Author: Ashton Wenborn

Islamic banking set to change financial markets

Posted on by Ashton Wenborn

On October 29, 2013, British Prime Minister David Cameron announced that the UK would issue a £200m sovereign Sukuk in 2014, making the UK the first Western nation to do so. As if to say, “Why not?”, the UK, with this announcement, has given a much-needed sense of legitimacy to a small but growing sector of the banking industry with great potential. If one were listening carefully after that announcement, a small cheer might have been heard coming from the direction of Saudi Arabia, an epicentre of modern Islamic banking.

Although Malaysia, Indonesia and a number of other countries have long been players in Islamic banking and finance (see Fig. 1), the GCC – more specifically, Saudi Arabia – has been a critical region with regard to Islamic banking’s future. The kingdom, which is home to the birthplace of Islam as well as the first modern Islamic bank (the Islamic Development Bank, or IDB) and the world’s largest Islamic bank (Al-Rajhi Bank), had for the longest time relied on a conventional banking model. But with IDB’s launch in 1975 and the subsequent rise of the Al-Rajhi empire a decade later, a path was laid towards an Islamic banking future for all in the country.

Sharia leader
Saudi Arabia’s importance cannot be understated. Currently, it is the largest IDB shareholder with 26.5 percent of paid up capital. According to the Islamic Research and Training Institute, an IDB affiliate, the kingdom also represented 7.1 percent of the $1.6trn global Islamic banking market in 2011. However, more importantly, Islamic banking accounts for nearly half of the kingdom’s banking market. Oh, and liquidity abounds.

In Riyadh and Jeddah, where Saudi Arabia’s banks are headquartered, both Islamic and hybrid Islamic/conventional banks are tripping over themselves to present their sharia-compliance bona fides. Conventional operations have gone far beyond the opening of so-called ‘Islamic windows’ and are now launching fully Islamic branches, as is the case with Saudi Investment Bank. And new market entrants, such as the well capitalised, publically owned Alinma Bank, have the benefit of being founded as 100 percent sharia-compliant across all products, services and operations.

What does all this have to do with London? That question can be answered with three words: competition, standardisation, and growth.

Saudi Arabia has the potential to become the hub for international Islamic banking and finance. However, in order to fulfil this potential, issues related to competition, standardisation and growth need to be sorted out. In short, if London pushes for a foothold as an Islamic banking hub, this will force Saudi Arabia (and others for that matter), to address its current challenges. Additionally, rising waters lift all boats; if London can be a gateway for other Western nations to adopt Sukuk financing or other Islamic instruments and practices, Saudi will have greater opportunities.

Milestone Sukuk deals
In the short run, Sukuk seems the most likely avenue for Saudi growth and is the area in which the country can be most influential. Already in 2013, there have been a number of important Sukuk issuances, most notably the Sadara Chemical issuance at $2bn, and the government’s $4bn issuance for the General Authority of Civil Aviation. These deals are not insignificant and cannot be ignored. In fact, they will be analysed and scrutinised with regard to their structures, and if Saudi Arabia keeps up this pace, it will help shape the discourse on how such Sukuk deals should be handled.

In terms of industry growth, however, the line need not be drawn at project finance. If anything has been learned in the past decade, it is that Islamic retail banking can compete with conventional retail banking and can be profitable in doing so. And if London were to open the door to retail operations in the future, this would give Saudi Arabia another area in which to shape the discourse and create opportunity for itself.

The two newest banks in Saudi Arabia, Albilad and Alinma, already hold an advantage over many regional and even European retail banks thanks to technology. Unencumbered by legacy systems, their sharia-compliant offerings are often easier to deliver. Alinma, in particular, has leveraged technology to be first to the market with smart-chip cards, instant in-branch card issuance, services for the blind and automated safe deposit boxes.

In short, the line between conventional and Islamic products will continue to blur. Innovation in sharia-compliance will make it possible for Islamic banks to challenge nearly all conventional products. The market will grow, and Saudi, if it plays its cards right, could be leading the charge at the end of the day.

Oil boom in GCC region shifts economic landscape

Posted on by Ashton Wenborn

This past decade has seen the economic landscape in GCC countries transform almost beyond recognition, with the recent oil boom and increase in government spending contributing to the region’s newfound attractiveness to investors (see Fig. 1). However, the GCC has not always harboured the same investment opportunities, as the countries’ prospects only truly began to gain as recently as a decade ago.

Gulf-region-oil-exports

Ahmed M Al Bahar, Managing Director and Agnello A S Fernandes, Vice President of Funds Administration and IT at Gulf Custody Company, spoke with World Finance about the ways in which the GCC has changed since the turn of the century, and the astuteness of domestic businesses in recognising the region’s prospective wealth.

Positive results in energy sector
“The recent oil boom generated a large volume of revenues for the six GCC countries: Bahrain, Oman, Kuwait, Qatar, the United Arab Emirates, and Saudi Arabia. Estimated at an annual average of $327bn over the period 2002 to 2006, the revenues more than doubled the average of the preceding five years,” recalls Fernandes.

“These abundant revenues were instrumental in boosting economic growth. The GCC has become a significant regional bloc and plays a vital economic and political role far beyond its shores, given its geopolitical strategic location, preponderance of global energy reserves and its emergence as a major international player through use of accumulated financial reserves.

The GCC has become a significant regional bloc and plays a vital economic and political role far beyond its shores

“During this period, with adequate liquidity in the market and a comfortable investment climate in the region, the investment sector has developed tools for both local and regional investors.”

The maturity of the GCC’s financial markets plays into the hands of the Kuwait-based fund custodian and administration service provider, as the need for these services has skyrocketed this past decade in accordance with an increasingly complex financial marketplace.

The GCC remains a relatively young – though no less potent – hotbed for investment says Fernandes, so the Gulf Custody Company has seen the demand for outsourcing fund custody, administration and registry skyrocket since its establishment in Kuwait over a decade ago. Established in 2001, Gulf Custody Company is a direct result of interpretation, where the founders recognised a place for fund custody and administration in the GCC’s not-too-distant future.

Bahar further stated that the promoters of Gulf Custody Company had the vision to acknowledge that although a servicing of investment instruments was available, a specialised ancillary services provider for core services such as Fund Admin, Custody and Transfer Agency would provide local Fund Managers access to Gulf markets and vice versa, coupled with competitive pricing that was non-existent.

The promoters then got together and established Gulf Custody Company with a mission to become a leader in fund administration, as well as Custodian and Transfer Agency services in Gulf markets. The company is indicative of an astute business climate present throughout much of the GCC, with the Gulf Custody Company being just one of many domestic companies that have recognised the potential for a sizeable return on investment from the very beginnings of its inception.

Testing market conditions
Those affected by the investment climate in the GCC have had to contend with trying economic tribulations of late, requiring companies to demonstrate a capacity to adapt if they are to survive. Gulf Custody Company has sought to adapt its strategy accordingly in keeping abreast of the wider financial services industry. “Since our beginnings we have gone from strength to strength, except for the last three years where they took a slight hit due to global market conditions. For the year ending 2012 Gulf Custody Company had $3bn under custody,” which represents a slight shortfall on previous years.

Regardless of the past half-decade’s trying economic conditions, Gulf Custody Company has weathered the financial storm of recent years and emerged relatively unscathed, standing the company in good stead to realise the financial rewards of global economic recovery.

Those affected by the investment climate in the GCC have had to contend with trying economic tribulations of late

The region is very much on track to being upgraded from frontier market to emerging market status by MSCI, announced in June and scheduled to take effect as of May 2014, prompting many in the region to implement advanced investment services in catering to a new breed of investor. The GCC has seen rising oil prices and increased government spending bolster the region’s investment prospects and instigate a rise in mutual fund results this year. The return to form for the GCC represents a shrewd business strategy on Gulf Custody Company’s part, as the company has invested a great deal in expanding its market share in the region.

It has attempted to expand upon its market position by opening offices in Bahrain and Oman. “We see a good potential for this service in the future in these regions and wanted to capture the market share before our other competitors did.”

Gulf Custody Company is an independent financial institution whose services cater to conventional Islamic and international mutual funds of various categories. Fernandes continued, “Gulf Custody Company provides a wide range of high quality and cost effective fund custodian, fund administration and share registrar services [transfer agency] to cater to the needs of both clients and fund managers in Kuwait, Gulf and Mena regions.”

The company differentiates its services from rival custody and administration service providers in the region in whatever way it can. “Fund Administration, Custody and Transfer Agency is our core business, and we are not distracted by anything else. Gulf Custody Company also do not invest or trade for its own self. As a result every piece of information relating to Fund Managers, financial markets, funds and financial instruments that is in our domain is segregated, uncompromised, safe and secure in our database and as it is of no use to us, as it is beyond a conflict of interest,” says Fernandes.

Harnessing technology
Gulf Custody Company service to represent something of a benchmark for the industry. Fernandes says that the company has spearheaded a number of changes in the business of fund custody and administration. “Every NAV and report provided is compiled independently by us, which significantly means each and every investor in our fund is afforded the assurance that our reporting is non-biased, accurate and independent.”

It does not hesitate to develop an approach that best meets its clients’ objectives. What differentiates the company from its competitors is that it is not tied down to following rigid procedures without reference to prevailing circumstances of the client – it adopts a flexible approach. Instead it will work with them to develop solutions that meet their needs. KYC and AML also form an integral part of its business procedures now.

Fernandes goes on to state the importance of IT investment to Gulf Custody Company and the business of fund custody and administration as a whole, believing technological advancement to be of an especial importance in delivering the best service possible.

“Our current IT platform, by a reputed international vendor, handles over 24 clients managing in excess of 62 funds. Our commitment to investment in IT is reflective of our need to ensure administration is delivered within a tightly controlled business that does not rely on excessive manual processing, or on the use of spreadsheets.”

One of the principal areas in which IT plays a part is in financial accounting, wherein Gulf Custody Company maintains a complete set of financial records for each fund and portfolio. It employs a fully integrated and state-of-the-art system, which is equipped to cater for the extensive range of fund types on the company’s books.

With the capabilities to accommodate multi-currency portfolios and a variety of fund structures, this IT measure is just one of the many ways in which the company ranks among the best fund custody and administration service providers in the region.

The MSM30 index saw returns of 10.02 percent in the first half of the year, with Bloomberg’s GCC200 Index registering a 10.2 percent increase in the same period, indicating a return to form for the bloc. Moreover, mutual funds have boasted returns in excess of these figures, with three of the 11 Omani funds that posted results in H1 2013 having generated over 20 percent returns, and another four posting over 15 percent.

The gains of GCC mutual funds will serve to boost Gulf Custody Company’s prospects, provided that funds throughout the region experience similar returns and seek out the services of custodians and administrators in protecting its gains.

The company’s prospects look set to improve in the coming years, though Gulf Custody Company is not simply content with its current position. “We plan to expand to other GCC markets when the current market scenario improves,” says Fernandes.

“We also have a highly sophisticated web based state-of-the-art IT solutions in the pipeline,” which highlights another area in which the company will likely advance ahead of its market competitors.

What does the future hold for the Brazilian stock market?

Posted on by Ashton Wenborn

For years, Brazilian capital markets have lagged behind the domestic economy in terms of size and growth potential, and have struggled to keep up with a number of international markets. As one of the world’s most significant growth economies, it is essential for Brazil to develop a market structure more in line with those found in the world’s leading financial centres, such as New York and London. A closer look at the market in Brazil reveals the obvious need for competition in order to stimulate growth and facilitate investor access to global investment opportunities.

A closer look at the market in Brazil reveals the obvious need for competition in order to stimulate growth and facilitate investor access to global investment opportunities

Global investors have long desired access to Brazil, only to be stifled by the monopoly that BM&FBovespa has had on equities and derivatives trading since 2008, when a merger between the country’s Bovespa stock exchange and the BM&F futures exchange was created. In the years that have followed, the group has criticised market fragmentation and promoted its own self-interest, to the detriment of the broader Brazilian economy. But change is in the air.

Market opportunity
In order to better comprehend the Brazilian economy today, it’s important to understand how the market has developed and modernised. As recently as the 1990s, the Brazilian capital market was struggling and losing ground to others due to the lack of protection for shareholders, uncertainties regarding investments, and lack of technological enhancements. With the lack of management transparency and adequate instruments to monitor companies, it gave off an impression of risk, which consequently increased the cost of company capital. In fact, between 1995 and 2003, there were only six initial public offerings in Brazil. Consequently, the Brazilian Stock Exchange was not used by companies to source funds and many Brazilian companies began to go to foreign markets, through American Depositary Receipts (ADRs).

Figure 1

Then in 2000, the Brazilian stock exchange system began to unify and consolidate, led by Bovespa and eight other Brazilian stock exchanges. The capital markets recovered as a result of a series of very favourable macroeconomic events for the Brazilian economy. The number of IPOs rose dramatically, with over 100 IPOs between 2003 and 2011. During this timeframe, the merger of BM&FBovespa occurred, liquidity levels improved and stock prices rallied, prompting the market to embrace the self-deceiving belief that this exchange consolidation was allowing Brazilian equities markets to inch closer to major international markets in terms of performance.

In the last few years, however, new investment alternatives have been few and the economy has suffered without any real growth in retail investing. Despite a growing middle class in Brazil that is consuming more goods than ever before, the domestic capital markets are not representative of the economy as a whole. The number of listed issuers compared to overall GDP is also not a clear representation of the whole picture (see Fig. 1). When compared to other exchanges, the monthly trading volume as a percentage of GDP of Brazil’s stock exchange is 2.4 percent, considerably below the 12.4 percent of key US markets such as NYSE and NASDAQ, and roughly three percent for key European markets (see Fig. 2). When broken down even further, approximately 50 percent of the volume traded is concentrated in only 10 companies in the Bovespa segment, and in the futures market almost 90 percent of the volume is concentrated in only five types of contracts. In addition, the Brazilian markets also have also had some of the largest bid-ask spreads worldwide.

New exchanges
Interest from foreign exchange operators led the Securities and Exchange Commission of Brazil (CVM) to announce in June 2012 that it was working with Oxera, an independent economic consultancy, to weigh up the benefits of allowing new exchanges to operate in the country. What resulted was a surprise to no one that follows the Brazilian markets. The overarching message was that competition would spur economic growth and enhance the economy by bringing in additional liquidity, benefiting a greater number of market participants investing in Brazil.

Figure-2

While the need for liquidity providers is essential for growing the economy, it is just as important to have a liquidity aggregator with efficient technology that meets international standards. By creating an additional stock exchange, a number of additional benefits would include:

  • Improved price formation and smaller bid-ask spreads;
  • Higher trading volumes;
  • Heightened liquidity for small and medium enterprises;
  • Rebalancing of the financial equation for investment services firms and technology providers;
  • Improved savings and liquidity formation conditions.

Another key component to improving Brazil’s financial structure is to develop current technology to increase the volume of trading on electronic platforms. When electronic trading was first introduced in Latin America with the launch of Globex (CME Group’s electronic trading platform) in 1992, the market was slow-moving. However, over the past few years the region has evolved and electronic trading is now growing in Brazil, Mexico and Chile. With that said, there is still a lot of room for expansion; there are many buy-side firms in Brazil that have been slow to adopt electronic trading order routing. Expanding electronic trading in Brazil will allow the order process to be speedier and more efficient while reducing the cost of transactions and increasing transparency.

Competing equities platforms
Recognising the opportunity and demand for a new exchange, NYSE Euronext announced it would partner with Americas Trading Group (ATG) to create a new equities platform to compete with BM&FBovespa. The new exchange, named Americas Trading System Brasil (ATS Brasil), will offer the Brazilian market an opportunity for significant growth and will seek to secure a share of approximately 10-15 percent in equities trading by the end of 2014.

This aggressive goal is based on ATG and NYSE Euronext’s established infrastructure and experience in the electronic trading and stock exchange business. For those not familiar with ATG, it is an electronic trading company that emerged as a result of the lack of development in the capital markets and the need for enhanced technology platforms and modernised access to the broader markets. ATG consolidates and manages connections between brokers, end users and stock exchanges in Latin America. The company also offers the buy- and sell-side firms support in electronic trading and a diverse array of products and services to ensure best order execution and control.

NYSE Euronext saw the opportunity to increase its exposure to the Latin American markets and partnered with ATG to become the exclusive liquidity hub in the region. ATG has invested heavily in technology infrastructure and in trading, monitoring and support systems to build a state-of-the-art, multi-asset, broker-neutral trading platform that connects to the principal economies in the Americas. NYSE Euronext also brings its sophisticated technology to the partnership and will be actively involved with the planning and implementation of this new market in Brazil. ATS Brasil will help remove capital market barriers, providing investors better access to companies and investment instruments.

A growing project
In June 2013, ATS filed a request with the CVM for approval to launch the new exchange. Three months later, ATS Brasil removed the largest barrier for the new stock exchange’s formation by partnering with the Risk Office to create a new clearinghouse in Brazil. The joint venture will provide the full range of clearing and settlement services for transactions in the Brazilian capital market. While the Risk Office and ATG will be the initial investors in the new clearing entity, there are other investors in advanced negotiations to become partners in the project.

With the new clearinghouse in place, ATS Brasil is continuing to move forward with its plan to open the Brazilian stock market for the overall betterment of Brazil and its economy. The new exchange is currently securing liquidity partners and is seeking final approval from CVM. The opportunity for a new modernised market structure in Brazil is on the horizon and when it becomes a reality, domestic and international investors will benefit greatly from increased competition.

Mexico and US in deadlock over insolvency reforms

Posted on by Ashton Wenborn

As Mexico surges towards becoming a modern, thriving economic hub, its legal processes must be brought up to date in order to ensure confidence from the business community. For a long time the country has offered considerable growth potential, but has suffered from a large unregulated and untaxed black market, as well as state monopolies of certain industries, causing a lack of serious competition.

When President Enrique Peña Nieto assumed control of the country in 2012, he set about a series of reforms aimed at improving Mexico’s competitiveness, stimulating economic growth, and freeing industries from the shackles of state ownership. While the economy is closely linked to the US, it has started to slow in recent years, and GDP growth is thought likely to only hit 1.2 percent during 2013.

This GDP growth is expected to reach 4.2 percent in 2014 with the legislative amendments and their effective implementation in matters of labour, education, tax, finance – including banking and insolvency – energy, oil and gas, and telecommunications.

During times of stagnation as well as economic crisis, a robust legal environment is essential to ensure that when companies fall into trouble, there is a proper framework that protects all stakeholders. Mexico enacted its Commercial Insolvency Law (Ley de Concursos Mercantiles LCM) in 2000, with the intention of governing the process after a company approaches insolvency.

Preventing economic fallout
There have been a number of legal wrangles in recent years that have come as a consequence of differences between Mexican law and that of neighbouring territories, like the US, that companies operate in. Designed to rehabilitate companies before having to put them into liquidation, the LCM does not regulate, inter alia, groups of companies, intercompany debt, discharge and other insolvency items for a 21st century regulation.

Cross-border trade, as well as the onset of increased globalisation, means that there needs to be a level of consistency between laws in both Mexico and other territories

Cross-border trade, as well as the onset of increased globalisation, means that there needs to be a level of consistency between laws in both Mexico and other territories. No more so has this trouble been emphasised than in the recent bankruptcy of Mexican glassmaker Vitro SAB.

While Mexico’s legal system might not be as robust as many international firms may hope for, there are a number of legal practitioners that know their way around the complex legal system. World Finance recently spoke to Dario Oscos Coria, founder of Oscos Abogados, about Mexico’s insolvency laws, and what can be learnt from the Vitro case.

Working around a catch and release
Vitro SAB is a Mexican holding company that has many operations across a number of international subsidiaries, including some in the US. With annual net sales of around $2bn and a primarily Mexican workforce of roughly 17,000, the company is a leading manufacturer of glass products.

In 2009, it fell into trouble, failing to pay $293m worth of derivative contracts, as well as interest on bonds that were set to mature in 2012, 2013 and 2017. This led to the company defaulting on around $1.5bn worth of debt held by banks and bondholders across the world.

In December 2010, Vitro sought bankruptcy as a means to restructure itself, as well as creating $1.9bn of intra-company loans between various subsidies. Such a move was seen as more favourable to shareholders than to creditors.

Mexico is in urgent need of a 21st-century insolvency system

“The company’s intention was to enable the subsidiary creditors that had lent money to the holding company to cast votes in support of Vitro’s restructuring plan, thereby imposing a majority in the reorganisation plan on dissenting creditors,” Oscós said.

“Moreover, its affiliates had also entered into a lock-up agreement with the holding company that required them to vote in favour of a restructuring that would release them from payment guarantees they had extended to outside creditors.”

While the bankruptcy reorganisation plan was granted in Mexico, the US legal courts rejected recognition of the reorganised plan because it was contrary to public policy and would release third party obligations of non-bankruptcy debtors.

Oscós says that the case highlighted the need for Mexico to reform its insolvency laws. “The Vitro insolvency case highlighted many of the deficiencies and possible abuses of the LCM, and may be underlined as the most notable insolvency case in recent years.”

He adds: “After 13 years in effect, experience of the LCM shows that Mexico is in urgent need of a 21st-century insolvency system. The legislator has recognised this situation and has made major amendments to the LCM.”

Zurich commits to CSR

Posted on by Ashton Wenborn

The complete structural overhaul of Turkey’s political and economic system in recent years has given rise to a plethora of new market opportunities, though not without accompanying complications. In light of Turkey’s recent developments, World Finance spoke to Zurich Sigorta’s CEO, Yılmaz Yıldız, about the country’s insurance market and how the leading multi-line insurance provider’s services are ready to capitalise on a country in the midst of change.

How is the current economic and political landscape affecting your business?
Due to well-observed structural reforms and successful macroeconomic policies, Turkey has become one of the fastest-growing economies in the world. We consider ourselves very lucky to be operating here as macroeconomic and demographic trends continue to exhibit strong performance to this day.

Sound economic policies combined with vigorous economic reforms have yielded favourable results, and the economy has sustained robust economic growth over the last decade. Turkey is the 17th largest economy worldwide, the sixth largest in Europe, exhibits strong growth prospects and boasts a dynamic population – 50 percent of whom are under 30 years old.

In the coming decades it is estimated that Turkey will expand upon its current political and economic influence further still and, according to recent forecasts, become the 10th largest economy in the world by 2023.

With strong economic indicators, such as consistent GDP growth (see Fig. 1 above), an increasing disposable income, falling unemployment, low public debt and falling inflation and interest rates, Turkey is expected to outperform numerous developed economies in the coming years. This economic environment – supported by structural reforms – will boost consumption of insurance products, so it can be said with a reasonable degree of certainty that the economic climate lifts Zurich’s prospects in Turkey. Thus Zurich, which operates in 170 countries, considers Turkey to be one of its key priority markets.

What have been the key developments in the market this year?
Turkey’s overall insurance market, including life, pensions and non-life, equates to approximately $24bn, and looks to grow at a rate of near 20 percent per annum. The General Insurance (GI) market, of which we form a major part, has attracted serious sums of foreign investment intended to capture future growth, therefore the number of foreign-based insurance companies operating in Turkey has almost tripled since 2001.

$24bn

The approximate value of Turkey’s insurance market, including life, pensions and non-life

20%

Amount Turkey’s insurance market is expected to grow per annum

$9.5bn

The approximate value of the Turkish General Insurance (GI) market

$35bn

Amount Turkish GI market is expected to increase by 2023

The Turkish GI market grew by approximately 18 percent in 2012 and equated to $9.5bn, which was remarkable given that global growth rates remained stagnant. The market has seen even more impressive gains so far in 2013 and, in brief, it can be said that the GI market continues to exhibit impressive growth.

The GI market’s compound annual growth rate from 2001 to 2012 was 22 percent and is expected to reach as much as $35bn by 2023 from $9.5bn today. I do continue to believe in the great potential of the Turkish insurance market, which is fuelled in no small part by sustainable economic growth. Moreover, Turkey’s low insurance penetration implies that there remains a sizeable opportunity for expansion in the near future to be driven by increased GDP per capita.

Regardless of an overwhelmingly positive outlook, there remains intense and often loss-inducing competition in the market. If you were to look at the Turkish GI landscape, it is clear to see that the market is highly fragmented and plays host to as many as 35 active players.

Consolidation in the mid-term is inevitable. Life is and will be extremely difficult for insurance companies with no captive bancassurance partnerships and/or critical scale. Insurance companies need to focus on implementing better technical pricing mechanisms, more balanced portfolios, better expense management practices and operational efficiency if they are to survive. Overall, the Turkish GI market is expected to continue its upward trajectory in tandem with economic expansion and increasing consumer awareness.

How important is CSR to the insurance sector today?
It is becoming increasingly important for companies to act as good corporate citizens. Consumers believe that increasing the transparency of business practices, and demonstrating positive social and environmental impacts are the two most effective actions companies can take to improve public trust in the private sector.

Our employees, executives and we as CEOs feel good about giving back to the societies in which we operate. We do believe it’s crucial to balance business and society in order to develop mutual and long-lasting relationships with the communities in which we live in. It is like most things in life, society and business, inasmuch as it’s all about striking a balance, as without profits, we would be unable to sustain the business and therefore continue with our CSR efforts.

As with any other company, an insurer needs to demonstrate that it is more than just a profit-generating, abstract entity. It is important for insurers to emphasise the vital role they play in economic and social development, and CSR projects will improve the industry’s reputation and reinforce stakeholder relationships, which, in turn, can increase loyalty, sales and resilience.

Tell us a little more about Zurich Sigorta’s CSR initiatives
Our stakeholders and the public in general have high expectations with regards to CSR, and demand that we play a part in addressing today’s social, economic and environmental challenges head-on.

It is an important issue for Zurich Turkey to be a responsible company

CSR is not only a key ingredient of our strategy, but also a natural component of our operational and strategic functions. We recognise that in order to be a successful business, we must be able to depend upon earning and maintaining the trust of our stakeholders by proactively addressing relevant environmental, social and governance issues.

In Zurich, CSR centres on our commitment to apply our core competencies, insurance and risk management expertise in contributing to the sustainability and welfare of a given community. Put simply, it’s about conducting our business in a way that creates long-term value for our customers, our people, our shareholders and the communities in which we operate.

It is an important issue for Zurich Turkey to be a responsible company as it is fundamental to our long-term sustainability to meet our aspirations to become the best global insurer. CSR is crucial in that it benefits everybody. It builds trust and demonstrates to our stakeholders that we are a sustainable, principled business. It makes us more attractive to talented employees, reassures customers we are trustworthy, and most importantly, makes society as a whole stronger.

We believe in taking care of children and the youth in many of our CSR projects, and therefore we’ve launched several activities in 2013 in which we’ve worked together with children in need. In many of our voluntary activities our participation rate stood in excess of 95 percent of our employees, and went quite some way in helping us to embrace the surrounding community with both sympathy and affection.

What are Zurich Sigorta’s plans for growth in 2014?
Our intentions are to leverage Zurich’s traditional strengths without neglecting the core values of local culture and business. Zurich’s focus will continue to lie with sustainable profits as well as creating value for our customers through excellent services and products. To reach that target we are strengthening our position by enhancing the group’s global power with local strategic business partnerships. This strategy coincides with Zurich Basics, which are integrity, customer centricity, sustainable value creation, excellence and teamwork.

Our goal is to be considered the best insurance company by our customers, employees and shareholders alike, and in line with that vision, we will focus on sustainable and profitable growth. We intend to become more competitive by optimising the benefits of our multi channel and multi segment structure, whether this is through organic or inorganic means.

In an emerging market, the secret to success is to capture favourable demographics through profitable growth, and so we will continue to operate in all segments: personal, small business, commercial and corporate; all distribution channels banks, agents, and brokers, and all through our main lines of businesses. We will continue to invest for the long term in our business, employees, and communities, as a major player with regards to CSR initiatives.

Legislative changes to boost Kuwaiti economy

Posted on by Ashton Wenborn

The Kuwaiti market is distinctive in nature. It is generally based on a free economy; however, the Kuwaiti Government has created a form of a luxury-based socialism since the declaration of independence from the United Kingdom in 1961. This trend had its effect on the rest of the GCC region in one way or another.

It was noble in nature; the Kuwaiti Government mainly intended to share its abundant petroleum natural resources with its citizens. And yet, the winds do not blow as ships wish. The government’s system has shown many negative side effects in the five decades since the declaration of independence.

Offshore investing is a viable income sources for many countries, but it cannot be a substitute for investing monies locally

Thanks to its economic strategy, the government has become the absolute and principal employer, giving rise to masked unemployment figures. The economy of the country has grown heavily dependent on returns from petroleum exportation, which form almost 96 percent of its income. This of course has led to the diminishing of the private sector’s role, which is only really focused on the public services sector. As a counter measure, the government took a decision to make offshore reinvestments of surplus petroleum revenues. This measure achieved revenues almost equal to those of petroleum exportation during the ’80s.

However, this achievement was short lived; the invasion of Kuwait took place in 1990, followed by several global financial crises, leading to a significant market value loss in such offshore investments. Offshore investing is a viable income sources for many countries, but it cannot be a substitute for investing monies locally and probing other options to vary income sources.

Efforts to legislate
The oil inflation witnessed by the global market, along with the steady rise of oil prices, will not last for long. Kuwait will face a massive budget deficit if oil prices drop below $75 a barrel, according to some estimates. This fact encouraged the government to try finding other solid alternatives. The Kuwaiti Government is currently attempting to vary its income sources, increase the role of the private sector in the economy, and lessen the excessive luxury aspects in the country. Yet all these attempts require patience, determination, and long-term planning.

The government has put in place certain legislations to try to revive the role of the private sector in the economy, but so many amendments have been made to them that they scarcely retain their original purpose. That said, we are now witnessing serious attempts to realign the economy and modify the basic infrastructure of all public facilities; a budget for which has been set at almost $135bn. This of course meant that the government had to revise the whole legal framework of the country, especially those economic legislations related to developmental aspects. The government also understood the necessity to involve the private sector in the process of creating and varying wealth resources.

Eventually, Law No.7 of 2008 has, along with its executive bylaw on the regulation of build, operate, and transfer (BOT) operations, brought about a law that is known as the Public-Private Partnership Law. Efforts were made to establish the Technical Bureau, whose job it is to focus on studying developmental projects and initiatives. Purviews and resolutions were established to regulate offset operations, leading to the establishment of the National Offset Company (NOC), which is mainly dedicated to implementing the National Offset Programme and try to avail the technologies and expertise of foreign investors implementing major projects in participation with the Kuwaiti Government.

Labour Law No.6 of 2010 was issued based on the concept of taking a comprehensive developmental view, which will provide a form of guarantee to encourage both foreign and Kuwaiti employers and employees. Labour Law No.7 was also issued, relating to the establishment of the stock exchange authority and regulation of stock trading. A total revision was made to legislations pertaining to the operation of legal entities and affiliated entities (companies and their types), all in order to avert the negativities of the old Commercial Companies Law. Ultimately the government issued the new Law No.25 in 2012, which was later amended by virtue of Law No.97 in 2013 along with the newly issued executive bylaw.

To complete the whole framework, the law regarding the encouraging of foreign investment was issued on June 16 2013, as well as Commercial Licenses Law No.111 in 2013, along with its executive bylaw, Ministerial Resolution No.411 on September 3 2013. In the coming period, Kuwait will witness a drastic change in the developmental sector for different fields, which will definitely be accompanied by the activation of new legislations to ensure the country benefits from foreign expertise, and can attract foreign investors.

Al-Twaijri Law Firm: A brief history
Since the company was established, Al-Twaijri Law Firm (TLF) has been striving to participate as much as possible in developing Kuwait’s legal system. This was done by publishing several studies in review of legislations pending promulgation. We also published several specialised books in certain fields of the law. What follows is a brief history of our firm.

The company was brought into the legal field in the late ’80s by its founder Mohammad Al-Twaijri. A legal office was established in Kuwait City after Al-Twaijri left his position as counsellor of a major international oil company to start his own legal business. At that time, the firm focused mainly on enforcing court orders and litigations relating to debt recovery. Eventually, we were able to gain the trust of our clients and began representing several banks and local financial incorporations.

In 1991, TLF was joined by a number of prominent legal figures to supervise and train its workforce. These legal figures cam from various fields, both local and international. As a result, our potential and experience grew larger and stronger in legal claims and local disputes.

One of the major development aspects of TLF’s history was when it supervised several transactions made in different countries, provided assistance for local and international businesses to join joint ventures, and provided legal assistance to foreign companies doing their business successfully in Kuwait and in GCC countries.

Today, TLF employs over 150 personnel who have the appropriate experience and legal skills to deal with any legal challenges

During the mid ’90s, our team grew to include over 50 personnel engaged in different specialised fields of law. By that time, our firm had its own official trade name, TLF. The 21st century saw TLF acquire its first ISO 9001:2000 certification for management-standard compliance, being the first law firm in Kuwait and of the first five law firms in the Middle East to acquire such certification. Today, TLF employs over 150 personnel who have the appropriate experience and legal skills to deal with any legal challenges. We now provide services in almost all legal fields.

We take pride in the fact that our firm has been chosen as one of the leading law firms in Kuwait and indeed the GCC region. This ranking was given by several international legal ranking firms such as Chambers & Partners, Legal-500, IFLR Euromoney, Martindale, and Hildebrandt.

The growth of TLF’s business and activities in the legal field eventually gave rise to the need to expand; thus, a branch office was established in Bahrain seven years ago. This made TLF the first law firm in Kuwait to have a branch in Bahrain without any Bahraini associates.

The continuous development of our legal services has seen TLF attract an elite group of clients, including several multinational companies and a wide group of local and international companies.

TLF’s business faced a major development in 2008 following the onset of the global financial crisis. Several companies were badly impacted, thus forcing us to dedicate a substantial part of our legal efforts towards the financial crisis and to help certain clients in the process or restructuring and incorporation or mergers.

During the last three decades, our firm has grown substantially by diverting and dedicating the skills and experience of its workforce towards serving clients effectively and comprehensively.

To keep up with the steady pace of globalisation, our firm has evolved to provide strategic legal services to local and international clients. We have assisted in the process of developing the concept of legal establishments in the GCC, and ultimately compete with other major international firms in Europe and the US.

Looking forward, TLF has taken practical steps towards establishing new branches in Saudi Arabia and Egypt; a step that will hopefully be fully achieved in the near future once we overcome certain administrative obstacles. These new offices will focus primarily on regional transactions taking place between hosting countries.

The GCC region, and the Arab region generally, are a major exporting area and a beehive for trading and offshore and inshore investments. TLF is planning to establish a legal complex for its legal activities in Kuwait; a complex that will include and cover all legal fields such as arbitration, conciliation, and other local and international legal services.

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.

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.

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.

RBS fined $100m by US for sanction violations

Posted on by Ashton Wenborn

The Royal Bank of Scotland has been fined $100m by US authorities for violating a number of sanctions against Iran, Sudan, Burma and Cuba between 2005 and 2009.

In 2010, US regulators uncovered evidence that RBS staff had “acted to conceal the identity of sanctioned clients by various means, including implementing formal procedures to strip out identifying data from payment messages,” according to a statement by the Department of Financial Services (DFS).

RBS has terminated four employees, including its head of global banking operations for Asia, the Middle East and Africa and its head of money laundering prevention unit for corporate markets. RBS began investigations in 2010 and uncovered around 3,500 transactions, with a combined value of $523m, were routed through New York to account holders in Iran, Sudan, Burma and Cuba. The bank notified authorities of its findings soon after. “The settlement arises from an investigation initiated by RBS in 2010 into its historical US dollar payment practices and controls in the UK,” the bank said in statement. “This review was shared with the relevant US Authorities in 2010 and has been disclosed in regulatory filings since.”

US regulators uncovered evidence that RBS staff had “acted to conceal the identify of sanctioned clients by various means”

It has also been alleged that the bank had a procedure for transfers to banned institutions in which employees would enter the actual name of the foreign bank as opposed to the Bank Identifier Code, which would be international practice. Other procedures were in place to remove location information from payments made from sanctioned countries. The DFS has said “employees at RBS acted to conceal the identity of sanctioned clients by various means, including implementing formal procedures to strip out identifying data from payment messages. RBS employees in payment processing centres in the United Kingdom received written instructions containing a step-by-step guide on how to create and route US dollar payment messages involving sanctioned entities through the United States to avoid detection.”

In its statement RBS said it had “cooperated fully with US authorities,” and that it “acknowledges and deeply regrets these failings.” It also added that since 2009 – the year in which the transactions ceased to be accepted – a number of controls, including a zero-tolerance policy, were put in place by senior executives in order to prevent further violations. The bank has also invested in toughening up its compliance department and now employs 1,700 officers, up from 753 in 2011.

Volcker rule approved despite opposition from Wall Street

Posted on by Ashton Wenborn

American regulators voted the Volcker rule in yesterday after years of contention. The new law will make it much harder for American financial institutions to indulge in risky speculation.

The rule, named after Paul Volcker, former Chairman of the Federal Reserve, actively bans banks from using their own funds for trading activity, and is the cornerstone of the Dodd-Frank act. Though the Volcker Rule was part of the original act passed in 2010, it faced fierce opposition from Wall Street and had to be amended and changed before being approved in its own right.

Effectively, Volcker rules out proprietary trading, that is, banks will not longer be able to bet using their own accounts, and their CEOs and executives will be subjected to greater regulatory scrutiny and be held more accountable.

Though some banks have suggested the rule is too comprehensive, others have pointed out that it does not sufficiently distinguish between trades made for profit and trades made to hedge against risk, leaving a lot of room for interpretation by regulators. “This is the era of ‘big brother’ banking, where the fortunes of banks are tied to the government like never before,” Credit Agricole banking analyst Mike Mayo told the BBC.

Though the rule was passed, Wall Street won a big concession at the last minute. The rule was passed without any provisions that explicitly prohibit banks from making trades to hedge risks in certain circumstances. For months before yesterday’s vote, banks had been worrying that the rule would be more stringent on that matter, especially since JP Morgan announced losses of $6bn in derivatives trading in 2012. Treasury Secretary Jack Lew had suggested the Volcker Rule would address that type of trading to prevent another such incident occurring in the future.

“Big brother was asleep on the couch before the financial crisis and now big brother seeks to micromanage the banks as a means to prevent future crises, [but] how can anyone in mid-level management really understand a proprietary trade?”

In a statement Barack Obama said: “The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices.

“Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.”

Volcker, the key advocate of the rule, has said the new provisions is another step in the “larger on-going effort to rebuild a strong banking system fully capable of, and attentive to, meeting the critical financial needs of businesses and individuals.”

“I look forward to a process, called for by the new regulation, in which the boards of directors and the top management of our leading commercial banks will cooperate closely in implementing the new rules within the institutions for which they are responsible,” he added in a statement.

Banks have until July 2015 to make arrangements to comply. The rule, which is stricter than banks had been lobbying for, will likely hurt profits in the short term, while institutions adapt to the new provisions. Critics have insisted that the rule will damage Wall Street’s ability to compete internationally. According to Standard & Poor’s, limiting proprietary trading could cost the eight main players in the market between $2-3bn a year in foreign earnings.

“We are disappointed that regulators may have sacrificed an effective process that could have avoided adverse consequences for Main Street businesses,” said the US Chamber of Commerce’s David Hirschmann in a statement.

“The Chamber asked regulators to re-propose the Volcker Rule in order to identify and fix unintended consequences before the Rule goes into effect.”