ECB Exams May Unlock Lending At EU Banks
The European Central Bank?s unprecedented inspection of lenders? books will help end a slump in lending that?s dogged southern Europe for years, said executives at some of the region?s largest banks.
?After the comprehensive assessment, when worries about capital levels are clarified, banks will be more open with credit,? said Giuseppe Castagna, 55, chief executive of Italy?s Banca Popolare di Milano Scarl.
He?s targeting annual loan growth of about 5 percent through 2016, following a 4.2 percent drop last year.
ECB President Mario Draghi is using the yearlong review to restore confidence in the financial system before taking over banking supervision in November.
The ECB studied the accounts of about 130 of the euro-area?s largest lenders to ferret out bad loans and ensure they have enough capital to withstand economic shocks. The results will be released on Sunday.
Draghi told lawmakers in Brussels last month that while the ECB?s exercise probably worsened Europe?s credit contraction as firms prepared for the exams, banks would be better able to boost lending when the cleanup was complete.
A pickup in lending, especially in southern Europe, is crucial to fending off the euro area?s third recession since 2008.
?It is like a wound that needs to be disinfected immediately,? Draghi said of healing Europe?s banks. ?Although there may be some more loss of blood once it has been properly taken care of, the illness will disappear. The banks will return to lending in a much more robust position.?
The 18-nation euro bloc posted no growth in the second quarter as Germany, France and Italy failed to expand. The region is at risk of becoming ?the major issue? facing the world economy, the International Monetary Fund said this month after cutting its global growth estimates.
Concerns that the region?s economy may contract contributed to a 7.5 percent drop in the 49-company Stoxx 600 Banks Index this month.
Loans to consumers and companies shrank 1.5 percent on an annual basis in August, the 28th consecutive monthly drop, ECB data show. Credit to Spanish companies and households stood at the lowest since 2006 in August, while loans in Portugal touched a seven-and-a-half-year low and credit in Italy and Greece lingered this year at levels last seen in 2010, the data show.
A reticence to lend while the ECB pushes banks to shore up their finances probably cut demand for the cheap long-term funds the central bank offered lenders last month to help stimulate the economy, said Jose Manuel Gonzalez-Paramo, 56, a management board member at Banco BilbaoVizcaya Argentaria.
The ECB allotted ?82.6 billion ($105 billion) at a rate of 0.15 percent in the first round of the four-year program tied to the size of banks? loan books. Banks will be more eager to tap the ECB cash at the next round in December, when the review is over, Paramo said in an interview last month.
?The banks are quite happy to request this money,? said Paramo, who served as an executive board member at the ECB before joining Spain?s second-largest bank last year. ?You see pent-up demand for loans.?
Some question whether the ECB?s measures will lead to a recovery unless governments take steps to improve competitiveness.
?As long as there aren?t structural reforms, investments won?t rebound,? Juergen Fitschen, 66, Deutsche Bank?s co-chief executive, told reporters in Washington this month. Even so, he described the ECB?s assumption of the banking supervisor role as ?a milestone for a stable and safe European finance industry.?
The ECB used findings from a review of bank asset quality to conduct a stress test last month. Firms will have six months to raise equity to cover shortfalls identified in the review or the milder of two stress-test scenarios, and nine months to fill capital holes resulting from the tougher scenario. Estimates of the system?s new capital needs have varied widely, from zero to as much as ?767 billion.
Banks the ECB will supervise directly already have ?strengthened their balance sheets? by almost ?203 billion since mid-2013, Draghi, 67, said this month. They sold stock, hoarded earnings, off-loaded assets, set aside provisions for bad loans and issued bonds that turn into equity when capital levels fall too low, he said.
The conclusion of the ECB?s test may also prompt banks to acquire local competitors and help boost earnings over the next two years, said Olivier Lefevre at the asset-management arm of French bank Natixis.
?In certain countries, especially Italy, you?re going to see consolidation between domestic banks,? said Paris-based Lefevre, who manages ?1 billion of European equities, including bank shares. ?It?s too fragmented and profitability is quite poor.?
Any recovery will depend on companies and consumers, said Pierfrancesco Saviotti, the chief executive of Verona-based Banco Popolare. ?There is a lot of liquidity in the system, so if demand recovers, banks will be ready to lend,? he said.
How an Aesop Fable Became a Symbol of Japan?s New Shareholder Activism
Seeking to explain changing attitudes in the world?s second-biggest stock market, asset managers in Tokyo have been evoking Ancient Greece.
In Aesop?s fable of the North Wind and the Sun, the two elements have a contest to see which is stronger, the challenge being to make a man remove his coat. The north wind unleashes a gale and the man wraps up tighter. Then the sun shines and he takes the jacket off.
The moral, that persuasion trumps force, is informing a wave of shareholder activism in Japan, with the government?s blessing. It is built on dialogue and consensus rather than proxy fights played out in public, say proponents such as Ken Kobayashi, director of investment at a fund within Japan?s oldest insurer, and Brian Heywood, chief executive of Taiyo Pacific Partners.
The strategy has taken the name ?engagement? in the local language, a transliteration of the English term.
The North Wind refers to western activists like Warren Lichtenstein?s Steel Partners that tried to force change at Japanese companies, Kobayashi said in an interview on Sept. 19. They ?would generally just say what they thought was right. But it didn?t really work with Japanese corporate culture. We?re partly a reaction to them. We take this culture into account.?
Kobayashi?s $330 million Japan Engagement Fund picks 10 to 15 medium-sized companies that are open to change, and advises them on how to improve their performance and financial strategies, he said.
The investments, which are not disclosed by JEF, include Calbee, according to Chisa Hayakawa, an executive officer at the snackmaker. JEF is a good investor that really listens and is supportive of the company?s growth, Hayakawa said. Calbee shares jumped 4.1 percent in Tokyo on Monday, while the Topix index climbed 4 percent.
JEF, part owned by the investment arm of Tokio Marine, returned 16 percent in the two years through March, compared with a 3 percent gain for the company?s mainstream funds. It got its first local pension clients this year, Kobayashi said.
The idea for the ?engagement fund? ran into opposition at the planning stage as colleagues worried about the reputational risk of activism and whether it would pay, according to Kobayashi. Things are easier now, with companies and potential investors more receptive, especially since Japan?s $1.2 trillion pension fund agreed to a stewardship code guiding money managers, he said.
?We?re seeing two big changes,? Kobayashi said. ?It?s getting easier to get company management onboard. Potential customers also have a different attitude. Pension funds are actively adopting the code and becoming more interested in engagement funds.?
Prime Minister Shinzo Abe?s regime is seeking better governance as a means to improve Japanese companies? earnings power. As well as rules for investor responsibility, the government backed the creation of a stock index that rewards businesses that use funds well. It also set a minimum target of 8 percent for return on equity at listed businesses.
Companies? receptiveness today stands in contrast to when foreign activists landed in Japan in the 2000s with plans to shake up the nation?s capitalism and make companies pay out cash to shareholders. The country buttoned up and waited them out: in one high-profile example, Steel Partners sold its entire stake in brewer Sapporo in 2010 after holding it for six years and failing to win board seats.
?Doing something hostile? doesn?t work in Japan, said Heywood of Taiyo Pacific Partners said on Oct. 14. ?When guys do things that are seen to be without the consensus of the system, Japan reacts. It?s like a white blood cell cleansing itself of impurities.?
The fable the engagement funds use to explain themselves resonates in Japan, as most people learned it at school. Fewer know where it hails from. Portuguese traders brought Aesop?s tales to Japanese shores in the 16th century. They were translated from Latin and escaped a ban on Western books when Japan closed its doors to the world.
Like the friendly activism they?re being aligned with, they turned Japanese.
Can Jokowi Lead Amid Challenging Times?
Jakarta. Businesses are optimistic that Joko Widodo, inaugurated on Monday as Indonesia?s seventh president, that the former furniture seller will lead the nation ? which faces slowing economic growth, triple deficit threats and welfare inequality ? through difficult times.
Curbing slowing growth is an imminent challenge. An editorial by Bloomberg View on Sunday, noted that Indonesia?s economic expansion in the second quarter at 5.1 percent was at its slowest in about five years after exports and investment slowed amid global weakness.
Such growth rate would be ?not nearly enough to accommodate the 15 million new workers who will join the labor force between now and 2020,? Bloomberg said in the editorial view.
Indonesia has a labor force of about 125 million and for this year alone, planning minister Armida Alisjahbana had said that the country would see about 900,000 to 1 million new workers joining the existing force.
Meanwhile, the World Bank this month pared its forecast on Indonesia?s economic growth to 5.2 percent, down from its forecast of 5.3 percent made in April. It would be lower than growth last year, when the economy expanded by 5.78 percent. The Washington-based lender was forecasting for a pick-up next year, with 5.6 percent growth in sight, but it came with a caveat ? that growth will largely depend on how effective the country?s next administration will be in pushing through policy reforms in 2015.
?We within the International Business Chamber, along with other people, are very optimistic that we will see some significant improvement in public administration,? said Peter Fanning, chairman of the International Business Chamber (IBC), an informal gathering of foreign chambers in Indonesia, on Monday. He believes that reforms will also involve a revamp on infrastructure planning, which is a much-needed development for a country that has been struggling with high logistics costs due to poor infrastructure conditions.
Andrew White, managing director of AmCham Indonesia, said that American businesses operating in Indonesia said that the new government should simplify Indonesia?s overly complex legal and regulatory environment and ensure that there is a transparent and level-playing field for businesses to operate.
He also believes that Joko should ensure solid coordination between government entities to effectively implement and execute laws and regulations that boost investment.
Robertus Kuswendri, head of Indonesia corporate coverage at RBS Indonesia, which is part of the Royal Bank of Scotland, said that the market was now awaiting for Joko?s announcement of his cabinet line-up.
Joko, whose presidential race was supported by the Indonesia Democratic Party of Struggle (PDI-P), which is led by Megawati Soekarnoputri, could release the make- up of his cabinet as soon as this week.
However, one of investors? greatest concerns about Joko?s presidency is that opposition parties ? through losing presidential candidate Prabowo Subianto?s Red-White Coalition ? control the majority of seats in both levels of legislature.
Still, Fanning of the IBC said, ?like all politicians he has to make compromises ... I think he is clever enough to negotiate through those problems.?
Monday?s inauguration was a relief for many, including businesses, as the worst-case scenario of the coalition blocking Joko?s inauguration or attempt to discredit his administration did not happen.
?It was a wonderful day today. I saw that the public was gathering in the Hotel Indonesia Roundabout. People were very enthusiastic. The market, so far, has responded it positively,? said Kunardy Lie, chief country officer at Deutsche Bank in Jakarta.
The veteran banker said he hoped that Joko would immediately tackle the triple deficits ? budget, trade and current account ? by starting with reducing spending on the fuel subsidy and reallocate that funding into public facilities that are productive like infrastructure.
Indonesia posted a $318 million deficit in August, compared to July?s revised surplus of $42.2 million, amid large oil imports and slowing exports. Southeast Asia?s largest economy used to post surpluses, but weak exports and more imports of fuel have been pushing the current account deficit to widen.
The country?s current account deficit stood at $9.1 billion, or 4.27 percent of gross domestic product, in the April-June period ? which is more than double the previous quarter. Meanwhile, Indonesia is targeting a state budget deficit for 2015 of Rp 245.9 trillion ($20 billion), or 2.21 percent of estimated GDP, of which the bulk is made up by fuel subsidy expenses.
Meanwhile, Joko also needs to keep his pledge in reducing the number of people in poverty. According to government data as of March, there were 28.2 million people, or 11.25 percent of the population, who were classified as being poor, or living on less than Rp 303,000 a month. At the same time the number of unemployed people stood at 7.15 million people, or 5.7 percent of the population. Ignoring the poor at the expense as the economy continues to grow creates huge wealth inequalities in a country of about 250 million people.
WHO Conference Recommends Nations Increase Tobacco Taxes To Save Lives
Meeting in Moscow on implementing the world’s first public health treaty, the World Health Organization Framework Convention on Tobacco Control, country delegates from around the world have unanimously recommended that parties to the treaty increase tobacco taxes to reduce tobacco use and save lives.
The 179 parties to the treaty are legally obligated to raise taxes on tobacco products to reduce tobacco consumption. The guidelines unanimously adopted this week will help parties meet this obligation.
Studies and experience from around the world show that making tobacco products more expensive by raising taxes is the most effective way to reduce tobacco use, especially among vulnerable populations such as youth, pregnant women and low-income tobacco users. Tobacco taxes are also an effective way for governments to generate revenue.
New Report: Graphic Cigarette Warnings Spread Around World
The number of countries requiring graphic health warnings on cigarette packs is growing rapidly, according to a report issued today by the Canadian Cancer Society.
The report finds that 77 countries and territories have finalized picture warnings — up from 55 countries that had implemented by the end of 2012 and just one country — Canada — in 2001.
Ahead of Global Meeting, Big Tobacco Seeks to Derail Progress on Life-Saving ...
A tobacco industry-funded organization is trying to gut life-saving efforts to raise tobacco taxes as countries prepare to discuss the issue at an upcoming World Health Organization conference on tobacco control, according to an article in the Financial Times (subscription required). The conference kicks off October 13 in Moscow.
The International Tax and Investment Center (ITIC), a Washington, DC-based organization, has asked government representatives from around the world to attend a private meeting shortly before the conference in an effort to undercut progress on tobacco tax increases. According to the Financial Times, “all four of the major international tobacco companies, including British American Tobacco and Philip Morris International, are sponsors of the ITIC and have representatives on its board of directors.”
Samsung seeks boost from redesigned Note
The latest version of Samsung's popular big-screen Galaxy Note has gone on sale at a crucial time for the South Korean company as it suffers a rapid decline in profit from its global smartphone business.
Asian stocks drift after China growth slows
Asian stock markets drifted lower Tuesday after China reported its weakest economic growth in five years while Japan's benchmark dropped as investors cashed in gains from a 4 percent surge the previous day.
Jokowi meets with PNG Prime Minister for bilateral talks
President Joko ?Jokowi? Widodo conducted a meeting with Papua New
Guinea (PNG) Prime Minister Peter O?Neill at the State Palace in Jakarta
on Tuesday morning.