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Tue, 17th January 2017

Anirudh Sethi Report

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Archives of “balance sheet” Tag

India :NPA pains to spill over into next fiscal: Moody’s

Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report.

“Asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of our outlook that lasts till the next financial year,” Alka Anbarasu, a vice-president and senior analyst at Moody’s, said in a report today.

The report is jointly penned by Moody’s and its domestic arm Icra Ratings. The report said the pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-12, when corporate investments rose significantly.

It, however, said aside from the legacy issues, the underlying asset trend for banks will be stable because of a generally supportive operating environment.

“While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested,” the report said.

Vanguard is best-selling fund manager of 2016

Vanguard has topped a table of the bestselling fund managers globally for 2016 after drawing nearly $200bn from investors, eclipsing the total amount of new money raised by its 10 nearest competitors.

 The Pennsylvania-based asset manager has benefited from the runaway success of its low-cost sales strategy, which has dealt a serious blow to pricier rivals in the active investment industry.

Amundi, the French fund house, was the second-bestselling asset manager, pulling in $35bn over the same period — roughly a sixth of Vanguard’s haul, according to figures compiled for FTfm by Morningstar, the data provider.

Timothy Strauts, markets research manager at Morningstar, said: “Vanguard is eating the rest of the US fund industry. It is dominating completely. Both its active and passive businesses are doing very well, mainly because [it charges] very low fees.

Vanguard is eating the rest of the US fund industry. The US market is all about fees and if you don’t have low fees, you don’t get flows

Timothy Strauts, Morningstar

“I can guarantee you Vanguard will be the biggest selling [company] of 2017. The US market is all about fees and if you don’t have low fees, you don’t get flows.”

Dimensional, the Texas-based asset manager, was the third-bestselling fund house, with $23bn of inflows, according to the data, which excluded flows to exchange traded funds. Including ETFs, Vanguard’s total was even bigger at $288bn.

Emerging Markets: An Update

  • China will raise the sales tax on small cars to 7.5% in 2017.
  • New methodology used by Turkstat to measure Turkish GDP has led to significant upward revisions.
  • Turkish authorities are growing more concerned about the weak lira.
  • Fitch moved the outlook on Chile.
  • Chile’s central bank shifted to an expansionary policy bias.
  • Colombia selected Juan Jose Echavarria to be the new central bank governor.
  • Fitch revised the outlook on Mexico’s BBB+ rating from stable to negative.
  • Banco de Mexico hiked rates by a larger than expected 50 bp.

In the EM equity space as measured by MSCI, Hungary (+4.3%), Russia (+3.2%), and Turkey (+2.3%) have outperformed this week, while Brazil (-3.8%), China (-3.6%), and Chile (-3.5%) have underperformed.  To put this in better context, MSCI EM fell -2.3% this week while MSCI DM fell -0.1%.

In the EM local currency bond space, Poland (10-year yield -15 bp), Korea (-4 bp), and Czech Republic (-4 bp) have outperformed this week, while the Philippines (10-year yield +41 bp), Indonesia (+32 bp), and Hong Kong (+32 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 12 bp this week to 2.59%.

In the EM FX space, RUB (+1.4% vs. USD), HUF (+0.9% vs. EUR), and PLN (+0.7% vs. EUR) have outperformed this week, while CLP (-2.7% vs. USD), EGP (-2.7% vs. USD), and ZAR (-1.7% vs. USD) have underperformed.
 
China will raise the sales tax on small cars to 7.5% in 2017.  The tax will be increased further to 10%, according to the Finance Ministry.  The government cut this tax rate from 15% in October 2015 after lobbying from China’s auto association.  Automakers had asked for the tax cut to be made permanent.

The Real Reason Why Global Elites Are Implementing a Cash Ban

Those who think the War on Cash is a new phenomenon are missing the Big Picture.

The War on Cash has been unfolding since at least 2013 if not earlier. And it’s not really a War on Cash… it’s a desperate attempt to prop up failing financial institutions.

Let’s wind back the clocks…

Back in 2013, the small European country of Cyprus implemented a “bail-in.”

This means that the bank STOLE savings (cash) from depositors, to shore up its balance sheet.

You see your cash, the money you keep at a bank, is considered a “liability.” The reason for this is that, technically speaking, you can withdraw this money at any time.

So if the bank has made a bunch of stupid loans to failing businesses… and those loans are defaulted upon… the bank NEEDS your cash to stay afloat. If a large number of depositors were to take their money out during this situation, the bank would quickly go bust.

THIS IS THE REAL WAR ON CASH.

If cash remains solely in electronic form, it never really leaves the financial system. But if you take it out in physical form, it’s out.

This is why whenever the next major banking crisis hits, the next step will be Bank Holidays and Bail-ins.

 

Fitch says Chinese banks may need $246bn to cushion off-balance sheet risks

Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.

As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.

 “In the past few years, we’ve seen WMPs carried off balance sheets continue to increase,” Jack Yuan, associate director at Fitch, said in a conference call on Thursday. He found that more than three-quarters of outstanding wealth management products, totaling 20 trillion yuan, resided outside banks’ loan books as of June.
 Wealth management products were particularly prominent at midtier banks such as China Merchant Bank, China Everbright Bank, and Ping An Bank. Their wealth management products represented over 30% of their total assets, and more than half of their deposits.  

State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.

2 big Mumbai-based state-run banks could be merged: Vinod Rai

India may merge two large state banks in the coming financial year once a cleanup of bad assets has run its course, the official overseeing a turnaround of the sector told Reuters, days before a new process to resolve stressed assets goes live.

Consolidation of India’s public-sector banks would represent a final step in rebuilding a financial system capable of underwriting credit growth and job-creating investment in Asia’s third-largest economy.

First, though, the state banks must cleanse their balance sheets.

 They accounted for 88 per cent of a pile of stressed loans that exceeded $138 billion in June, the legacy of a lending binge under the last government that has hobbled Prime Minister Narendra Modi’s growth agenda.

Vinod Rai, the veteran bureaucrat hired this year to head a new Banks Board Bureau, said a next step could be the merger of “two large Mumbai-based banks” that he declined to identify.

“Once that consolidation has taken place, in the second phase, we will put a weaker, smaller bank into this merged entity,” he said in an interview.

India- Indirect tax collections grow 25.9%, direct up by 8.95%

The indirect tax collections, which comprise central excise, service tax and customs, have shown a healthy growth of 25.9% till September 2016 at R4.08 lakh crore against the same period last year.

Till September, 52.5% of the budget estimates of indirect taxes for 2016-17 have been achieved, said a finance ministry statement.

Finance minister Arun Jaitley has pegged collection from indirect taxes in the current financial year at Rs 7.79 lakh crore.

The net central excise collections stood at R1.83 lakh crore during April-September, 2016 as compared to R1.25 lakh crore during the corresponding period in the previous year, a growth of 46.3%.

At the same time, net service tax collections during April-September, 2016 stood at R1,16,975 crore as compared to R95,780 crore during the corresponding period last year, a growth of 22.1%.

For customs, the net collection during April-September 2016 is recorded at R1.08 lakh crore as compared to R1.03 lakh crore during the same period in the previous Year, a growth of 4.8%.

India bad loans mountain grows, risks delaying bank clean-up

Stressed loans in India’s banking sector crossed $138 billion in June, central bank data reviewed by Reuters shows, an increase of nearly 15 percent in just six months that suggests a state clean-up effort will take longer and cost more than expected.

Fixing the mountain of bad debt weighing down India’s banks is vital for Prime Minister Narendra Modi’s government to revive weak credit and investment growth and put a faltering recovery in Asia’s third largest economy on a firmer footing.

India’s central bank has set a March deadline for banks to fully reveal problem loans on their books. When lenders disclose bad loans, they need to take writedowns that hit their bottom line and eat into equity.

The latest data obtained by Reuters through a right-to-information request showed stressed loans rose to 9.22 trillion rupees ($138.5 billion) as at end-June, from 8.06 trillion rupees ($121 billion) in December.

The end-December $121 billion figure has been cited by the government and bankers as the peak of stressed assets in the banking sector.

Stressed assets include both non-performing loans (NPLs) – defined as those that have not been serviced for 90 or more days – and restructured or rolled over loans, where banks have eased interest rates or the repayment period.

Ray Dalio Warns A 1% Rise In Yields Would Lead To Trillions In Losses

Last week, we shared with readers a fascinating presentation that Bridgewater’s Ray Dalio made to NY Fed staffers at the 40th Annual Central Banking Seminar held on Wednesday, October 5, 2016. In it, Dalio pointed out that thoughts which dared to question the economic orthodoxy, and which were once relegated to the fringe blogs, have become the norm, pointing out that it is no longer controversial to say that:

  • …this isn’t a normal business cycle and we are likely in an environment of abnormally slow growth
  • …the current tools of monetary policy will be a lot less effective going forward
  • …the risks are asymmetric to the downside
  • …investment returns will be very low going forward, and
  • …the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.

He further notes that the debt bubble which was not eliminated during the financial crisis of 2008, has since grown to staggering proportions, and notes that “the biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits.”

Alas, while the underlying symptoms are clear, that does not make the solution of the problem any easier. Quite the contrary. As Dalio further adds, “when we do our projections we see an intensifying financing squeeze emerging from a combination of slow income growth, low investment returns and an acceleration in liabilities coming due both because of the relatively high levels of debt and because of large pension and health care liabilities. The pension and health care liabilities that are coming due are much larger than the debt liabilities in most countries because of demographics – i.e., due to the baby-boom generation moving from working and paying taxes to getting their retirement and health care benefits.”

Here the Bridgewater head provides a simple explanation for why the system is unsustainable: debt is fundamentally a liability even though it is treated as an asset by those who “own” it. As a result, “holders of debt believe that they are holding an asset that they can sell for money to use to buy things, so they believe that they will have that spending power without having to work. Similarly, retirees expect that they will get the retirement and health care benefits that they were promised without working. So, all of these people expect to get a huge amount of spending power without producing anything. At the same time, workers expect to get spending power that is equal in value to what they are giving. They all can’t be satisfied.”

The IMF Sounds An Alarm As Global Debt Hits A Record $152 Trillion Or 225% Of World GDP

Another record for the history books.

In addition to reporting on the dangers facing global banks as a result of declining profits in the current low rate environment, today the IMF also released its latest Fiscal Monitor report which sounded a loud alarm when it revealed something disturbing: at 225 percent of world GDP, the global debt of the nonfinancial sector, comprising the general government, households, and nonfinancial firms, is currently at an all-time high of $152 trillion.

Add financial debt and you will need a far bigger chart.