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Industry roundup: 21 April

Fitch outlines China corporates’ challenges

Near-term pressures on profitability are increasing for Chinese companies in several sectors, says Fitch Ratings in its latest assessment. Domestic and external consumer demand faces headwinds, even as supply chains within China are challenged by wide-ranging restrictions on movement designed to counter the spread of Covid-19 cases.

Citing research firm Gavekal, the ratings agency notes that a s of mid-April, pandemic-related public health restrictions affected all but 13 of China’s top 100 cities by GDP, with major regions such as Shanghai and Jilin facing full lockdowns for parts of March and April. These measures have added further challenges to policymakers’ efforts to stabilise economic momentum, after the emergence of housing-sector strains from mid-2021 that led some developers into distress.

Fitch adds that dented consumer confidence was evident in a quarterly survey released at the end of Q1 2022 by the People’s Bank of China (PBoC). This showed urban residents intended to reduce spending and investment, despite improved perceptions about household income and employment. It indicated that households intend to cut discretionary spending, focusing instead on essential items, education and healthcare. Retail sales also fell year-on-year (yoy) in March.

The agency now expects China’s retail sales growth to decelerate to mid-single digits in 2022 from 12.5% in 2021, given weaker consumer sentiment, the impact of lockdowns and the high base effect for the first half of 2022. Sectors that benefit from discretionary spending, including tourism, entertainment and luxury goods, are likely to underperform essentials. This could put pressure on the ratings of more vulnerable firms in these discretionary sectors.

Demand pressures for Chinese corporates will be aggravated by softer consumer demand in developed markets. This reflects, in part, high levels of inflation and the tightening of monetary policy - in contrast to trends in China, where consumer price inflation remains low - as well as a normalisation of demand patterns after the surge in goods purchases during the pandemic. China’s goods export growth slowed to 15.8% yoy in Q1 2022, from 29.9% in full-year 2021.

These pressures have been accompanied in recent weeks by an increase in supply chain problems associated with movement restrictions. Several companies have reportedly halted production owing to difficulties in transporting inputs and finished products. Fitch expects manufacturers with long supply chains - such as automotive, aerospace and consumer technology firms - to be more exposed to this issue. Effects on output may prove temporary (and recoverable) if the authorities succeed in containing Covid-19 cases, but the agency believes there is a risk that disruption could continue for months as new outbreaks emerge and are suppressed.

Subdued consumer sentiment has impeded companies’ ability to pass on higher input costs. Consumer price inflation has been below producer price inflation, in yoy terms, since January 2021, suggesting that downstream corporates are absorbing higher upstream costs. This may have adverse effects on their profitability, and in turn on their standalone creditworthiness. However, this impact could be offset by other factors, such as reducing capex due to the weaker demand outlook. Moreover, exporters have been better able to raise prices, passing on higher costs to overseas customers.

Higher commodity prices should be broadly credit positive for upstream industrial corporates, Fitch concludes. In February profits among large mining and quarrying firms rose by 132% yoy while those of manufacturers dropped by 4.2%. Weak consumer sentiment may prompt the government to accelerate counter-cyclical policy support, notably in infrastructure investment. This would likely skew activity further towards heavy industry and upstream industrial corporates, at least in the near term.

European corporates “gain €3.8bn from commodities hedging”

Hedges amassed in 2021 provide a €3.8 billion (US$4.15bn) relief to European automobile and consumer goods multinationals reports EuroFinance, but it warns that protection will fade as hedges expire and costs of new ones catch up with today’s prices.

EuroFinance calculates that the recent surge in commodity prices after Russia’s invasion of Ukraine, means that major corporates such as Nestle, BMW, VW and Anheuser-Busch are sitting on a market-to-market (mtm) gain of €3.8 billion from commodity hedges added last year, according to analysis of filings. The hedging gain removes some of the pain of an estimated €15 billion increase in raw material costs experienced by the companies.

“These risk management actions by treasurers provided a much-needed buffer to corporates as they deployed operational strategies including pricing, higher procurement, operating leverage and efficiencies programs to mitigate a sustained rise in input prices,” it adds.

In the case of Nestle, the Swiss food and drink conglomerate held notional commodity hedges worth CHF2.55 billion (€2.45 billion) at the end of 2021, 190% or €1.6 billion higher than last year. These derivatives locked in prices of its future purchases of green coffee, cocoa beans, cereals and grains, which when expressed as a proportion of cost of goods sold equated to 5.6% in 2021.  Based on the current spot prices of commodities consumed by Nestle, EuroFinance estimates these hedges to yield a €493 million mtm gain. 

Germany’s auto manufacturer BMW also followed suit with a 57% or €1.87 billion increase in notional hedges to €5.1 billion in 2021, sufficient to hedge 74% of raw material exposed to price changes in key metals including aluminium, copper, nickel, platinum and palladium. While the average price at which BMW locked in hedges has gone up by 56%, EuroFinance estimates the year-to-date mtm gain to be €1.18 billion. “Good news is that commodities are hedged to a very high degree for 2022.” said Nicolas Peter, CFO at BMW. 

However, the report warns that despite the mark to market gains, hedging is only a stopgap solution. “As contracts expire, they will be replaced by new transactions struck at today’s high prices,” EuroFinance comments. “Other tools for commodity risk management are necessary, such as supply chain or procurement, where corporates are deploying other operational strategies to fight inflation in the coming quarters.”

Société Générale seeks start-ups for acceleration

France’s Société Générale has launched its first acceleration programme dedicated to startups linked to trade finance, cash management, factoring, and cash clearing and correspondent banking activities.

The group, which says that it is “a partner of many start-ups”, is launching a new call for projects to improve the customer experience in the transaction banking sector, by increasing the performance and productivity of its activities.

“With the new “Payment & Transaction Banking Accelerator” (P&T BAX), Société Générale aims to repeat the successful experience of the previous four Markets Incubator initiatives that have enabled start-ups to emerge and develop in partnership with SG.”

The group describes the P&T BAX programme as “a unique opportunity for entrepreneurs to convert innovative ideas into market-ready solutions and to gain valuable exposure to the industry. The proposed solutions may be related to data, client communication interfaces, CSR, the fight against fraud, amongst other topics. The selected start-ups will have access to SG’s expertise, with the opportunity to present their solutions and services to real-life business environments.”

“In a constantly changing environment, Société Générale’s payment and transaction banking activities are accelerating their digital transformation thanks to their ability to collaborate with start-ups,” said Alexandre Maymat, Group Head of Global Transaction & Payment Services. “By combining our respective expertise and cultures, we are resolutely accompanying our customers into the world of tomorrow.”

Candidates can apply until 31 May 2022 on ptb-accelerator.societegenerale.com. The selection process will commence in June, with the list of selected startups announced on 19 July 2022. The six-month incubation period will start from September 2022.

There is also a presentation video, accessible on: https://sg.fr/PTBAX

Citi recycles plastic for corporate cards

Citi has introduced recycled PVC (rPVC) for its corporate cards and says that the rollout will start in the Europe, Middle East, and Africa (EMEA) region, before being distributed globally.

The rPVC cards will be produced from recycled industrial plastic material that typically comes from industries such as printing and packaging. The cards will go through an open loop recycling process, meaning old products are transformed into new products delivering a significant benefit in the reduction of industrial plastic waste.

“Every rPVC card will be made with 85% recycled industrial waste per finished card and represents a reduction in CO2 emissions during the card manufacturing process, delivering a reduction of 36% CO2 emissions in comparison to a standard PVC card,” the bank stated. “To ensure that no unnecessary wastage occurs by replacing original cards that have not yet expired, the rollout will commence in EMEA in April 2022 and will be introduced globally in a phased manner.”

Trudy Curtis, EMEA Head of Commercial Cards at Citi Treasury and Trade Solutions, added: “As a dual network issuer, we are able to offer rPVC across both Mastercard and Visa.”

Fyle offers real-time spend management for Visa credit cards

US fintech Fyle Inc, specialist in artificial intelligence (AI)-powered expense management software, has launched of a for real-time spend management solution for customers using corporate and small business cards in the US, starting with Visa.

“Fyle will be one of the first spend management platforms to offer direct and real-time transaction feeds to any Visa-powered credit card users, with direct secure enrolment from the cardholder,” said the company.

“Small businesses are the backbone of the US economy, with over six million small businesses in the US. They use business credit cards as a crucial tool in their cash management function. Yet, the experience of managing and accounting for card spending remains manual because of outdated technology from issuing banks.”

The firm – which is partnering with financial consultancy Aprio for the launch –  adds that to tackle this, new spend management start-ups are issuing their corporate cards, bypassing the banks. Benefits include real-time visibility, end-user notifications, and cash control. However, these fintechs require minimum cash balances, ranging from US$25,000 to US$250,000. These cards primarily charge cards that don’t support any balance rollover, shortening the credit period to a day or month.

“Focusing on tech-savvy and funded start-ups is a great acquisition strategy, but it addresses a small market. Card-led fintech accounts for less than 10% of the overall US$1.5 trillion commercial card spend in the US, while more than 90% of this spend happens on cards issued by leading banks.

“Instead of asking customers to switch to another business card, Fyle integrates with their existing business credit cards to give them a real-time spend management experience. The instantaneous data from card feeds and receipts are combined and made ready for accounting, vastly reducing manual work for spenders, finance teams and accounting firms.

“The implications are significant. While SMBs get sophisticated AI-enabled spend management software and the freedom to choose their business credit card, Fyle can offer their product to any business credit card without depending on the bank’s tech stack. This offers unique collaboration opportunities to comarket the solution to banks’ business customers.”

Fyle says that it is  initially launching the solution for the Visa network and will support other networks over the months ahead.

Harbor finds a berth in India

US receivables and supply chain finance (SCF) provider Harbor plans to move into India, as part of its expansion plans to roll out its offering to businesses in developing markets.

The Miami-based company is launching its India operations through a franchise partnership with Blue Ocean, a Mumbai-based asset manager and investment advisor focused on working capital and trade finance. The agreement will see Blue Ocean act as a local originator and operate under the name Habor India. The move into the Asian market follows Harbor’s recent launch in Mexico via a similar franchise arrangement with Monterrey-based firm KC2.

“In the case of Mexico and India, our local operations are managed exclusively by our franchisee that takes funding and risk participation in the trade finance programmes originated in their market. This allows for more efficient origination and risk management/due diligence with skin in the game,” said a Harbor spokesperson. “The partners leverage our branding and marketing support as well as our funding, integrated risk management system and product modules like receivables and supply chain finance.”

Harbor launched in 2018 as an SCF provider for the middle market, serving buyers in North America, Latin America and Western Europe, as well as their domestic and international suppliers, targeting smaller suppliers often overlooked by large buyers. The firm has since expanded its user base to also include suppliers in developing markets that include Greater China, Southeast Asia and South America. In the past year, Harbor has broadened its offering for supplier companies by rolling out a receivables finance product.

Qualco UK goes live with open banking solutions

Software company Qualco UK has gone live with two solutions, featuring open banking technology delivered by its key partners.

Working with Ecospend Technologies and commercial debt firm Themis Global, Qualco UK introduced account-to-account payment options, under a white label model, for new client, Simon Jersey Limited. “The innovative approach includes letters and emails being sent to customers, containing a unique QR code, which when scanned, opens up a simple and secure payment journey,” Qualco reports.

Customers with mobile banking apps or online banking can select their preferred bank account, use their normal login protocols and authorise payment, without having to input card details or reference numbers. Options include the ability to pay the full balance immediately, or to make regular repayments, much like a traditional standing order.

The second feature makes use of Experian’s Affordability Passport, which uses open banking technology to understand the customer’s financial situation by intelligently analysing the activity of their chosen bank account(s). This feature removes the need for manual financial assessments, subject to the customer providing consent.

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