the country. From health and education to infrastructure and food, the government has provided investment and subsidies that have brought about the emergence of a new middle class consumer, helping to drive the economy and stoke demand for banking services.

Specifically, the government is placing a greater emphasis on increasing home ownership among Saudi nationals, which currently stands at around 30 percent, and is encouraging the involvement of local banks in reaching this objective. In 2011, it launched the construction of 500,000 new homes as part of an overall spending package estimated at 19 percent of Saudi GDP, and this is already having a positive impact on home ownership. However, in Saudi Arabia today, mortgages comprise only around two percent of GDP, so the kingdom has introduced a new mortgage law to ensure a more effective and transparent system.

Saudi Hollandi bank by numbers

1926

Founded

1,534

Employees

299 Atms

52 Branches

With a population of 29 million (a huge proportion of which – some 70 percent – is under 30 years old) expected to grow at a rate of 2.5 percent annually, it is clear that the demand for banking services will continue to broaden. Increasingly, people across the kingdom are turning to banks not just to access cash, but for advice on how to finance their future plans, be it in the form of a new home or car, or simply to enable access to their funds day-to-day, wherever they are.

We already know that traditional customer service and strong relationships have an important place in meeting customer expectations. But with customers who are increasingly technologically sophisticated and used to ‘anytime-anywhere’ service, every bank needs to evolve its service model. Customers expect, and banks have to provide, convenient and effective service across a wide range of channels (including the internet and mobile apps), accessible anywhere.

Digital transformation
Nowhere is that more immediately obvious than in the impact and usage of social media. Already more than eight million people are on Facebook in Saudi Arabia, and five million on Twitter, so there is a real opportunity to build insights on customers and to make improvements in service that can be felt quickly. Today, customer enquiries and complaints generated on these channels must be dealt with immediately; responsiveness at this level is key to building a great customer service reputation, which in turn attracts new customers to your brand.

Beyond the obvious visibility of social media, technology is also enabling the growth of mobile banking and customers are embracing the use of their smartphones and tablets to handle transactions. The demand for applications that are both useful and easy to navigate is growing fast. Smart phone penetration in Saudi Arabia is already close to 75 percent and the potential to broaden the usage of this channel and to place it at the heart of customer relationships in retail banking is huge. When SHB launched a mobile banking app, over a quarter of our existing internet banking users registered almost immediately, without any direct marketing efforts.

Digital transformations like this give banks an opportunity to provide customers with ever more convenient services, and can also play a major role in building customer loyalty. Many new loyalty programmes in retail banking are now built around approaches that allow product managers to more deeply understand customer behaviour and needs. Technology is allowing the analysis of data that in turn helps to formulate offers and rewards that strengthen bonds and enhance customer experience at the same time. SHB has realised the potential in this digital transformation and has evolved its loyalty programme proposition to its customers accordingly.

Evolution and tradition
But we should not forget that in Saudi Arabia, some critically important banking transactions are still carried out in branches, including the initiation of relationships and account openings. While there is a need to continue to provide branch accessibility, the cost of doing so for the simplest routine transactions, such as withdrawing cash or making small deposits, is increasingly seen as prohibitive.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

In line with global trends, banks in the Kingdom of Saudi Arabia are actively moving their cost structures towards a combination of self-service electronic channels for everyday transactions with more specialist advisory services at repurposed physical branches. Globally, some two-thirds of branch interactions consist of the routine, with only one third being about advice or new sales. Longer-term, banks will need to move their cost structures towards a combination of self-service digital channels for everyday transactions, with more specialist advisory services at repurposed branch buildings. Providing a true omni-channel experience across low-touch digital channels and high-value add branches is the future of retail banking in the kingdom and across the world.

To be truly successful in the retail market, banks need to focus their resources on segments where they can combine a natural set of strengths with an understanding of that particular segment. And, of course, combine that with an understanding of market dynamics. For example, in SHB’s case, the knowledge that there is a relatively low home ownership rate in Saudi Arabia, and that the government is working to increase this, has led the bank to focus much of its efforts on home finance. It has also innovated an approach that combines government support for loans with the bank’s own funding to help first-time buyers.

Similarly, knowing that SMEs are a generator of economic value for the kingdom and are among the main generators of jobs in every economy, SHB has invested in understanding and serving this segment. In all of this, and against a backdrop of growing demand for retail financial services, the prerequisites of excellence in service, customer access to the right products and services, and efficient delivery channels, are as ever the keys to future success.