Year: 2014

KIB remains focused on booming sharia market

Posted on by Ashton Wenborn

More and more financial institutions are emerging that offer the full range of Islamic banking products. But while many of these firms have been set up for this purpose alone, some well-established banks are changing the way they do business in order to be fully sharia-compliant.

The growth of Islamic finance institutions is not just confined to Islamic countries, but stretches across the globe; some of the countries that pioneered this method of banking are continuing to innovate. Kuwait, for example, has led the way in sharia-compliant financial products in recent years, and one of its leading banks, Kuwait International Bank (KIB), has been transforming the way it does business to cater for this market.

Founded in 1973, KIB became sharia-compliant six years ago. The bank’s Chairman, Sheikh Mohammed al Sabah, spoke to World Finance about how the company has transformed itself over the last six years, what challenges face the Kuwaiti banking industry, and how it is becoming a thriving hub for financial products.

Embracing change
KIB decided to comply with sharia law in July 2007, and this shift has transformed what was once known as the Kuwait Real Estate Bank into one that offers a wide range of Islamic finance products. The move has proved highly successful, and recent financial results have been strong.

“KIB posted exceptional financial results last year, where operating profits exceeded KWD 21m and shareholders received seven percent in cash,” says al Sabah. “The bank continued this steady growth in the first half of 2013 by attaining operating profits of more than KWD 16.6m and the second half looks promising and encouraging too.”

There have been plenty of challenges in changing the way the bank operates, especially as the company has such a deep-seated history in the industry.

“This journey of transformation, from a conventional bank to an Islamic one, has been one of our biggest challenges and accomplishments,” says al Sabah. “When you have a 34-year-old legacy and are a leader in the sector, it is not easy to transform, while maintaining your client base and managing their expectations.

There are vast opportunities and potential growth in the Kuwaiti banking sector, especially because of the government’s development plans

“I would say that during this journey of transformation, meeting our client’s expectations, understanding their needs and catering to them was very critical. We are always open minded and willing to listen to our clients. This has helped us grow our base in terms of corporate clients as well as individual clients.”

KIB has also been widely recognised for the way it has remained successful during the last few turbulent years. Despite the financial crisis, credit ratings agency Fitch gave it an ‘A+’ level recognition due to its strong capitalisation, liquidity profile and strong capital ratios.

KIB also received the Golden Medal Award of Merit 2013 from the Tatweej Academy for Excellence and Quality in the Arab Region. The bank is also the only Kuwaiti firm to publish its corporate governance manual in both Arabic and English, emphasising its commitment to transparency.

The opportunities in Kuwait’s banking industry are considerable, and al Sabah says that the government is keen to develop it even further.

“There are vast opportunities and potential growth in the Kuwaiti banking sector, especially because of the government’s development plans. The Kuwaiti banking sector is strong and stable in comparison with other economic sectors. This is in spite of structural imbalances suffered by our national economy, deterioration of investment spending, lacklustre implementation of the development plan for which KWD 34m was allocated, and a slowdown in infrastructure projects due to privatisation issues. All of these negatively affected the performance of the private sector and consequently lead to a weakening of financing channels in local banks.

KWD 21mn

KIB operating profit (2012)

“Irrespective of these foggy conditions, the Kuwaiti banking sector was able to retain its prominent status, ranking third among GCC counties after Saudi Arabic and Qatar, as per Moody’s ratings. Kuwaiti banks are aware of the pressing need to offer innovative and creative products, and to develop and update their information and communication technology in order to stay ahead of competition.”

With assets of around $4.6bn, the company now offers a full range of Islamic finance products.

“Today, KIB’s business covers all banking services including acceptance of deposits, financing transactions, direct investment, Murabaha (auto, real estate and commodities), Ijara Muntahia Bittamleek (lease-to-own), Istisna’a, Tawarruq, credit cards, Wakala and other products. We also provide corporate projects and finance, treasury services, letters of credit, letters of guarantee, real estate dealings and management of properties,” says al Sabah.

He adds that the adoption of Islamic finance products has also helped KIB to innovate.

“Being one of the early adopters of Islamic banking presents both an advantage and a challenge for KIB. Today, almost all local banks have adopted Islamic banking. This works as a trigger for KIB to keep on innovating and enhancing our products and services, so that we are way ahead of the competition and always part of the local leading banks.”

New technology
The bank is actively developing a range of technological services for clients, from mobile banking to online services.

“Technology has been driving business excellence and pushing the standards of service levels across organisations. The banking sector is no different. At KIB we use technology as an enabler and service differentiator. KIB also has its own expansion plan in terms of both products and presence. We are committed to offering modern, sharia-compliant products and to reach out to our clients across the state of Kuwait by increasing our presence through various banking channels, including a wide network of branches, ATMs, mobile banking, and internet banking, to facilitate customer interface.

The mantra today is innovation and alignment. The one-size-fits-all logic does not work in today’s world

“Our excellence is based on two significant elements: strong leadership and keeping up-to-date with technology. We place great emphasis on attracting and retaining able and experienced leadership from inside and outside Kuwait. We also ensure that all our staff are trained regularly with a view to upgrading their capabilities in all fields. We have also put in a significant effort to offer the latest electronic and online services to our customers.”

Maintaining customer satisfaction is also a vital part of KIB’s strategy, and the firm has developed a range of services to enhance the banking experience, whether clients are at home in Kuwait or overseas.

“We also believe in rewarding our loyal clients with a host of special services and privileges wherever in the world they may be,” says al Sabah. “One such privilege that is offered to our Visa Platinum and Gold cardholders is access to VIP lounges in airports around the world. Operational excellence, customer service satisfaction, innovative product offerings and outstanding service are essentially the cornerstones of any business. We believe that all of this must exist in the culture of KIB for us to stand out.

“The mantra today is innovation and alignment. The one-size-fits-all logic does not work in today’s world.”

Regulatory landscape
The changing regulatory landscape for the global banking industry has meant that firms across the world are having to make adjustments to the way they do business.

“KIB has developed a five-year plan that focuses on maximising shareholder rights, mitigating risks, improving capabilities and the potential of KIB staff, and applying a flexible business model that will help realise sustainable, acceptable and secured development,” says al Sabah.

“The bank is committed to full compliance with all international rules and regulations and is well placed to meet the demands of Basel III. KIB holds sufficient high-quality liquid assets and is committed to be in-line with Basel III requirements as prescribed by the Central Bank of Kuwait. We also have an independent Anti-Money Laundering Unit in order to prevent and detect money laundering, terrorism financing and other illegal activities.”

KIB aims to develop its international banking service in the coming years, as well as its domestic retail-banking arm.

“Our current strategy is to concentrate on the international and retail banking sectors with innovative and up-to-date services. One of our key objectives is customer satisfaction, as that is the path to achieve profitable distributions and remain a leader in the Islamic banking industry.”

Al Sabah adds that the banking sector can play an integral role in developing the country’s economy in the coming years, and he is keen for the firm to play its role.

“Banking is one of the promising sectors in the country, and plays a vital role in its economic development. Despite challenges in the global financial market, the banking system in Kuwait has been progressing rapidly over the last few years. Favourable demographics, a focus on asset management, increased investment in technology and drive on regulatory reforms have contributed to this burgeoning growth.”

A new era of transparency in Luxembourg

Posted on by Ashton Wenborn

Tidy, quiet Luxembourg – smaller than the smallest US state and richer, per capita, than nearly every other nation on Earth – has lately found itself in the very last place it wants to be: in the global spotlight. Since the government announced in April 2013 that the country was ready to engage in the automatic exchange of information with EU and American tax authorities, analysts worldwide have speculated about what the end of an era means for this nation of 500,000, whose financial services sector now accounts for roughly 28 percent of GDP.

€41bn

KBL epb assets under management

2,000

KBL epb employees

In banking circles here, concern has been mixed with relief that the future regulatory outlook is at last certain. The mood is also mixed among the wider population, who are worried about the impact on employment and state revenues, but gratified that the country will soon shed its longstanding reputation as a tax haven.

That characterisation – which implies that Luxembourg is a place where individuals evade their responsibilities – is simply not representative of who we are as a country, or a people.

For the better part of the 20th century, including the period leading up to and following two World Wars, Luxembourg was an industrial nation, dominated by the production of iron and steel. The rise of industry came swiftly and was sustained until the 1970s, when the services sector (led by banking) finally became ascendant.

Given that the median age here is nearly 40, most of us have at least some memory of that earlier era. Our ancestral values of labour, respect and thrift are borne of the steel works in which our parents and grandparents toiled.

Our people are typically conservative, in the true sense of the word. Despite our openness to new ideas and to the world at large – reflected by the fact that some 40 percent of the country’s resident population is foreign – we’re a quiet people, who don’t relish being in the spotlight.

The premium we place on discretion perfectly suited the rise of private banking in this strategically located crossroads (roughly 40 percent of the wealth of the EU is concentrated in a 500km area centred around Luxembourg).

Stability and success
Supported by one of the world’s most responsive regulatory environments, our private banking industry now collectively manages roughly €300bn, generating more than €3bn in annual revenues. Private banks here, both foreign and domestic, operate alongside extremely vibrant asset management and insurance sectors, in an environment characterised by an extraordinarily high level of political stability, drawing upon an oversized pool of skilled, highly productive professionals.

Critically, with more than €2.4trn in net assets under management, Luxembourg is the largest investment fund centre in Europe and the second largest in the world, after the US.

Following nearly four decades of more or less sustained expansion, however, the end of banking secrecy represents a watershed moment for private banks based here, which will surely lead to some reorganisation – and likely consolidation.

Consider that, in the first four months of 2013 alone, according to a report in Brussels-based Le Soir, some 1,715 Belgian citizens officially disclosed previously undeclared revenues. That figure represents a nearly 10 percent increase compared to all of 2011 and, if that trend continues, would be equivalent a rise of about 120 percent vs. last year. There is little doubt that some – but by no means all – of that previously unreported capital has been held at Luxembourg-based banks.

One clear consequence of the so-called ‘onshorisation’ process is that some ‘offshore’ clients in Luxembourg are now electing to repatriate their wealth, based mostly on their preference for geographic proximity. That fact is undeniable.

One clear consequence of the so-called ‘onshorisation’ process is that some ‘offshore’ clients in Luxembourg are now electing to repatriate their wealth

What is also a fact is that most of those clients are in the lower tier of the private banking pyramid. According to a 2011 PwC survey, 80 percent of private banking clients in Luxembourg have accounts with under €1m, often well below that figure. Only a fraction of the total client base here can be truly categorised in the high-net-worth-individual (HNWI) or ultra-high-net-worth-individual (UHNWI) segment.

The challenge for private banks in Luxembourg is therefore obvious: while assisting existing clients with ‘onshorisation’ and retaining as many of them as possible, private banks need to attract more clients that fit the HNWI and UHNWI profile.

My firm belief is that we can and will do so – primarily because this small country already offers a concentration of services and skills found nowhere else. In future, therefore, the key selling point for Luxembourg will not be secrecy, but rather the talent base and political and macroeconomic stability we offer.

Lending expectations
At the same time, it has never been more important for Luxembourg-based private banks to establish broader geographic networks, and to ensure that such operations are at scale. Today’s HNWIs and UHNWIs seek private banks that can manage their international portfolios, meet their lending expectations, and provide highly advanced professional services. Private banks in Luxembourg are perfectly placed in that regard.

KBL European Private Bankers (KBL epb), the firm I lead, is well ahead of this curve.

With a multi-local presence spanning Europe, centuries of collective heritage, and a shared commitment to personalised service, KBL epb engages its clients in dialogue, providing them with independent investment advice, and striving to meet their evolving needs through a range of tailor-made services and products.

Based on our core belief in the principle of interdependence – among our stakeholders and across our network of more than 2,000 specialist professionals in nine European markets – we foster cooperation and encourage entrepreneurship.

From our central hub in Luxembourg – with the ability to share information and resources seamlessly and efficiently across our footprint – we serve our clients through an operational model that allows us to combine broad pan-European perspective and deep local insight.

As a group, we look to the future with ambition and confidence, focusing on our mission to be a preferred European private banking group that cares for clients and colleagues as if they were members of our own family, always putting their long-term wellbeing first.

With €41bn in assets under management and €39bn in assets under custody (as of December 31, 2012), KBL epb is widely recognised as a private banking leader. We have defined a clear strategy for even greater success and are confident that we can realise our vision to become a top 20 European private banking group by 2015, with a minimum of €50bn in assets under management and €100m in annual net profit. To achieve our ambitious goals, we are today in the midst of group-wide transformation.

With the full support of our shareholder – Precision Capital, a Luxembourg-based bank holding company – KBL epb is consolidating its presence across Europe, including through potential acquisitions. Simultaneously, we are expanding our horizons to capture future opportunities in high-growth emerging markets, including the Middle East and Asia.

In Luxembourg, where KBL epb is headquartered, the end of the era of banking secrecy coincides with the conclusion of a long period of uncertainty. We now know, and our clients know, that full transparency is the future. We have no option but to act accordingly.

However, secrecy and privacy are not synonymous. Even in this age of always-on surveillance, where every Facebook post can be analysed instantly and stored forever, individuals retain the right to privacy. That is important to all of us, especially those in the private banking industry.

Here in Luxembourg, privacy will remain a basic principle that will continue to guide our client relationships as we enter this new era.

Danone to sue Fonterra over baby milk formula scare

Posted on by Ashton Wenborn

After months of negotiations following the recall of its infant milk formulas last August, an unappeased Danone plans to sue its New Zealand based supplier Fonterra. The Paris-based food group intends to terminate the supply contract with the farming co-operative wholesale dairy exporter.

The recall, affecting nine Asian countries, was sparked when Fonterra found that some products were infected by bacteria that caused botulism, a fatal illness. On further investigation, it was found that the ingredient did not contain fatal bacteria and that the recall was based on a false alarm.

As one of the world’s largest dairy processors, Fonterra’s milk formula recall affected not only Danone, but also other multinationals. Fonterra has now reached agreements with the majority of the eight companies who were forced to recall their products. These agreements have included the extension of supply contracts for up to 10 years and compensation for losses over the recall.

Danone and Fonterra began negotiations after the recalls in China last October. Due to its domestic food quality issues, China is in high demand of foreign branded baby milk formula. Baby food accounts for 20 percent of Danone’s revenue and China is a key growth market. The recall forced Danone to lower its annual targets and, after failing to reach an agreement, the company became the first to initiate legal proceedings against its dairy wholesaler.

As New Zealand’s largest company, Fonterra controls approximately one-third of diary exports worldwide and is a dairy wholesaler for a range of multinationals

Danone is reportedly seeking full compensation for the losses suffered from the recall, which they allege to amount to €350m (USD $476m/£289m). Fonterra, however, recognised a contingent liability amounting to only NZD $14m. Danone will initiate proceedings in the New Zealand High Court as well as arbitration proceedings in Singapore. In a statement, Fonterra said that it has “been in ongoing commercial discussions with Danone and is disappointed that they have resulted in legal action” and that it “will vigorously defend any proceedings”.

As New Zealand’s largest company, Fonterra controls approximately one-third of diary exports worldwide and is a dairy wholesaler for a range of multinationals including Danone and Nestle. According to analysts, Danone is one of Fonterra’s biggest milk powder customers and following the announcement that Danone will be terminating its supply contract with the processor, Fonterra’s sharetrading units fell approximately 2 percent.

Rickey Ward, head of equities at Tyndall Investment Management in Auckland, told Reuters that the global demand for dairy products remains high, especially in China, and consequently Fonterra will not have issue in making up for cancelled orders.

“It’s not nice to lose a big customer … [but] there’s large global demand and short supply so Fonterra may be able to fill that void if there is a big void,” he continued. Nevertheless, in December Fonterra cut its dividend forecast from 32c to 10c per share, keeping the price of milk solids at $8.30/kg instead of raising it to an expected $9.00/kg.

In a statement, Danone said, “this affair illustrates serious failings on Fonterra’s part in applying the quality standards required in the food industry,” and that any future collaboration with Fonterra will rely on “full transparency and compliance with the cutting-edge food safety procedures applied to all products supplied to Danone.”

In its statement, Fonterra asserted that it “stands by its track record of having world-class food safety and quality standards, quality systems, and robust testing regimes across all its manufacturing facilities”.

Matt Goodson, managing director at Salt Funds Management told TVNZ’s ONE News: “it’s hard to know at this point how much of a claim by Danone is real and how much is negotiating tactics… At the moment this is a very news story driven equity market.”

Nevertheless, this legal battle between two key players in the dairy industry highlights the risk in over-reliance on sole suppliers. Although Fonterra’s future remains somewhat secure, it still stands to lose big over the loss of such a major client.

Paulo Pinto on investing online | DIF Broker | Video

Posted on by World Finance

The internet has brought international finance closer to home, giving investors easier access to the global economy. Paulo Pinto, CEO of the pan-European brokerage firm DIF Broker, discusses what it takes to succeed when it comes to online investing, and the challenges that DIF Broker takes on – negotiating complex laws and regulations across different jurisdictions – so its traders don’t have to.

World Finance: Paulo, how is international finance responding to online investing?

Paulo Pinto: Through technology. We don’t have people anymore dealing with things in finance, and basically it’s computers, it’s wireless internet, it’s connections, communications, and just connecting the dots in between all the markets in the world and bringing them into one platform and providing that to the client, like if you were dealing with your local market.

“It’s allowing people to invest worldwide with no difficulties, with no complications, feeling safe”

World Finance: Well this investment model, I’ve heard you say, is the future of investing, so can you tell me more about that?

Paulo Pinto: We indeed believe this is the 21st century for investment. It’s going into the future, it’s allowing people to invest worldwide with no difficulties, with no complications, understanding where they put their money, feeling safe that even if they don’t understand about Japanese or know anything about Japan, they will be able to have a model on Japan and put their money there, working there for them.

World Finance: What challenges is DIF Broker facing while trying to expand globally?

Paulo Pinto: We are a global broker, catering for global investors. We are not specialised in any particular market so we do not compete in a local market with a local broker. Our goal is to go to global investors and to teach the ones that want to have a broader view. For that, we leveraged ourselves using our partners in the US – DWA, Dorsey Wright – and we have created a new concept, because they are mastering the ETF model of investing and by bridging the two companies we are offering more than 80 models to investors. We came to the conclusion that the investors today, they don’t want a quarter inch drill, they want a quarter inch hole. They don’t want anymore to do it yourself, they want to have it done, and this is basically what we offer.

“We are a global broker, catering for global investors, offering more than 80 models to investors”

World Finance: Well DIF Broker allows it clients to invest in whichever markets they choose, and this means negotiating often different and complex laws and regulations among the different countries, so how do you approach this?

Paulo Pinto: It’s not a difficult process for us because we keep it simple, we don’t do as other brokers arbitrage in regulation. We open all our accounts in Europe, which means that we have to comply with the rules of compliance, and know your clients’ rules. Basically, we keep it simple, because we believe that this will cover everything that the investor wants and they will be much better with the investments made with the European broker.

World Finance: What are the greatest concerns for investors when it comes to online brokerage?

Paulo Pinto: We believe it’s the fear of taking responsibility. While the industry is talking about empowering the investor, the investor is afraid of taking responsibility, and that’s why we pretend to take things in a very simple way and present to the investors in a very simply way. We create these models, which people will understand, we provide them the risks, we alert them for the risks on investment, we alert them for the fact that we are aware of these risks on investment also, and we keep it simple.

“While the industry is talking about empowering the investor, the investor is afraid of taking responsibility”

World Finance: Now DIF Broker is focused on customer growth, so how are you going about this?

Paulo Pinto: We are more focused on customer retention than customer growth, and we understand that the clients’ Danish market where we are, the clients that we cater which are global investors, they are not compatible with the growth that people eventually will create on their minds for brokers. Client retention is a lot more important for us, because we have a lot of clients, we want to keep them happy, and we want to keep serving them, and we provide the service that a company that is customer orientated should provide to the clients.

World Finance: So what does it take to succeed in online brokerage?

Paulo Pinto: It’s to have the idea that we are useful in what we do, and to believe that what we do is really making a difference for the investors.

World Finance: Well finally, what is DIF Brokers’ plan for 2014?

Paulo Pinto: We would like to continue to be the best online broker for our clients, and if we can succeed in that we’ll be happy.

World Finance: Paulo, thank you.

Paulo Pinto: Thank you.

Godwin Emefiele on e-channels in Nigerian banking | Zenith Bank | Video

Posted on by World Finance

With its headquarters in Nigeria and subsidiaries in four other African states and the UK, Zenith Bank is a leader in African financial services. CEO Godwin Emefiele discusses the Central Bank of Nigeria’s recent changes, including its drive to improve the use of electronic channels in the banking sector; as well as Zenith’s own profile for innovation and community engagement.

World Finance: Godwin, Zenith is said to be the most respected bank in Nigeria; why is this?

Godwin Emefiele: Zenith is the most respected bank in Nigeria because it’s one of the biggest banks in Africa today. It’s the biggest in West Africa in terms of shareholders’ funds, and it ranks in one of the top six, top seven banks in Africa today.

Zenith Bank was the most productive bank in Nigeria in 2012, with profitability of over $600m. In terms of market capitalisation as well, it’s one of the biggest companies listed on the Nigerian Stock Exchange today.

“Zenith Bank was the most productive bank in Nigeria in 2012, with profitability of over $600m”

World Finance: Well you also have a very strong corporate social responsibility profile; why is this important?

Godwin Emefiele: Because we believe that we should give to any environment that has given us, afforded us, an opportunity to conduct banking services in that community. And what we do from time to time, is ensure we look at the community, we determine the needs of those communities, and based on the needs that we determine the community desires, we go ahead and improve some of those needs for them.

World Finance: Well, how is the banking industry in Nigeria developing?

Godwin Emefiele: The Nigerian banking industry is coming of age. If you consider the fact that we have strengthened corporate governance in Nigeria; risk management practices have become very strong. And before the financial crisis, you’ll find that if you rank a Nigerian bank you may think that they’re not well capitalised. But with the financial crisis we find that the Nigerian banks, indeed some African banks, are some of the best regulated institutions in the world today. Because if consider the fact that banks are expected to keep a minimum of 30 percent of their assets in liquid assets, or 12 percent in Nigeria in cash reserve ratios. Or that Nigerian banks also have to maintain minimum 15 percent in capital adequacy ratios, then you’ll see that the Nigerian banking industry has indeed come of age.

World Finance: Due to the increased levy paid to the assets management company of Nigeria and the poor state of infrastructure in the country, Nigerian banks have the highest cost base among their peers, so how are you addressing this?

“The Nigerian banking industry has come of age”

Godwin Emefiele: The level of infrastructure development is below average right now. For instance, you find that banks have to provide power for themselves; banks have to run around collecting cash from their customers to ensure their customers are properly served.

But of course the level of infrastructure development is improving now. With government divesting power and then allowing private sector institutions to come in. We’re expecting that power will improve, and the level of power generation will improve, and then Nigerian banks can begin to focus on their banking businesses, instead of focusing on power. And with that, costs will suddenly come down.

Also, in the Nigerian banking industry today, the Central Bank of Nigeria recently put in place a cashless policy, where we’re trying to say, let’s reduce the level of cash in the economy, let’s improve on the use of electronic channels in conducting banking businesses in Nigeria. This will certainly help to reduce the cost of doing business in Nigeria.

World Finance: The second part of this year has been quite challenging, with the revised bank tariffs on products and services, but Zenith has managed to maintain its growth. So what would you say your key to success is?

Godwin Emefiele: The Central Bank of Nigeria put in place a policy to say for instance, commission on turnover have to reduce from about five per thousand to about three per thousand in 2013, and hopefully by about 2016 it will become about zero.

No doubt this will have some impact on the revenue base of the banks, but of course what we are doing is to ensure that we continue to look to other areas where we can improve our revenues, ensuring also that we set up offices in areas where we can mop up cheap deposits with which we can do business. And that’s where, for instance, if you take a look at Zenith Bank’s third quarter results, you’ll find that out of most other banks, Zenith Bank’s net interest margins have continued to move up.

“A mobile banking licence ensures we can reach customers in the nooks and crannies of Nigeria”

World Finance: Zenith is known for its state of the art technologies, so what’s your latest innovation?

Godwin Emefiele: When we started the bank, we said we would not open any branch of the bank without ensuring we could provide good technology to support our services, we want to ensure that we provide excellent services to our customers.

That we have done for 23 years. And what we continue to do is embrace any opportunity to provide excellent services, and what we are doing at this time is to ensure that we embrace the electronic channels where we are using point of sale terminals to drive business for our customers.

Recently Zenith Bank was given a mobile banking licence, and we’re also using that to ensure that we’re able to reach some of our customers that are in some of the nooks and crannies of Nigeria.

World Finance: Finally, what’s next for Zenith?

Godwin Emefiele: We’re working hard to ensure that we remain one of the global players. Zenith Bank has to maintain the leading position in Africa, and we are very optimistic that we will achieve this.

World Finance: Godwin, thank you.

Godwin Emefiele: Thank you very much.

Aluminium premiums soar towards record heights

Posted on by Ashton Wenborn

Aluminium premiums are at all-time highs in the US, with Europe and Asia following suit. Despite the global increase in metal production, resources are being fed into financial trade, not the market.

Western smelters are being forced to shut or at least reduce capacity as traders continue to stockpile spare metal as collateral. Analysts have estimated that 10-15 million tonnes of aluminium stocks are currently tied up in financing deals.

This entails investors borrowing money at low interest rates in order to purchase resources, while paying warehouses to store the metals cheaply. This model exploits future price structures currently in existence, allowing investors to sell metals such as aluminium immediately for profit.

For metal producers, low aluminium prices in conjunction with high energy rates continue to force Western producers, such as US Ormet Corp into closure. INTL FCStone analyst, Ed Meir, posited that the reason we keep hearing that “metal is quite tight” is related to Ormet’s closure.

Meanwhile Dutch smelter, Aluminium Delfzijl BV (Aldel), also filed for bankruptcy on 30 December 2013. Aldel attributes its losses to the disparity between metal prices and electricity rates. Previously, the company’s production capacity was 170,000 tonnes annually.

These problems are not particular to the US. The Harbor Intelligence research institute believes that Europe, Asia, Mexico and Brazil will follow in the US’ footsteps

As the world’s largest metals marketplace, the London Metal Exchange has demonstrated inadequacy in dealing with these problems. In November 2013, LME announced significant alterations to its metal storage systems. In years prior to this, the exchange had been receiving complaints about long wait times and large premiums. Currently, the LME prices the delivery of metal in a three month period at approximately $1,775/tonne.

Analysts and manufacturers hoped that the LME’s plans to cut waiting time to a maximum of 50 days along with other measures would lower premiums. Instead, premiums continue to increase. Platts US Midwest aluminium premium went from $0.03 to $0.15 for each pound of metal, reported the pricing agency.

Meir told Reuters that “the fact that we are still trading at 15 cents today suggests that this was not a fluke and that we will likely stay at elevated levels for some time across all geographies.”

In a note to clients, Standard Bank analyst Leon Westgate wrote that, “it’s not clear if the premium spike is sustainable,” but that, “it does appear to reflect concerns amongst traders in terms of being able to replace aluminium units in an environment that includes weaker US production, reduced Canadian imports and a lack of LME material flowing out to the wider market.”

These problems are not particular to the US. The Harbor Intelligence research institute believes that Europe, Asia, Mexico and Brazil will follow in the US’ footsteps, anticipating record-high aluminium premiums in these coming weeks. The institute bases this theory on the fact that existing metal producers in the US are nearly sold out for the remainder of this month.

Additionally, China continues to produce more and more metal, exacerbating the problem. By driving aluminium prices even lower, Western producers are put under even greater strain. As investors lock away aluminium and metal producers continue to suffer the effects of low prices due to increased production, the imminent descent of premiums seems unlikely.

China introduces five new private banks

Posted on by Ashton Wenborn

It has been announced that China will create up to five privately financed banks this year in an attempt to boost the sector and increase competition. The idea is to gradually open up the market in order to provide a platform for more robust growth for the overall economy.

At first, the new institutions will operate on a trial basis, supervised by Chinese banking authorities, though they will be entirely funded through private enterprise. The idea is to either restructure existing banks as well as to create new ones, capable of “bearing their own risks”, the China Banking Regulatory Commission (CBRC) told Xinhua, the state-owned news agency.

The move is another attempt by Chinese leaders to boost competition in the economy without relinquishing overall control of the markets

The new move is part of an effort by CBRC to ease to flow of foreign capital into the Chinese banking sector. According to Xinhua, the regulator will also be investigating the possibility of lowering the threshold required for foreign banks to enter the country.

The move is another attempt by Chinese leaders to boost competition in the economy without relinquishing overall control of the markets. It is a direct result of the lower growth rates experienced over the past two years, after decades of uninhibited growth, which called into question China’s overreliance on foreign trade. Last year the overall economy grew only 7.5 percent, the lowest rate for two decades.

David Robson on oil and gas in Central Asia | Tethys Petroleum | Video

Posted on by World Finance

London and Toronto -listed Tethys Petroleum is the only independent oil company operating in three Central Asian republics, and following a major farm-out deal is looking towards new territories. Dr David Robson, Executive Chairman and President of Tethys Petroleum, discusses the company’s presence in Uzbekistan, the challenges it presents, and Tethys’ ambitions for the rest of the region.

World Finance: Why Central Asia, and what has been your approach to this region?

David Robson: Really what drove us there was the potential, the geological potential for oil and gas. There are very large geological basins but very underexplored in some areas, so the potential certainly is there, there’s still a lot to be found in Central Asia. Ally that to the emergence of the newly independent states in Central Asia, such as Kazakhstan, Uzbekistan, etc, means that there is a real desire to attract investment into these regions. Now, the reasons that there’s no one else in Tajikistan is because we got there first and picked up most of it. Uzbekistan is a country which people have shied away from because of the lack of enthusiasm, in the past certainly, for Western investment, and some of the political issues around that. Kazakhstan of course, when we started there, there wasn’t all of the companies that are there today, and once again it was a matter of getting in there early in a time when the legislation wasn’t as good as it is today, being prepared to take that risk, working with it and making sure in Kazakhstan that everything was done according to the rules.

“There’s still a lot of oil and gas to be found in Central Asia”

World Finance: You mentioned the potential for further developments, at what stage are these at?

David Robson: Exploring for oil and gas is a risky business. But if you apply the right technology and the right approach, you can minimise that risk, and we were very successful in finding the first new oil discovery in the area of Kazakhstan we’re working in, about 450km from the nearest other oil discovery, using really North Sea models for the development of oil and gas fields.

World Finance: You’re the only Western company currently operating within the oil and gas sector in Uzbekistan. What challenges have you faced?

David Robson: Uzbekistan has its own set of challenges. It certainly, of the countries we work in, some of the bureaucracy is quite slow there, and it takes a little time to get things done. Therefore it’s a country you can’t rush, you’ve got to be very patient, you’ve got ups and downs. We’re patient people, and I think as time goes on we will certainly develop more there. But it’s not going to happen instantly.

World Finance: What about the socioeconomic risks within this region?

David Robson: We’ve seen, certainly in countries like Kazakhstan and now Tajikistan, an improvement in the standard of living over the last 20 years for the population, which I think bodes very well for the future development. Part of our job is to make sure the country has sufficient energy, that it either becomes energy self-sufficient, or is able to export energy. And that’s one of our jobs, because that will improve the lot of the people in these different countries and also obviously we employ people, we employ local staff, they then employ people etc, etc. So our footprint is actually much, much broader. The other part of our job is to improve the environment for the people in Kazakhstan, or Uzbekistan, or Tajikistan, to make their lot better, becuase that will create more stability, and that in the end will help us do our job better.

World Finance: You have been involved in a few high profile farming deals, what is the significance?

David Robson: We brought Total and CNPC into our production sharing contract area in Tajikistan, and then the next step forward for us was to bring in partners to share the risk of these deep expensive wells, but also to bring additional technology, for exmaple through Total, to help us safely and efficiently drill these wells. And with CNPC, the ability to cost effectively develop such deposits and indeed to provide a good market for gas. A more recent deal we’ve done in Kazakhstan with a Chinese private equity firm based in Beijing is, I believe, one of the very first, if not the first deal, done in the oil and gas sector by such a private equity firm in Kazakhstan. That deal brings in a good financial partner, and their aim in the end is to make a good return and exit, and we will benefit from that exit, it’s an extremely good farming deal.

“Tethys, I firmly believe, will be a big player in the Central Asian oil and gas sector”

World Finance: And these deals, how will they impact future expansion?

David Robson: We’ve just acquired a new project in Georgia for example, and that is an unconventional oil project, it will be the first shale oil project I believe in the former Soviet Union. And there’s a lot of it: over three billion barrels, according to independent estimates. So it’s moving the company in a slightly different direction within its core area. And we will do more deals like that, and with our partners helping fund all that it gives us more free capital to look at investing in other areas, perhaps areas around which share similar geology, or a similar way of doing business. Tethys, I firmly believe, will be a big player in the Central Asian oil and gas sector, which is going to be one of the world’s biggest oil and sectors.

World Finance: David, thank you.

David Robson: And thank you very much, it’s been a real pleasure.

Janet Yellen approved as new Fed chair

Posted on by Ashton Wenborn

Following a 56-26 Senate vote in her favour, Janet Yellen has been approved as head of the Federal Reserve and later this month will become the first woman to hold the position in the institution’s 100-year history. The Brooklyn-born economist has been the clear favourite to succeed Ben Bernanke since he announced his plans to step down last year, having her service as vice chair for three years and her part in many of the Fed’s most influential decisions of late.

“The American people will have a fierce champion who understands that the ultimate goal of economic and financial policymaking is to improve the lives, jobs and standard of living of American workers and their families,” said President Obama in a statement. “As one of our nation’s most respected economists and a leading voice at the Fed for more than a decade – and Vice Chair for the past three years – Janet helped pull our economy out of recession and put us on the path of steady growth.”

Yellen will succeed Bernanke when his term expires on January 31 and is expected to continue with the Fed’s aggressive bond-buying programme for some time yet. Although the stimulus was pared by $10bn in January, the amount still stands at $75bn per month and so a decision to taper the sum further still will likely come during Yellen’s tenure.

The 67-year-old’s dovish leanings, however, are the reason why the vote was one of the closest in the institution’s history and something that certain onlookers are less than convinced by, fearing that monetary stimulus on this scale will ultimately result in out-of-control inflation rates.

The 67-year-old’s dovish leanings […] are the reason why the vote was one of the closest in the institution’s history

Nonetheless, the Fed’s quantitative easing policies and record low interest rates appear to be having a positive effect on the US economy, and have been instrumental in bringing down the US unemployment rate – an area that Yellen expresses an especial interest in.

Yellen’s service so far is perhaps best characterised by an unerring focus on unemployment and how it is the country’s central banking authority can reduce joblessness. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” she said at a White House ceremony in October.

Regardless of Yellen’s approach, her tenure will span a term of relative uncertainty for the US economy, as the country’s central bank prepares to reduce the country’s dependency on monetary stimulus and boost employment opportunities wherever possible.

China proposes new shadow banking regulations

Posted on by Ashton Wenborn

China’s cabinet has drawn up a series of regulations pertaining to the country’s thriving shadow banking sector in an effort to curb the country’s spiralling debt levels and put power back in the hands of banks. The guidelines, labelled “document no. 107”, aim to curtail the sector’s boom of these past few years, whilst recognising that China’s non-bank institutions are a central pillar of the country’s financial system and an indication of its diversified offerings.

The guidelines issued by China’s cabinet are surprisingly positive given that many analysts have expressed concern over China’s rising debt levels

A copy of the draft regulations obtained by the FT reads, “The emergence of shadow banks is an inevitable result of financial development and innovation. As a complement to the traditional banking system, shadow banks play a positive role in serving the real economy and enriching investment channels for ordinary citizens.”

Critics maintain, however, that the sector shares a great deal of responsibility for China’s spiralling debt levels, adding that unregulated financial dealings are having a huge impact on the supposed transparency of China’s credit flows. Only a few years ago China’s financial system was dictated almost entirely by banks, however recent years have seen non-banking institutions come to account for near half of China’s funding.

The guidelines issued by China’s cabinet are surprisingly positive given that many analysts have expressed concern over China’s rising debt levels, which have risen quite substantially since 2008 and the explosion of shadow banking since 2010.  China’s State Council warned against the threat of non-bank institutions with regards to rising debt, suggesting that they return to their role as asset managers and refrain from credit business.

At the present time, trust companies are the non-bank institutions with the most assets under management, having quite recently surpassed those of insurance companies at the beginning of this year.

Provided that the guidelines pass, Chinese authorities will be hoping that fresh restrictions on shadow bank lending will prevent parties from exploiting the regulatory loopholes at large in the current system and, as a consequence, lower the country’s growing debt levels.

Maria Bianca Farina on insurance in Italy | Poste Vita | Video

Posted on by World Finance

Following the financial crisis, Italy is undergoing social and economic change, representing interesting opportunities, but also challenges for the insurance sector. Maria Bianca Farina, CEO of Poste Vita and Poste Assicura, discusses Poste Vita’s strategy, how it tailors its solutions to meet the needs of Italian families and companies, and the impact the Italian government’s cuts are having on the Italian insurance industry.

World Finance: Maria, the Italian insurance sector was hit quite hard by the financial crisis, yet Poste Vita flourished, what are the reasons behind this success, do you think?

Maria Bianca Farina: Our success relies on many factors, but above all on our capability to protect and support Italy’s householders, through the offer of innovative experienced and savings solutions, tailored to fulfil the real needs of Italian families and companies.

To give you an example, thanks to our competitive pricing model, customers have access to affordable, high quality insurance coverage, as well as low premium investment and pension plans.

“The challenge insurance companies face is to make individuals aware today of their forthcoming needs”

World Finance: What challenges will the Italian insurance sector face over the next few years, and how do you plan to address them?

Maria Bianca Farina: Some convergent factors, such as the population ageing, the economic crisis, and the need to cut back on public expenditure, make it ever more and more urgent for people’s need to have access to covers to protect and manage both their present and future lifestyle.

The challenge insurance companies face is to make individuals aware today of their forthcoming needs.

Insurance companies can offer an essential contribution to promote a comprehensive, combined and efficient action, focused on designing affordable solutions that take into account daily problems.

With regard to the corporate and SME segment, we are developing collective welfare solutions for personal protection and health that employers can offer as an additional benefit to their employees.

Last but not least, the Italian insurance sector will have to face the impact of digitalisation on consumer behaviour. Given that in the future, traditional distribution channels will continue to dominate the scene, in the coming five to 10 years, we need to invest, to ‘digitally arm’ our distributors, as well as enhance our customer experience.

World Finance: What role will Italy’s insurance sector play in the future of the country?

Maria Bianca Farina: The decrease of the traditional welfare model increases people’s need to rely on alternative solutions to protect and manage their present and future. In this macroeconomic scenario, insurance companies have the opportunity to meet the new needs that have arisen in different fields – welfare, health, social services, and income security during the working age and afterwards – by supporting the development of new markets, and producing clients with a secure net compared to government expenditure cutbacks.

A greater access to insurance products could contribute to the whole welfare and health system, allowing public money to be allocated differently, and managing private assets more effectively.

“The decrease of the traditional welfare model increases people’s need for alternative solutions”

World Finance: Who do you target for your services, and how does that address the needs of the Italian consumer?

Maria Bianca Farina: We concentrate marketing new products that can meet people’s everyday needs, such as income assistance and health.

For example, Postapersona Sempre Presente, our new long term care cover, and Postaprotezione Casa Special, which includes all major house covers, plus the bill protection warranty, which covers all costs related to the household in case of job loss, disability, or long term illness.

We also intend to strengthen our position in the management of the new welfare, by making supplementary pension plans more easily accessible to companies for their employees through our new collective pension scheme that we will be launching very soon.

World Finance: So, what’s your strategy for the next few years, bearing in mind Italy’s current economic climate?

Maria Bianca Farina: Although we keep on improving our product range, our real commitment focuses on reinforcing sale assistance offered to post offices, developing new client services, leveraging on existing resources and competencies within the group, as well as continuing to improve and modernise information technology systems.

“Greater access to insurance products could contribute to the whole welfare and health system”

World Finance: Finally, the topic of boardroom composition is an interesting one; what does it take to succeed as a woman in this market?

Maria Bianca Farina: In fact, the world of insurance and finance is still predominantly male-dominated. But luckily, we are witnessing some changes. In the last decades, more and more women have become part of the financial services sector, and they brought in more feminine traits such as caution, reduced inclination to risk, and greater attention to taking action.

Today, a woman still has to make a much greater effort compared to a man to achieve the same goals. Nevertheless, her unique and irreplaceable features are what to put a stake on. Moreover, I believe that a woman doesn’t need to act like a man to break the glass ceiling. As far myself, I never changed my personal approach in a working environment, always preferring to be true to myself and my ideas.

World Finance: Maria, thank you.

Maria Bianca Farina: Thank you to you.

Christos Christodoulou, Frixos Savvides, and Mehran Eftekhar, on Cyprus insurance | Trust International | Video

Posted on by World Finance

Cryprus’ insurance industry is relatively small, but EU membership is helping the country to attract international insurance management and reinsurance operations. Christos Christodoulou, Frixos Savvides, and Mehran Eftekhar from Trust International Insurance, discuss the challenges in Cyprus’ insurance industry caused by Solvency II and other EU regulations, but also the opportunities for consolidation as banks are forced to divest their insurance arms.

World Finance: Christos – you’re the fastest growing insurance company in Cyprus. Tell me what the secret is behind this success?

Christos Christodoulou: In 2009 we decided to enter the Cypriot market. The new board has said, from the beginning of its operations, that we will become a leading insurance company through innovation and customer service excellence. Because the Cypriot market was a very crowded and mature market; we needed to separate ourselves from the competition.

Therefore the board saw this opportunity to innovate. So we produced a new approach to general insurance, and we have established good systems, to provide to customers excellent support.

“The whole structure of the insurance business in Cyprus is changing”

World Finance: Tell us how the industry has developed from its British heritage to international influences.

Christos Christodoulou: In 1960, insurance was offered mainly from the UK, that maintained branches in Cyprus. It was not done until 1969 that the first insurance company was established on the island.

Currently we have 30 insurance companies operating on a small island with a population of less than one million. The Cypriot people are accepting insurance, and they are insurance-literate.

The market in Cyprus is relatively small, but due to EU membership, we expect it to grow.

World Finance: Frixo – what challenges does the Cypriot insurance market face?

Frixos Savvides: We have gone through a lot in these past few months. Definitely the whole structure of the insurance business in Cyprus is changing. And either it has to change by force, or it has to change voluntarily.

Traditionally, Cyprus insurance market was predominantly led by the two major banks through their subsidiaries. Now the two major banks: one of them is gone, Popular Bank has gone, and Bank of Cyprus is going through an unbelievable restructuring and redevelopment of the capital, and a load of other activities; and naturally as a process imposed by the European Union, the banks have to get rid of their insurance arms. And they have to be on the same level of competition as everybody else.

Thus, the major change which is going to be very painful to the banks, but also it will give the opportunity to young companies like us, to buy out or merge with other companies in order to absorb these unbelievably valuable businesses which will become available.

“Banks have to get rid of their insurance arms, presenting an opportunity to buy or merge with these companies”

World Finance: Mehran, how do you see cross-border business developing?

Mehran Eftekhar: In order to do cross-border, you need passporting. Passporting really means that your regulator, in the country that you’re operating in, will allow you to do business in other European Union countries, or actually any other country in addition to the EU. And for the regulator there to also accept you as a company that can transact business in that country, and therefore it will be very difficult.

World Finance: You already mentioned regulations – what are they key regulations, and what kind of impact have they had on the country?

Mehran Eftekhar: The main regulation is European Union directives on the insurance industry. We have also international financial reporting standards, that Cyprus applies through its local institute of accounting and other bodies.

We also have the local laws which they have to abide by, and now Solvency II.

“Trust International Insurance is a step ahead, because we are mostly ready for Solvency II”

World Finance: In terms of Solvency II, Christos, perhaps you can give us some detail about the technicalities?

Christos Christodoulou: As from the first of January 2014, the whole way of evaluating solvency in an insurance company will be changing. Depending on the speed things will change, it will affect the market, because due to the financial crisis we are going through the financial position of the different companies from the island has been affected. Solvency II makes things tougher; it corrects things, but it makes them tougher. So the timing of applying the Solvency II, and the speed with which it will be implemented, will change the insurance industry. Some of the players will not be able to take this rate.

This is again where Trust International Insurance is a step ahead, because we are not affected, and we are mostly ready for Solvency II. We are ready to implement all its provisions, and our assets are solid. Therefore we look to a future with a lot of prosperity, and we hope it will be turned to our favour.

World Finance: Christos, Mehran, Frixos, thank you very much for your time.

Christos Christodoulou, Fixos Savvides, Mehran Eftekhar: Thank you, thank you very much.