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Sun, 25th June 2017

Anirudh Sethi Report

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Archives of “Bank” Tag

China’s $24 Trillion private wealth is twice the size of GDP

China’s private wealth swelled to 165 trillion yuan ($24 trillion) last year, about twice the size of its gross domestic product and six times the level it was a decade ago, new research showed on Wednesday.

The pool of private wealth in China will rise to 188 trillion yuan by the end of this year, according to a biennial report jointly launched by Bain & Co and China Merchants Bank. Its pace of growth, however, is expected to be the slowest in a decade at 14%, down from the peak between 2014 and 2016 when the compound annual growth rate was 21%.

 The number of high net worth Chinese with investable assets of at least 10 million yuan grew more than eight-fold to 1.6 million last year, up from 180,000 a decade ago, the report found. Those with at least 100 million yuan of assets also surged 12 times to 120,000 during the period.

“In short, about 400 Chinese multi-millionaires were made every day in the last decade,” said Wang Jing, general manager at China Merchants Bank’s private banking department. She described the growth of Chinese private wealth as “staggering” against the backdrop of a slowing economy and ongoing reforms to regulate wealth management products.

China’s economy expanded at 6.7% last year, its weakest pace for a quarter century, and is expected to slow further in the coming years.

RBI picks dozen for remedial steps

The RBI has trained its guns on a dozen bank accounts that are awash with bad loans for action under insolvency rules that could lead to the liquidation of the companies.

An internal committee of the Reserve Bank of India (RBI) has identified the 12 accounts that would be considered for resolution under Insolvency and Bankruptcy Code (IBC).

These accounts account for around 25 per cent of the gross non-performing assets (NPAs) of the banking system. Bad loans in the banking system are estimated at over Rs 8 lakh crore, meaning the NPAs in the 12 accounts are at over Rs 2 lakh crore.

The RBI had constituted an Internal Advisory Committee (IAC) comprising independent members of its board to advise it on cases that may come under the insolvency code.

This was part of an action plan of the central bank against bad loans under Banking Regulation (Amendment) Ordinance, 2017.

According to the ordinance, the RBI can issue directions to banks to initiate insolvency proceedings against defaulters.

Upcoming Week :Central banks in the spotlight

This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.

Here is what investors will be watching in the days ahead:

US Fed

The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.

There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.

UBS economists offered this to help read the tea leaves next week:

Indian Banks : Gross non-performing assets will increase to Rs 8.2- 8.5 lakh crore BY 2017-18

PSU banks will need Rs 90,000-crore of extra capital in the next two years to meet stringent global adequacy norms, much in excess of the Rs 20,000 crore kept for them by the government during this period, Moody’s Investors Service said today.

In a report on the health of Indian banking vis-à-vis the 11 state-owned banks that it rates, Moody’s said weak capitalisation levels would remain a key credit weakness for these 11 banks and added that they had limited ability to raise external capital.

“Capital infusions from the government remain the only viable source of external equity capital, because of the public sector banks’ low capital market valuations, which would likely to continue to deny them the option of raising fresh equity from the capital markets,” the agency noted.

Under the Indradhanush plan for bank recapitalisation, the Centre will infuse Rs 70,000 crore in PSU banks beginning 2015. Of this, the government has already infused Rs 50,000 crore in the past two years and the rest will be pumped in by the end of 2018-19.

According to the plan, the state-owned banks need to raise Rs 1.10 lakh crore from the markets, including follow-on public offers, to meet Basel-III capital adequacy norms, which kick in from March 2019.

According to Moody’s Indian affiliate, Icra, the asset quality outlook for the banking sector will remain weak. Gross non-performing assets (NPAs), or bad loans, will increase to Rs 8.2- 8.5 lakh crore (9.9-10.3 per cent of total advances) by the end of 2017-18 against Rs 7.65 lakh crore (9.5 per cent) at the end of March 2017.

“In our central scenario, we estimate that the 11 Moody’s-rated public sector banks will require external equity capital of about Rs 70,000-95,000 crore, or about $10.6-14.6 billion,” Moody’s vice-president and senior analyst Alka Anbarasu said.

The international rating agency added that the stock of impaired loans would increase during the horizon of this outlook, but at a slower pace versus the last two years.

Moody’s said it expected credit costs to stay broadly in line with the levels during the last fiscal but any material improvements in the banks’ profitability profiles over the next two years were unlikely.

Bad loans

Karthik Srinivasan, Icra group head, financial sector ratings, said fresh NPA generation was likely to come at 5.5 per cent for 2016-17 compared with 6 per cent in the previous year. Overall stressed assets for banks stood at around 16-17 per cent as on March 2017.

The recent Ordinance to amend the Banking Regulation Act of 1949 is a positive for banks.

Moody’s further said that its stable outlook for non-financial corporates over the next 12-18 months reflects the country’s sustained economic growth.

Japan’s central bank nearly doubles ETF holdings in one year

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.

 The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

Central Banks Now Own A Third Of The Entire $54 Trillion Global Bond Market

Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…

… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.

That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.

Moody’s downgrades Hong Kong after China ratings cut

Where China goes, so goes Hong Kong.

Moody’s has cut Hong Kong’s local and foreign currency ratings by a notch to A1 on Wednesday just hours after it downgraded its rating on China amid concerns over the country’s rising debt and slow pace of economic reforms.

In a statement, the US ratings agency cites Hong Kong’s exposure to the mainland for the move. It said:

The downgrade in Hong Kong’s rating reflects Moody’s view that credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland.

In the nearly 20 years since Hong Kong reverted back to Chinese rule, the economic and financial ties between the two have tightened considerably. As Moody’s noted:

Directly, China accounts for more than half Hong Kong’s exports of goods, three quarters of tourist arrivals and 40 per cent of exports of services in general. Indirectly, Hong Kong is a very open economy with exports, the vast proportion of which are re-exports, accounting for nearly 190 per cent of GDP. Combined with China’s rising share in world GDP and global trade, Hong Kong’s very high openness to global trade intensifies the effective economic links between Hong Kong and China.

Financial linkages between Hong Kong and China are broad in nature and large in the size of the assets involved. The Hong Kong banking sector’s exposure to mainland China increased further in the second half of last year. Total mainland-related lending rose to HKD3.6 trillion at the end of 2016, up 3.5 per cent compared with last June, while other non-bank exposures also increased by 11.4 per cent to HKD1.2 trillion.

MSCI to make decision on China A-share inclusion on June 20

Mark your calendars China watchers.

MSCI will on June 20 announce whether it would finally include China’s domestic A-shares in its global indices.

The US index provider last June delayed for a third straight year the A-shares’ inclusion into its benchmark $1.5tn emerging markets stock index, citing regulation worries and accessibility for global investors.

Ahead of this year’s decision, China has embarked on a series of new actions aimed at addressing these concerns. Its banking regulator has launched a “regulatory windstorm” while the central bank has made the first move to ease capital controls, providing much needed liquidity to the offshore renminbi market.

Meanwhile, BlackRock has for the first time publicly backed the inclusion of onshore stocks in MSCI’s indices and Chinese officials have even criticised dividend-dodging companies, dubbed “iron cockerels”, and promised extra scrutiny.

World Money: Five Hidden Signals From The IMF

Less than a month ago a handful of the world’s policy makers gathered in Washington at the International Monetary Fund (IMF), no surprising headlines were run – but an obscure meeting and a discreet report launched exclusive signals for the next global economic crisis.

The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary.  On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways.

The discussion revealed what global central banks are planning for a future crisis and how the IMF is orchestrating policy for financial bubbles, currency shocks and institutional failures.

Why the urgency from the financial elites?

In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”

“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”

Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar.

1. China Spars for the SDR Market

Emerging Markets :An Update

  • Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
  • Egypt declared a 3-month state of emergency after two deadly church attacks.
  • South Africa’s parliamentary no confidence vote has been delayed
  • Argentina central bank surprised markets with a 150 bp hike to 26.25%.
  • Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
 
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
 
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.