Month: September 2014

Abenomics review: can Japan’s Prime Minister reinvigorate its economy?

Posted on by Ashton Wenborn

In a series of World Finance interviews, we speak to Professor Janet Hunt, Economic Historian at the London School of Economics and Political Sciences, about the impact Abenomics is likely to have on Japan’s economy.

Part 1: Can Japanese PM Shinzo Abe end the country’s deflationary spiral?

World Finance: Janet, a lot of money and effort has been spent on getting Japan away from its dark deflationary past; do you think Japan is on the path that it needs to be on, in terms of its economic progress?

Janet Hunter: There’s a lot of evidence that it has increased confidence, it has increased the extent to which people are willing to spend. That in terms gives a stimulus to growth.

Whether it has progressed as far and as fast as people would like – that’s much more difficult. Because I think one of the things that we have to remember is that the sort of, third arrow of Abenomics, was structural change in the economy.

If the stimulus from the shorter-term fiscal policy is going to be sustained, he really has to deliver on structural change, and that’s a very difficult thing to do – particularly over a short time period.

There are clearly significant political constraints.

It is probably the only Japanese political party that has a degree of credibility

What I think we do have to remember is that Abe leads the largest party. It is probably the only Japanese political party that has a degree of credibility, and outweighs the other political parties collectively.

However, it is not unified within itself; it is divided; there are different views as to how best to go forward.

In some ways, politically, Abe has probably got the best chance of any political leader trying to carry this sort of thing through.

But he has to cope with his own party, he has to cope with the constraints of two houses of parliament, local government, local interests.

But I think the other thing that makes that the kind of radical, fast reform very difficult, is just people are conservative. Organisations are conservative. It is very difficult to change the way that people think, and act, and organise themselves overnight.

Part 2: Why is structural reform so hard to achieve?

World Finance: Take me into the Japanese psyche and explain to me: why is it so difficult for them to be open to change that in any other modern democracy, any other robust economic system, has already become commonplace?

Janet Hunter: I’m not actually convinced that change in other places is that easy either!

World Finance: But there is more of an appetite for change…

Janet Hunter: There may be more of an appetite for change.

World Finance: …you could say, in for instance the UK and the US.

Janet Hunter: Perhaps there is, and I think, as you indicated earlier, part of the answer to that lies in the nature of the political system and the way that people vote.

Any system that appears to deliver success generates vested interests, which make it more difficult to change.

If you can say that something has worked for 30 years, then it takes people a while to realise that it’s not working anymore. And it also makes it much more difficult to see what is going to work.

There’s quite a big appetite for change, but there’s also a feeling that they shouldn’t throw out the good things that they have, and a reluctance to do exactly what America might do, or England might do, or whatever.

So the question is really: who is going to bear the cost of the change?

World Finance: But there is a certain reality that everyone has to confront. And that’s economic reality the country’s in, they wouldn’t be pushing for such dramatic stimulus programmes if there wasn’t a need. Is that not enough to get people to want to change?

Janet Hunter: It’s clearly a significant factor, that people do recognise they have to face reality. And almost any Japanese person you might talk to will say, ‘Yes, we do need to change.’ But what we have to remember is that change comes at a price. It has a human cost.

And in any environment, if the cost is your job, or your livelihood, then change is going to be more difficult.

So the question is really: who is going to bear the cost of the change? In an environment where you have very strong vested interests, and really quite a conservative way of doing society?

Part 3: Will cutting corporation tax help or hinder Japan’s recovery?

World Finance: A slash in the corporate tax rate from 35 to 29 percent – are we seeing a system that is being structured in a way that will allow money to filter from the top to the rest?

Janet Hunter: In relation to the corporate tax, I think those of us outside Japan tend very often to forget that small businesses, family businesses, are enormously important in Japan.

I think the image that we often have is that the big businesses – the Toyotas – that is what Japanese business is. And clearly it’s a big part of Japanese business. But if you look at the predominance of small business and family business in Japan, it is far far greater than in England or the US. It is more comparable to what you’d find in, say, Germany. It’s a very big part of the economy.

So you could argue that by reducing corporation tax, you’re also assisting the smaller elements in Japanese business. And that’s very important for the domestic market and also for the external market.

As you say – quite rightly – you’ve got a situation in which there are lots of people who aren’t involved in business who aren’t going to be affected by that. Interest rates remain incredibly low in Japan, so for example, taking out a mortgage is not costly at the moment at all. It also means that saving is not very well remunerated. So in theory, people ought to be spending.

Where I think the problem has been is almost in terms of confidence. Not that people don’t have the money to spend – they just don’t have the confidence in the future. And that is one of the things that is very difficult to turn around. And I think Abe has to some extent begun to turn it around. But I think it’s really difficult.

Part 4: Will Japan’s special economic zones work?

World Finance: Now let’s talk about the Special Economic Zones that Abe is creating.

Janet Hunter: An economic zone in the same way as China in the 1990s developed economic zones, is not going to work in a very high income, high industrial economy such as Japan.

[H]e will be credited with some of the success for bringing Japan out of what has really been two decades of economic problems

I think if you see an economic zone as a way of trying to open up the Japanese economy – to deregulate what’s already there, to try to encourage foreign firms to come in – then clearly that may have significant advantages.

But Japan, as you will be aware, has conventionally had – in some respects – a very highly regulated economy. And there’s got to be a lot of evidence that it’s going to work, to attract people.

And I think the other thing is that conventionally, special economic zones have often been – as they have been in other parts of Asia – to allow foreign firms to come in and invest in local, cheap labour.

Japan’s labour is not cheap. At all.

There’s much less experience, I think, of how an economic zone might work in a country such as Japan.

Part 5: Is the outside world too judgemental of Japan’s economic efforts?

World Finance: Janet, do you think that I’m too judgemental? When I say me, I mean the outside world, who says Japan just has been getting it wrong all this time, and there isn’t this intimate understanding of how the economy is intertwined with culture?

Janet Hunter: I think we often are very judgemental. I mean, the Japanese themselves are pretty judgemental very often too.

You will find people in Japan saying, ‘We’ve got it wrong all these years!’

But if you look back to the 1980s, when the Japanese economy was doing well, you had people in the US saying ‘Oh well the Japanese have got it right! We need to do what the Japanese do!’ And it’s no easier to transfer that system to the US than it is to transfer a US system to Japan.

And I think what you need is a recognition that there are different strengths in different systems, which have evolved in different cultural environments. And there can be a mutual learning process, but if you just try and take something lock stock and barrel from one country and put it in another, it’s very unlikely to work.

If he manages to deliver on structural reform, if he manages to get re-elected, he will be credited with some of the success for bringing Japan out of what has really been two decades of economic problems.

But I think it’s very difficult. There is so much that has not changed, that probably does need to change.

US new home sales at a six year high

Posted on by Ashton Wenborn

Confirmation that the US housing market recovery remains on track came this week, when the Commerce Department announced that new home sales were up 18 percent from the previous month. August saw the market’s strongest sales pace in six years, and such heights have not been seen since May 2008.

Meanwhile, the re-sale of existing homes fell by 1.8 percent after four straight months of improvement, as investors who were previously snapping up and renovating distressed properties began to abandon the market. Investors accounted for just 12 percent of all transactions in August, the smallest share since November 2009.

“Two years ago, US housing was very cheap and it was a big investment opportunity. But now that there’s fewer foreclosures and not so much of the distressed supply that investors can snap up cheaply, that opportunity is really dwindling quite quickly,” explained Paul Diggle, Property Economist at Capital Economics. He added that the withdrawal of investors from the US market is not a new trend, and is likely to continue for some time. Compared to August last year, sales of existing homes had fallen by 5.3 percent.

Two years ago, US housing was very cheap and it was a big investment opportunity, that opportunity is really dwindling quite quickly

New home sales in the West climbed a massive 50 percent in August – the highest since January 2008 – compared to 29.2 percent in the Northeast and 7.8 percent in the South, whereas there was no change whatsoever in the Midwest. Meanwhile, the median sales price of a new house sold in August fell by 1.6 percent, to $275,600; the first price decrease in four months.

Experts insist there is no cause for concern, claiming the 18 percent climb in the sale of new properties is more than enough to maintain market growth. Diggle is confident that relaxed credit conditions and stronger job growth in the US will create the right environment for the conventional buyer to return to the market and fill the void left by investors.

SEC suspects hedge fund ‘cherry picking’

Posted on by Ashton Wenborn

Director of the Securities Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, Andrew Bowden, has spoken out against hedge fund advisors manipulating their performance indicators to better reflect on results. Speaking at a CFA Institute conference, Bowden said the organisation’s quantitative analytics unit had uncovered evidence that as many as 13 funds had been assigning their trades to favoured clients, a practice otherwise known as ‘cherry picking’.

“We plotted the accounts that were allocated winning trades more often than losing trades. And we came out of that and found 13 hedge funds that had accounts that were being disproportionately allocated favourable trades,” he said. However, the agency official went on to stress that the investigation was yet to uncover conclusive evidence of misconduct: “I’m not saying it is a pinpoint but from an examination standpoint we’re zeroing in on issues that raise the spectre of improper conduct.”

The findings come as the SEC closes out a two-year examination of recently registered hedge funds, all of which are managing over $100m in assets and have agreed to comply with the SEC’s regulatory framework, which strictly prohibits cherry picking.

Bowden’s announcement also comes hot on the heels of the regulator’s decision in August to broaden its investigation into how the ‘liquid alternative’ sector operates, after the SEC opted to extend its questioning of 15-20 funds to 35-40 funds.

The agency has, in the last four years, ramped up its efforts to uncover instances of non-compliance amongst fund advisors, and while the investigations have uncovered a long list of deficiencies, many of them are due to the complexity of new regulatory requirements. The 2010 Dodd-Frank overhaul and the SEC’s investigations combined mean that a hedge fund industry that has, historically speaking, been subject to loose touch oversight is now beginning to feel the pinch of sharpened regulatory scrutiny.

US Treasury announces targeted crackdown on tax inversion

Posted on by Ashton Wenborn

Months after President Obama spoke out against companies employing corporate tax inversions to escape tax liabilities, the US Department of the Treasury and the IRS has taken action to close existing loopholes. The practice involves a US parent company being replaced by a foreign parent, therein exempting the company in question from paying US taxes.

In a bid to escape the country’s 35 percent corporate tax rate, increasingly, US companies are exploiting tax loopholes and relocating to foreign countries to take advantage of lesser rates. “You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers,” said Obama to crowds gathered at Los Angeles Trade-Technical College earlier in the year.

You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers

The measures unveiled by the IRS prevent inverted companies from accessing foreign earnings by way of “hopscotch” loans, and the tax inversion process will also be made more difficult, given that the owner of the company must now own no less than 80 percent of the combined entity. In short, the actions restrict inverted companies from transferring foreign earnings tax-free either through a foreign subsidiary, and should help prevent the loophole from eroding the country’s tax base.

“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether,” said Treasury Secretary Jacob Lew in a statement. “While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem.”

The crackdown should succeed in reducing the benefits for those choosing to go abroad, though the actions are by no means exhaustive. “Treasury will continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments,” said the Treasury in a statement.

 

Emerging markets are ‘at the heart of the recovery’, says Scotiabank

Posted on by Ashton Wenborn

With approximately 50 percent of earnings coming from the international segment Scotiabank, Canada’s most international bank, is a leading presence in emerging economies. World Finance speaks to its Executive Vice President and Head of Global Transaction Banking to find out how to approach emerging markets.

World Finance: Well Alberta, Scotiabank offers financial services in over 55 countries, but looking at banking trends now there has obviously been a lot of interest in emerging markets in terms of trade finance, because emerging markets have grown a lot more than established markets. But are they still the investment they once were?

Alberta Cefis: We live in a time characterised by a lot of geopolitical unrest, and that is playing out very much in the emerging markets, but I think one has to remember that not all emerging markets are the same. Emerging markets are still at the heart of the recovery. Even this year, GDP growth, 50 percent of it will come from emerging markets, so they’re really coming into their own as a major force. The final point is trade. Emerging markets are growing two to three times faster than developed markets when it comes to world trade. So if one puts all of this in context, yes, emerging markets are still fundamentally important and very viable to growth moving forward.

Emerging markets are growing two to three times faster than developed markets when it comes to world trade

World Finance: Well I read that you helped to establish global transaction banking as a viable option for Scotiabank. Now how did you navigate the different markets in the different parts of the world?

Alberta Cefis: We’ve always been a global transaction bank, before let’s say the use of this terminology. Trade and supporting trade corridors was always at the heart of Scotiabank’s mandate. For us, what global transaction banking has done is just put under the fold of one group capabilities around trade, correspondent banking, cash management payments, electronic banking and liquidity solutions to support our customers and to follow our customers wherever they might transact.

World Finance: Well what are the challenges in these regions for foreign banks and investors, and how do you approach these?

Alberta Cefis: For those that are doing business in emerging markets and are new to them, it’s so important to partner with the right financial institution. What we’ve seen in the past years, particularly since the global crisis, is that a lot of banks have pulled away from some of the emerging markets, or they downsize presence. So I think what’s important is to look for an established bank that knows the country, has local expertise, knows the culture, the language, how the business is done, but also has the network and that competence to follow their customers across inter-regional boundaries.

World Finance: How do you approach countries such as China, where national banks hold the monopoly?

Alberta Cefis: We have a rep-office, we have five branches. Our purpose there is not to compete at all with the local banks. It is again to be there to facilitate trade flows, and facilitate commerce. So we see our work in that region as one of, again, following our customers, supporting trade corridors so obviously China is an important trade corridor country for us, back to where we have the majority of our strength, which is the Americas, and North, Central and South America and supporting those trade flows for our customers.

Growth in the markets we’re in to further support our customers becomes really very fundamental for us now

World Finance: What do you see as the key trends in trade finance in emerging markets in the coming years, and what are the countries to focus on?

Alberta Cefis: Historically, trade was north/south, east/west. And now it’s south/south, meaning emerging market to emerging market. The other trend that we see is the emergence of Asia as the most important trading block. That’s for two reasons, inter-regionally and intra-regionally. So it’s expected that by 2020, Asia will account for 60 percent of world trade, so it’s just a tremendously large market. But what we also see is the importance of the China and India trade corridor, which is growing very very rapidly.

World Finance: What should companies be looking for when approaching these markets in terms of support?

Alberta Cefis: Given that one would have a business plan of what they want to do and what they have to accomplish, do they have a trusted team of partners that have both network capability, and that might be inter-regionally, intra-regionally, globally and then locally on the ground. Do they have the expertise, do they know the way to do business, can they support you on the ground with the ability to really transact and be operationally efficient. So again, when we think of the obvious partners one needs, which is a good high quality bank, which has the capital strength and the expertise necessary to operate in the market, and the accounting firms and the backup that are required, particularly around complex matter such as capital investment and tax. And then legal advice and legal expertise, because particularly in emerging markets, the regulatory framework is so different.

World Finance: Well finally, what are Scotiabank’s priorities for future growth?

Alberta Cefis: Growth in the markets we’re in to further support our customers becomes really very fundamental for us now, in a period of consolidation. Efficiencies and expansion within those markets.

World Finance: Alberta, thank you.

Farazad Investments on the role of structured finance in boosting the global economy

Posted on by Ashton Wenborn

Farazad Investments provides global access to capital and assistance in obtaining loans for industrial and commercial projects. World Finance speaks to company founder and CEO, Korosh Farazad, to find out about how these activities promote the growth of the global economy.

World Finance: Well Korosh, what role does structured finance play in the current economic climate, and what is Farazad Investments’ approach to this?

Korosh Farazad: Well structured financing basically is a key element of raising capital for various types of sectors and/or arenas in the funding world, and Farazad’s interest in these type of scenarios is basically to make sure that all the components in terms of a transaction is well prepared by the potential entity that wants to borrow, and we put those all into one package and present it to our institutional investors and/or private equity financiers.

World Finance: Well what services do you offer, and how do you tailor these products to your clients’ needs?

Korosh Farazad: Well in terms of tailoring, it’s case by case. There’s various types of scenarios or components that go into one deal that allows the transaction to be successfully funded. There is structured financing, there is conventional debts, and then you have your bonds funding in terms of rating bonds and then selling it into the market through the institutions which they will then go ahead and sell to their investors within their institution. It’s quite straightforward if you take the deals and understand what the client’s requirements are, and then implement a structure that would be tailor-made for the purpose of that transaction.

[W]e’ve managed to maintain a structure that complies with the regulations of whatever country we may be financing

World Finance: Well Farazad Investments is very well situated across five continents, so what advantage is this in terms of investment knowledge?

Korosh Farazad: You have to definitely have the knowledge in order to proceed into maintaining different cultures, different criteria, different compliances, regulations, etc, and having the know-how to adapt to those various cultures in terms of the regulations, compliance procedures, the knowledge within the ground and having the local sponsors to assist on those scenarios, it provides us with the comfort, and it provides the other side the comfort that we have the ability to finance the transactions in a successful manner. There is no transaction that is a perfect transaction, and it has to go through procedures in order for us to get to the end goal, which is to finance the deal and have our institutional investors and our private equity partners to feel comfortable that their capital will be preserved and they would make a return on their investment.

World Finance: Well obviously a lot of companies like Farazad Investments were hit quite hard by the global financial crisis. However, you’ve seen progressive growth, so what do you think your key to success would be?

Korosh Farazad: There has been a lot of problems. Throughout the financial crisis a lot of entities, both the private equity funds and the institutional front were hit hard, and the banks have now recently unstitched their pockets in terms of lending. The criteria are still the same, the capacity is still the same. In terms of compliance regulations, they’re making sure that all the components are in place. We’ve been fortunate to have the right partners in place, and that means we have our own preferred institutional lenders, and the private equity partners that we work with do know us. They know that we follow very strict criteria in terms of doing a provisional underwriting, if you wish to call it, and gathering the material, making sure that the information makes sense before we present it to the institution and/or the private equity investors. Even during the economic crisis, there was still an appetite to finance transactions, whether it was a combination of private equity and/or debts, or one or the other, but if there was not enough components in the transaction and if the borrower did not provide sufficient contribution to the deal, it would make it challenging. So we implemented a structure that we wanted to make sure that the borrower has some form of contribution, whether it’s 10, 20, 30 percent of the deal as a contribution in terms of either first charges on the assets, or in terms of cash. Once that was confirmed, then it made it easier for us to find the right partner to finance the deal.

We are seeing a lot of interest in terms of bond financing, whether they’re Sukuk bonds, which are the Islamic way of doing Sharia compliant bonds

World Finance: Well looking at regulatory compliance, and what impact has this had on your business?

Korosh Farazad: It definitely has impacted the business, and that’s because of the fact that there has been so many new reforms made in the financing world, especially again after the 2008/9 crisis. In some cases the new regulations have caused transactions to fail, but we’ve managed to maintain a structure that complies with the regulations of whatever country we may be financing, or that particular jurisdiction, and at the same time it allows comfort for again the institution and/or private equity financiers, lenders, to accelerate their interest in financing the deal.

World Finance: Well looking to the future now finally, and what major tends or developments do you think are going to influence investments over the next 12 months?

Korosh Farazad: We are seeing a lot of interest in terms of bond financing, whether they’re Sukuk bonds, which are the Islamic way of doing Sharia compliant bonds, we are beginning to see a lot of interest in that arena. We are also seeing more interest in rated bonds. The company is obviously a revenue-generating entity, and they get one of the top majors, like your Standard & Poors, your Moodys, your Fitches, to come in and rate or grade their company in order to attract more investments, and we are seeing that happen. On the other hand we are also seeing a lot of conventional funding taking place, but the conventional funding is a two part structure. One, in order for us to finance a deal, we want to make sure that the client does have enough capacity in terms of cash reserves, so then we can do an entire package of two parts, one part being providing project financing for that particular transaction, and establishing private banking and relationships.

World Finance: Korosh, thank you.

An introduction to the World Finance Banking Awards 2014

Posted on by Ashton Wenborn

When Lehman Brothers crashed in October 2008 and precipitated the financial crisis, some of the world’s biggest banks were put on life support as the contagion spread around the world. In America, Britain, Switzerland, Germany, Greece, Spain and even Iceland, institutions considered to be impregnable suffered near-death experiences.

But you would never think so now. Nearly everywhere you look, banks that were once terminally ill have made rapid and in some cases pretty miraculous recoveries. Albeit with the benefit of taxpayer-funded rescues, most of Wall Street’s giants were very much back in business within two or three years and are now returning handsome profits.

However, the crisis left its mark, even among that vast population of banks that flew through it. It has to be remembered that most firms in Asia, Australia, New Zealand, Canada and Latin America weathered the storm well. After all, it affected not so much individual banks, barring a relative handful of famous names, but the financial system as a whole.

A new breed of banking
Despite that, the banking landscape has changed as a result, especially in Wall Street. Bear Stearns, the first to fail, was absorbed by JP Morgan Chase. Merrill Lynch merged with Bank of America – and it wasn’t a merger of equals. Morgan Stanley and Goldman Sachs converted themselves into commercial banks. And Citigroup used its time in bail-out to raise cash and shed assets at a furious rate. So they’re not the banks they were.

WF Banking Awards 2014

World Finance Banking Awards 2014

And although it’s not something that the public notices, behind the scenes the biggest banks, collectively known as Sifis (systemically important financial institutions), have undergone a dramatic spring clean of their capital, admittedly under pressure from governments and regulators. Take just the one issue of leverage – the amount banks raise in various forms of debt for every dollar they hold in deposits. Some were leveraged as high as 50 to one – hedge fund-style levels – while 30 to one was relatively common. As for Lehman Brothers, it had no deposits at all, precariously funding itself on the overnight market. But not any more. According to recent figures from the US Federal Reserve, financial sector debt has shrunk over each of the last four years and had fallen to $13.9trn last year compared with $17.1trn at the onset of the crisis.

“We may still hate the [American] banking system,” observes trenchant US columnist Daniel Russo, “but the reality is that it is much better capitalised than it has been in years”. Russo says that fewer banks are failing – in the years immediately after the crisis regional institutions were toppling almost on a weekly basis in the US. In fact, federal supervisors had got so adept at shutting down ailing local banks that they were arriving on a Friday and leaving on Monday morning after merging the mismanaged firm with a stable rival and changing the nameplate. Outside the US, few appreciate the rate of consolidation in its banking sector. According to the Federal Deposit Insurance Corporation, there are now some 1,600 banks less than there were at the end of 2007, down about 20 percent.

Although the scale is different, much the same phenomenon has occurred around the world as banks hastily repaired their balance sheets. Take the issue of leverage again, if only because it’s a major focus of regulators who are working on an easily explicable format for measuring just how indebted banks really are. Banks now take it for granted that they will no longer be able to design their own leverage ratios under proprietary models, as they did before the crisis. As the Bank of England’s Deputy Governor for Financial Stability Sir John Cunliffe pointed out recently, the whole concept of firms coming up with their own ratios is full of “inescapable weaknesses”. And so it proved.

The global banking sector, however, has actually changed its ways. It has collectively adopted more responsible lending policies and the quality of loan books has improved as a result (see Fig. 1). Bit by bit, low-quality assets have been sold off to shadow institutions that specialise in the management of higher-risk debt. Vitally, the investment banking divisions whose reckless accumulation of suspect debt instruments wrought most of the havoc, have been split – or are in the process of being split – from the deposit-taking divisions.

Shocked by what happened and by what they subsequently discovered about the habits of some of the systemically important firms, in the intervening years regulators have subjected them to a blizzard of reforms designed to make them more stable. Although some institutions lobbied hard against certain aspects of the regulations, all are moving quickly to meet much higher standards of, for instance, capital buffers. Indeed, bowing to the inevitable, most banks are ahead of the official timetable.

In a complete turnaround of the laissez-faire style of regulation that prevailed before the crisis, the authorities are coordinating their efforts through global bodies such as the Financial Stability Board. The goal is to subject banks to common, cross-border standards that, as far as is possible, allow authorities to make internationally transparent assessments of their soundness. Also, they are determined to prevent firms exploiting opportunities in “regulatory arbitrage” by setting up operations in a jurisdiction with softer rules than elsewhere.

Of course it’s not possible to entirely repair such a heavily damaged sector within a few short years. After all, globally, banks lost $1.5trn in just two years, between 2007 and 2009. Ever since, liquidation experts have had a field day – in Germany, for instance, Lehman Brothers Bankhaus collapsed owing the Bundesbank €8.5bn, and it has taken years to sort out the mess. Now, however, the global tidy-up operation is nearing its end.

Work to be done
If they haven’t read it yet, most senior bankers could do worse than obtain a copy of a book that has greatly influenced regulators: The Bankers New Clothes: What’s Wrong with Banking and What to Do About it. Written by Anat Admati of Stanford’s Graduate School of Business and Martin Hellwig of the Max Planck Institute, its premise is that higher capital ratios were the starting point for reform.

According to the authors, banks had rendered themselves unsafe because they made money out of their fragility – their self-designed ratios for capital and liquidity were daringly low, mainly because they permitted sky-high leverage ratios. As it happens, the influential Financial Times economist Martin Wolf, a member of UK’s Independent Commission on Banking, agrees wholeheartedly with the main proposition of The Banker’s New Clothes. He wrote last year: “It makes no sense to build either bridges or banks that collapse in the next storm. One makes banks stronger by forcing them to fund themselves with more equity and less debt.” Although not many banks are moving towards an equity ratio of 20-30 percent, which the authors suggest is the more appropriate number, they are rapidly heading in the right general direction.

So how much safer are the banks? The main reform is that the minimum tier one capital ratio has been raised for most banks from a lowly four percent to a more robust six percent of risk-weighted assets. Also, the actual composition of tier one capital has been revised to make banks safer in the event of a crisis. Further, there is now a countercyclical capital buffer that can be raised or lowered according to the growth of credit. If regulators judge that too much credit is being handed out, they will insist on a compensating increase in the buffer.

The truly giant institutions will be required to build a risk-based capital surcharge that reflects the degree of their systemic risk. In short, the big boys must take a hit for the heightened danger they are judged to be running. Boardrooms have raised their game, also under pressure from regulators following another avalanche of research about directors’ responsibility for the crisis. “During the financial crisis it came to light that many of these risks [in bank governance] had been neglected, underestimated or – particularly in the case of systemic risks – not understood and taken into consideration,” pointed out Klaus Hopt of the Max Planck Institute, a German research institute, in a recent paper.

Unless they stumble onto the road of reform, the big institutions are very much in the eye of relentless regulators. In August, Standard Chartered took a $300m hit from probably the world’s most aggressive agency, the New York Department for Financial Services. Its heinous crime? Alleged deficiencies in its information technology systems. No overt damage was caused, no money-laundering rules breached, and no Libor was rigged. As one analyst wrote: “there appears to be no suggestion by the NYDFS of any wrongdoing or breach of regulations by Standard Chartered”. So in this new environment, banks can be punished merely for being fallible.

In the World Finance Banking Awards 2014, we highlight the banks and leaders who have helped to rebuild an industry. There is also a selection of expert commentary, making the supplement the ideal companion for those in the industry, and for those who need to know who is defining the markets, and where.

Ackman announces plans for Pershing Square Holdings IPO

Posted on by Ashton Wenborn

The move will enable the fund, established in 2012, to raise permanent capital, opening the doors for bigger investments by reducing investor redemptions.

The IPO will offer shares at $25 each. $13bn firm PSCM, which manages but remains separate from PSH, is set to invest $100m. The $2bn investments would add to the $1.5bn already secured from 30 cornerstone investors – including European pension funds, private bank clients and other US hedge funds – making the fund’s market capitalisation a minimum of $5bn.

Pershing Square Holdings has seen a successful year with returns in excess of 30 percent for its investors

The announcement fulfils expectations set out earlier in the year. In August Ackman sent a letter to investors confirming rumours of a future IPO. “Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions”, he wrote. “We will hopefully begin to address this issue with the initial public offering of Pershing Square Holdings, Ltd.”

Pershing Square Holdings has seen a successful year with returns in excess of 30 percent for its investors. Ackman hopes to increase that further by raising public money through a closed-end fund and following similar recent moves by other key hedge fund players such as Alan Howard and Daniel Loeb. He said in a statement: “We expect that the public listing of PSH will substantially enhance the stability of our capital base enabling us to invest a greater percentage of our assets in activist commitments on a long‐term basis, and improving our ability to take advantage of market dislocations when they arise”.

Earlier in the year Ackman joined forces with Canadian pharmaceutical firm Valeant in a bid to purchase Botox-maker Allergan for $53bn, adding to its current 9.7 percent stake in the company, but its efforts have so far proved unsuccessful.

Harbour Asset Management: New Zealand’s economy is unshakeable

Posted on by Ashton Wenborn

As sports lovers watched the 2014 FIFA Football World Cup, the famous New Zealand All Blacks became focussed on the defence of their Rugby World Cup in 2015. With an unbeaten record in 2013 and a home series win against England in 2014, the defending champions deserve their status as strong favourites.

At the same time, New Zealand’s economy and financial markets have been world-beaters, with conditions set for further success (see Fig. 1). The New Zealand economy has been growing at three to four percent with future growth underpinned by the post earthquake rebuild for the second largest city, the strong dairy prices lifted by demand from the growing Chinese middle class and record net migration. The depth and breadth of the New Zealand’s financial market has also expanded, with government asset sales and new listings in the agricultural and technology sectors.

In this environment, it has been Harbour Asset Management (Harbour) that has emerged as the premier New Zealand investment manager. Named Morningstar Fund Manager of the Year, New Zealand in 2014, Harbour has received World Finance’s Best Investment Manager, New Zealand award in both 2013 and 2014. An independent specialist, Harbour is focused on providing an expanding client base with New Zealand growth and income investment solutions.

New Zealand key facts
Source: Statistics NZ

Repeating history
New Zealand had already learnt the lesson of its own financial crisis in the mid 1980s, which had prompted widespread reforms to create a world-leading framework for monetary policy and fiscal responsibility. As a result, New Zealand entered the global financial crisis with a strong banking system, low inflation, and low levels of government debt. This provided ample scope for the authorities to respond with large-scale policy support, even though the eye of the crisis was in the northern hemisphere. Now that the rest of the world has emerged from the financial crisis, New Zealand’s economy has also benefited from three additional drivers of growth.

Following the devastating February 2011 earthquake in Christchurch, New Zealand’s second largest city, there has been a surge in residential and commercial construction, funded by insurance cover from global reinsurers, which is set to continue for many years to come. The country has benefited from very strong dairy prices and a quickly growing trade relationship with China. There is a structural change occurring across Asia, and New Zealand has the agricultural land, technology, sunshine and water to feed the growing middle classes in Asia. It is experiencing record net migration, equivalent to around one percent of the population, as foreigners are drawn to the economic prospects in New Zealand, and fewer locals are departing to foreign shores as they see better opportunities at home. These drivers of growth have not only put New Zealand at the top of the league table for GDP growth in 2013, but it is forecast to remain at the top over 2014 and 2015.

Combined with this macroeconomic backdrop, New Zealand has a vibrant capital market that is seeing new equity listings across a number of sectors. Government stability, strong growth of the local savings industry and the proximity to growing Asian markets are factors that have helped contribute to around an 18 percent growth in the equity market in the past year. Moreover, its equity market continues to provide a cash yield to global investors around 4.5 percent while local investment grade bonds also yield around 4.5 percent. These yields look good in the context of local inflation, which is hovering below two percent.

New Zealand’s Harbour Asset Management has embraced these market conditions, harnessing the experience of a team of proven investment professionals, many who have worked together for over 14 years. The company’s experience and consistent approach has delivered stellar investment outcomes for clients.

Made to measure funds
Harbour’s high growth Australasian equity strategy has delivered annualised returns of 13 percent per annum for over 14 years with an impressive 4.8 percent per annum alpha (see Fig. 2). This fund brings a core exposure to New Zealand, but also invests about 25 percent of the funds in Australia in higher growth sectors. It has a bias to faster growing sectors such as healthcare and technology, and in the 12 months to May 2014 it provided gross returns of 21 percent.

Australasian equities' cumulative performance
Source: Harbour, NZX, Goldman Sachs

Harbour invests in its staff and business to ensure that it meets the needs of its growing support base of around 60 wholesale clients and 250 independent financial advisors. The company’s client focus has also prompted the launch on new products in 2014. In March this year, it launched the Harbour Australasian Equity Focus Fund, which combines the talents of our individual in-house analysts and portfolio managers. The fund will generally only invest in stocks that are ‘buy rated’ by the Harbour analysts with final portfolio construction having no regard to their weighting in the index. These in-house ratings reflect the analysts’ assessment of the growth investment opportunity relative to current market expectations and prices.

In June this year, following client demand, Harbour launched a new income fund. It combines the New Zealand Corporate Bond Fund, which acts as ballast and provides a high quality stable income stream, and the Australasian Equity Income Fund, which provides diversification benefits that over time should provide the capital appreciation required to offset the impacts of inflation.

It has been a busy and successful time for Harbour, but like the famous All Blacks, the team is resolutely looking forward and focused on delivering future success for its clients investing in New Zealand for income and growth.

Banca March’s prudent approach sees it become Europe’s most solvent bank

Posted on by Ashton Wenborn

Banca March, founded in 1926 in Spain’s Balearic Isles, is the only completely family-owned Spanish bank and the only one that specialises in asset management. It is also the most solvent bank in Europe (see Fig. 1) as shown by the stress tests carried out by the European Banking Authority.

These qualities and the idiosyncrasy, history and experience of Banca March make it the perfect bank specialising in private banking. Being a 100 percent family-owned bank means it adopts a prudent approach to asset management – a feature of only those who risk and manage their own money. This conservative management policy has been particularly notable during the years of the financial crisis, steering clear of risks and adventures, and allowing the bank to emerge significantly strengthened – as shown by the growth ratios in the strategic business areas.

Maintaining and strengthening
Our goal is to become leaders and references in three financial activity sectors: wealth and asset management, where we already occupy a prominent position; private banking, where we are already implementing a very ambitious growth project; and corporate consultancy, where we are starting to see the first results of establishing the bases, staff and resources.

Group strength

The Banca March Group has two main activities:

Banking, through Banca March and its associated companies: March Gestión de Fondos, March Gestión de Pensiones, March Vida de Seguros y Reaseguros and March JLT Correduría de Seguros.

Investment, through Corporación Financiera Alba, a stock market listed company of which Banca March is the major shareholder. Through this company, the Banca March Group participates in ACS, Spain’s leading services and construction company and one of the top such companies in Europe. ACS is in turn the largest shareholder in the German company Hochtief and Australian outfit Leighton, Acerinox (one of the world’s leading manufacturers of stainless steel with plants in Spain, the US, South Africa and Malaysia), Indra, Ebro Foods, Clínica Baviera and Antevenio. Corporación Financiera Alba is also the leading shareholder of the venture capital company Deyá Capital, focusing on investment in non-listed companies such as Ocibar, Ros Roca, Mecalux, Pepe Jeans, Panasa and Flex.

What’s more, rather than abandoning commercial banking, we are maintaining and strengthening it in our traditional area for four reasons: because it is profitable, because it adds value to our company, because we know our customers and because we hardly have any delinquency. We know we are very competitive in private banking. We can offer services the major Spanish and foreign banks cannot adequately provide. The reorganisation of the finance sector in Spain is enabling us to consolidate that unique model.

Being a bank specialised in private banking is a plus that other banks in the sector cannot offer. In Spain, there are major global, general and international financial institutions offering specialist asset management as one of their services to customers. At Banca March, asset management is not just another one of the company’s services but rather its core business. In its almost 100 years of existence, Banca March has specialised in managing the assets of family business owners, and providing services and financing to family businesses, covering a twofold objective that is the basis for the company’s success.

Finally, only one family bank can offer and implement a true co-investment proposal with its customers: the possibility of participating in the same opportunities and businesses as the family that own Banca March. A clear philosophy: same risks, same profit opportunities.

Consolidation in times of crisis
Banca March has been perfectly placed to take full advantage of the economic turbulence of recent years, attracting customers who are seeking peace of mind and security for their investments. Our bank has known how to continue to grow and consolidate its position. In this respect, the bank’s new project is focused on increasing the specialisation of its own offices to transform them into advisory and business centres that can serve the customer as appropriately and conveniently as possible. The daily financial transactions of customers will become collateral services that will be offered through all the channels provided by new technologies.

Banca March by numbers

We are proud to have received the Best Private Bank Spain 2014 award from World Finance for the fifth year running. The strength of the bank has also been shown in the investment funds and SICAV sector, through the March Gestión de Fondos subsidiary. Torrenova, one of Banca March’s three institutional SICAVs, has become the leading Spanish SICAV in terms of managed asset volume. There is an identical product in Luxembourg, with more than €1bn assets under management.

In addition, March Gestión is now ranked third in SICAV management behind two major Spanish banks: a sign of Banca March’s recognition and the guarantee it can give its customers. March Gestión stands out for the originality and uniqueness of its investment funds, looking for profitable and safe alternatives for its customers. One of the elements that sets Banca March apart is its commitment to family businesses. The Family Businesses Fund is a global equities markets investment fund that invests in a selection of the leading listed family-owned companies. More than 25 percent of the shareholders belong to a single family, at least one member of the family is involved in its management and there is an interest in transferring ownership to the next generation.

Banca March is also particularly active in the corporate banking business, helping to finance companies and providing general advice, as well as helping customers with their long-term needs and projects. Furthermore, Banca March is very active in the parabanking financing business in order to take advantage of the growing opportunities of corporate debt.

Another of Banca March’s strengths is the development of its insurance business through March JLT, the group’s insurance broker and the first mainly Spanish-owned brokerage. March JLT offers its brokerage services to large multinational companies and medium-sized businesses in key sectors such as finance, tourism, distribution, civil construction, shipbuilding and social welfare, as well as to public administrations both in Spain and abroad. With over 100 employees throughout Spain, March JLT offers its services, through Jardine Lloyd Thompson (JLT), to companies in over 130 countries. About to celebrate its centenary, Banca March is today a successful project that helps family businesses and business families: always with the objective of being a great, but family-orientated, bank.

Nordea Bank keeps its cool in rough economic waters

Posted on by Ashton Wenborn

Nordic banks avoided the worst of the global economic downturn and bounced back much more quickly than their southern European counterparts. There are several reasons for this impressive resilience – the Scandinavian economy was less exposed to Europe, for one. But part of the reason Nordic banks fared so well during such a tumultuous time for the industry is that they responded quickly and effectively in order to remain appealing to investors and safe for customers.

Sweden has some of the most progressive regulation in Europe, slowly brought in after a local banking crisis in the 1990s. Even before the most recent crisis, Sweden had one of the highest capital ratio mandates in the developed world, demanding that, from 2015, a minimum of 12 percent of assets should be core tier-1 – under Basel III guidelines that figure is only seven percent by 2019. There are plans afoot to boost up capital ratios even further as counter-cycle measures designed to buffer the local economy from further shocks. Though these measures may seem excessively stringent, Nordic banks are much better off for it, and as a result, Sweden’s banks have been generating some of the highest returns on equity in the region. In 2013, the Swedish government sold its remaining stake in Nordea, at the time of the sale shares were up 28 percent that year.

The Nordic banking industry has undergone tremendous ­– if perfectly calculated – change over the past half a decade. But these changes have ensured unparalleled capital adequacy and asset quality, ensuring that macro-economic trends continue ticking up in the region. Nordea has been leading the industry in terms of adapting to the new industry environment without sacrificing the quality of its services.

Stabilising the economy
The bank is a shining beacon of hope in the European industry’s horizon. Its strong performance, adaptability, and resilience in the face of a crisis can be emulated across Europe. Nordea is an even more vital role model since the financial crisis of 2007-08, as it has since been completely denationalised. When the European banking industry almost collapsed six years ago, a number of banks across the region were taken under governmental control; now many of these authorities have been left with no coherent strategy about how to return banks to the public domain. Sweden’s phasing out of Nordea took over two decades, but it was done in a meticulous way. It proved that banks can be safe and profitable in equal measures.

Nordea, the largest financial institution in the Nordics, is constantly striving for greater customer experiences by fine-tuning the organisation and its services to adapt to changes in customer behaviour, regulations and tough competition. As the only global Systemically Important Financial Institution in the Nordics, Nordea continues to deliver stable results and has been awarded Best Banking Group, Nordics by World Finance for the fourth year in a row. Christian Clausen, President and CEO of Nordea, says: “We are proud to receive this award. We see it as a recognition that we are able to manoeuvre to become the relationship bank of the future: 2013 was yet another year of low growth and interest rates declined to record-low levels. In this environment we have delivered a stable income level and seen a continued inflow of customers.”

With operations in seven countries including the Nordics, the Baltic countries and Russia, more than 10.5m retail customers, more than 500 corporate and institutional relationships and more than 1,000 branch offices, Nordea is the most diversified bank in the region. Clausen says: “As the last five years of recession and mediocre growth have proven, strong banks are vital not only for financial markets but for society at large. Throughout the crisis, Nordea has been a stabilising force in society, serving more customers and doing more business.

The bank is a shining beacon of hope in the European industry’s horizon

Adapting to changing behaviour
Nordea is continuing to adapt to customers change in behaviour by building a solid platform for future business. While branch offices are handling advisory services, Nordea is increasing its call centre capacity and is now offering twenty-four-seven services in the Nordic countries and increasing other ways of meeting and advising the customers.

Net meetings and secure chat functionality are other ways of meeting the customer on their terms, making it all the more convenient to be a customer of the bank. In addition, there has been a rapid increase in the use of mobile solutions for everyday banking. Nordea’s mobile offerings are looking at an increase of more than 1,000 new users per day in 2013. Clausen says: “We pursue a multichannel distribution strategy. The aim is to improve customer satisfaction while reducing the cost of service. Proactive contact with our customers is conducted through local branches, supplemented by contact centres, video meetings, online services and the mobile bank – the latter of which is becoming increasingly important.

“Our strong financial platform is fundamental to the ability to deliver on our relationship strategy and our most important value – creating great customer experiences. Everything everyone does at Nordea has one purpose only – to create great customer experiences. At every level of our organisation, this message is the most important guide for every action and decision taken. We strive to understand our customers’ needs and help them realise their aspirations. This is the core of our relationship strategy – ensuring financial stability for our customers, leading to high satisfaction and closer, long-lasting relationships. In turn, these closer relationships lead to reduced risk for the bank.

A market-leading position
Nordea is fulfilling its ambition to be the preferred speaking partner for the large corporates in the region, leveraging on a multi-local presence in the Nordic markets combined with size and competence that matches international competition. Clausen says: “In our wholesale banking operation, our size, scale and financial strength enables us to meet any financial need of our customers.

With €233bn of AUM, Nordea is by far the largest asset manager in the Nordics. A steady growth in the Nordic market has been complemented by a strong inflow from their global fund distribution. In May 2014, Nordea was awarded third place in Mackay Williams’ ‘Fund Brand 50’ report; the report measured which asset managers European customers wanted to do business with over the next 12 months.

An increased fund management operation leads to an increased focus on how customers’ money is invested. Nordea was the first bank in the Nordics to sign the Principles for Responsible Investment (PRI) back in 2007 and has developed a systematic approach to ensure responsibility. Nordea’s asset management team identify companies breaching international norms and engage with them to encourage positive change. This approach has then broadened to include positive screening, actively searching for companies that have ESG aspects as part of their actual business. Clausen says: “We recognise that we are an integral part of society, and as such, we want to do our share in creating a sustainable future. Our values, together with our code of conduct and sustainability policy serve to guide our people in their behaviour towards customers and our work to act ethically throughout Nordea.”

On the financial side, Nordea has delivered stable income, and has recorded flat costs for 13 consecutive quarters (by the end of 2013). With loan losses continuing downwards, the strong, stable capital generation has continued. In 2013, the core tier-1 ratio was up by 180 basis points to 14.9 percent. The capital base was increased and has doubled since 2006. Clausen says: “Looking ahead we do not foresee any substantial easing of the challenging environment of subdued consumption and low investment needs among both households and corporates. We are adapting to this environment and maintaining our strong position by becoming more efficient and reducing our costs further. Also, by pursuing high operational efficiency and better agility in our solutions and services, we will ensure great customer experiences – and fulfil our mission of ‘Making it Possible.”

Islamic State “is a completely different model of terrorist financing” | Video

Posted on by World Finance

What makes a terrorist organisation successful? Extreme views? The ability to recruit high numbers of dedicated and malleable followers?

These might be contributing factors, but what it really boils down to is money. Loretta Napoleoni, one of the leading experts on terrorist financing, and financial barrister William Willson, discuss the ways terrorists raise the billions of dollars needed to wage war against the state, and how this can actually have a positive impact on nations’ economies.

World Finance: Well Loretta if I might start with you. Terrorism: could it be described as a business?

Loretta Napoleoni: Oh absolutely! It is a very, very expensive business; and it’s also a business which is very hard to keep rolling, because most of the activities that terrorist organisations carry on in order to fund themselves are illegal or criminal activities.

“Before 9/11, about one third of the money that terrorist organisations generated came from legitimate businesses”

World Finance: What sort of figures are we looking at? How much does it cost to finance a terrorist organisation?

Well terrorist organisations are very expensive. It is in reality an organisation that is waging war against the state.

It’s very difficult to give a figure to the amount of money. Some terrorist organisations can generate vast amounts of money. In the case of PLO in the 1990s, according to the CIA, the turnover of this organisation ranged $8bn-$12bn. So we’re talking about more money than was the GDP of countries like Jordan, for example.

World Finance: What’s the most significant source of terrorist financing?

Loretta Napoleoni: Well in the past, the smuggling of drugs and people was the number one revenue for terrorist organisations. Things have changed since the rise to power of the Islamic State. It’s a completely different model of terrorist financing.

Before 9/11, about one third of the money that terrorist organisations generated came from legitimate businesses. PLO actually controlled the production of textiles from the occupied territories in Palestine, and used those revenues to fund its terrorist organisation.

So, one third is roughly what it was before 9/11. But today, in the case of the Islamic State, the so-called legitimate business is actually much more than one third. Some of the aid near the borders in Turkey, in Iraq, and in Kurdistan – part of that aid is taxed by the Islamic State, which controls those borders.

We can say the same about the oil fields. The Islamic State is in business with the local tribes in Syria, in order to sell the oil to the Damascan government.

“There are suddenly new sources of cash, and that’s a very terrifying prospect, and a very difficult thing to counter”

World Finance: William, do you have anything to add?

William Willson: In terms of the rising star of international terrorism, the Islamic State, we’ve got a completely new situation here. We have a terrorist organisation that’s basically taken over the second largest city in Iraq. Reports say that their raid on the large bank in Mosul pocketed them $430m. Well that’s quite a lot of money to hold in cash. It’s not something we’ve ever really seen in international terrorism before: the ready access to that amount of cash.

When you couple that again with them holding 35 percent of territory, they’ve now got all of the oil fields in the north of Syria. There are lorries full of oil going into Turkey. There are all of the antiquities that were held in the Middle East: there seems to have been quite a large outflow of them, again raising tens of millions of dollars.

There are suddenly new sources of cash, and that’s a very terrifying prospect, and a very difficult thing to counter.

World Finance: Well Loretta, do you think economies could perhaps indirectly benefit from terrorism? Especially considering the new calculations on GDP which will include arms sales, drugs, and prostitution?

Loretta Napoleoni: Oh, absolutely. The best example is Italy: Italy is part of the PIGS, which you know are in serious economic trouble because of the crisis of 2010.

And among these countries, Italy is the one that has done the best because a large part – maybe even 40 percent – of the GDP of Italy is produced by the black market! And the black market is controlled by organised crime, so, we have a criminal economy which has sustained strongly the legitimate economy.

“For some people what they would call terrorism is for other people what they’d just call politics”

World Finance: Well William, what are the penalties for financing or investing in terrorist organisations, or those affiliated with terrorism?

William Willson: In this country it’s obviously regarded as a criminal activity. So the terrorist legislation here says that if you either have knowledge or a reasonable suspicion that a particular batch of money is being used for the purposes of raising terrorism, that creates a criminal offence.

The state has search and seizure powers, so it can stop actual flows of money as they are flowing out to fund terrorist activities.

Part of the problem that we face in trying to clamp down on these organisations is that they’re treated differently in different places. Part of the reason for that is that different people define terrorism differently: for some people what they would call terrorism is for other people what they’d just call politics, or involvement in foreign politics in other arenas.

World Finance: Well William, a comment piece in the FT said that financial secrecy supports networks that fuel terrorism, criminality, and tax evasion. If companies were forced to be more transparent, what would be the impact on terrorism? 

William Willson: We traditionally associate the funding of terrorism coming from shady places, often offshore jurisdictions, which have very light-touch regulation. Where banking secrecy law is very prominent, and therefore the ultimate depositor or customer, their identity is ultimately masked.

But at the same time it’s true to say that that situation has changed quite a lot in the last decade.

A lot of the jurisdictions that I work in – the Cayman Islands, Dubai, the British Virgin Islands, Gibraltar – have all enacted tough legislation, and their regulators are now taking this sort of thing a lot more seriously.

You’re not seeing so much money in the terrorist economy coming from sources like that. The terrorists all seem to be one step ahead of the game. And they’re now resorting to different tactics and different places.

I think we’re going to be seeing the geography of that shift away to other places. I think Central Asia is the next big one, and also certain states in Africa.

World Finance: William, Loretta, thank you.

William Willson: Thanks a lot.

Banplus Banco Universal’s fighting spirit

Posted on by Ashton Wenborn

Venezuela’s economy has been through a turbulent time over the past decade, with national growth remaining unstable. However, recently the economy has maintained solid expansion and financial services are doing particularly well. The last four years have seen the money supply grow exponentially, with a 77 percent rise in the first quarter of 2014 alone.

This has largely improved capital for Venezuelan financial firms, which as a sector contribute unprecedented growth rates to national GDP (see Fig. 1), and has taken to supporting the local economy. In particular, Banplus Banco Universal has found its strength and capital in local small and medium enterprises, which have seen positive growth in recent years.

As a result, Banplus Banco Universal has maintained a constant growth rate in its turnover during the last five years, resulting in higher market shares in loans and deposits, reaching 0.67 percent and 0.75 percent respectively at the end of the first half of 2014. This good progression resulted in the firm last year receiving approval to increase capital and conclude its transformation into Banco Universal from the Venezuelan watchdog, the Superintendency of Banking Sector Institutions. In part, this comes down to the firm showing sustained and significant growth in the segment of small banks in the past five years, thanks to strong financial balances and a diversification of its offerings of products and services to target customers.

Branch expansion
The firm currently serves its 112,600 account holders through 47 agencies, 38 ATMs and a work force over 800 employees. “The sheer size of Banplus has grown in recent years, and this has paid off in terms of customer satisfaction,” says Diego Ricol, Executive President at Banplus Banco Universal.

“The opening of new branches in strategic locations and the growth of the sales force have sustained the level of trust and increment of funds deposited by customers and administered by Banplus Banco Universal. This strategy was responsible for Banplus Banco Universal climbing positions in the Venezuelan market, increasing the market share from 0.14 percent in June 2007 to 0.75 percent in June 2014, which represents $1,929m,” explains Ricol.

To this end, the firm has performed particularly well when it comes to financial intermediation loans for the first half of 2014, recording an annualised increase of 101 percent to $884m. This allocation effort helped the bank climb two places, to the 12th spot in the national rankings of private banks as it continues to hold a prudently low rate of arrears among customers, significantly below that of the general sector.

According to Ricol, this performance has been maintained by the continuity of three strategies, including credit placement in sectors with economic growth and controlled risk levels; efficient processes for admission and approval of credits; and efficient collection processes.

Source: IMF, World Bank
Source: IMF, World Bank

Product innovation
In particular, SMEs have proved to be a sector with massive growth prospects, in addition to Banplus focusing on and investing in significant technological advancements that could increase its transactions and clients based on numbers.

“A winning strategy for Banplus Banco Universal was to increase the involvement in the market share of electronic payments, focusing efforts on expanding attention to segments formed by individuals and small and medium business establishments, which complement each other. Flagship products for these market segments are Points of Electronic Sales and Credit Cards respectively, and in both segments Banplus reached a better position than other banks in the small segment,” says Ricol.

More importantly, the bank has developed product and transaction services that enable customers to manage their daily finances through electronic channels, like home banking, which is gaining ground in markets such as Venezuela where distance to branches often leaves many unbanked. With technological advances allowing for electronic and mobile banking, firms such as Banplus are quickly gaining an upper hand by tapping into a new and broad customer base.

As a result, the firm saw its cumulative net profit reach $39m by the end of the first half of 2014, leading to a 59.9 percent return on equity, making it the fifth most profitable private bank in Venezuela. Hopefully this growth trend will continue as Banplus Banco Universal pursues nationwide expansion in 2014, as well as a strengthening of the processes and internal control required. By investing and believing in Venezuela’s development, Ricol maintains that Banplus will see a year of growth benefiting employees, customers and shareholders.

Tamer Group on Saudi Arabia’s healthcare market

Posted on by Ashton Wenborn

Social development has been in focus over the past decade in Saudi Arabia, with healthcare at the forefront. Over the years, Tamer Group has become a leader in healthcare, bringing out a range of innovative pharmaceutical products. World Finance speaks to its Managing Partner, Mohammed Tamer, to find out about developments in the kingdom, its initiatives for promoting women, and strategy for future growth.

World Finance: Well Mohammed, maybe you can start by telling me, how has healthcare developed in Saudi Arabia over the past few years?

Mohammed Tamer: It has been developed positively in terms of expanding new hospitals. The Ministry of Health is really working hard at expanding hospitals in a very quick period of time. They’re also encouraging more hospitals for the private and the government sector. Today the healthcare in Saudi Arabia is a challenge. E-health is an issue. There, of course, the hospitals are automated, but there is no interlink between them. So, like everywhere else, infrastructure solutions, IT solutions are challenges, and human capital or human workforce is a challenge, to obtain further growth to cope with the population.

World Finance: How much is the healthcare industry worth, and how do you see it developing with government incentives?

We are number one in pharmaceutical in Saudi Arabia today, in value and in quantity

Mohammed Tamer: They are building over 138 hospitals, they’re reaching 44,000 beds. This is a ratio of 3.5 beds per 1000 of the population. Currently we’re at one bed per 1000, so it’s quite a considerable increase. The total healthcare budget is expected for 2014 to close around $27.4 bn. If the expenditure continues the same, it will reach around $47 bn in the next two years.

World Finance: Well as a leading Saudi conglomerate, how is Tamer Group structured, and how involved are you in driving the country’s healthcare sector forward?

Mohammed Tamer: My grandfather was a pharmacist, and moved into Saudi Arabia in 1922, specifically Jeddah, and at that time he was the first pharmacist, and opened the first pharmacy. Later on, my late father and my uncle decided to expand the pharmaceutical distribution network of the Tamer family business, and we have opened all over the kingdom and the GCC. Today we are a company structured of three divisions. Healthcare, which is pharmaceutical and medical devices. Consumer, which is fast-moving products, beauty care, and hair colourants. And the third category is the prestige perfumery and luxury items. We are number one in pharmaceutical in Saudi Arabia today, in value and in quantity. We bring the latest products that are available for the local market, and we also manufacture locally, for the Saudi and the GCC Levant area, and North Africa.

World Finance: What are the health trends in the country, and how are you responding to these?

Mohammed Tamer: Well the health trends, unfortunately, are the same as most developed countries, where you have the issue of NCD, non-communicable diseases. This is in Saudi Arabia. The society has become an affluent society, and unfortunately obesity, lack of activity, has contributed to the increase of NCD, especially diabetes. Today in Saudi Arabia, about 25 percent of the population are diabetic. This trend is going on worldwide, but in Saudi Arabia it is a major part, and everybody is tracking it. In addition, also heart disease. We are the number one importer of products that treat diabetics and heart diseases in Saudi Arabia. In addition, the ageing population, and that requires a specific treatment for elderly people.

World Finance: You have a strong CSR programme. How are you aiding the development of Saudi Arabia?

Mohammed Tamer: In 2011, we made a CSR department, extending an arm’s help to society. We are contributing a different arm for art and culture, where we invite Saudi artists to come to London, to the UK and the United States to represent their artists, to get more exposure. We also have an arm for education and training, where we teach and educate Saudi women and men the vocational work that they need to join organisations. In addition, we are a member of a ministry of labour organisation, a non-profit organisation, helping to recruit disabled employees.

World Finance: You’re also dedicated to the empowerment of women. What initiatives do you have in place?

[W]e have recruited many women over the past five years in our organisation, and we will continue to do so

Mohammed Tamer: In Saudi Arabia, women are still at home, because they are not allowed to drive and so on. But we have strengthened our human resources department to cater for the specific needs in hiring ladies in the offices at work, and the operation. The issue today is that we have to meet what they need. For instance, in Saudi Arabia women are not allowed to drive to work, so you have to give them a transportation allowance. We are trying to get them to be more independent, so we give them housing allowance, benefits such as daycare for their children while they’re at work, so their mind is free to be at work and working, rather than being worried about their children. So yes, we have recruited many women over the past five years in our organisation, and we will continue to do so, and try to give them the best benefits, that we will be the number one employer in Saudi Arabia for women and male subjects.

World Finance: And finally, what’s your strategy for future growth?

Mohammed Tamer: More joint venture, investment in our operation. However, we would like to also increase, expand our manufacturing, and one of the strategies is to develop and improve our research and development, and manufacturing pharmaceutical products. In addition to that, we are investing in our operations facilities and our IT solutions.

World Finance: Mohammed, thank you.

Mohammed Tamer: Thank you very much.