Report names Canada’s RBC as top funder of fossil fuels
The world’s largest banks allocated more than €60 billion (US$66 billion) to fossil fuel financing last year, according to the 2023 Banking on Climate Chaos report compiled by the Rainforest Action Network and others.
Since the Paris Agreement came into effect in 2016 - binding countries to limit global heating - the world’s 60 largest banks have spent a total of €4.9 trillion on fossil fuels. The report also reveals that the Russian invasion of Ukraine in February 2022 gave fossil fuel companies a chance to amass record profits totalling US$4 trillion.
Royal Bank of Canada (RBC) is named as the biggest single provider in 2022, giving fossil fuel companies more than €38 billion and surpassing JP Morgan Chase for the first time since 2019, although the US bank is still well ahead with nearly €400 billion allocated over the past seven years.
While US multinationals dominate the fossil fuel financing scene, European banks are playing a leading role in lending and underwriting debt to oil and gas majors. France’s BNP Paribas remains the biggest lender Europe according to the report, with its fossil fuel financing hitting €18.9 billion last year. BNP Paribas is also the first commercial bank to be sued over its loans to oil and gas majors. The current legal action is by three non-governmental organisations (NGOs) - Oxfam, Friends of the Earth and Notre Affaire à Tous.
The report traces funds from the eurozone’s biggest bank to various fossil fuel companies, including BP, Var Energi, TotalEnergies, Saudi Arabian Oil and Shell. From 2016 to 2022, the UK’s Barclays Bank sent the most funding to fossil fuel companies, primarily Exxon Mobil. HSBC ranks third highest in the list of last year’s most fossil fuel-friendly banks in Europe. Mitsubishi UFJ Financial Group (MUFG) ranks as top provider among Asian banks, financing $29.5 billion in 2022.
“Fossil fuel companies are the ones dousing the planet in oil, gas, and coal, but big banks hold the matches,” comments April Merleaux, co-author and Research and Policy Manager at Rainforest Action Network. “Without financing, fossil fuels won’t burn.”
The report also assesses bank financing for top companies in certain spotlight fossil fuel sectors, and highlights the communities fighting projects in these sectors that threaten their lives and livelihoods.
- Tar sands oil: The top tar sands companies received US$21.0 billion in financing in 2022, led by the biggest Canadian banks, who provided 89% of those funds. Toronto-Dominion, RBC and Bank of Montreal top the list.
- Arctic oil and gas: Chinese banks ICBC, Agricultural Bank of China, and China Construction Bank led financing for Arctic oil and gas, which totalled US$2.9 billion for the top companies in this sector in 2022. 26 banks are still financing Arctic oil and gas, including US banks JPMorgan Chase, Citi and Bank of America.
- Amazon oil and gas: Spain’s Santander leads financing for companies extracting in the Amazon biome, followed closely by Citi. Financing totalled US$769 million in 2022.
- Fracked oil and gas: Finance for fracking companies totalled US$67.0 billion in 2022, an 8% increase over the financing reported in 2021 for the top fracking companies. RBC and JPMorgan Chase are the top financiers of fracked oil and gas for 2022 and since the Paris Agreement.
- Offshore oil and gas: France’s BNP Paribas and Crédit Agricole and Japan’s SMBC Group top the list of biggest financiers of offshore oil and gas for 2022. Financing totalled US$34 billion.
- Coal mining: Of the US$13.0 billion in financing allocated to the world’s 30 largest coal mining companies, 87% was provided by banks located in China, led by China CITIC Bank, China Everbright Bank and Industrial Bank.
- Coal power: Of the financing to the world’s top 30 companies in coal power,97% of financing was provided by Chinese banks. These companies, which have plans to expand coal power capacity, received US$29.5 billion from the profiled banks in 2022.
In the nearly two years since the International Energy Agency (IEA) announced that developing new oil and gas fields would restrict the chances of limiting global warming below 1.5°C, most banks have failed to adopt stringent exclusion policies for companies expanding fossil fuels, the report alleges.
“All Canadian and US banks are still at square one when it comes to oil and gas expansion policies,” it adds. “Under their current policies, they can continue to support companies developing new oil and/or gas projects and also provide project and dedicated finance to most new extraction.”
Banks reduce support for North Sea oil firms after windfall tax levied
Banks are reducing their support for North Sea oil and gas firms as the UK’s windfall tax begins to impact firms ability to secure more favourable financing deals for future projects.
Reports suggest that after the Energy Profits Levy (EPL) was introduced last May, banks didn’t factor in the EPL when deciding to loan oil and gas firms money – via a process known as ‘reserve-based lending’ (RBL) – because it was considered to have a limited time span, concluding by 2025 at the latest.
British chancellor Jeremy Hunt subsequently expanded its lifespan to six years and confirmed that the government “will no longer consider phasing out the levy ahead of its end date of March 2028."
Most UK banks no longer fund projects in the North Sea leaving European banks to pick up the slack, reports business daily City A.M. The big three banks seen as the main supporters of North Sea firms are ING, BNP Paribas and DNB Group, while the likes of Deutsche Bank, Credit Agricole and Société Générale are also frequent lenders.
One source at a major European bank told the paper that they now regard the temporary tax as permanent and it is factored into loan agreements for North Sea companies, making the terms of the loan less generous and meaning oil and gas firms inevitably borrow less from banks.
The change is more likely to impact smaller North Sea oil and gas firms, rather than global energy giants such as BP or Shell, who make the majority of their income outside of the UK.
Iain Lewis, chief financial officer at UK oil and gas firm Ithaca Energy commented that “there’s no doubt that the current structure of the EPL being linked to RBLs will impact our capital expenditure profile.”
“The EPL has been constructed in such a way that it’s very difficult for the banks to be supportive,” he added.
One North Sea industry source said that some lending facilities are being reduced by as much as 40-50% Another industry source noted that multiple energy firms have faced RBL issues in recent months following changes to the windfall tax.
“The timing of the tax increase has been pretty significant and companies have seen their lending and the borrowing base of their lending facilities erode significantly. It’s a pretty tough environment, and the way that banks will look at these things typically is when they see the increase in EPL, that they assume this is an increase in taxation or permanent change in taxation,” the source said.
A UK Treasury spokesperson said: “The Energy Profits Levy strikes a balance between funding cost of living support from excess profits while encouraging investment in order to bolster the UK’s energy security.
“We have been clear that we want to encourage reinvestment of the sector’s profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay.”
Business confidence revives among UK CFOs, reports Deloitte
Sentiment among finance leaders of the UK’s largest firms improved significantly in the first three months of the year, according to Deloitte’s UK CFO Survey Q1 2023.
A net 25% of Britain’s chief financial officers (CFOs) are more optimistic about the financial prospects of their business than they were three months ago. Having run well below the long-term average reading of -2% all last year, it marks the largest increase in confidence since the Covid-19 vaccine rollout at the end of 2020, said Deloitte.
Conducted between 21 March and 3 April, the Q1 CFO Survey captures sentiment amongst the UK’s largest businesses. A total of 64 CFOs participated, including the CFOs of 11 FTSE 100 and 24 FTSE 250 companies. The combined market value of the 38 UK-listed companies surveyed is £253 billion (US$315 billion), or about 10% of the UK quoted equity market.
The survey was conducted in the period following Silicon Valley Bank’s collapse on 10 March and pressures on some regional US banks, although the findings “suggest these events seem to have had little, if any, impact on UK CFO sentiment.”
Perceptions of external financial and economic uncertainty have fallen at the fastest pace since the question was first asked in 2010, from 71% of CFOs rating uncertainty as high or very high in Q4 2022, to 39% doing so in Q1 2023. CFOs now rate external uncertainty at levels far below the previous peak last autumn, the start of the pandemic in 2020, and following the EU referendum in 2016.
Ian Stewart, chief economist at Deloitte, said: The economic unpredictability that marked the beginning of 2023 has started to clear, with CFOs reporting the largest decline in perceptions of uncertainty to date. Business confidence has rebounded, helped by a decrease in energy prices, an easing of Brexit concerns and an improving inflation backdrop.
“Crucially, finance leaders report little change in credit conditions, suggesting that March’s events in the global banking system have not affected the pricing and availability of credit for UK corporates. Despite a brighter outlook, CFOs are alive to the continued risks facing the economy. Corporates remain in defensive mode and CFO risk appetite is subdued.”
UK CFOs reported a slight rise in the cost of credit and a marginal improvement in credit availability in Q1 2023, with a net 73% rating credit as costly – from a net 66% in Q4 2022 – while a net -2% say that new credit is easily available, up from a net -22% in Q4 2022.
Risk appetite remains below normal levels, with just 17% of CFOs saying this is a good time to take greater risk onto their balance sheets. CFOs are instead heavily focussed on cost control and building up cash, with 41% and 44% of CFOs respectively rating those as strong priorities for their businesses. Furthermore, although CFOs’ revenue growth expectations have jumped from a net -8% to a net 44%, a majority of respondents (65%) expect margins to shrink in the next 12 months, reflecting continued growth in input costs.
CFOs see Brexit, high energy prices and disrupted energy supplies posing significantly less risk to business than they did in Q4 2022. The announcement on 27 February of the Windsor Framework, which aims to improve the flow of goods between Britain and Northern Ireland, is likely to have contributed to the easing of CFO concerns around Brexit, which are now close to the lowest level in over six years. Falling energy prices – with wholesale gas prices down by almost 70% since CFOs were last surveyed – are also likely to have reduced the risks posed by elevated energy prices.
Finance leaders report a fall in supply disruptions faced by their businesses this quarter. Only 7% expect ‘significant’ or ‘severe’ levels of disruption to persist in a year’s time, and the panel expects such disruption to ease entirely in two years from now. CFOs also reported a marked easing of recruitment difficulties in the first quarter, while expectations for inflation in one year’s time have declined from 5.8% to 4.2%, and eventually to 2.9% in two years’ time.
Meanwhile, an overwhelming majority of CFOs expect to see a significant growth in capital spending on artificial intelligence (AI) over the next five years. A net 67% also believe the adoption and application of AI will help raise UK productivity. However, respondents were almost equally divided between those who believe that AI will lead to an increase in the number of jobs and those who believe it potentially means fewer jobs over the next five years.
Stewart added: “The CFOs foresee AI helping to drive UK productivity, an outcome that could provide a lasting boost to business growth. They are divided, however, on how AI will affect the number of jobs in the economy, highlighting the need to ensure the gains from new technologies are widely shared.”
Paul Schofield, Senior Partner at Deloitte in Cambridge commented “The latest CFO survey reflects the returning optimism we are hearing from the businesses we work with. Although the CFOs are seemingly still in defensive mode, we are seeing many corporates that are now investing further in transformation and strategic priorities.”
Brazil's BNDES signs deal with China Development Bank
The return to power at the start of the year of Brazil’s President Luiz Inácio Lula da Silva has encouraged the return of the federal Brazilian Development Bank, aka BNDES, to the international arena, which could provide a boost for the country's engineering and construction firms.
In a statement, BNDES said it signed a deal with the China Development Bank (CDB) to jointly raise up to US$1.3bn to finance projects in the infrastructure, energy, oil and gas, mining and sanitation sectors.
“When a company competes for a project and has experience in engineering and construction, as the major Brazilian companies have, having a financier behind them radically changes the scenario and makes the proposal much more competitive," said Alexandre Garcia, a senior engineering and construction sector analyst and associate director at Fitch Ratings.
The deal was part of a series of agreements signed between Brazil and China during Lula’s visit to China last week.
“This agreement with CDB is the result of the return of Brazil's leading role in the world. An internationally respected country opens up more opportunities for attracting and diversifying funding sources for BNDES, which will generate more jobs and income in our country in the future," said BNDES president Aloizio Mercadante.
During previous Workers party administrations (Lula's previous two terms and his successor Dilma Rousseff’s) between 2003 and mid-2016, BNDES financed several engineering projects outside Brazil, generating a significant increase in the backlog of construction companies.
This strategy suffered a severe blow as a result of the Lava Jato (Car Wash) corruption scandal in March 2014, which showed that several Brazilian construction firms were paying bribes across Latin America to secure contracts. From mid-2016 until the end of last year, BNDES did not fund any projects outside Brazil.
Since returning to office in January, Lula has also said his government plans to help finance the construction of the Vaca Muerta gas pipeline between Argentina and Brazil.
BIS head warns of threats to financial stability
The Bank of International Settlements (BIS) – dubbed the central bankers' central bank – has warned that years of fighting economic crises have created conditions that are pushing the limits of stability when it comes to the international financial system.
Agustín Carstens, the BIS’s general manager of the BIS, said this “region of stability” was not defined by interest rates, or debt levels, but instead influenced over time by political and technological forces and macroeconomic policies.
Central bankers around the world have been hiking interest rates since late 2021 to battle resurgent inflation. However, in a speech at Colombia University in New York, Carstens said that to avoid a long-term “high-inflation regime” rates may need to stay higher and for longer than previously thought, even at the expense of slowing down economies.
Debts amassed during the global financial crisis, and more recently the Covid-19 pandemic, are making the central banks’ task more complex too. Some are already seeing political pressure to slow rate hikes to ensure the cost of servicing that debt does not spiral.
They are also facing large losses - on paper at least - on the trillions of dollars, or euros, worth of bonds they bought to try to boost their economies during crises, meaning that governments are also no longer getting a share of the profits those purchases once generated. “These risks are material,” said Carstens.
Another major challenge is financial instability. Since the 1970s, in close to one in five cases, banking stress has emerged about three years after the start of a coordinated global interest rate hiking cycle.
Larger increases in inflation and higher levels of private sector debt make stress ever more likely, Carstens added, noting that this was the first time since the Second World War where a major surge in inflation has come when debt levels are so high.
It also means policymakers should alter their approach going forward and refrain from aggressive rate cuts, or stimulus, when inflation settles below targets.
That should help limit the negative side effects of ultra-low interest rates, most notably the build-up of the kind of financial vulnerabilities that have been seen recently in the banking system.
Central bank independence should be enshrined and mechanisms to encourage prudent fiscal policy should also be given greater bite, Carstens said.
“A shift in policy mindset is called for," the former Mexico central bank governor said. "Returning firmly inside the boundaries of the region of stability should be a conscious and explicit policy consideration.”
Standard Chartered partners with MISA to help Vietnam’s SMEs
Standard Chartered Bank announced the launch of a strategic partnership with information technology company MISA JSC to offer unsecured invoice financing to Vietnam’s small and medium-sized enterprises (SMEs) at competitive interest rates and straight-through processes.
A release announcing the launch said that the first partnership of its kind combines MISA’s pioneering use of cloud-based technologies to simplify and improve the efficiency of their clients’ processes and Standard Chartered’s global expertise in business banking and financing capabilities.
Speaking at the launch, Nguyễn Xuân Hoàng, vice chairman of MISA, said: “The cooperation between MISA and Standard Chartered Bank will provide much-needed funding to hundreds of thousands of underbanked SMEs without collateral via MISA Lending.”
Harmander Mahal, head of the bank’s consumer, private, and business banking for Việtnam and Asia, said: “We’re excited to be pioneers in this space that promises to have a significant positive impact on SMEs in Việtnam. By providing SMEs with more effective access to financing solutions, we can accelerate broader financial inclusion and further contribute to the economy’s growth through this important segment.”
The programme’s target customers are SMEs in manufacturing, trading and services that require financing against e-invoices to meet their working capital requirements. Standard Chartered will use multiple data points and digital underwriting to set suitable credit limits.
Standard Bank backs initiative to drive Africa’s cross-border growth
Standard Bank said that it regards the African Continental Free Trade Area (AfCFTA) is a key opportunity for Africa to alleviate poverty, drive economic activity and achieve prosperity for her people.
By eliminating trade barriers and boosting intra-Africa trade, the AfCFTA aims to lift 30 million Africans out of poverty by increasing income across Africa by 7% by 2035. Once implemented, it will be the world’s largest free trade area.
The bank is a key sponsor of this week’s AfCFTA Business Forum in Cape Town. “As Africa’s largest bank by assets, Standard Bank is committed to driving her growth and unlocking opportunities across the 20 markets we serve,” said Philip Myburgh, the bank’s Head of Trade for Business and Commercial Banking.
“In this regard, we support solutions that are Africa-centric and where the private sector plays a greater role in the health of local and regional economies. However, trade barriers and other protective internal policies remain stumbling blocks”
Recent global supply chain disruptions illustrate the urgent need of building domestic value chains integrated into regional and global supply ecosystems. Standard Bank is optimistic about the benefits of a single market and wants to harness its broad networks and expertise on-the-ground to play a key role in helping AfCFTA take off.
“Standard Bank is building the finance and trade solutions to help address the tariff and non-tariff barriers required to realise the continent’s ambitions to create an effective single market,” said Myburgh.
Beyond aligning legislation and reducing red tape, a more conducive environment for trade includes developing manufacturing capabilities and expanding the rail, road and port infrastructure required to move goods between and across vast territories.
Beyond hard infrastructure, access to trade finance remains a challenge. While banks are important players in financing trade across the continent, perennial risks continue to limit commercial credit appetite.
“In this environment, leveraging the ability of Africa’s financial institutions to deploy capital from development finance institutions and sovereigns into effective trade finance, especially for entities that have not yet built up their credit standing, could dramatically expand intra-African trade,” said Myburgh.
Other areas where banks and the private sector could work with the AfCFTA to begin implementation in 2023, is to identify and then co-operate on leveraging growth in high-potential sectors.
“In Africa, for example, agriculture is the bedrock, biggest earner, and greatest employer in many markets. Starting with small steps to improve the movement of food and agricultural goods, inputs, services and people could have a disproportionally large positive impact on social stability, growth, investment and national revenue across the continent,” noted Myburgh.
Energy and power infrastructure is another area where even limited cross-border co-operation and co-ordinated national investment could have a disproportionally high impact on regional and continental growth.
Free trade or special economic zones have also proved their worth as drivers of investment, production, and export earnings among African economies.
Importantly for Africa, and critically for the AfCFTA vision of a single African market, the continent’s booming digital ability, supported by a youthful population, presents another avenue for Standard Bank to provide the finance, guidance and digital platforms and connectivity to grow Africa’s digital revolution into a global investment proposition,” said Myburgh.
A significant non-tariff barrier in Africa is access to information and in response, Standard Bank has developed the Africa Trade Barometer, which blends qualitative and quantitative data from, initially, 10 of Africa’s leading trade economies. It provides a near real-time view of trade openness, access to finance, macro-economic stability, infrastructure, foreign trade, governance, economic performance, and trade finance behaviour in Africa.
“The secret to Africa’s success will be the power of partnerships, awareness of what is needed and access to trusted information, as no one can do it alone. The AfCFTA Business Forum is the perfect opportunity to get these partnerships off the ground and working to breathe life into the move to a single market,” said Myburgh.
“It is important that we use this opportunity to accelerate moves to a practical cross-border framework on which to build the institutions, systems and practices capable of uniting Africa’s business potential into a continental force for growth.”
IMF to publish CBDC guidance via handbook
The International Monetary Fund (IMF) said that with interest in central bank digital currencies (CBDCs) at an “unprecedented” level, it is experiencing heavy demand for guidance about them. In response, the IMF planned to release a CBDC handbook, said deputy managing director Bo Li.
The IMF official commented that it recognised some urgency in meeting the needs of central banks planning CBDCs and has engaged with almost 30 countries that requested assistance in the past two years. Over 40 countries have contacted it so far, Li said, adding: “We believe CBDC capacity development is essential to avoid a digital divide.”
In addition, poor design of a CBDC could to a variety of risks. To address the informational need, the IMF handbook will be “the basis for capacity development,” Li said.
The future handbook was discussed in greater detail in an IMF staff report. The handbook will “mostly be descriptive rather than prescriptive, offering information, experience, empirical findings, and frameworks to evaluate CBDC.”
The handbook will be completed over the course of four-to-five years, with major funding for it coming from Japan, the report said. It presented a tentative table of contents for the handbook, with 19 chapters divided into broad sections. The tentative contents touch on both policy and technical issues.
Meanwhile, as policymakers consider more concrete questions relating to CBDC, the IMF advice has had to become “more tailored to country circumstances and […] more normative and anchored in policy experience and frameworks,” according to the report. The IMF will prioritise assistance for “countries that are systemically important and to countries that are fast-tracking CBDC developments but have relatively high-capacity constraints or weak regulatory standards.”
ANZ expects little impact on business credit growth from US bank failures
Australia’s ‘big four’ banking group ANZ forecasts business credit growth of 5.5% in 2023 and 5.1% in 2024, with minimal disruption anticipated from international bank failures in Europe and the US.
Dragged down by housing credit decelerating from 6.4% year-on-year (YOY) in 2022 to only 2.8% YOY in 2023, total private sector credit growth of just 3.7% is forecast in 2023 and 4.8% in 2024. The forecast is considerably lower than the average YOY growth rates of 5.9% from 2020 to 2022 and 4.8% from 2015 to 2019.
ANZ projects quarterly business credit growth, which has been trending above average, to outpace housing credit growth between now and Q3 2024. Labour shortages and strong capital expenditure (capex) plans outweigh the negative impacts of higher rates and global financial volatility on lending demand.
“We have softened our business credit growth forecasts a touch since February but have retained our view of growth through 2024. Companies’ resilient capital expenditure expectations are likely to drive business credit growth. Instability in the construction sector and other supply constraints seem to have delayed, not discouraged, capex appetite” ANZ Senior Economist Adelaide Timbrell stated in ANZ Research’s latest Australian Economic Insight.
“While business confidence is lower than its long-term average, most business conditions are still trending above average. We expect significant labour constraints and pent-up demand for capex will outweigh the negative impacts of higher rates on appetite for credit.”
“Very high capacity utilisation suggests firms are already “behind” on their capital compared to usual, which means they may not require as much demand growth as usual to necessitate investment. This reduces the impacts of the slowing economy on capex.” Timbrell added.
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