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Europe’s banks are challenging the challengers - Industry roundup: 19 February

Europe’s banks are challenging the challengers

Research from Economist Impact supported by Temenos finds that European banks are fighting back against competition from platform players, neobanks and payment providers. According to the study, “Challenging the challengers: Europe’s banks face the competition”, almost half (43%) are investing in fintech start-ups, and a third (36%) are building their own greenfield digital bank or fintech company.

European banks are also migrating core banking systems to public cloud and SaaS more significantly than their counterparts in other regions. Over a fifth (21%) of European banks see cloud as a strategic priority, ensuring their operations are agile and secure to compete with more nimble competitors. AI is also a key part of their technology investment strategy, particularly to improve the customer experience and support digital marketing, with three-quarters (75%) of European bankers believing that generative AI will significantly impact the banking sector.

The report reveals that European banks are more likely to view neobanks as their company’s biggest competitors in the next five years than other regions. However, payment players and technology providers remain top of mind, with payments being the space European banks predict new entrants will gain the most market share. HSBC recently launched Zing, a new multi-currency payments app to compete with the likes of Wise and Revolut.

“Fintechs and neobanks took the lead in using new technologies to provide better customer experiences,” commented Jonathan Birdwell, Global Head of Policy & Insights, Economist Impact. “European banks are now fighting back, emulating the way non-traditional players have used technology to reach consumers who had been underserved by traditional financial services, and to appeal to existing customers with support in managing their personal finances.”


North American companies hit by US$30bn currency impact

The currency impact on earnings reported by North American companies totalled US$30bn in Q3 2023, with US$16.01bn in headwinds and US$13.92bn in tailwinds, according to Kyriba’s latest Currency Impact Report (CIR). The CIR analyses the earnings calls of 1,700 publicly traded North American and European companies as part of a continued effort to provide insight into how foreign exchange impacts global organisations' revenue, earnings and cash flow.

“While the overall currency impact hasn’t greatly fluctuated since the previous quarter, market volatility continues to persist meaning that all global organisations must be on watch to ensure they understand the impact that currency can have on their bottom line,” said Melissa Di Donato, Chair and CEO at Kyriba. “With the looming prospect of interest rate reductions coming later this year, now is the time to be more diligent about managing FX risk.”

The US$16.01bn in headwinds reported by publicly traded North American companies in Q3 2023 was down 20% from last quarter, while the US$13.92bn in tailwinds was up US$6.4m. The North American industries most impacted include healthcare equipment and supplies; machinery, trading and distribution; life sciences; chemicals; biotech and pharmaceutical.

The euro was the most mentioned currency by North American companies surveyed. The Chinese renminbi was the second most-mentioned, followed by the Great British pound, the Canadian dollar, and the Japanese yen. While the Chinese renminbi was the third most volatile currency weighted by GDP.

European companies reported US$8.96bn in FX-related impacts, about 56.6% greater than the previous quarter. Of the 850 Europe-based multinationals analysed, 12.4% reported headwinds in Q3 2023. Of those, 61.9% quantified their negative impacts.


Federal Reserve Board releases the hypothetical scenarios for annual stress test

The Federal Reserve Board has released the hypothetical scenarios for its annual stress test, which helps ensure that large banks can lend to households and businesses even in a severe recession. Additionally, for the first time, the Board released four hypothetical elements designed to probe different risks through its “exploratory analysis” of the banking system. The exploratory analysis will not affect bank capital requirements.

The Board's annual stress test evaluates the resilience of large banks by estimating losses, net revenue, and capital levels - which provide a cushion against losses - under hypothetical recession scenarios that extend two years into the future. This year, 32 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets and corporate debt markets. The scenarios are not forecasts and should not be interpreted as predictions of future economic conditions.

In the 2024 stress test scenario, the US unemployment rate rises nearly 6.5 percentage points to a peak of 10%. The increase in the unemployment rate is accompanied by severe market volatility, a widening of corporate bond spreads, and a collapse in asset prices, including a 36% decline in house prices and a 40% decline in commercial real estate prices. Large banks with substantial trading or custodial operations are also required to incorporate a counterparty default scenario component to estimate and report potential losses and capital effects associated with the unexpected default of the firm’s largest counterparty.

In addition, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading and related positions. The global market shock component is a set of hypothetical stresses to a large set of risk factors reflecting market distress and heightened uncertainty.

This year's exploratory analysis includes four separate hypothetical elements to assess the banking system's resilience to a broader range of risks. Two of the hypothetical elements include funding stresses that cause a rapid repricing of a large proportion of deposits at large banks. Each element has a different set of interest rate and economic conditions, including a moderate recession with increasing inflation and rising interest rates, and a severe global recession with high and persistent inflation and rising interest rates.

The other two elements of the exploratory analysis include two sets of market shocks that will be applied only to the largest and most complex banks. These shocks hypothesise the failure of five large hedge funds, with each under a different set of financial market conditions. Those conditions include expectations of reduced global economic activity with a negative outlook for long-term inflation, and expectations of severe recessions in the US and other countries.

The exploratory analysis is distinct from the stress test and will explore additional hypothetical risks to the broader banking system rather than focusing on firm-specific results. The Board will publish aggregate results alongside the annual stress test results in June 2024.


DBS widens foreign access to China’s interbank bond market 

China’s National Association of Financial Market Institutional Investors has provided a licence to DBS China to underwrite debt financing instruments for non-financial enterprises, including foreign issuers, in the China Interbank Bond Market, the world’s second-largest bond market. 

Foreign issuers are increasingly tapping China’s bond markets for financing. According to Chinese financial data provider Wind Information, issuance of Panda bonds in the China Interbank Bond Market last year hit a record RMB140bn (SGD26.2bn), an almost 70% jump from RMB83bn (SGD15.5bn) in 2022.

“The growth of Panda bond issuances highlights the domestic bond market’s depth and rising international standing, driven in part by the government’s initiatives to internationalise its financial markets,” said Ginger Cheng, CEO of DBS Bank (China). “As one of the first foreign banks to participate in the China Interbank Bond Market, our new underwriting licence expands DBS’ existing capabilities and networks in helping both foreign and local issuers access this attractive market.”


US small businesses optimistic for 2024 after uncertain year

US small businesses feel optimistic going into 2024, as they ended 2023 on a high note, according to the latest Amex Trendex: Small Business Edition from American Express. An overwhelming 85% of all small businesses surveyed said they are satisfied with the success of their business. Further, 86% said they achieved their 2023 business goals. This is significant, especially when compared to an American Express small business survey from August 2023, where 80% of all small businesses surveyed said the economy negatively impacted their long-term financial confidence.

Small businesses have ambitious growth plans to expand their businesses throughout 2024 – broadly prioritising their customer base and workforce. Half (50%) of small businesses surveyed have plans to grow or expand their business this upcoming year. With new business expansions underway, 46% of all small businesses are excited about gaining new customers, and 32% are excited to enhance their customer retention. 

Similarly, with business expansions and strategic growth top-of-mind, small businesses are thinking about their workforce and hiring needs. 28% of all small businesses surveyed aim to hire more employees. Notably, 46% of the largest small businesses (with 101-500 employees) reported hiring as one of their top goals. To help attract new talent, 57% of all respondents cited ‘providing flexible work options to employees’ as their top way to attract and retain employees in 2024.

As small businesses start 2024, they are continuing to embrace artificial intelligence. The new data shows that AI is one of the top business areas (33%) the largest of small businesses surveyed are most excited about in 2024 – surpassing enthusiasm for other business areas like product development (25%), social media (28%), and standing out among competitors (27%).

According to data collected by the analytics department at RenomowaneKasyno, some 41% of small business owners identify AI as a top priority for their business plan. Business areas in which SMEs are particularly planning on deploying AI are advertising (48%), marketing (46%), and customer service (46%). To support this, small businesses are now dedicating an average of 20% of their IT budget to AI tools and platforms. 


Demica partners with The Shoprite Group to fund SMEs across Africa

In a collaborative effort to bolster the growth of African small and medium-sized enterprises (SMEs), the Shoprite Group, Africa’s largest supermarket retailer, and Demica, a supply chain finance solutions provider, joined forces at the end of 2022 to provide accessible and affordable funding opportunities.

Over the past year, this partnership has already benefitted 82 suppliers, including Classic Food Brands, Rieses Food Imports, Pretty Bright Girls, and Mighty Meats, offering them a financial tool to not only survive but also accelerate their businesses.

A little over a year ago, Demica collaborated with the Shoprite Group to introduce the technology-led CredX supply chain finance programme. Recognising that the sustainability of South Africa’s future hinges on the success of SMEs, the Shoprite Group identified cash flow as the lifeblood of its suppliers.

By leveraging Demica’s platform technology, CredX aids SMEs with accessible cash flow, particularly those who might otherwise have limited access to affordable funding in South Africa.

The platform also helps suppliers overcome the peaks and troughs of seasonal cash flow often typical of food production. Willie Pieterse, Managing Director at Berkeley Foods elaborated: “By making use of the platform, our cash flow has seen an increase during winter. It would not have been a pleasant winter, if we had not explored this opportunity.”


CBA and Ruminati pilot to help agri customers reduce net emissions 

The Commonwealth Bank of Australia (CBA) has commenced a pilot with emissions platform Ruminati that provides farmers with tools to calculate baseline emissions and to model what changes in farming practices might have for them.

In the first phase of the pilot, the emissions calculator has been made available to a group of livestock and mixed farming customers in Victoria, Queensland and New South Wales.

By gaining a better understanding of what is driving their current emissions, producers can unlock opportunities both within their supply chain and on the farm to identify practice changes which can support both improved economic and environmental outcomes. These could include changed grazing practices, alternative stocking rates, cover cropping, biodiversity corridors or practices which involve a reduction or change in chemical usage.

The Ruminati pilot follows CBA’s investment in AgTech integrator Pairtree Intelligence, which aims to reduce complexity for farmers by providing seamless integrations with 100-plus leading AgTech companies.

“The pilot with Ruminati is a further demonstration of our commitment to support farmers through transition as they build future-fit farming businesses,” said Paul Fowler, Executive General Manager Regional and Agribusiness Banking, CBA. “The conversation is shifting from curiosity towards intent and from intent towards action. We want to support customers with access to tools and resources which help them make informed decisions, so they are well placed to take advantage of the opportunities to improve productivity and profitability with the benefit of enhancing natural capital.”

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