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Financial markets calmer, but IMF warns of turbulence ahead – Industry roundup: 28 March

First Citizens Bank buys SVB’s book for US$16.5 billion

After two weeks of volatility, stock markets have maintained a more positive tone as investor concerns over the health of the banking sector continue to ease.

Sentiment was helped as US regulators have said they will support a US$16.5 billion (£13.4 billion) deal for regional lender First Citizens BancShares to acquire failed Silicon Valley Bank (SVB).

First Citizen, self-described as one of America’s largest family-controlled banks, has bought SVB from US regulator the Federal Deposit Insurance Corporation (FDIC), which took over the lender earlier this month as depositors raced to withdraw money.

All of SVB’s deposits, worth US$119 billion, and all loans are being taken over by First Citizen, which opened 17 former SVB branches as First Citizen Banks on Monday. Customers of SVB are automatically First Citizen Bank customers as a result of the purchase.

Around US$72 billion of SVB assets are being bought at a discount of US$16.5 billion and approximately US$90 billion is remaining with the FDIC. But the deposit insurance fund - paid into by banks in case of such a scenario - is down by US$20 billion, the FDIC said.

The UK and European stock markets are calmer, with shares in Deutsche Bank, Germany’s largest bank, recouping some of Friday’s losses when it bore the brunt of selling across banking and wider financial stocks in the wake of the forced takeover of Credit Suisse by its larger rival, UBS.

The calmer tone followed a warning at the weekend from the head of the International Monetary Fund (IMF) that the global economy faces risks to its financial stability because of the turbulence in the banking sector.

Kristalina Georgieva, the managing director of the Washington-based lender of last resort, said rising interest rates had put pressure on debts, leading to “stresses” in leading economies, including among lenders.

Georgieva said the world economy would expand by just 3% in this year as rising borrowing costs, combined with the war in Ukraine and fallout from the Covid-19 pandemic, would stifle growth.

“At a time of higher debt levels, the rapid transition from a prolonged period of low interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” Georgieva said at a conference in Beijing.

Susannah Streeter, head of money and markets at UK financial services firm Hargreaves Lansdown, also warned that the return of more stable conditions to the banking sector could prove short-lived.

“The big worry is that they are sitting on big piles of unrealised losses, not just in their bond portfolios, but on other assets which have been battered by the storm of high interest rates,” she commented. “It’s feared that the commercial real estate sector could be the next weakest link as debt matures over the next few years and will need to be refinanced in a market where rates have soared, while valuations have fallen, and there is a lot less money sloshing around.”

In a separate development, the chair of the Saudi National Bank (SNB) has resigned for “personal reasons” less than two weeks after his comments spurred investor panic over Credit Suisse that led to the emergency takeover by UBS.

The SNB, which was Credit Suisse’s largest shareholder, announced yesterday that it had “accepted” Ammar Al Khudairy’s resignation, and that he would be immediately replaced by its chief executive.

The Middle Eastern bank offered little detail regarding the swift replacement, other than  Al Khudairy was stepping down “due to personal reasons”, according to a statement released to the Saudi stock exchange.

Banking turmoil “could disrupt transition from LIBOR”

The recent crisis of confidence in global banking and a backlog of uncleared contracts is further complicating the already cumbersome shift to a new set of rates as the end of the LIBOR era approaches, according to industry experts.

For many years the key market benchmark, the London Interbank Offered Rate (LIBOR) was discredited when authorities found traders had manipulated it, prompting calls for reform. It is largely being replaced by risk-free rates (RFRs) compiled by central banks as they are based on actual transactions, including the Federal Reserve’s Secured Overnight Financing Rate (SOFR) for instance, making them harder to rig.

LIBOR has already been scrapped for use in new contracts, with the use of a few remaining dollar-denominated rates in outstanding contracts due to end in June.

“With the transition deadline in sight, LIBOR’s grand finale may be more dramatic than previously thought with derivative contracts piling up amid the current banking turmoil,” said Glenn Yin, head of research and analysis at AETOS Capital Group.

Global trading activity as measured by DV01 (a gauge that represents the valuation change in a derivative contract resulting from a 1 basis point (bp) shift in the swaps curve) in cleared over-the-counter (OTC) and exchange-traded interest rate derivatives (IRD) that reference risk-free rates (RFRs) in eight major currencies was at 52.9% in February, according to the International Swaps and Derivatives Association (ISDA)-Clarus RFR Adoption Indicator.

It helps derivatives market participants keep tabs on progress on the shift to RFRs. The indicator was at 4.7% in June 2020 and then surged to 53.9% last December, its highest level, before declining slightly in the first two months of 2023.

“SOFR’s slow uptake was already setting the stage for a late rush to amend credit agreements, and I suspect the ongoing challenges in the banking sector will push transition plans back even further,” said Matt Orton, chief market strategist at Raymond James Investment Management

The challenges result from the recent collapse of three US banks and the state-orchestrated rescue of Credit Suisse by UBS. “The current turmoil is forcing banks to split their focus and may be diverting resources from the transition,” said Gennadiy Goldberg, US interest rate strategist at TD Securities.

“This might make it a bit more difficult for banks to transition on time, but I suspect regulators are highly unlikely to postpone the end date for Libor.”

While plans are in place to convert cleared US dollar LIBOR swaps and eurodollar futures and options into corresponding contracts referencing SOFR before June 30, non-cleared derivatives that continue to reference US dollar LIBOR “may transition via bilateral negotiations,” ISDA said earlier this month.

Wind sector nearing supply chain crunch, warns industry body

The global wind sector could face a supply chain crunch within three years, as looming bottlenecks for key components and ships are set to squeeze the sector, an industry body has warned.

The Global Wind Energy Council (GWEC) said “spare capacity” in wind energy manufacturing was “likely to disappear by 2026”. The squeeze will hit the US and Europe particularly hard as both target an ambitious rollout of domestic renewable energy projects even as much of the wind industry’s supply chain is concentrated in China, it added.

Companies are already feeling the crunch, with Singaporean shipping group Marco Polo warning of a “big vacuum” of the large vessels required to install offshore turbines. Growing demand for new wind projects meant that “this problem is now becoming more acute”, said Sean Lee, chief executive of Marco Polo Marine Group.

European wind turbine manufacturers including Vestas and Siemens Gamesa faced tough conditions in 2022, as a combination of rising input costs, supply chain constraints and the slow permitting process for new projects hit profits and caused delays.

GWEC said 2022 had been the third best year for new wind capacity installations despite the tough conditions, with 78 gigawatts (GW) added globally. Total installed global capacity grew to 906 GW, representing year-on-year (yoy) growth of 9%. 

2023 should be the very first year to exceed 100 GW of new capacity added globally and GWEC Market Intelligence forecasts yoy growth of 15%.and 680 GW of new capacity in the next five years (2023-27). This represents 136 GW per year to 2027. 

However, it warned that policymakers “need to act now to avoid a supply chain bottleneck stalling the deployment of wind energy from 2026” and there was an “urgent need” to increase investment in the global onshore and offshore wind sector supply chains.

Many companies were “not in a position to invest to the degree that they should be because they haven’t made money for the last few years”, said GWEC’s chief executive Ben Backwell.

Attempts by European and US lawmakers to encourage a shift of manufacturing away from China, in key sectors including renewable energy, risked amplifying the shortages, GWEC warned. Shortages for key components such as wind turbine nacelles, which contain the gearbox, generator, and brake and blades, were likely to emerge, the report added.

Europe’s offshore turbine nacelle assembly capacity would “no longer be able to support growth outside of Europe” from 2026, and by 2030 it would need to double from current levels to meet European demand alone”, GWEC said.

China accounts for about 60% of total onshore and offshore nacelle production. There are no offshore nacelle assembly facilities in North America, though companies including GE Renewable Energy and Vestas have recently announced US investment plans.


APAC corporates move supply chains nearer home

Corporates in Asia Pacific are looking to move more of their supply chains closer to home over the next 12 to 24 months, reports HSBC. 

According to HSBC’s latest report Global Supply Chains – Networks of Tomorrow research conducted by market researcher East & Partners, APAC corporates will base more than half (53%) of their supply network in Asia, up by nearly 6 percentage points from 2020.

As supply chains shift in response to ever-changing factors, including the entry into force of the November 2020 free trade agreement the Regional Comprehensive Economic Partnership (RCEP), the trend for APAC corporates to move their supply chains closer to home is becoming more apparent.

Aditya Gahlaut, Co-Head of Global Trade and Receivables Finance, Asia Pacific, HSBC, comments: “Companies in Asia Pacific have begun to realign their supply chains to capitalise on the advantages offered by RCEP. RCEP harmonises the rules of origin across much of the region, lowering the cost of inputs for manufacturers and making their goods more price-competitive. At the same time, it provides greater access to larger markets for exporters, spurring investment within RCEP and from beyond.”

At a time when “supply chain resilience” is increasingly heard on earnings calls, 67% of APAC corporates are looking to reduce their number of suppliers, up by 20 percentage points from 2020.

“It may seem counterintuitive – if a company faced supply disruptions in the past, you would think it would want to work with more suppliers,” comments Gahlaut. “But it makes sense for companies to secure their sourcing from fewer suppliers while cultivating longer-term, more strategic relationships with them. Where we’re seeing the move towards having more suppliers is when a company is reliant on only one market. Geographic diversification is an important consideration when designing more resilient supply chains.”

Disruptions to global supply chains and the resulting logistical challenges have caused just-in-time inventory management to give way to just-in-case. Nearly four in five (78%) APAC corporates have held excess stock over the last two years, with an average increase of 36% in inventory.

Gahlaut concludes, “The model of having everything arrive just in time is unlikely to come back entirely. A topic that corporates are increasingly discussing is the need to get the balance right between stocking up for just-in-case scenarios and the cost of doing so.”

As corporates continue to make changes to their supply chains, “product quality” (83%) and “cost” (78%) are the main factors when deciding on suppliers. Rounding out the top five are “payment terms” (52%), “ease of digital integration” (27%) and “environmental, social and governance (ESG) credentials” (26%).

The report is based on responses from senior management of 450 corporates from nine markets in Asia Pacific: Australia, mainland China, Hong Kong, India, Indonesia, Japan, Malaysia, Singapore and South Korea, who were interviewed between August and October 2022.


Macau launches MCEX platform for access to China’s micro and small businesses

Hong Kong-based financial markets platform Micro Connect has been given the go-ahead from the Macau Monetary Authority to launch the Micro Connect Macao Financial Assets Exchange (MCEX) in Macao.

MCEX is described as the first licensed global exchange for Daily Revenue Obligations (DROs), which the venue says is a new asset class that connects institutional capital around the world with China’s micro and small businesses. The Exchange aims to provide them with adequate and sustainable financing while allowing global investors to enjoy quality returns by tapping into their daily cash flows.

The DROs can be traded by institutional investors, which provide funding for small businesses in China in exchange for part of their daily revenue.

MCEX, was set up according to an Executive Order announced by the Chief Executive of the Macao SAR on December 5, 2022. The venue is expected to create an impactful financial market that supports grassroots entrepreneurship, increases job opportunities and helps achieve “common prosperity”.

With this industrial upgrade and economic diversification, Macao plans to become a multi-level financial services centre and a focal point in the Greater Bay Area.

Co-founder Gary Zhang said: “The establishment of MCEX means that financing via financial exchanges is no longer exclusive to a small number of large corporates, but now a convenient choice for millions of micro and small businesses. As an important channel for these entities, Macao will rise to become a new international financial centre in the digital age.”


HSBC agrees to table Asia breakup vote

HSBC has acceded to pressure from a group of shareholders in Hong Kong and will table a vote on a proposal to revamp the business, including carving out its Asia arm.

The UK bank, which recently stepped in to take over the UK business of Silicon Valley Bank (SVB), reportedly revealed the vote on Friday in an update to investors. The poll was requested by Ken Lui, a shareholder who spearheads the group calling to spin-off its Asian business.

HSBC has also approved a vote on whether it should restore its dividend to pre-Covid levels of no less than US$0.51, paid once a quarter.

The bank has told shareholders to reject both proposals.

“The board recommends all shareholders vote against these two resolutions because they are not in the best interest of the company or its shareholders,” said a spokesperson for the bank.

“We remain clear that our current strategy is the fastest, safest and most value enhancing way to deliver returns. It is already delivering attractive and sustainable returns and dividends for shareholders, as was evident from our recent 2022 annual results announcement.”

HSBC has been under pressure from shareholders in Hong Kong and also its largest investor, Chinese insurer Ping An, to separate its Asian arm – which generates most of its profit – from other comparatively underperforming divisions of the bank.

The calls gathered momentum after UK regulators prevented banks from handing out dividends during the Covid-19 pandemic to ensure money was retained in the banking system to cushion the economic crisis caused by the lockdowns.

The decision deprived Asian shareholders of dividends, provoking a backlash from retail investors in Hong Kong.

HSBC recently conducted a review of whether selling off its Asia arm would be effective and concluded such a move would damage the bank’s international business model.

Singapore's Climate Impact X to launch new spot trading platform

Singapore-based carbon exchange Climate Impact X, aka CIX, has announced plans to launch a new spot trading platform called CIX Exchange, and a standardised contract of nature-based carbon credits called CIX Nature X.

The contract will be tradeable on CIX Exchange when the venue goes live, according to a CIX spokesperson, who said that the launch of the spot exchange is currently scheduled for Q2 this year.

CIX Nature X is designed to address key market concerns over nature-based projects' delivery risk, standardise and simplify carbon trading procedures for professional buyers, and target to enhance market liquidity and facilitate price discovery, according to a statement by the group.

The CIX is jointly established by DBS Bank, Singapore Exchange, Standard Chartered and Singapore‘s state investment company Temasek, catering to an international customer base.

Nature X contract offers a basket of carbon credits from 11 REDD+ projects, namely projects that reduce emissions from deforestation and forest degradation through sustainable management of forests and the enhancement of forest carbon stocks, according to the CIX statement.

REDD+ is a framework created by the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) to guide activities in the forest sector that reduces emissions from deforestation and forest degradation, as well as the sustainable management of forests and the conservation and enhancement of forest carbon stocks in developing countries.

The 11 projects are all verified under the Verra registry and are hosted by countries across the Americas, Africa and Asia, collectively accounting for close to two-thirds of all global REDD+ market volumes.

"As the largest single category of voluntary market carbon credits today by volume of credits issued and retired, REDD+ is an essential part of global decarbonisation, and will serve long-term as a critical marker for all nature-based credits," Tom Enger, Head of Product at CIX, said in the statement.

Upon its launch, four tradable Nature X contracts will be offered, each representing carbon credit vintages over a fixed period of four years between 2016 and 2022, CIX said. The "vintage" of a carbon credit refers to the year of its issuance.


Indian government hikes STT on futures and options contracts from 1 April

India has raised the securities transaction tax (STT) on futures and options contracts, the government said in amendments to the finance bill, 2023, passed on Friday.

STT on options contracts were raised to 0.0625% from 0.05%, the finance ministry said, while STT for futures has been raised to 0.0125% from 0.01%. The hikes will take effect from April 1.

“The increase in STT will specially impact high-frequency traders (HFTs). Any change in the cost structure has a material impact due to the thin spread in which HFTs operate,” said Rajesh Gandhi, partner, Deloitte Haskins and Sells LLP.

He added that foreign portfolio investors do not get a deduction for STT while computing capital gains on derivatives.

While there could be some impact on the volume of trading by foreign investors, overall market volumes may be unaffected, said Shyam Sekhar, founder of investment advisory firm iThought.


Standard Bank tackles power outages

South Africa’s Standard Bank has radically reduced the number and length of outages of its digital channels, which it attributes to increased transparency, accountability, and discipline among its engineering teams.

The country's biggest bank by revenue and customers suffered a series of significant outages of digital banking between April 2021 and May 2022. The interruption on 21 May 2022 resulted in customers being unable to use ATMs or transact with their cards at points of sale. It resulted in the departure of its group chief engineering officer Alpheus Mangale shortly afterwards.

Standard Bank’s engineering teams have more recently reported to Margaret Nienaber, who was chief executive for client solutions, before being appointed chief operating officer in July 2022.

Over the past nine months  MyBroadband, South Africa’s largest IT news website, has only suffered two instances of downtime and both were resolved fairly quickly.

Nienaber said that the bank’s major service outages reduced by 63% in 2022 compared to 2021 and it also reduced the mean time to recover from an outage by around 59% over the same period. Much of this progress was made during the second half of 2022.

South Africa has suffered a recurring problem from loadshedding and outages since 2007, caused in part by the country’s reliance on coal-fired power plants.

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