Manhattan-New York

In Case You Missed It: Business News Round-Up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.

The US has avoided a double dip recession, although the Fed reported that the recovery has slowed. The Basel Committee on Banking Supervision softened some provisions in Basel III, watering down earlier definitions of capital and including a long phase-in period to comply with new requirements about leverage and liquidity ratios. BP announced that Robert Dudley will replace Tony Hayword as its CEO.

Economic Backdrop

  • In global equity markets the week began well, in the wake of good earnings from companies in the US and Europe, and a sharp rally in banking stocks after European bank stress tests eased investors’ fears about the region’s financials. The rally was reversed mid-week, however, when some US economic numbers such as durable goods and the Federal Reserve’s Beige Book cast doubt on the outlook for growth later this year. In its Beige Book report on the American economy, the Federal Reserve observed a modest rise in economic activity in June and the first half of July. The Fed found that conditions were improving in most of its 12 regional districts, but that advances were moderate, lending credence to the view that the recovery is weakening but broadly on track. Nevertheless, Wall Street recorded its biggest monthly gain in a year.
  • Following news that the American consumer-confidence index had fallen to a five-month low of 50.4 in July, from 54.3 in June, and the release of poor data on second-quarter US growth, the dollar fell against a broad range of currencies. On a trade-weighted basis it was down 0.9 per cent over the week, and was at its weakest against the Japanese currency (apart from two trading days last year) since 1995.
  • At the same time, the euro rallied to its highest in three months: it gained 0.9 per cent to $1.3025 over the week, at one point rising above $1.31. The pound was 1.5 per cent stronger at $1.5662, its highest level in five months.
  • In US government bond trading, the disappointing data on July consumer confidence and on the US labour market kept yields on US Treasuries near their lowest levels for the year. The yield on 10-year notes was at 2.91 per cent on Friday, down from a high of 3.06 per cent on Wednesday.

Mergers and Acquisitions

  • Sage, the accounting software group, hopes to acquire TeamSystem, the Italian business management software group, for up to €650m (£542m). Final bids for TeamSystem are expected next Friday for the business that has been put up for sale by Bain Capital, the US private equity group.

Financial Institutions

  • Santander, the eurozone’s largest bank by market value, unveiled a slight year-on-year fall in first-half net profits, as bad-loan provisions and domestic weakness offset solid growth. The bank produced profits for the six months to the end of June of €4.45bn ($5.82bn), compared with €4.52bn a year before.
  • A slight pick-up in domestic activity and growth in its foreign franchises helped BBVA beat analysts’ forecasts even as it posted a 17.5 per cent year-on-year drop in second-quarter net profits. Spain’s second-biggest bank by market value said profits for the three months to the end of June were €1.3bn ($1.69bn) compared with about €1.6bn for the same period last year.
  • Investment bank Lazard produced quarterly earnings up 58%, helped by strong asset management results. Lazard’s second quarter profits were $44.5m, up from $28.2m a year ago.
  • Deutsche Bank on Tuesday reported net income of €1.2bn for the second quarter, slightly beating expectations after a tough period for the trading that it and other investment banks depend upon.
  • UBS reported better-than-expected second-quarter profits as resilient investment banking revenues and improved private banking boosted the Swiss group’s performance. UBS reported SFr2 billion ($1.8 billion) in net profits for the second quarter, marking its third profitable quarter in a row.
  • Meanwhile, Credit Suisse, another Swiss lender, made a profit of SFr1.6 billion. Although investment banking earnings fell in the second quarter, exceptional items more than compensated and group profits beat expectations as a result.
  • Virgin Money, the financial services arm of Sir Richard Branson’s Virgin Group, has postponed its launch into mainstream banking until the spring. The delay is likely to be seen as a blow to government and regulatory hopes to boost competition in retail banking. Virgin had intended to start to offer internet savings accounts this summer under the banking licence it acquired in January through the purchase of Church House Trust, a tiny bank in Somerset.
  • New entrant Metro Bank opened for business on Thursday with its first branch in London.

Credit

  • The prices of Spanish and Greek bonds have rallied following the publication of the results of European bank stress tests, which only 7 out of the 91 banks failed.

Other

  • The UK’s House of Lords’ economic affairs committee launched a review into the Big Four accounting firms’ role in the financial crisis. The latest inquiry will be closely watched by regulators in the US and in Europe, where Michel Barnier, EU internal markets commissioner, is holding a separate inquiry into audit competition. It follows criticism of auditors this month by the Financial Services Authority, the UK banking regulator, which said they fell “far short” of the expectations of regulators by showing a “worrying lack of scepticism” in some of their audits of financial institutions in the run-up to the financial crisis.
  • The International Accounting Standards Board (IASB) has proposed, for the first time, a single accounting system for insurers, making their accounts comparable across more than 120 countries around the world. The IASB proposal foresees a single standard that all insurers in all jurisdictions could apply to all contract types on a consistent basis. Crucially, the IASB proposes insurers, including life and general, direct insurance and reinsurance, measure their liabilities using the same approach. The IASB proposes insurance liabilities should be measured using a “building block approach”. This would see insurers making a best estimate of their liabilities plus a risk adjustment. However, to avoid a profit being recognised too early the amount of the liability will be increased to reflect the premiums charged to the customer. The best estimate and risk adjustment would also be re-measured at each reporting date. The draft is open for comment until the end of November. It is expected to be in force in 2013 or 2014.
  • BPP, the for-profit business education provider, is set to become the UK’s first new private independent university college since 1973, as the government signals its intention to bring newcomers into the UK’s higher education sector. Launched in 1976, BPP specialises in accountancy qualifications. BPP is the only for-profit business college with the power to award degrees, a right it gained in 2007. The government has now granted it the right to call itself a “university college” – a protected term whose use requires the approval of the Privy Council. The college will start to use the title “BPP University College of Professional Studies” immediately. The college, which is partly owned by private equity investors, trains more than 30,000 accountants in addition to 6,500 students at its British law and business schools.
  • The Basel Committee on Banking Supervision softened some provisions in Basel III, a set of rules being drawn up to govern banks’ capital requirements and liquidity standards. The modifications water down earlier definitions of capital and include a long phase-in period to comply with new requirements about leverage and liquidity ratios. The final package of reforms is expected to be presented to the G20 leaders’ meeting in Seoul in November.
  • The original rules, known as Basel I, were drawn up in 1988 by a committee formed following the disastrous collapse of German bank Herstatt in the 1970s. The measures were revised in Basel II in 2004 although the US did not implement the update.
  • Basel III plans to make banks raise their tier one and tier two capital ratios. Banks will also need “counter-cyclical” capital levels, meaning they will have to hold more in good times to slow their activity and less in bad times to encourage lending. Softer forms of capital that cannot absorb financial shocks will be eliminated. Basel III will introduce a leverage ratio to limit banks’ borrowings and a “net stable funding ratio” to force institutions to match the duration of their liabilities and assets more closely.
  • The European Central Bank announced a new set of discounts it will apply from January 1st 2011 when accepting low-quality assets as collateral from banks. The decision is intended to reduce the risk the ECB has taken on during the crisis. The discounts will not apply to government bonds.
  • BP announced that its chief executive Tony Hayward would step down on October 1st. Robert Dudley, its American executive director, will replace him. BP reported a loss of $17 billion in the second quarter, after a pre-tax charge of $32 billion to cover the costs of cleaning up the oil spill, compensating its victims and paying fines. The company intends to sell up to $30 billion of assets to settle its bills.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

/by