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Europe’s banks complain about ESG demands – Industry roundup: 9 April

Banks say Europe divergent from US in enforcing ESG rules

The European Banking Federation (EBF), umbrella organisation for Europe’s banking associations, has warned that the region’s lenders will be increasingly restricted in competing with their US rivals if regulators impose stringent environmental, social and governance (ESG) rules that Wall Street is free to ignore.

The alert from the bloc’s main bank lobby comes as the European Central Bank (ECB) puts pressure on lenders to capture ESG risks, including in loan-loss provisions, marking a new frontier in reporting standards.

The ECB wants banks to demonstrate they can cope with losses stemming from what it calls “emerging risks”, which include clients’ carbon emissions and rising costs associated with consuming natural resources. The exercise follows a 2023 review that concluded that most of Europe’s banks are unprepared.

The EBF and other bodies believe that increasingly regulators in Europe are moving along a different trajectory than their US counterparts. The EU’s banks now face ESG-adjusted capital requirements, more disclosure rules and the possibility of an explicit climate buffer, all of which regulators say will ultimately equip the sector to deal with the risks ahead.

By contrast, the US is balking at further rules and guidelines against a backdrop of Republican-led opposition to all things ESG.

Denisa Avermaete, the EBF’s senior policy adviser for sustainable finance, said ESG buffers are problematic because they’re an “exclusively European tool”.

The Federation fears that banks will be required to set aside financial reserves for risks that remain hard to quantify before getting clear regulatory instructions so proceeding with such requirements before “the prudential framework is fully reviewed for climate risk” opens the door to “double counting”, she added.

Reports suggest that banks in Europe are already falling behind their US peers in investors’ perceptions. JPMorgan Chase has a market value of 1.9 times the value of the assets on its books, according to Bloomberg. Meanwhile, BNP Paribas, the EU’s biggest bank, has a price-to-book valuation of 0.7, meaning investors regard it as actually worth less than the value of its assets.

While European bank share prices have risen over the past six months, their valuations continue to fall short of US peers, said Philip Richards, senior bank analyst at Bloomberg Intelligence in London. And “catch-up seems unlikely without a sustainable pickup in profitability in Europe,” he said.

The ECB said its efforts are about ensuring that banks are prepared for new risks.

Speaking at a conference in February, the ECB’s top bank oversight official, Claudia Buch, referred to climate change as an area characterised by “novel risks” that require more discussion around how banks should adjust, including the kinds of “information systems” they need in order to cope.

“And these are actually areas where we do indeed find deficiencies, not only with regard to climate,” she said.

The ECB has grown increasingly active in its efforts to get lenders to treat ESG risks as financially material. The Frankfurt-based central bank has conducted climate stress tests and even threatened some lenders with fines for failing to take ESG risks seriously.

A 2023 study by the ECB found that almost three in four of European banks’ corporate loan books are exposed to nature-related risks.


Taiwan chipmaker TSMC increases US investment to US$65 billion

With a US federal grant of US$6.6 billion providing a sweetener, Taiwan Semiconductor Manufacturing Co. (TSMC) has agreed to increase its US investment by more than 60% to over US$65 billion and produce the world’s most advanced 2-nanometer (nm) chips on American soil.

US Commerce Secretary Gina Raimondo said TSMC will also build a previously unannounced third chip plant in Phoenix, Arizona, that will be operational by 2030.

“For the first time ever, we will be making, at scale, the most advanced semiconductor chips on the planet here in the United States of America,” announced Raimondo ahead of the official announcement on Monday, adding that these chips would “underpin all artificial intelligence [demand].” The investment will be the largest foreign direct investment in U.S. history for a greenfield project, she added.

TSMC whose Taiwan facilities were affected by last week’s earthquake, will also receive US$5 billion in loans and be able to claim an investment tax credit of up to 25% of capital expenditures.

Raimondo said 14 suppliers are planning to construct or expand plants in Arizona or elsewhere in the US to support the TSMC fabrication plants. She added that 70% of TSMC's customers are US companies and have confirmed that they want to buy American-made chips.

TSMC is the world's biggest contract chipmaker, serving leading global chip developers including Apple, Nvidia, Qualcomm and Amazon. The US$6.6 billion direct funding to TSMC represents the US government’s largest financial grant to a foreign chipmaker to date.

It will be only the second-largest grant under the CHIPS and Science Act of 2022, however, following US$8.5 billion in grants and US$11 billion in loans to Intel. President Joe Biden travelled to Arizona to celebrate the grants. Washington has allocated around US$39 billion to support domestic semiconductor manufacturing.

TSMC had previously set its investment in Arizona at US$40 billion and the increase to US$65 billion would put the US on track to produce around 20% of the world's leading-edge chips by 2030, the Commerce Department said in a press release.

The first TSMC plant in Arizona will make 4-nm chips and is scheduled to begin production in 2025. The company said that its second plant, originally intended to produce 3-nm chips, will now also produce 2-nm ones. This plant is scheduled to begin production by 2028, a senior US official said. 

The third TSMC plant will also produce 2-nm chips, as well as even more advanced semiconductors, according to the company.  

Generally speaking, the smaller the nanometer size, the more advanced and powerful the chips are. Only TSMC, Intel and Samsung are able to continue pushing the limits of semiconductor development, with all three aiming to put 2-nm chips into production before the end of 2025.


IFC and DBS allocate US$500 million to boost trade flows in emerging markets

International Finance Corporation (IFC), a member of the World Bank Group and Singapore’s DBS have signed a US$500 million facility under IFC’s Global Trade Liquidity Programme (GTLP).

The facility aims to promote capital and trade flows in emerging markets across Asia, Africa, the Middle East and Latin America, help bridge the record US$2.5 trillion global trade finance gap and accelerate economic progress across these regions.

IFC and DBS will share the risk equally on a portfolio of trade-related assets of up to USD$500 million. This enhances DBS’ capacity to support more trade financing – such as Letters of Credit – with faster turnaround time to businesses trading with emerging markets counterparts, while better managing risk.

A release announcing the facility noted that emerging markets play an important role in achieving a low-carbon future. To accelerate the decarbonisation of trade flows across emerging markets, 20% of the facility will be allocated to climate-eligible trade transactions, such as the trading of renewable energy equipment, energy efficient equipment and climate-smart agriculture certified commodities.

The facility is part of IFC’s GTLP – a product designed to provide a countercyclical solution to the lack of trade financing in emerging markets by helping banks grow their credit limits, manage risk and support trade across developing markets which are often under-served. It is IFC’s first GTLP with a Southeast Asian bank and the first long-term investment project between IFC and DBS.

“As our trade finance exposure to emerging markets continues to grow at pace, we constantly seek innovative ways to support our clients’ evolving requirements,” said Sriram Muthukrishnan, Group Head of Global Transaction Services Product Management at DBS Bank. “These include a greater focus on strengthening supply chain resilience, diversifying business models, establishing new markets, and capitalising on the significant increase in emerging markets trading and infrastructure activities.


China’s central bank launches Yuan 500 billion tech relending programme

The People’s Bank of China (PBOC) has announced plans to launch a yuan (CNY) 500 billion (US$69.12 billion) relending programme aimed at supporting innovation and project upgrades in China’s science and technology sectors.

The loans will have an interest rate of 1.75% and a term of one year, which can be extended twice for an additional year. The PBOC will provide the low-cost funds for 21 financial institutions, including China Development Bank, Postal Savings Bank of China, and some policy banks, state-owned commercial banks, and joint-stock commercial banks. For eligible loans issued by these institutions, the PBOC will provide reloans equivalent to 60% of the loan principal.

A statement released by the PBOC explains that the facility aims to guide financial institutions to step up credit support for sci-tech-oriented small and medium-sized firms in their early stage of development or in growth stage, and for technical transformation and equipment renewal projects to help key sectors become more digitalised, smart, advanced, and green, according to the central bank.

The PBOC first announced its plans to launch the relending programmes in March, alongside its aims to grow the economy by around 5% in 2024.


Grocery giants unite on start-up investment fund

Five of the world’s biggest supermarket chains are collaborating on a five-year, US$125 million venture capital fund designed to “accelerate innovation”.

The W23 Global fund is a collaborative partnership between the UK’s Tesco, the Dutch-Belgian Ahold Delhaize, Australian multinational Woolworths Group, Canada’s Sobeys and Shoprite in Africa with the aim of funding “the world’s most innovative start-ups and scale-ups with the potential to transform grocery retail and address the sector’s sustainability challenges”.

W23 Global is headed by CEO and chief investment officer Ingrid Maes who has worked in innovation in grocery retail and fast-moving consumer goods (FMCG) for over 25-years and currently leads Australian grocery giant Woolworth’s W23 Australia fund.

Each of the five retailers is an equal funder and partner in the fund, meaning contributions of US$25 million over five years and their CEOs will sit on the investment committee.

W23 Global start-up partners will be “free to contract with any customers” whether they are part of the fund or not, “on whatever terms they decide”.

Maes said: “W23 Global is a pioneering international venture capital (VC) fund with a uniquely powerful proposition for both our investors and portfolio companies. At a time when innovation is reshaping retail and value chains across the economy, we aim to offer our investors incomparable access to transformative innovation in grocery and sustainability across the globe.

“W23 Global will also work with its investors to identify common unaddressed challenges and identify entrepreneurs best placed to innovate new solutions. Our ambition is to offer our portfolio companies faster pathways to global scale, without being exposed to a venture fund anchored by a single strategic investor.

“With five of the world’s leading grocery CEOs sitting on our investment committee and access to our broader ecosystem, our founders can test and develop their ideas quickly based on an accelerated understanding of retailers’ needs.”


Gold price sets new high above US$2,350

Gold prices have begun the week at a record high after China’s central bank continued buying up the precious metal for its reserves.

An ounce of gold hit US$2,355 in Asian trading on Monday as the People’s Bank of China (PBOC) bolstered its gold reserves to 72.74 million fine troy ounces in March, its 17th successive month of purchases, according to official statistics.

Gold has been on a protracted rally since early March, driven by the purchases of various central banks, with 64 net metric tonnes bought in January and February alone, data from the World Gold Council shows. 

It has also been elevated in recent weeks by impending hopes of interest rate cuts by the US Federal Reserve. The Fed hiked its funds rate 11 consecutive times between March 2022 and last July in response to rising inflation before holding it steady at 5.25 to 5.5%. As a result, the US inflation rate has come down from 9.1% in mid-2022 to 3.2% in February, boosting the likelihood of the central bank cutting the funds rate from this summer.

Gold prices have historically tended to be inversely correlated with interest rates, as cutting the latter makes the former a more attractive investment relative to fixed-income assets like bonds.

Analysts from UBS Global Wealth Management predict gold exchange-traded fund holdings will rise once the Fed begins lowering rates 'as these buyers tend to move more in sync with interest rate adjustments'.

As a result, UBS GWM is now forecasting gold's value will rise to $2,500/oz by the end of 2024, an upgrade on previous forecasts of $2,250/oz.

The World Gold Council said annual gold demand, including over-the-counter orders, expanded by 3 per cent to a record 4,899 tonnes in 2023.

Much of this growth was driven by households and investors in China, who increasingly bought bullion due to severe pressures within the country's stock market and property sectors. Prices have received a further uplift from the geopolitical tensions posed by the conflicts in Ukraine and the Middle East.

“Investors are continuing to untangle the implications of a stronger US jobs market, and the potential for higher interest rates,” said Sophie Lund-Yates, lead equity analyst at financial services group Hargreaves Lansdown. The needle is likely to move this week, depending on the outcome of the Federal Reserve’s March minutes and CPI data.

“Some commentators believe that sub-US$2,000 pricing for the shiny stuff could be a thing of the past, but as with all commodities, there will be ups and downs. There’s an element of people chasing the high which is contributing to the climbs seen in recent days, rather than the rally being solely based on fundamental factors.”


Santander UK quits lending standards body

Santander UK, the country’s fifth-biggest high street bank, is reported to be cancelling its membership of a key lending standards body because of the duplication of regulatory standards to which the industry must adhere.

According to the report the Spanish-owned bank served notice last week of its intention to quit the Lending Standards Board (LSB), citing the establishment of the City watchdog's Consumer Duty and the imminent implementation of new fraud reimbursement rules overseen by the Payment Systems Regulator.

In its letter to the LSB, Santander UK said the new regulatory frameworks would "supersede the existing voluntary industry standards that are set out in the current LSB codes".

"This inevitably leads to duplicative regulation and can create confusion among staff and customers about which standards apply."

The bank added that withdrawing from the LSB would "mean more certainty and confidence over the regulatory landscape. Reducing duplicated effort, thereby enabling us to concentrate resources on other important customer and regulatory priorities".

Several  other major UK banks are believed to also be considering following Santander UK's decision to terminate their involvement with the LSB, according to industry sources.


ZiG marks Zimbabwe’s sixth effort at currency stability

Zimbabwe Gold, aka ZiG, the Southern Africa country’s new currency has begun trading as businesses struggled with the nation’s sixth attempt at introducing a revamped unit.

Reserve Bank Governor John Mushayavanhu set the introductory exchange rate of 13.56 per US dollar for the gold-backed currency, where it started trading. The interbank market will set the daily exchange rate from now on, Mushayavanhu said.

The ZiG replaces a Zimbabwean dollar, the RTGS, that had lost three-quarters of its value so far this year. It marks the latest attempt to stabilise an economy that has lurched from crisis to crisis for the past 25 years, with annual inflation in March at a seven-month high of 55% but still down from some of the peaks reached previously.

Zimbabweans have 21 days to exchange old, inflation-hit notes for the new currency. However, the US dollar, which accounts for 85% of transactions, will remain legal tender and seems likely to continue being the preference of most people.

Mushayavanhu said the new currency was being rolled out with immediate effect and banks must convert current Zimbabwe dollar balances to the ZiG. He committed to ensuring that the amount of local currency in circulation was backed by equivalent value in precious minerals - mainly gold - or foreign exchange, in order to prevent the currency losing value like its predecessors.


European Central Bank awards contracts for electronic trading platforms

Euronext’s dealer to client (D2C) trading platform MTS BondVision has been awarded the contract to supply the European Central Bank (ECB) with electronic trading platforms for euro-denominated bonds.

MTS BondVision covers rates, credit and repo. The contract agreed with the ECB covers euro-denominated European government bonds and bills, corporate bonds, senior unsecured bank bonds, covered bonds, and supranational, agency and sovereign bonds.

“This further confirms MTS’s position as a leading market operator across D2D, and D2C cash and repo markets,” said Angelo Proni, chief executive of MTS. “We provide clients with a robust and efficient infrastructure across all our services, including MTS BondVision, a cutting-edge dealer-to-client trading platform covering rates, credit and repo, that connects investors to an extensive network of dealers across Europe and beyond.”

Contracts for the facilitation of electronic trading platforms for the ECB have been announced over recent days.

Bloomberg announced it had won the bid to supply the central bank with platforms for Euro, US Dollar (USD) and Japanese Yen (JPY) denominated government bonds and USD and JPY interest rate swaps, as well as USD and JPY denominated Futures contracts, while Tradeweb confirmed it had secured contracts to supply platforms for the trading of EUR-denominated bonds, US Treasuries, Japanese government bonds, USD- and EUR-denominated supranationals, sovereign and agency bonds and USD- and JPY-denominated interest rate swaps.


UK’s ClearBank points to international expansion

ClearBank, the UK-based embedded banking and clearing provider, said that it is looking to expand overseas after reporting its first full-year pre-tax profit since launching in 2017.

At the time it was the UK’s first new purpose-built clearing bank for 250 years, ClearBank is now used by more than 200 firms, including 15 of the UK’s newest banks such as Allica and Alba.

The company posted a full year pre-tax profit of £18.4 million (US$23.3 million) for 2023, from a £7.1 million loss the previous year. Income grew 91% to £111.3 million, with deposits doubling to £6.1 billion. ClearBank also saw its embedded banking end-customer base grow by 93% year-on-year. 1.2 million customers now hold Financial Services Compensation Scheme (FSCS)-protected accounts through partners such as Chip, Raisin, and Tide.

“While the industry and the broader economy have faced significant challenges, our values of innovation and sustainable growth have led to our first full-year of profitability — an incredible milestone in our journey,” said Charles McManus, CEO, ClearBank:

“We have been able to offer resilience and stability in an uncertain market, building services our customers need, including a best-in-class embedded banking offering. But this is just one step on the journey, not the finish line.”

Meanwhile, work on a European banking licence application continues ahead of a planned full European Union (EU) launch later this year, and longer-term a move into the US is also in the pipeline.

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