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Mon, 20th February 2017

Anirudh Sethi Report

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Archives of “Bank” Tag

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

Rs 6.78 lakh cr remonetised, Rs 9.1 lakh cr in circulation: Govt

In the ongoing process of remonetisation, banknotes worth Rs 6.78 lakh crore returned to the formal banking system between November 10 and January 13, taking the total currency in circulation to Rs 9.1 lakh crore, the government said on Tuesday.

“Remonetisation is taking place ceaselessly at a fast pace. Between November 10, 2016 and January 13, 2017, the notes in circulation have increased by Rs 6.78 lakh crore, thereby taking the total notes in circulation to Rs 9.1 lakh crore,” Minister of State for Finance Arjun Ram Meghwal said in a written reply in Rajya Sabha.

He was answering question on estimated time period for replacing old high denomination notes with new currency.

Supplies are even being effected by air with direct dispatches to some centres to cut down on delivery time, he added.

In a separate reply, when asked how much old Rs 500 and Rs 1,000 notes (SBNs) were deposited/exchanged upon being de-legalised, Meghwal said specified bank notes (SBNs) worth Rs 12.44 lakh crore were returned to currency chests of RBI by December 10, 2016.

World’s Largest Actively Managed-Bond Fund Dumps “Excessively Risky” Eurozone Bank Debt

Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that “the time has come to leave the dance floor”, noting that “corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle.” Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are “excessively risky.”

In an interview with the FT, Rivelle said the company began to reduce its exposure to debt issued by eurozone lenders following the UK’s vote to leave the EU last June. In the first half of last year TCW, which oversees $160bn in fixed income strategies, had around $2bn invested in European bank debt. This has fallen to less than $500m since the Brexit vote, most of it in UK banks.

Rivelle, who previously was a bond fund manager at PIMCO, said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1 trilion. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue. Rivelle said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”

Continuing his bearish bent, Rivelle added that there is a 50% likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.

Deutsche Bank Takes Out Full-Page Ad To Apologize For Its Market-Rigging Misconduct

Deutsche Bank took out full-page ads in Germany’s Frankfurter Allgemeine Zeitung and Sueddeutsche Zeitung on Saturday, in which the country’s biggest lender apologized for (getting caught) engaging in market manipulation and misconduct that has cost the company billions. In the ad, signed by CEO John Cryan on behalf of the bank’s top management,the bank said its past conduct “not only cost us money, but also our reputation and trust.

The ad said “we in the management committee and bank leadership as a whole will do everything in our power to keep such cases from happening again.”

Emerging Markets :An Update

In the EM equity space as measured by MSCI, Turkey (+5.7%), Colombia (+2.5%), and Mexico (+2.4%) have outperformed this week, while Qatar (-4.2%), UAE (-3.8%), and the Philippines (-1.6%) have underperformed.  To put this in better context, MSCI EM rose 0.6% this week while MSCI DM was flat.

In the EM local currency bond space, Brazil (10-year yield -28 bp), Turkey (-20 bp), and Russia (-12 bp) have outperformed this week, while Taiwan (10-year yield +6 bp), Thailand (+6 bp), and Hungary (+5 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 6 bp this week to 2.43%.
 
In the EM FX space, TRY (+4.6% vs. USD), COP (+3.0% vs. USD), and MXN (+2.8% vs. USD) have outperformed this week, while CZK (flat vs. EUR), MYR (+0.1%% vs. USD), and PHP (+0.1% vs. USD) have underperformed.
 
Philippine Environment Department suspended 5 mines and closed 21 after a nationwide audit. Environment Secretary Gina Lopez said that the moves were made to enforce environmental standards.   She added that the mines closed account for nearly half of the nation’s nickel output, which itself accounts for nearly a quarter of global output.
The Turkish central bank raised its end-2017 forecast from 6.5% to 8% due largely to the weak lira.  It said that the 5% target is unlikely to be met until 2019.  January CPI was reported at a much higher than expected 9.22% y/y.  The central bank refrained last month from hiking the benchmark rate whilst instead conducting backdoor tightening.  
Central Bank of Turkey finally got around to releasing the schedule of its MPC meetings this year.  We don’t know if they ever announced it, but the number of meetings have been reduced from 12 last year to 8 this year.  The next meeting is March 16.  Whilst a lot of banks have changed the frequency of policy meetings, it’s hard not to feel that this is just another move away from transparency under Erdogan.

Overnight US Market :Dow closes back above 20,000, Nasdaq hits record

Banks and other financial companies led stocks higher on Wall Street Friday as President Trump prepares to scale back financial industry regulations. Buyers were also encouraged by a pickup in hiring in January. Small-company stocks, which stand to benefit more than others from stronger economic growth, make sharp gains.

The Dow Jones industrial average jumped back above the 20,000 level as the blue-chip index rose 186.55 points, or 0.9%, to close at 20,071.46. The Standard & Poor’s 500 index gained 16.57, or 0.7%, to 2297.43, moving within one point of its record closing high of 2298.37. The Nasdaq composite index added 30.57, or 0.5%, to set a new record closing high of 5666.77.

The Russell 2000 index of smaller-company stocks climbed 1.5% to 1,377.84. Smaller, domestically-focused companies may have more to gain than their larger peers from faster growth in the U.S. The Russell made large gains at the end of 2016 based on those hopes.

The stock market rally kicked off early after the government reported that U.S. employers added 227,000 jobs in January, higher than last year’s average monthly gain of 187,000 and a sign that President Donald Trump has inherited a robust job market. The unemployment rate ticked up to a low 4.8% from 4.7% in December, but for a good reason: More people started looking for work. The percentage of adults working or looking for jobs increased to its highest level since September.

Financial firms rose after President Donald Trump took his first steps aimed at scaling back regulations on the industry. He signed an order that directs the Treasury Secretary to look for potential changes to the Dodd-Frank law, which reshaped financial regulations after the 2008-09 financial crisis and created the Consumer Financial Protection Bureau.

The order doesn’t have any immediate impact, but suggests Trump is intent on reducing regulations, which could boost profits for financial companies and banks.

Dow components Visa (V) and Goldman Sachs (GS) jumped 4.6%, JPMorgan Chase (JPM) added 3.1% and American Express (AXP) gained 2%. Smaller banks, which could find it easier to lend money if regulations are cut, also traded higher.

Next Week -Watch For Fed, Apple results, BoE, US jobs

With President Donald Trump’s litany of executive orders grabbing the limelight, investors turn their attention back to central banks and economic data next week.

Here’s what to watch in the coming days.

Federal Reserve

Economists widely expect the central bank will leave interest rates unchanged, noting that the absence of a press conference with Fed chair Janet Yellen leaves little room for major shifts in policy. “The February FOMC meeting should come and go with little market implications,” Tom Porcelli, economist at RBC Capital Markets, said. “The Fed is likely to continue to strike a positive tone on the economy and they may upgrade their inflation characterization toward a slightly more hawkish slant in the wake of headline CPI now breaching 2%.”

Central banks

Meanwhile, the Bank of Japan’s meeting next week marks the one-year anniversary of its adoption of negative interest rate policy. The central bank is not expected to change its policy but it will provide updates on economic growth and inflation.

“Next week’s BoJ meeting should reveal a resolute central bank in its yield curve control framework,” Mazen Issa at TD Securities, said. “We expect the BoJ to be side-lined on all fronts. Speculative ‘taper talk’ is premature though we think this dynamic will need to be reassessed in the coming months.”

Elsewhere, the Bank of England is also expected to leave policy unchanged and update its forecasts as it unveils the inflation report. Economists expect the BoE to maintain a neutral stance on policy.

Brazil slashes rates by 75bps to 13% in surprise move

Don’t anyone accuse Brazil’s central bank of not being bold.

In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November

In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.

The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.

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.