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Industry roundup: 12 April

Six global banks aim to decarbonise the aviation industry

Six major lenders to the global aviation sector – Bank of America, BNP Paribas, Citi, Crédit Agricole CIB, Société Générale and Standard Chartered – are working together to develop a climate-aligned finance framework to support decarbonisation in the industry.

The coalition will partner with the Center for Climate-Aligned Finance established by the Rocky Mountain Institute (RMI) – an independent, non-profit organisation set up in 1982 to accelerate the clean energy transition – to form the Aviation Climate-Aligned Finance Working Group. The body aims to create a collective climate-aligned finance (CAF) framework by the end of 2022 that defines common goals for action for aviation sector decarbonisation.

The CAF framework is a commitment by participating financial institutions to annually assess and disclose, consistent with the UN-convened Net-Zero Banking Alliance, the degree to which the greenhouse gas emissions from aircraft, airlines and lessors that they finance are in line with 1.5°C climate targets.

The banks say that the framework will create consistency and transparency in reporting, establishing a level playing field for measuring progress against climate targets. Within it financial institutions will be able to assess the emissions of their aviation loan books and work with their clients to report their emissions, fund lower-carbon solutions and support investments in new technologies.

The aviation sector accounts for 2.5% of global CO2 emissions, and air traffic is projected to increase significantly through 2050. In a business-as-usual scenario, aviation alone could use up to 10% of the earth’s remaining global carbon budget by mid-century. The industry has initiated efforts in response, including the International Air Transport Association’s (IATA) commitment to achieve net-zero emissions by 2050.

To support these goals, the aviation sector is seeking to invest in more efficient aircraft, support the development of new aviation technology and accelerate the transition to sustainable aviation fuels (SAF).

The financial sector will play a crucial role in funding the technologies, projects and companies involved in this net-zero transition.

José Abramovici, global head of asset finance group at Crédit Agricole CIB, comments: “Our intention is to propose a robust and effective framework for the benefit of all stakeholders in aviation finance including banks, investors, airlines and lessors. We firmly believe that decarbonisation is key to ensure the long-term future of the aviation industry.”

The aviation CAF framework will be based on the experience gained from the Poseidon Principles for maritime shipping and the soon-to-be-launched CAF agreement for steel. The Poseidon Principles, launched in 2019 with 11 banking signatories, now has 29 covering more than 50% of global ship finance. The aviation CAF framework “is intended to be designed for similar rapid adoption by aviation financiers globally.”

Nokia joins Russia exodus

Finland’s telecoms equipment maker Nokia announced that it is withdrawing from the Russian market reports Reuters, which quotes the group’s CEO Pekka Lundmark. Nokia is going a step further than Swedish rival Ericsson, which announced this week that it was indefinitely suspending its business in Russia.

While telecommunications is among the several sectors that have been exempted from some sanctions on humanitarian or related grounds, Nokia said it had decided that quitting Russia was the only option.

“We just simply do not see any possibilities to continue in the country under the current circumstances,” said Lundmark. “A lot would have to change before it will be possible to consider again doing business in the country.”

He added that Nokia would continue to support customers during its exit, and it was not possible to say at this stage how long the withdrawal would take.

Nokia is applying for the relevant licences to support customers in compliance with current sanctions, it said in a statement.

Both Nokia and Ericsson made only a low single-digit percentage of sales in Russia, where Chinese companies such as Huawei and ZTE have a bigger share.

Nokia's decision to leave Russia will affect about 2,000 workers, and some of them might be offered work in other parts of the world, Lundmark said. The company has about 90,000 employees globally.

He also confirmed that Nokia would not implement a plan announced in November to set up a joint venture with Russia's YADRO to build 4G and 5G telecom base stations.

EBF warns against EU plans to shift clearing business

Proposals by the European Union to reduce the City of London’s dominance in the clearing market have been criticised by the European Banking Federation (EBF), which has warned against the move.

The EBF, led by Santander’s chair Ana Botin, represents 32 national banking associations across the region and more than 3,500 European banks.

The EU is seeking to lessen what it calls an “excessive dependence” on London and its €660 trillion (£563trn) clearing market and the European Commission proposes to penalise banks for failing to shift lucrative clearing business away from the City.

However, the EBF says that the EC’s proposals to force EU-based firms to clear trades within the bloc and impose higher charges on those that continue to clear through the UK. would cause “serious market disruption” and “significantly weaken the attractiveness and competitiveness” of EU clearing houses. 

By acting as middlemen in derivatives trades between banks, clearing houses have become an important part of the financial system since the 2008 financial crisis.

The EC’s consultation paper, a 46-page document, canvassed views on possible “negative and positive” incentives to shift clearing business away from London. In its submission, the EBF also warns that international clients “will move their entire capital markets business (not only the clearing business) to non-EU institutions” if the EC pushes ahead with its "forced relocation" plans. 

It added: “EBF would like to highlight that any forced relocation strategy or other coercive measures will not achieve, and would likely undermine, the objective of a competitive and resilient EU clearing [market].”

London is Europe’s largest centre for clearing activity, with the London Stock Exchange’s LCH unit clearing about 90% of euro interest rate derivatives. Brussels is keen for the EU to have control over euro-denominated trades to build “strategic autonomy” in capital markets. Following the UK’s Brexit departure, it decreed that EU banks would be shut out of London with an initial deadline of January 2020.

The deadline has been pushed back several times over concerns about financial stability and reduced access to products such as mortgages. In January this year Mairead McGuinness, the European commissioner for financial services, conceded that banks and money managers based in the EU could continue to clear trades in London until June 2025, having failed to persuade banks and their customers to shift the activity more swiftly from London to Deutsche Boerse's Eurex clearing house in Frankfurt.

However, Ms McGuinness renewed her efforts in a speech in Frankfurt last week, when she compared the EU’s reliance on the City of London for clearing to its dependence on Russian oil and gas, commenting: “We do need to watch out for areas where we are vulnerable to decisions made outside the EU, and therefore, beyond our control.

“Energy is the most prominent and urgent example of that vulnerability right now. But we also need to watch for vulnerabilities in capital and financial services.”

By contrast, in its submission the EBF said that an indiscriminate relocation of clearing activity would be “ineffective and counterproductive” and would “disincentivise non-EU market participants to move a significant share of their market activity into the EU”. 

It concluded: “We ask the European Commission to only consider measures that make clearing in the EU more attractive, without disproportionally undermining other market participants that are key to the fair and efficient provision of clearing services.”

Bank of England Governor Andrew Bailey has also warned Brussels that the EU risks damaging the financial system by pressing ahead with its plans to raid London’s market. While an abrupt end to cross-border clearing would have disrupted markets, EU officials are confident that three years will be sufficient to allow the build-up of European capacity to replace the trade.

Sri Lanka “seeks US$3bn financial rescue”

Sri Lanka will need about US$3 billion in external assistance over the next six months to help restore supplies of essential items including fuel and medicine, its finance minister Ali Sabry told Reuters in an interview at the weekend.

Sabry was previously the island nation’s justice minister and was appointed finance minister on 4 April by President Gotabaya Rajapaksa after sacking his younger brother Basil Rajapaksa, who was at the centre of anger within the ruling Sri Lanka Podujana Peramuna (SLPP) coalition.

Sabry resigned from the post within 24 hours of his appointment and told Parliament he wanted to stand aside for someone more suitable. After no alternative candidate for the post emerged, he agreed to continue as finance minister and head the government’s negotiating team at the International Monetary Fund (IMF) as Sri Lanka struggles with the impact of a shortage of foreign reserves.

The new finance minister admitted to Reuters that he faces a “Herculean task”, with Sri Lanka needing US$3 billion in bridge financing as it prepares for negotiations with the IMF. The island will aim to restructure international sovereign bonds and seek a moratorium on payments but is confident of negotiating with bondholders for an upcoming US$1 billion payment in July. It will a further US$500 million credit line from India for fuel, which would suffice for about five weeks of requirements, Sabry said.

J.P. Morgan analysts estimate that Sri Lanka’s gross debt servicing will amount to US$7 billion this year, with the current account deficit coming in around US$3 billion.

“The entire effort is not to go for a hard default, as we understand the consequences of a hard default,” Sabry told Reuters. The Sri Lankan government would also seek support from the Asian Development Bank (ADB), the World Bank and bilateral partners including China, the US, the UK and countries in the Middle East.

“We know where we are, and the only thing is to fight back,” he added. “We have no choice.” he said.

On 8 April, the Central Bank of Sri Lanka’s (CBSL) monetary board almost doubled interest rates, raised its standing lending facility to 700 basis points 14.50% and its standing deposit facility to 13.50% in a bid to tame soaring inflation and stabilise the economy.

The build-up of aggregate demand, domestic supply disruptions, the plunge of the local currency and high prices of commodities globally could keep up the pressure on inflation, CBSL warned in its monetary policy decision statement. “The rate hike will give a strong signal to investors and markets that we are coming out of this as soon as possible,” governor P Nandalal Weerasinghe said.

Sabry said Sri Lanka will have to raise tax rates and further increase fuel prices within the next six months. “These are very unpopular measures, but these are things we need to do for the country to come out of this,” he added. “But the choice is do you do that, or do you go down the drain permanently?”

Citigroup analysts said that the interest rate move had helped restore the CBSL’s credibility but might not be enough to remove the risk of a debt default by Sri Lanka. “While this steep rate hike should help the rupee, stabilising it may require progress on bridge financing, alongside material progress to a Fund program,” Johanna Chua, chief economist for Asia Pacific at Citigroup in Hong Kong, wrote in a report to clients. “We view the risk of default as now very high.”

MTN gets go-ahead for Nigeria bank

South Africa’s MTN Group – formerly M-Cell and Africa’s largest mobile network operator – has won final approval from Nigerian regulators to run a payment service bank, the group said in a regulatory filing.

“The date of commencement will be communicated to the Central Bank of Nigeria (CBN) in accordance with its requirements,” MTN said of the new bank, to be known as MoMo Payment Service Bank Limited, in a note to the Nigerian Exchange.

The approval follows a wait of more than two years for the permit and gives the local unit of Johannesburg-headquartered MTN permission to operate most of the services offered by conventional commercial banks, with the exception of granting credit and processing foreign exchange transactions.

“We want to leverage the financial inclusion drive. We plan to give people who don’t have bank accounts or even ATM cards the opportunity to be able to do banking services,” a senior MTN official told the local press.

“And we are leveraging on our size. When we have subscribers of over 70 million spread across Nigeria with our infrastructural spread, we are well-positioned to cover everywhere. That’s exactly what we want to achieve.”

MTN Nigeria and Airtel Africa, which secured preliminary approval last November to operate in the same space, will tap Nigeria’s unbanked adult population of 38 million people, who according to estimates had unbanked money totalling Naira (NGN) 26.2 trillion (US$63bn) in 2021. Their entry into the financial services market will pit both telecoms against traditional banks.

While there has been a marked increase in the number of financially included citizens, Nigeria fell short of its National Financial Inclusion Strategy targets for 2020, reaching 51% instead of the projected 70%.

Ex-Citi trio launch crypto investment fund

A trio of former Citigroup executives who left the bank last month have formed Motus Capital Management, a crypto-focused investment management firm.

The new firm has been set up by Alex Kriete, Greg Girasole and Frank Cavallo, each of whom left Citi after long stints at the bank. Most recently, Kriete and Girasole served as co-heads of the Citi Global Wealth digital assets group. In 2017 they began writing an internal, crypto-focused newsletter for Citi that helped establish the pair as the bank’s in-house experts.

Although details about the new operation are scant, Kriete said in a LinkedIn post that it would aim to bring the trio’s “decades of combined experience advising and managing clients’ wealth” to the crypto sector. In a recent interview, Kriete said that “financial institutions have a hard time keeping pace in this market.”

“We’re excited to build something that caters to these people,” he added.

The departures mark the latest exodus of individuals leaving Citi to move into the crypto sector, with others finding new homes at firms including Copper, CoinFund, Paxos, Genesis and the Provenance Blockchain Foundation.

London-based crypto custodian Copper is making its services more accessible to institutional investors by building prime brokerage platforms and is also hiring executives from Bank of America to help develop them.

The project will be led by Michael Roberts, who is joining Copper directly from BoA together with colleagues Adam Groom and Paul Barham. 

Tata to deliver real-time for Payments Canada

Payments Canada has named Tata Consultancy Services (TCS) as the integration lead for the country’s real-time payment system, Real-Time Rail (RTR).

As integration lead, TCS will help to plan and coordinate activities with industry stakeholders to integrate the components of the RTR and the deployment of the new system.

It will also work with Interac, the RTR’s exchange provider, and Mastercard’s Vocalink, the clearing and settlement solution provider, to deliver the system – now scheduled to go live in mid-2023 after plans to launch later this year had to be put back.

John Cowan, chief technology and operations officer at Payments Canada, said that TCS’s three decades of experience in delivering market infrastructure solutions makes it a “valuable partner” in the delivery of the RTR.

“Testing and deployment is a critical step in the introduction of the new real-time payment system and we’re excited to work with TCS to execute on this next step for the RTR as we help shape the future of payments in Canada,” Cowan added.

When it launches, the RTR will be operated by Payments Canada and regulated by the Bank of Canada, allowing Canadians to initiate payments and receive funds “in seconds”. It is part of Payments Canada’s multi-year industry programme to modernise the country's payments system.

“We are excited to partner with Payments Canada to enable individuals and businesses with newer products and services through a contemporary payments capability,” said Manmeet Chhabra, business unit head for financial services at TCS in Canada.

“This reinforces our commitment to the Canadian market to bring our global expertise in diverse critical national infrastructure; propelling Canada in the journey of payments transformation and innovation.”

In 2021, Payments Canada’s systems cleared and settled more than C$135 trillion, equating to over C$539 billion each business day.

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