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Leveraged banks endure severe stress scenario – Industry roundup: 01 July

Chinese companies intend to list in Switzerland and London 

The third-largest exchange in Europe, SIX Swiss Exchange, is getting ready to welcome a number of Chinese companies. Earlier this year, at least five companies based in China announced plans to list in Zurich, including construction equipment giant Sany, medical equipment firm Lepu Medical, and lithium battery maker Guoxuan High-Tech. In addition, Joincare Pharmaceutical and GEM, a battery and electronics recycler, both reportedly have plans to join the exchange in the upcoming weeks, along with a chipmaker, a beverage producer, and an electronic firm. The Shanghai-London Stock Connect's expansion is said to integrate Chinese corporations into the share trading program as well as expand its global coverage to bourses in Germany and Switzerland.  

The new network into Zurich claims to make the approvals process faster than in most other markets, including Shanghai. Issuers expect higher valuations than on other international exchanges, attracting Swiss asset managers looking for exposure to high-growth firms in sectors such as new energy and medical equipment. According to Chinese media reports, these changes are new signs of success for the Stock Connect program and further evidence of how China is opening up its capital markets to the rest of the world. 

According to reports, Chinese companies may soon be forced out of US stock exchanges as a result of the Holding Foreign Companies Accountable Act, which seeks to bar foreign-jurisdiction firms from US exchanges if they fail to comply with local auditing standards for three consecutive years. It was noted that more than 120 companies based in China are currently at risk to face expulsion by US regulators, and neither government appears willing to concede. However, Chinese firms seeking international financing may turn to Global Depository Receipts (GDRs) as alternatives to the American Depository Receipts (ADRs) traded in US markets. 

China also unveiled plans for an expanded stock connect program in December 2021 that reportedly will connect Shanghai and London with capital markets to include Germany and Switzerland, boosting cross-border investment and fostering China's financial markets. 

BNP Paribas exits the commodity finance business in the United States 

BNP Paribas SA (BNP), a Paris-based bank, is withdrawing its commodities finance business in the United States (US). This is reportedly consistent with their approach in the Europe, Middle East and Africa (EMEA) region. The bank stated that the impact is limited, and it expects to remain committed to the US and the Americas, in addition to its energy and renewables clients. 

According to reports, BNP sold the loan book to Mitsubishi UFJ Financial Group Inc. (MUFG). The sale is said to involve only commodities finance and does not include its commodity derivatives platform. The financial terms of the transaction and the number of employees affected were not disclosed.  

BNP, formerly among one of the largest lenders to commodity traders, has been reducing its exposure to commodity financing for some time. The bank was fined nearly US $9 billion in 2014 for violating US sanctions involving Iran, Cuba, and Sudan. After incurring significant losses, it suspended new commodity trade finance deals in EMEA in 2020. Furthermore, BNP ceased financing oil pumped from the Ecuadorian Amazon in 2021. 

Reports indicate that the sale to MUFG is expected to close in the next three to six months. Some employees will be transferred to MUFG, while others will remain at BNP. 

RBI reports strong leveraged banks endure severe stress scenario 

Reserve Bank of India (RBI) stated that the stress test results presented in the FSR (Financial Stability Report) demonstrate that banks in good standing may be able to endure severe stress scenarios without dropping below the minimum capital requirement. Indian banks and non-banking institutions are said to have adequate capital buffers to withstand shocks and expect to meet the minimum capital requirements even in excessive stress scenarios.  

Banks' gross non-performing assets ratio dropped to a six-year low of 5.9 percent in March 2022, according to RBI. Shaktikanta Das, Governor, RBI, commented that “the financial system is well-capitalized and on its way to profitability," adding that it is a combination of good governance and risk management practices. Nonetheless, Das stated that the banks must be aware of the imminent emerging risks posed by cryptocurrencies. He also added that, while technology has expanded the reach of the financial sector, and its benefits must be fully realized, its potential to disrupt financial stability must be avoided. "As the financial system becomes more digitalized, cyber risks grow and require special attention," he warned. 

Sanctioned Russia provides opportunities for businesses in India  

India-based firms are said to be interested in expanding their operations in Russia, leveraging the void left by the exodus of companies from Europe, Japan and the US following the Ukraine conflict. Reports indicate that Indian companies, from drugmakers to consumer goods, have either secured new contracts or are preparing to bid for more as Moscow seeks new partners and vendors to fill the void. Indian retailers are allegedly in discussions to open stores in Russia. 

It was reported that India and China have been purchasing inexpensive Russian crude, which is then processed by domestic refiners such as Reliance Industries Ltd., who are leveraging discounted barrels as global prices rise. Rajneesh Chopra, Global Head of Business Development, VA Tech Wabag Ltd., a Chennai-based builder of water and sewage treatment plants that received an 18-million-euro (US $19 million) order from Russia in June 2022, claims that its European competitors have put their Russian projects on hold, prompting clients to seek alternatives.  

Berger Paints India Ltd.'s CFO, Srijit Dasgupta, stated last month that there are significant opportunities in Russia as multinational paint companies withdraw. Russia is also said to be a key medium-term growth area for Dr. Reddy's Laboratories Ltd., one of India's largest drugmakers, according to Saion Mukherjee, a Mumbai-based analyst at Nomura Holdings Inc. 

Trade between India and Russia reached a record of US $13 billion in 2021, though Russia is said to rank below India's top 20 trading partners. Rohit Sharma, Director, Federation of Indian Chambers of Commerce and Industry, stated that there is a strong desire to include new industries and goods in the mix of goods traded between the two nations, such as telecom and IT hardware, automobile parts, and wellness products. 

Cross-border payments remain a significant barrier for those looking to execute business transactions in Russia. Due to the extreme volatility in the Russian currency, the planned rupee-ruble mechanism to import oil was dropped. As an alternative, India is now considering settling payments in rupees. 

Goldman Sachs and Derivative Path collaborate to expand transaction banking 

Goldman Sachs Group Inc. has formed an alliance with Derivative Path, a capital markets technology firm, enabling many US regional banks and credit unions to use its foreign exchange services. The collaboration is said to be Goldman’s latest step toward increasing market share in the competitive transaction banking sector, which it joined in 2019.  

Derivative Path clients can expect to use Goldman for all foreign exchange transactions and rate pricing under the terms of the agreement. While Goldman's existing clients are primarily large corporations and governments, they stated that Derivative Path expects to target approximately 4,700 regional and community banks in the US. The agreement's financial terms were not disclosed. 

The report defines transaction banking as the handling of cash for governments and multinational corporations, which includes processing employee payroll, collections from customers, as well as securing foreign exchange rates for payments sent to other countries. The pandemic accelerated customers' use of electronic payments, making rival banks like Citigroup Inc. and Bank of America expand into the US $300 billion sector.  

Goldman developed the technology for its transaction banking division in-house, similar to its online bank Marcus. Eduardo Vergara, Global Head of Transaction Banking Products and Sales, Goldman, said "you know where the payment is, how much it is, and how quickly it arrives," similar to a shipment tracking methodology. In 2021, Goldman launched a similar partnership with Fiserv Inc., which enabled them to collaborate with its transaction banking and foreign exchange services to 12,000 banking, brokerage, and government clients. 

Central banks in Latin America avoid FX crisis, says BIS

The Head of the Bank for International Settlements (BIS), Agustin Carstens, stated that aggressive interest rate increases imposed in 2021 by Latin America's central banks have helped to avert a currency crisis and moderate some of the region's inflationary pressures. The central banks' tightening of monetary policy mitigated the impacts seen previously when the US Federal Reserve’s sustained interest rate increases sparked rapid exchange rate depreciation, stated Carstens. He further added that without these banks' prompt actions, inflation would be two to three percentage points higher, making it much more difficult for policymakers to combat price pressures. 

Central banks in Latin America began raising key interest rates much earlier than their counterparts in developed countries, with Brazil raising borrowing costs 11 times since March 2021. This was said to avoid the expected reversal of capital flows that would impact their currencies once the Fed began raising borrowing costs in the world's largest economy.  

Nonetheless, reports show that annual inflation in much of the region remains at multiyear highs, with rates in Brazil and Chile approaching 12% and Mexico approaching 8%. Colombia's central bank is expected to raise the key rate by 150 basis points this week in an effort to contain inflation, which is approaching 10%. 

Carstens expects Latin American exchange rates to remain stable, enabling policymakers to avoid extreme rate increases. 

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