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Japan and UK economies slip into recession – Industry roundup: 15 February

Japan and UK report dip into recession in H2 2023

The economies of Japan and the United Kingdon both dipped into recession during the second half of 2023, based on data showing two consecutive quarters of negative growth.

Japan’s worse-than-expected provisional government figures showed an unexpected further contraction in the three months to the end of December 2023. Provisional gross domestic product (GDP) fell by 0.4% in Q4 from a year earlier after a revised 3.3% slump in the July-September period. This was way below the median estimate for 1.4% growth in a Reuters poll among economists. The GDP deflator in the fourth quarter stood at 3.8% on an annualised basis.

Japan’s economy also contracted 0.1% in the fourth quarter from the previous quarter, after shrinking by a revised 0.8% in Q3 from the second quarter. This was also weaker than expectations for 0.3% expansion.

“Whether Japan has now entered a recession is debatable, though,” commented Marcel Thieliant, Capital Economics’ head of Asia-Pacific, in a client note.

“While job vacancies have weakened, the unemployment rate dropped to an eleven-month low of 2.4% in December. What’s more, the Bank of Japan’s (BOJ) Tankan survey showed that business conditions across all industries and firm sizes were the strongest they’ve been since 2018 in Q4.”

High inflation crimped domestic demand and private consumption in Q4 and pushed Japan’s ranking from third to fourth in the world’s largest economies in dollar terms as it was displaced by Germany.

The data complicates the case for interest rate normalization for Bank of Japan Governor Kazuo Ueda and fiscal policy support for Japanese Prime Minister Fumio Kishida.

The UK’s dip into recession was less unexpected, with retail sales figures weak in the period before Christmas as households reined in spending in response to higher interest rates and a cost-of-living squeeze.

The Office for National Statistics (ONS) reported that UK GDP fell by a larger than expected 0.3% in the three months to December. It followed a drop of 0.1% in Q3, confirming a second consecutive quarter of falling national output – the technical definition of a recession.

The ONS said that the UK’s growth over 2023 as a whole was estimated at only 0.1%, the weakest year since 2009 during the global financial crisis, excluding the sharp economic contraction in 2020 during the Covid pandemic.

The director of economic statistics at the ONS, Liz McKeown, said: “Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.

“All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.”

Susannah Streeter, head of money and markets at financial services firm Hargreaves Lansdown commented“There are a few green shoots of hope emerging this year, with business and consumer confidence increasing in January, but it’s going to be a hard slog back to meaningful expansion.”


Uber plans US$7 billion share buyback after moving into profit

Uber Technologies announced that it will buy back up to US$7 billion worth of company shares following a strong recovery in its share of the ride-hiring services market and healthy demand at its food delivery business.

The announcement sparked a strong rise in the company’s share price, which has risen to nearly US$80 against less than US$30 last April.

“Today’s authorisation of our first-ever share repurchase programme is a vote of confidence in the company’s strong financial momentum,” said Uber CFO Prashanth Mahendra-Rajah.

Over the next three years Uber expects gross bookings growth in the mid to high teens percentage and adjusted core profit growth in the high 30s to 40%.

Free cash flow as a percentage of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to be 90% or higher annually, the company said.

The ride-hailing firm posted its first annual net profit last year since going public in 2019. Uber had a free cash flow of $3.4 billion in 2023, up from $390 million a year earlier.

Uber reported fourth-quarter results that beat analysts’ estimates on top and bottom lines. Net income of US$1.4 billion, or 66 cents per share, compared with US$595 million, or 29 cents per share, in Q4 2022. The figure includes a US $1 billion net boost thanks to “unrealised gains” from revaluations of its equity investments, according to a release.

The company’s revenue for Q4 was up 15% from the same quarter a year ago. Uber’s gross bookings came in at US$37.6 billion, up 22% year over year.

CEO Dara Khosrowshahi said 2023 marked a year of “sustainable, profitable growth for Uber” as consumer spending continues to shift from retail to services.


Delivery Hero says cash flow generation can settle debt maturities

Delivery Hero, the German online food ordering and delivery multinational said that it expects its organic cash flow generation to be more than sufficient to settle convertible bond and debt maturities in the years ahead.

Berlin-based Delivery Hero's shares have come under pressure in recent months, reflecting investor concerns about its ability to generate cash and repay outstanding debt organically while still delivering on both profitability and growth.

In an earnings presentation, the company said that it is not dependent on any external refinancing transaction or potential proceeds from minority stake monetisation or business disposals. Corporate debt includes €4.4 billion (US$4.7 billion) in outstanding convertible bonds and US$825 million and €300 million term loans, it said.

Delivery Hero added it had €2.2 million restricted cash at the end of 2023, with cash located in hyperinflation countries corresponding to less than 3% of the group's cash.

“We have ample access to capital if beneficial and when a compelling refinancing opportunity arises to further strengthen our long-term capital structure,” the company said.

Adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) amounted to €253.3 million for the year, against a loss of €623.6 million in 2022.

Figures for the full-year 2022 include Spanish business Glovo, acquired at the end of 2021, on a pro-forma basis.

The company confirmed its 2024 target for an adjusted EBITDA in a range of €725-775 million and a positive free cash flow.

At the end of January, Delivery Hero disposed of a 5% stake in rival Deliveroo, which it acquired in mid-2021 for £284 million, when pandemic lockdowns increased demand for food delivery services. The company placed around 68 million shares in Deliveroo at a price of £1.13 per share, giving it a total of £82.28 million.


Barclays ends financing for new oil and gas projects

Barclays announced that it will no longer provide direct financing for any new upstream oil and gas, thermal coal expansion projects or related infrastructure to help achieve its net zero goals.

The UK-based ‘Big Four’ bank’s updated Climate Change Statement also stipulates that all portfolio energy companies will be required to report information relating to their transition plans and decarbonisation strategies — including their scoped emissions reductions targets, expansion plans and any low-carbon business activities or plans — by 1 January 2025.

As part of the change, Barclays has unveiled a Transition Finance Framework that outlines how it will classify “transition finance” and allocate funding to decarbonise high-emitting sectors. The framework aims to track its progress against a prior commitment to allocate US$1 trillion in sustainable and transition financing by 2030.

Barclays said that from 2026, it will only fund energy companies with “near-term net-zero-aligned” scope 1 and scope 2 reduction targets, a 2030 target to reduce methane emissions in line with leading industry guidance and a commitment to cease all routine, non-essential venting and flaring.

It stressed that its climate change strategy is focused on achieving net-zero emissions across its operations, reducing its financed emissions and financing the transition. Barclays said it will continue to update and adapt its strategy to keep up with the pace of market, technological, geopolitical and regulatory updates.

“We will keep our policies, targets and progress under review in light of the rapidly changing external environment and the need to support governments and clients in delivering an orderly energy transition, integrating social considerations and providing energy security,” the updated climate strategy statement said.


China’s economy “booming” but lacks confidence, says Standard Chartered

China’s recent problems reflect a major economic transition that is being stretched out, and the country would benefit from a boost in confidence, says Standard Chartered’s CEO Bill Winters.

“I think China is going through a major transition from old economy to new economy. If you visit the new economy, which many of you have — I have — it's booming, absolutely booming, well into double-digit growth rates,” he said during a panel discussion at Dubai's recent World Governments Summit.

Winters cited examples of a promising economic expansion, including China's electric vehicle output, as well as the growth of sustainability-related finance and industries. Yet neither domestic savers nor foreign investors are demonstrating high confidence in China's potential — the biggest issue the country will have to overcome, he said.

Offshore investors have staged a mass exit from the country’s equity markets, causing a US$7 trillion decline since 2021. Analysts who are considerably less optimistic than Winters have warned that this could be a permanent withdrawal.

Confidence has been strained from multiple angles. Beijing's crackdown on the country's emerging tech sector has not sat well with investors, while challenging conditions in its property market are prompting panicked traders to leave.

A healthy real estate industry is central to the country, as it makes up 70% of household wealth and around a quarter of Chinese GDP. While the current issues are the result of too much debt in the sector, it is exacerbated by lacking consumer confidence. 

Since the pandemic, domestic consumers have focused aggressively on saving, weighing down on the country's growth and the world's only deflationary economy. 

Forecasts of a major stimulus push from Beijing authorities to revive confidence and provide households with incentives to spend have so far been largely unfulfilled. So far, solutions have included interest rate cuts, limited stimulus boosts, and looser rules on property ownership.

“They're trying to manage this transition without disrupting the financial system, which in the West, we've never managed to do,” Winters said. “Every big industrial transition has had a major depression associated with it, or global financial crisis. They’re trying to avoid that which means it gets dragged out. I think they’ll get through the back end just fine.”


Regulators concerned as banks’ debt to shadow lenders tops US$1 trillion

American lenders have loaned so-called “shadow banks” more than US$1 trillion, and regulators are worried, according to a recent report by the Financial Times.

The paper cites figures from the Federal Reserve showing that US banks’ loans to non-deposit-taking financial companies had gone past US$1 trillion at the end of last month.

That represents a 12% increase over the past year, making these loans — to hedge funds, direct lenders and private equity firms — one of the fastest-growing areas of business for banks at a time when overall loan growth has slowed.

However, the report noted that the recipients of the loans are using the money to leverage investments and increasingly lend it out to riskier borrowers, of whom regulators have warned banks against lending directly.

The FT reports that the rise in loans to these lenders has regulators worried as there is little information about the risks these companies are taking.

Michael Hsu, acting head of the Office of the Comptroller of the Currency (OCC), recently told the paper he thought the loosely regulated lenders were pushing banks to make lower-quality and higher-risk loans.

“We need to solve the race to the bottom,” Hsu said. “And I think part of the way to solve it is to put due attention on those non-banks.”


Ripple to acquire digital asset platform Standard Custody

Ripple has announced a deal to acquire the New York-based digital asset platform Standard Custody and Trust Company. 

While the acquisition still needs go to through a regulatory approval process, Ripple will become the sole shareholder once the deal closes, a spokesperson said. The digital payment network will use Standard Custody’s limited purpose trust charter and money transmitter licences to bolster its regulatory licences portfolio.

“What Standard Custody brings to the portfolio here is another set of important licenses with trust licenses in the US,” said Ripple’s President Monica Long. “Being able to provide not just the technology component to financial institutions who want to use blockchain for all types of decentralised financial services, you also need a compliance piece. And so these licences are really key to us being able to deliver that full end-to-end solution.

“The trust licences add to our portfolio, which include MTL or multiple sets of money transmission licenses in the US. We also got the major payment institution (MPI) licence in Singapore, in addition to licences that we’re seeking in the UK and Europe."

Standard Custody provides digital asset custody, escrow and settlement services for institutional clients and was among the first digital asset firms to receive de novo application approval for a New York trust licence in May 2021.

Ripple has increased its European custody team and is working with clients across five continents, according to a company spokesperson. Its public clients include HSBC, DekaBank, VP Bank and DZ Bank in Germany, and the firm maintains relationships with Société Générale, BBVA Switzerland, DBS and Zodia Custody.


DBS wins licence to underwrite non-financial corporate bonds in China

Singapore’s DBS Group has received regulatory approval to underwrite debt financing instruments for non-financial companies in the China Interbank Bond market, making it the first Southeast Asian-headquartered bank to secure the licence.

The approval from China's National Association of Financial Market Institutional Investors (NAFMII) allows non-financial enterprises outside China to tap DBS’s expertise when raising funds from the world's second-largest bond market, the bank announced.

Last year, DBS was the joint lead underwriter for 3.1 billion Singapore dollars (US$2.3 billion) worth of Panda bonds issued in the China Interbank Bond market, accounting for over 10% of S$26.2 billion Panda bonds issued in 2023.

Panda bonds are a common term for yuan-denominated debt issued in China's onshore market by non-Chinese companies, governments, and organizations.

“DBS has supported several multilateral development banks, foreign governments, and European financial institutions to issue Panda bonds, some of which were inaugural issuances," said the bank's global head of fixed income, Clifford Lee.


Citi explores private fund tokenisation via blockchain

Citigroup has completed a simulation that demonstrates how a private equity (PE) fund can be tokenised on a blockchain network, potentially paving the way for greater adoption of distributed ledger technology on Wall Street.

The bank worked with private investment specialistsWellington Management and WisdomTree to carry out its ‘proof of concept’, according to a statement. The project showed it’s possible to issue and custody tokenised versions of PE funds on behalf of clients in a controlled environment, while remaining compatible with existing bank systems, Citi said.

The proof-of-concept trial was issued on Avalanche’s Spruce, according to a press release. Spruce is an Evergreen subnet designed for large financial institutions looking to use public blockchain infrastructure.

Citi joining the subnet “is the latest bet from a Wall Street giant looking to dive further into the use cases of blockchain adoption,” according to one report. Traditional finance – aka TradFi – firms such as T. Rowe Price, WisdomTree, Wellington Management and Cumberland joined the subnet last April to make trade execution and settlements more efficient

“The growing use of Avalanche by leading financial services firms like Citi, Wellington, WisdomTree, and DTCC Digital Assets continues to cement Avalanche as an institutional blockchain leader,” said Morgan Krupetsky, senior director of business development, institutions and capital markets at Ava Labs.


Ex-Credit Suisse bankers “reviving the US$1.3 trillion CLO market”

Various major global banks have started to muscle in on the lucrative business of arranging collateralised loan obligations (CLOSs) according to reports, in a further sign that life is returning to this crucial US$1.3 trillion corner of corporate finance.

Credit Suisse was traditionally a big arranger of CLOs — vehicles that buy up junk-rated company loans, bundle them together and sell them as bonds. But the Swiss lender’s demise last March has opened the door to a raft of new contenders including Canada’s CIBC, the Bank of Nova Scotia and Spain’s Banco Santander SA. France’s Société Générale and Japan’s Mizuho Financial Group. Each is taking advantage to ramp up in Europe.

Drawn by the prospect of attractive fees, many of the new arrivals have been hiring ex-Credit Suisse CLO dealmakers for their own investment bank divisions. These individuals are hired by the firms that run CLOs, known as collateral managers, to put the deals together and market them to investors. They can earn more than US$1 million for a new transaction, the reports suggest.

They note that the CLO market has been gummed up for much of the past two years as banks such as JPMorgan Chase, Citigroup and Wells Fargo either stopped or pared back buying the safest and largest “AAA” tranche, although some have started returning. The emergence of Canadian, European and Japanese rivals with chunky balance sheets now creates another important source of AAA buyers.

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