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In Case You Missed It: Business News Round-Up

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

British banks produced encouraging Q2 results, mainly due to a reduction in impairment charges and booming retail and commercial business. The Bank of England and the European Central Bank left benchmark interest rates unchanged. THe ECB president announced eurozone economic recovery “surpasses expectations”. In the US, non-farm payroll figures raise the prospect that the Fed will reinstate a quantitative easing programme to stimulate growth. And Chinese manufacturing output grew at a slower rate in Q2 and predictions for Q3 are for further slowing.

Economic Backdrop

  • The global economic recovery was again shown to be fragile with news of slowing expansion in Chinese manufacturing adding to disappointing growth in the US. The Chinese purchasing managers’ index for July sank to its lowest level since February 2009: the economy has been restrained by Chinese government attempts to curb real estate speculation.
  • In the US, although the unemployment rate held steady at 9.5 percent, US businesses created jobs at a slower pace than earlier in the year and barely fast enough to keep up with population growth. Private payrolls increased by 71,000 jobs, compared with a forecast of 90,000. Overall, the US economy shed 131,000 jobs in July, and a revised 221,000 jobs in June, but that decline was the result of the end of temporary government jobs for the 2010 census.
  • The euro has rallied 11 percent since reaching a four-year low versus the dollar on June 7, as investors gained confidence that government austerity measures will help the region weather its sovereign-debt crisis. A report last week showed business confidence in Germany unexpectedly climbed to a three- year high and monthly purchasing managers’ indices for Europe said growth in services and manufacturing industries accelerated in July.
  • The ECB and the Bank of England left interest rates unchanged at their monthly meetings.
  • The COMEX December gold futures contract closed up Friday at $1205.30. People were also buying gold on the longer-term view that the dollar may weaken further and inflation may rise if a stuttering economic recovery causes the U.S. to inject more money into the system. In addition, China announced a series of measures to liberalise its local gold market, which will increase liquidity and spur development of gold financial products.

Mergers and Acquisitions

  • Last week, Sage, the accounting software group, lost out on the purchase of TeamSystem, the Italian business management software group, to HgCapital, the UK-based private equity group.

Financial Institutions

  • BNP Paribas, France’s largest bank, reported a 31 pc increase in net Q2 profit as provisions for bad loans fell to the lowest level for 2 years. Last year’s merger with Fortis of Belgium accounted for an 11.8pc increase in revenues. Société Générale also beat forecasts with a three-fold leap in Q2 net profit, but warned that the economic recovery was still fragile.
  • Barclays reported a 44 percent increase in first-half profit on Thursday, fuelled by a drop in loan loss charges, which fell by about a third on a year-on-year basis. However, while pre-tax profit increased three fold at Barclays Capital, the investment bank’s revenues slipped by nearly a third.
  • Lloyds Banking Group surged back into profit in the first half of the year, supporting evidence of a recovery in the UK financial sector. The part-nationalised bank far outstripped market expectations when it reported an underlying pre-tax profit of £1.6bn for the first half following a sharp fall in bad debts and a rise in the profitability of its mortgage lending. A year ago Lloyds made £4bn of pre-tax losses.
  • Pre-tax profit more than doubled at HSBC in the first six months of the year as bad debts fell to the lowest level since the start of the financial crisis and its investment banking division revealed a surprisingly resilient performance. Group pre-tax profit rose to $11.1bn from $5.02bn a year ago. HSBC was profitable in every region except the US, where it reported a loss of about $80m.
  • Separately, HSBC Holdings said its US division was under investigation for possible violations of anti-money laundering and bank secrecy rules. HSBC USA disclosed in a securities filing that it had received grand jury subpoenas and other requests for information from the US Attorney’s Office and the Department of Justice. It said it was the subject of examinations by other government agencies, including the Office of the Comptroller of the Currency and the Federal Reserve Bank of Chicago. HSBC acquired the global banknotes business, which distributes money to central banks, large commercial banks and currency exchanges, through its 1999 acquisition of Republic Bank. It said that following an internal strategic review, the bank decided last month to shut down the global banknotes business. The move was the bank’s decision and not imposed by regulators. In the SEC filing, HSBC said the unit’s closure would reduce revenue by $110m.
  • Royal Bank of Scotland announced a Q2 profit of £257m due to large one-time gains, although losses from bad loans increased. Earlier, the Financial Services Authority fined RBS, and its subsidiaries NatWest, Ulster Bank and Coutts & Co., £5.6m for having inadequate controls to prevent breaches of sanctions against terrorist groups and others listed by the government. RBS also disclosed that the FSA is investigating sales by Coutts & Co. of investments in a fund run by American Life Insurance Co. between 2001 and 2008, when it was a unit of bailed-out U.S. insurer AIG. Separately, RBS is expected to announce the sale of its Global Merchant Service arm – the leading UK credit card payment processing business – to Advent International and Bain Capital for £2bn. The £1.65bn sale of 318 branches to Santander was also completed this week.
  • Goldman Sachs is rumoured to be preparing to shut down the unit that trades with the bank’s funds and move its traders to either an independent hedge fund or its asset management arm to comply with new US law and prevent an exodus of star employees. After last month’s passage of US financial reform legislation, the “Volcker rule” bans banks from making trading bets with their own money but gives them at least four years to comply.
  • The head of Standard Chartered has indicated that the bank may look to move its base out of London as he said tougher regulation and a new industry levy were damping the UK’s competitiveness. Peter Sands, chief executive, said the Asia-focused bank did not have any plans to move its City headquarters but admitted that investors had voiced concerns over the UK’s attractiveness compared with other markets. His comments came as the bank announced its first-half results. Pre-tax profits rose 10 per cent to $3.1bn (£1.95bn) in the first six months of the year on the back of a 60 per cent fall in bad debts.

    • It was reported that Citigroup is preparing to put Egg, its UK online bank, up for sale as part of the US financial group’s plan to shed billions of dollars in unwanted assets, according to people close to the situation. Egg, which was created by Prudential, was sold to Citi in 2007.

Credit

  • A number of large banks have recently issued hybrid bonds, which contain features of debt and equity. Hybrids are essentially bonds with added features, such as giving the borrower the right not to redeem them on a particular date and to withhold or skip interest payments under certain conditions. Investors, particularly long-term ones such as insurers, like hybrids for their long-dated nature and the higher coupons they offer to compensate for the extra risks involved in holding them. Since regulators have allowed them to count towards regulatory capital, their appeal to issuers is that they look like relatively cheap equity.
  • Some of Europe’s biggest banks are also planning to issue contingent convertible instruments– nicknamed cocos – if regulators confirm they can count towards top-notch tier-one capital. Cocos are essentially bonds that convert into equity if a certain trigger point is reached, for example if the bank’s core tier- one ratio – the key measure of a bank’s capital strength – falls below 5 percent. They boost capital without diluting shareholdings.
  • However, regulators’ views of cocos are still unclear. The Basel Committee on Banking Supervision, which oversees global banking regulation, is set to finalise new capital rules at the end of the year, however, there are signs that the rules will no longer take the expected hard line on tier-one capital. Last week the Basel Committee said it would give an update of its views on “the use of contingent capital for meeting a portion of the capital buffers” in September.

Other

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

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