Japan’s SMFG restarts AT1 bonds after Credit Suisse wipeout

Japan’s Sumitomo Mitsui Financial Group (SMFG) has sold US$1 billion of additional tier-1 (AT1) debt, becoming the first major global bank to sell the risky securities since similar bonds issued by Credit Suisse were wiped out last month.

The deal is seen as reflecting revived confidence in the banking sector of Asia’s second-largest economy and could pave the way for a similar re-opening in Europe, where banks are challenged by higher funding costs following the sudden collapse of two US regional lenders.

“SMFG had a choice of not selling them but they went ahead, likely signalling that the Japanese financial system may be more stable than those in other countries,” said Nana Otsuki, senior fellow at asset manager Pictet Japan.

AT1 bonds, aka contingent convertibles or CoCo bonds, are regarded as the riskiest tranche of a bank’s bonds and can be converted into equity or written off if a bank's capital level falls below a certain threshold. The market for AT1s froze in March after the Swiss government-brokered the takeover of Credit Suisse by rival UBS.

The Swiss regulator determined that more than US$17 billion worth of Credit Suisse's AT1 bonds will be written down to zero, even as shareholders, who sit below bonds on the priority ladder for repayment in a bankruptcy process, will receive over US$3 billion.

The resulting tumult cast doubts on whether SMFG would proceed with its planned AT1 offer, and persuaded Japan’s biggest bank, Mitsubishi UFJ Financial Group Inc, to delay its issuance until at least mid-May.

In a note on April 17, analysts at Morgan Stanley estimated European banks would need to issue more than €400 billion of debt over the next three years. The note added that lenders most likely to issue AT1s over 2023 to help meet this requirement include BNP Paribas, UniCredit, Santander and Standard Chartered,

SMFG sold its bonds in two tranches, in Yen (JPY) 89 billion (US$662.5 million) five-year notes, and JPY51 billion 10-year bonds.

The JPY89 billion issuance carries a coupon rate of 1.879% for the initial five years and two-month period, a regulatory filing showed and compared with an initial 1.534% coupon on similar bonds issued by the bank in December.

The JPY51 billion one has a coupon of 2.180% for the first 10 years and two months, compared with 1.750% on the 10-year bonds sold in December.

The terms were attractive for investors, some analysts confirmed.

“In Japan, where spreads over corporate bonds are thin, the terms for these AT1 bonds were reasonably good, provided that the banking sector is credible,” said Pictet's Otsuki.

Japanese banks’ AT1 bonds had been configured in a way the value is secured even if the government is involved in restructuring, and SMFG's new issues are seen to have the same features, she added.

 

ChatGPT “can accurately decipher Fed statements and corporate news”

ChatGPT, OpenAI’s artificial intelligence (AI) chatbot released last November, has demonstrated an ability to decipher the meaning behind US Federal Reserve statements and also exhibited predictive stock market capabilities in response to corporate news headlines, according to separate studies.

Researchers at the Federal Reserve Bank of Richmond – aka the Richmond Fed – reported in a paper that ChatGPT can reason similarly to humans when decoding “Fed speak”.

Testing both ChatGPT-3 and GPT-4, the study took 500 sentences from Fed policy statements and asked the AI to sort them based on five categories: dovish, mostly dovish, neutral, mostly hawkish, and hawkish.

Even without prior training, the AI outperformed BERT (Bidirectional Encoder Representations from Transformers), another language model used in finance, and was closely aligned to the way four human reviewers categorised the sentences. In addition, it was able to provide a reasonable justification for its choices:

“The sentence indicates the committee’s expectation to start implementing its balance sheet normalisation program soon, which is a clear signal of tightening monetary policy, as long as the economy evolves as anticipated,” wrote GPT-4 of a statement it deemed hawkish.

GPT-4, released a month ago, was more likely to agree with humans than GPT-3.

In asecond study, University of Florida researchers took financial headlines issued since October 2021, when ChatGPT’s knowledge base ends, and prompted the AI to make investing recommendations based on them.

This enabled ChatGPT to be tested on how news would move a stock without having prior information on what actually happened. Results showed a strong correlation between ChatGPT’s responses and stock market moves.

For instance, the authors asked ChatGPT to decide what the headline “Rimini Street Fined $630,000 in Case Against Oracle” meant for Oracle. It responded that investor confidence in Oracle would rise as the ruling could improve the company’s ability to protect its intellectual property.

“These findings confirm the predictive power of ChatGPT sentiment scores and emphasise the potential benefits of incorporating large language models (LLMs) into investment decision-making processes,” the researchers concluded.

 

Greece is deemed a European success story

Greece, which in 2008 successfully exited its third and final financial bailout programme after years of austerity, has been deemed “a European success story” by The Economist, although the magazine comments that prime minister Kyriakos Mitsotakis may receive little credit when voters go to the polls on 21 May.

Mitsotakis can demonstrate “a rapid fire list of achievements and successes” after four years in office, yet lags in the opinion polls, it reports.

“A polished technocratic type, Mr Mitsotakis is one of Brussels’s darlings,” the magazine adds. “After the pandemonium of his predecessor’s administration, when under the radical left Syriza party Greece came close to ejection from the euro, the past four years have been a huge relief.

“Mr Mitsotakis has steadily calmed tension with his neighbour Turkey: rushing aid to the victims of February’s earthquake there was shrewd as well as humanitarian.”

The article appeared the same day as Greece reported that the general government balance showed a surplus of €211 million (US$231 million) in the January-March 2023 period from a budget target for a deficit of €2.602 billion and a deficit of €3.884 billion in Q1 2022.

Tax revenue significantly surpassed targets in Q1 2023, said the finance ministry. In a report on budget execution on an amended cash basis for the period January-March 2023, the ministry said that tax revenue totalled €13.682 billion in the three-month period, up 12.4% from budget targets, helping the state budget to record a primary surplus of around €3 billion.

Alternate Finance Minister Theodore Skylakakis, commenting on the report, said the March figures confirmed the fact that the Greek economy was performing significantly better than expected. "The country is moving towards general elections in an environment of financial stability and improved economic performance,” he noted.

Earlier this month its central bank chief, Yiannis Stournaras forecast that Greece's economy will grow by 2.2% in 2023, upwardly revising an earlier central bank estimate on economic expansion from last December when the Bank of Greece estimated growth at 1.5% in 2023 from 5.9% 2022.

Red flag has re-emerged in the corporate bond market, says TD Securities

Last month’s banking drama means a technical tidal wave may be coming for the biggest slice of the US$10 trillion market for corporate bonds, according to TD Securities, whose analysts predict that banks’ collective higher cost of funding will curb appetite for higher-quality credit and eventually force risk premiums to rise.

At issue is decreasing yields on investment-grade bonds relative to the effective federal funds rate, which is a proxy for funding costs. This “carry spread” has now reached a level seen only twice in the past 27 years – most recently in 2007.

This means that even though high-quality corporate bonds may seem “cheaper” based on their mark-to-market values, which have fallen over the past year due to rising interest rates, the funds for these positions are more expensive. The higher cost of still can reduce bank buying and eventually force a higher move in the spread.

“The US recession we anticipate in the final quarter of the year, along with the recent collapses of Silicon Valley Bank and Credit Suisse, have raised risks to a correction in the US investment-grade corporate bond market,” says Christian Maggio, TD’s head of portfolio and environmental, social and governance (ESG) strategy. “Tighter loan conditions in the future could act as a catalyst for this recovery.”

While banks are not the largest investors in the corporate bond market, they play an important role in facilitating trades and providing liquidity for other investors. To do this, banks must allocate precious regulatory capital and balance sheets – something that is becoming both more scarce and costly after last month’s banking sector volatility and a broader flight in deposits.

So even if banks hold just 7% of corporate bonds outstanding, according to TD estimates, they can still recover credit risk premiums that are low by historical standards. Maggio estimates that carry spreads are now just 23 basis points, marking the third tightest level in the data since 1996.

“Banks are important in this context because their sensitivity to interest rates can put pressure on US investment-grade corporate returns to correct,” Maggio says. “While unfunded investors (a large portion of the market) may be content with a modest yield pick-up on Treasuries, liquidity providers require sufficient margin to beat their internal funding costs.”

 

Tanzania signs US$667 million of rare earth and graphite development projects

Tanzania has signed agreements worth a total of US$667 million with three Australian companies for the development of rare earth minerals and graphite projects as companies look to source outside of China.

Signed with Evolution Energy Minerals, Ecograf and Peak Rare Earths, the agreements form part of the East African country’s efforts to advance negotiations on long-delayed mining and energy projects.

Under the deals, Tanzania will have a 16% stake in each of the jointly established companies to operate the rare earth and graphite projects, reported Reuters, citing Palamagamba Kabudi, the chairman of the Tanzanian Government’s negotiating team.

Evolution Energy Minerals has signed agreements related to the arrangements regarding the ownership and development of its Chilalo Graphite Project.

Evolution managing director Phil Hoskins said: “Completion of the agreements is a key milestone as we continue to progress towards the development of our Chilalo project.

“Financiers require certainty on the operation of the Tanzanian government’s free-carried interest and the completion of these agreements provides the certainty to support further investment from Evolution and debt and equity financiers.”

EcoGraf has signed an agreement with the Tanzanian government for the development and operation of the Epanko Graphite Project. As part of the deal, the new Duma TanzGraphite joint venture has been incorporated to develop and operate the Epanko project.

EcoGraf holds an 84% stake in Duma TanzGraphite while the government owns a 16% free-carried interest.

Peak Rare Earths has signed a binding framework agreement with the government for the development of the Ngualla Rare Earth Project.

Peak executive chair Russell Scrimshaw said: “Development of the Ngualla Project will deliver direct foreign investment of more than US$320 million into the Tanzanian economy, generate hundreds of direct and thousands of indirect jobs for Tanzanians and position Tanzania as one of the major rare earth producers outside of China.”

 

Bank of Israel considers digital shekel

Israel's central bank is preparing an action plan for the potential issuance of a digital shekel. In a recent document, the Bank of Israel (BoI) discussed the conditions that would enable or support a decision to issue a BOI central bank digital currency (CBDC) at some point, indicating several variables that may have an effect on the steering committee’s recommendation.

A 21-page paper outlines various scenarios – including the widespread adoption of stablecoins – that it says could influence a decision to issue a digital shekel. But it noted that although 90% of the world's central banks are examining CBDCs, only a small number have advanced to the point of issuance.

The Bank’s steering committee added that the regulator has not made a decision on issuing a CBDC.

The BoI and the central banks of Norway, and Sweden have teamed up with the Bank for International Settlements (BIS) to complete an exploration of how CBDCs can be used for international retail and remittance payments.

Scenarios that could influence whether to issue a digital shekel include a decision by the US or the European Union to issue CBDCs. A decline in cash usage, significant use of stablecoins, competition in the domestic payment system, and significant technological developments in payments systems could also sway the central bank’s decision to proceed furtherf.

“The Bank of Israel must be prepared to advance the issuance of a digital shekel, if the variables listed above support it,” the announcement said.

 

Liberty Bank launches Owners Bank for US small businesses

Connecticut, US-based Liberty Bank has launched an offshoot named Owners Bank, a new digital bank that aims to meet the needs of US small business owners. Owners Bank is currently available to small businesses in Rhode Island, Massachusetts, Connecticut and Pennsylvania.

Owners Bank will offer business interest chequing and savings accounts equipped with digital tools to help small businesses manage their finances, set up savings goals and send and accept digital payments.

Users will have access to a personalised dashboard that can consolidate all their bank accounts – including those from other financial institutions – into one platform. The new digital bank will also start offering business loans and credit from mid-2023.

“Big banks often fall short when it comes to servicing small businesses,” said David Mitchell, founder and CEO of Owners Bank. “So, in an age when small businesses represent a large and impactful portion of our business landscape, workforce and economy, we thought it was about time there was a bank that caters specifically to their needs.”

“This is why we created Owners Bank — to fill a major gap in the banking industry by providing tools designed to help small business owners knock out financial tasks, so they can get back to running their businesses.”

Mitchell will be responsible for leading the rollout of Owners Bank across the US as well as expanding  the company’s product offering. The bank has also appointed Harry Gunsallus as its chief operating officer (COO) and Lizette Nigro as its chief product officer (CPO). Both will work on building digital strategies and fintech partnerships for Owners Bank.

 

Santander UK unites with Unibeez to plug skills gap

Santander UK has announced a partnership with Unibeez, a skills-based talent platform for emerging talent that connects students and graduates to a range of jobs and enables businesses to grow by providing access to in-demand skills.

The Unibeez platform will be available at a discount to Santander Navigator’s subscribers as well as to Santander UK’s clients and Santander’s’ partner universities. The platform will use artificial intelligence (AI) to match the skills of students and graduates with the skills employers are looking for. Hirers “can recruit faster, smarter and have access to a range of emerging talent which was previously very hard to connect with.”

With a highly diverse talent pool including 69% female, 25% STEM (science, technology, engineering and maths) graduates and 45% candidates from Black Asian and Minority Ethnic backgrounds, Unibeez has been designed to help eliminate hiring bias on the grounds of race, gender and socio-economic background.

The diversity, creativity and digital skills of the UK’s student and graduate population are in huge demand by employers, the partners report. The digital skill shortage is set to cost the UK economy £12.8 billion (US$15.9 billion) a year while diverse teams are 70% more likely to capture new markets, so connecting emerging talent with internationally ambitious growth companies makes a lot of sense.

“Over the past six months, businesses have been inundated with labour related crises including higher starting salaries, more staff vacancies than usual and Brexit-induced staff shortages,” said John Carroll. Head of International and Transactional Banking, Santander UK. “Our partnership with Unibeez will be crucial to help businesses access new talent as they place recruitment and training top of their investment plans for the next year.”

 

Montonio partners with Episode Six on open banking offering

Estonia-based Montonio, which launched a year ago as an e-commerce checkout orchestration platform, has partnered with payments technology company Episode Six to bolster its open banking offering in the Nordics.

“Leveraging Episode Six’s Tritium platform, Montonio looks to create a modern payments ecosystem that breaks the barriers of traditional card processing and acquiring,” stated a release. “It will enable Montonio’s merchant customers to reduce payment costs and payment times.

“Montonio, which holds a strong position in open banking in the Nordics, needed a PayTech partner to provide them with a digital ledger that ensures instant payment flow between buyer and merchant accounts.

Episode Six’s platform, Tritium is equipped with over 550 APIs that help develop, customise, and launch tailored payment products and services. Episode Six will enable Montonio to effect chargebacks automatically and efficiently for any problematic transaction.

As these payments are irrevocable, there is no chargeback risk for merchants and banks. Fraud becomes a non-issue as account-to-account payments rely on the banks’ own security.

Kristofer Turmen, co-founder and chief technology officer (CTO) at Montonio said: “We are constantly looking to provide our merchant customers with a more positive and innovative payments experience. By partnering with Episode Six and leveraging its flexible solution, we’re now able to do just that. This partnership also means we can cater to larger merchants with higher transaction volumes.”

John Mitchell CEO and Co-Founder of Episode Six added: “Our partnership employs open banking and the concept of a digital marketplace to create a modern payments ecosystem that breaks the barriers of traditional card processing and acquiring. The project particularly excites us because it aligns with Episode Six’s vision of redefining possible payments. It is also a key milestone for Episode Six, as we are marking our expansion into the Nordics, a highly progressive region for payments.”