JP Morgan acquires majority of First Republic

The 84 branches of US regional bank First Republic opened on Monday morning under the banner of JP Morgan Chase after weekend talks to prevent a further escalation of the US banking crisis. They ended with regulator the Federal Deposit Insurance Corporation (FDIC) confirming that First Republic had collapsed and would be taken over by JP Morgan, which reportedly won out over as many as five rival bidders.

An auction arranged by the FDIC resulted in JPMorgan agreeing to buy all of First Republic’s US$100 billon deposits; while losses on the San Francisco-based bank’s residential and commercial loans will be shared with the FDIC, which is providing US50 billion in financing.

“Our government invited us and others to step up, and we did,” said JPMorgan CEO Jamie Dimon. “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.

“Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimise costs to the deposit insurance fund,” (which is estimated at about US$13 billion

JP Morgan will take on US$173 billion of loans, US$30 billion of securities and US$92 billion in deposits but not First Republic’s corporate debt or preferred stock. In addition to the FDIC’s US$50 billion contribution under the loss-sharing agreement, JPMorgan is set to realise a one-time US$2.6 billion gain from the deal but expects to spend US$2 billion on restructuring costs over the next 18 months.

A group of 11 Wall Street banks had pumped US$30 billion into First Republic in March in a bid to avoid the third bank failure of 2023 following the collapse of Silicon Valley Bank (SVB) and Signature Bank. However, shares in First Republic, which targeted high net worth individuals, fell by more than 75% last week after it revealed customers had withdrawn US$100 billion of deposits in March.

First Republic looked increasingly vulnerable after the collapse of SVB. Both banks had many depositors not covered by federal deposit insurance, who exited in large numbers. First Republic’s deposit base steadily declined over Q1 from US $176 billion at the end of 2022 to $104 billion at the end of March.

The bank turned to expensive short-term borrowing, some of it from the Federal Reserve’s emergency facilities to plug the gap. Loans it had made when interest rates were low have slumped in value, leading to worries about its solvency and broader concerns that a rash of US bank failures was likely in a replay of the 2008 global financial crisis.

Growing anxiety about the potential for the malaise to spread, as customers pull deposits from any US lender perceived as weak, has forced the Federal Reserve to launch emergency measures to stabilise the markets.

Commenting on the news, Susannah Streeter, head of money and markets at UK financial services group Hargreaves Lansdown said: “The rescue is aimed at creating stability but the collapse of such a big bank inevitably will sustain some nervousness. Dimon…has been trying to calm nerves indicating that this purchase has helped bring the banking crisis to an end. Certainly, there are no large banks teetering on a precipice like First Republic was after the huge scale of the deposit flight became clear.

“The concern remains that a tide of worry could rise up again surrounding other parts of bank portfolios such as commercial real estate, which are under stress because of sharply higher interest rates with many billions of dollars of loans coming up for renewal.

“There is a safety valve of the Fed’s lending programmes to rely on and funding is still being heavily tapped. Demand for liquidity from the Fed’s discount window and the Federal Home Loan Banks scheme is continuing as lenders adopt defensive strategies. Banks are having to work harder to attract customers, given higher returns on offer elsewhere. The worry remains that dwindling deposits could lead to some banks becoming more conservative in their lending, which will act as a fresh drag on growth in the US economy and knock-on effects around the world.”

 

Chip designer Arm registers for US initial public offering

Chip designer Arm has registered for a US stock market listing, which is expected to be this year’s biggest. In a press release published April 29, the Cambridge, UK- based mobile chip company confirmed that it recently confidentially submitted a draft F-1 form to the Securities and Exchange Commission (SEC).

Arm previously revealed in March that it planned to float in New York on the Nasdaq and would not pursue a listing in London, despite a campaign by British government ministers.

The company’s decision to press ahead with an initial public offering (IPO) registration in the US has been made despite recent market volatility. The number of US IPOs so far in 2023 is down 22% on last year, according to figures from Dealogic. However, the market may be starting to revive, with Johnson & Johnson about to list its consumer health business Kenvue in New York, which is expected to raise up to US$3.5 billion.

Arm hopes to attract between US$8 billion and US$10 billion when it holds its own IPO offering later this year, although the company said it had yet to determine the size and price range.

Its parent company SoftBank has been considering a public listing since February 2022, when a US$40 billion bid to buy Arm launched 18 months earlier by US multinational tech group NVIDIA was abandoned in the face of regulatory resistance from the US Federal Trade Commission and other antitrust watchdogs.

Arm has proved a major UK success story whose technology underpins the global smartphone industry. The company designs the processor components used in most mobile devices, including models from Apple and Samsung. Its licencing model means nearly every tech company depends on Arm designs.

Revenues have held up better than many other companies in the chip industry thanks to its focus on data centre servers and personal computers, with sales increasing by 28% to £593 million (US$742 million) in its most recent quarter.

According to a Financial Times report, Arm recently began work on a prototype chip that is “more advanced” than any semiconductor produced in the past.

 

Deutsche Bank to buy Numis for £410 million

Numis, one of the UK’s leading independent investment banks, has recommended a £410 million (US$511 million) takeover by Deutsche Bank.

The board recommended that shareholders accept the 350 pence-a-share cash offer from one of Europe’s biggest investment banks. The offer is at a 72% premium to Numis’s closing price of 204 pence on April 27, before the deal was announced. Numis shares rose by 68%, or 138 pence, to 342 pence when the news broke.

The stockbroker’s largest shareholder, Anders Holch Povlsen, who owns a 22.8% stake, has given irrevocable undertakings to accept the deal as have the directors at Numis, who hold about 4.4% of the company’s shares. Povlsen, a Danish billionaire and one of Scotland’s biggest landowners istands to get around £90 million once the deal goes through. He is also the biggest shareholder in the online fashion company Asos and chief executive of the international retailer Bestseller.

Numis was founded in 1989 and specialises in advising FTSE 350 companies on doing deals and raising equity capital. It also has an equities trading operation. The company will be combined with Deutsche’s team in London. The senior management of Numis will remain with the combined business and the Numis brand is expected to remain in some form.

Fabrizio Campelli, head of the corporate bank and investment bank at Deutsche Bank, said: “We have been evaluating how to accelerate the growth of our business in the UK and, as a leading UK franchise with a long history of successfully delivering superior client service and growth, Numis represents a compelling strategic fit.”

The German bank said that the deal would allow it to “accelerate its Global Hausbank strategy by unlocking a much deeper engagement with the corporate client segment in the UK”. Deutsche Bank, the leading bank in Germany, with strong European roots, aims to become a “global local bank”: the first point of contact in all financial matters.

Luke Savage, Numis chairman, said the deal would be a “highly complementary combination”.

 

HSBC profits boosted ahead of investor showdown

Europe's biggest bank, HSBC, has reported pre-tax profit of US$12.9 billion for the three months to the end of March, more than triple the figure for Q1 2022 and said that the figure got a US$1.5 billon (£1.2 billion) boost from its purchase of collapsed Silicon Valley Bank's British business (SVB UK).

In March, HSBC bought SVB UK for a nominal £1 in a deal led by the British government and the Bank of England.

“We remain focused on continuing to improve our performance and maintaining tight cost discipline, but we also saw an opportunity to invest in SVB UK to accelerate our growth plans,” said group chief executive Noel Quinn.

HSBC was further helped from the reversal of its plan to write-off US $2.1 billion due to the sale of its French business, as that deal may no longer be completed.

The bank announced its first quarterly payout to shareholders since 2019, before the pandemic and said it would buy back USS$2 billion of its shares. It also said the completion of the sale of its business in Canada is likely to be delayed. The planned US$10 billion sale, originally scheduled to be completed later this year, is now likely to go through in early 2024.

The proposed deal is a key part of its strategy to pull back from slow-growing Western markets, while HSBC is under increasing pressure from its biggest shareholder, Chinese insurance giant Ping An, which wants the bank to spin off its lucrative business in Asia.

Ping An, which holds an 8% stake in HSBC, is expected to vote in favour of two proposals to be tabled at this Friday’s annual general meeting in Birmingham by a group of disgruntled Hong Kong retail investors led by Ken Lui.

Their demands for regular strategy review and a more generous dividend policy don’t call for a complete break. However, they are widely seen as a stalking horse to test broader investor support for the dismantling of the FTSE 100 bank.

Lui’s proposals have Ping An’s backing, but it’s not clear whether he – or the insurer – will attend the AGM in person. They are opposed by the HSBC board, chaired by Mark Tucker.

HSBC, whose largest profit centre is in Hong Kong, has held more than 20 meetings with Ping An to discuss the insurer’s demands. These include a separate listing for HSBC Asia in Hong Kong, where it would be subject to local regulation. Despite the talks, the two sides appear to be as far apart as ever.

 

Latin America’s two biggest economies surprise with stronger growth

Brazil and Mexico surprised investors with stronger-than-expected growth in data published Friday, indicating Latin America’s largest economies are holding up amid high interest rates and fast inflation.

Brazil’s economic activity surged 3.3% on the month in February, according to the central bank’s proxy for gross domestic product, roughly three times the 1.05% rise seen by analysts in a Bloomberg survey. The Mexican economy grew 1.1% in the first quarter from the previous three months, above the 0.8% median survey forecast, preliminary data showed. On an annual basis, Mexico expanded 3.9%, faster than all but one estimate in the economists’ survey.

The growth figures caught investors by surprise, as central bankers in both countries have been keeping monetary policies tight to dampen above-average inflation. Brazil’s new government under returning president Luiz Inacio Lula is working to revamp credit flows, while Mexico has received a boost from continued demand in the US.

Both countries have hiked interest rates aggressively to offset to tame post-pandemic inflation, with Brazil’s borrowing costs at 13.75% and Mexico’s at 11.25%, both among the highest rates within the group of G20 economies.

At the same time, Mexico’s economy has posted six consecutive quarters of growth, the longest run under president Andres Manuel Lopez Obrador. The expansion was supported by the services sector, which grew 4.4% annually in the first quarter, while manufacturing rose 2.7% and the agricultural sector 2.4%.

Elsewhere in the region Colombia raised interest rates to the highest level since 1999 after political turmoil triggered a plunge in the nation’s bonds and currency.  

The central bank lifted its benchmark rate by a quarter percentage point to 13.25% on Friday, Governor Leonardo Villar told reporters in Bogota. Four of the seven-member board voted for the move, two voted to hold, and one argued for a bigger increase, of half a percentage point. The increase continued a long tightening cycle amid persistent inflation and significant stability risks to the global financial system, he added.

 

Australia to issue first green bond in 2024

The Australian government will launch the country’s inaugural sovereign green bond in Q2 2024 in conjunction with energy investors seeking to enhance corporate investment in the transition to net zero carbon emissions.

The instrument allows major investors such as superannuation funds and banks to finance public projects targeted at speeding up Australia’s net zero trajectory, as part of Treasurer Jim Chalmers’ strategy to allocate private funding for national investment priorities. The Australian Securities and Investments Commission (ASIC) will also be allocated another A$4.3 million (US$2.9 million) to police greenwashing.

Green bonds are used to finance new and existing projects that offer climate change and environmental benefits.

“The bond programme will attract more green capital to Australia by offering investors another way to tap into public projects geared towards the energy transition, and by boosting the scale and credibility of the nation’s green finance market. We need to give as many opportunities for people to invest as we can,” said Chalmers.

The announcement follows the recent government announcement which sets out a legally binding target to cut carbon dioxide emissions in Australia by 43% from 2005 levels by 2030.

Australia is the latest to join a fast-growing global market for sovereign green bonds. Poland became the first country to issue one in 2016, and since then, about 40 countries have followed suit. According to the World Bank, the total outstanding green bonds has reached around US$300 billion, representing about 13% of all outstanding thematic bonds.

• The Reserve Bank of Australia (RBA) took markets by surprise by unexpectedly announcing a 0.25% basis points (bps) hike in its cash rate to 3.85% after holding it steady at 3.6% at the April meeting. Chalmers described the increase as “a really difficult decision”. Most analysts had confidently predicted that rates would stay on hold for a further month following signs that Australia’s inflation rate is easing.

 

Standard Chartered replaces key emissions gauge for oil and gas loans

Standard Chartered has announced that it no longer intends to finance an oil pipeline in East Africa that has been estimated to generate seven times more CO2 emissions each year than the entire country of Uganda.

A spokesman for the bank said that Standard Chartered has no involvement in the financing of the East Africa Crude Oil Pipeline (EACOP) project, which on completion will carry oil 900 miles from the fields of western Uganda to the coast of Tanzania.

The EACOP pipeline has become a cultural flashpoint similar to the Line 3 and Dakota Access pipelines in the US. Protestors warn that it threatens local wildlife populations, including lion and hippo habitats, and that it would displace communities and trigger a dangerous spike in emissions.

The pipeline, which according to analysts at Barclays is budgeted at US$5 billion, has emerged as a test for the finance industry’s appetite for backing fossil-fuel projects, as protestors target individual firms. Their pressure campaign has already resulted in several European insurers pledging not to finance the pipeline.

Standard Chartered also announced that it has changed its target for curbing carbon emissions associated with its loans to oil and gas companies, ditching a methodology that critics say allows climate-damaging emissions to rise. In a policy update, the bank said that it now aimed to cut emissions by 29% in absolute terms by the end of the decade from 2020 levels, a target it said was in line with the International Energy Agency's (IEA) landmark Net Zero Emissions by 2050 Scenario.

 

Citi and TIS expand tie-up

Citi’s Treasury and Trade Solutions (TTS) and cloud-based cashflow and liquidity specialist Treasury Intelligence Solutions (TIS) announced that they have expanded its relationship. Joint clients may now, through Citi, gain access to TIS’ e cash forecasting and working capital platform, enhancing Citi’s end-to-end solutions suite across its global banking network.

“This relationship expansion follows the joint successes Citi and TIS have had in helping companies become more digital, efficient, and automated in managing cash and working capital,” a release stated. “TIS provides an innovative platform with rich data analytics and streamlined workflows to drive enterprise cash management, forecasting, and working capital optimization. Smart logic provides users with deep insights to their cash flows, invoicing cycles, payment trends, and vendor behaviour on a global scale.”

Citi clients may now gain streamlined and direct access to the TIS platform, in addition to Citi's extensive banking network and global cash management and working capital solution suite. Companies can use the insights provided by TIS through Citi to optimise liquidity more effectively, strategically manage working capital deployment across suppliers and customers, and improve treasury funding and investing activities.

Stephen Randall, Global Head of Liquidity Management Services, Citi Treasury and Trade Solutions said: “Against a challenging global environment, corporate treasuries and finance teams are focused on improving liquidity and working capital management.

The TIS platform, now available through Citi, supplements our solutions by integrating with client ERP systems to help deliver dynamic visibility over working capital, cash forecasts, and enhanced decision-support for strategic liquidity and working capital optimisation.”