Archive for the ‘banking’ Category

ChiNext launch poses problems as well as opportunities

MARKETS-CHINA-STOCKS-RECORDThis week, China will be launching a ground breaking new secondary market & trading platform that hopes to help smaller technology companies attract investment in domestic IPOs.

Small & Medium Sized Enterprises (SME’s), are the mainstay of the Chinese economy, as they provide the largest employment base as China moves towards a more enterprise based economy. However, smaller companies have found it difficult to raise funding, as the large commercial banks concentrate on state owned enterprises.

Shenzen based ChiNext, which is being hailed as a Nasdaq style trading board will begin trading on Friday 30th October in the hope that traded entities will be able to take advantage of excessive liquidity, expecially in retail investment markets. It is believed that investors will be attracted to new opportunities to stake a claim in up & coming tech startups, but also by the more relaxed trading environment, as companies listed on ChiNext will not face the Byzantine rules that are applied to A & B class share issues in Shanghai.

“The launch of ChiNext represents a milestone in the development of China’s financial markets and is an important part of the government’s plans to boost support for small and medium-sized firms,” said Jing Ulrich, Managing Director of China equities at JP Morgan, Hong Kong. “The board will provide an additional source of financing for younger companies while broadening the options available to investors.”

More importantly, it is expected that ChiNext will also draw in private equity & venture capital firms, which are critical to helping startups gain a foothold in global markets. According to Jackson Wong from Tanrich Securities, these investment vehicles will be more likely to take part, since they have more routes to cash out on their investments, with an avid pool of retail investors ready to speculate.

“The launch of the growth enterprise board is an important step towards implementing the national strategy on promoting innovation,” Shang Fulin, chairman of the China Securities Regulatory Commission, said last week. The first 28 companies to list on the board, ranging from software to medical equipment makers, have raised 16 billion yuan (US$2.3 billion) in their initial public offerings — more than double initial forecasts.

Well known China investor Jim Rogers (he of the dickie bow) according to this report from CCTV is watching the new bourse with great interest, although he hasn’t invested in any of the companies that will IPO this week, any move he makes in the near future is bound to be followed by Sinophile investors

So far, more than 9 million people have opened  trading accounts with the ChiNext platform, fuelling fears that there may be some price fluctuations in the offing. According to, the average price-earnings ratio for 28 companies  due to list on Friday is 56, which is a hefty premium on the average 25 encountered on comparable listings on the Shanghai A list.

Wang Yiwen, GM of Shanghai Deding Investment Management  said, “The IPO prices for those firms have been set very high. This will cause pricing and trading issues for the secondary market. Take the SME board at the A-share market as an example. When the SME board starting trading in June 2004, 8 firms got listed. Their share prices all opened and ended higher on that day. But prices soon started declining after 5 to 10 trading days, with some losing nearly half their values.”

So it would seem that we will see some initial decay, but all in all, this is an exciting move for China’s retail investors individually & global investors as a whole. Hopefully ChiNext will give some small domestic companies a financial springboard which will allow thenm to accelerate growth before performing secondaries in Hong Kong & on the NASDAQ & NYSE in the future.

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Growth in Russian economy, but no champagne corks yet

russian economyRussia’s economy may have expanded as much as 4% in the last quarter of 2009 following a timid return to growth in the third quarter, according to Deputy Economy Minister Andrei Klepach speaking at a conference in Moscow last week.

The economy may show “quite strong growth” of between 3% & 4% in the fourth quarter from the previous three months, Klepach said. This is an interesting claim, and doubly so given that Klepach has been quite cautious so far this year in his claims. Evidently the rising price of oil and the return of some financial flows into Russia is firing up optimism.

GDP expanded 0.6 percent in the third quarter as compared to the second quarter according to Economy Ministry data out this week. Whilst the economy also grew 0.5%  between August and September, with month-on-month growth being due to a “good grain harvest,” increased meat production and an improvement in manufacturing output, the Economy Ministry said.

Nonetheless the economy still managed to register an annual decline of 9.4%, compared with a 10.9%  record annual contraction in the second quarter.

Certainly foreign investment into Russia is on the rebound. On Oct. 19th Klepach predicted the country may see a small capital inflow this month, and no net outflow in the fourth quarter. This compares with a net capital outflow of $31.5 billion in the third quarter. In September, the net outflow was $6 billion, down from $16 billion in July. This indicates that foreign investors are returning to Russia’s capital markets, while Russian companies and banks are increasingly able to access international markets. However,  this improvement isn’t necessarily great cause for celebration. The increase in foreign investment is largely being driven by bank lending and portfolio investment, which can easily go into reverse.

This must most certainly be one of the reasons behind Russia’s central bank recent decision to lower key interest rates by half a percentage point for the second time in a month, in a bid to both stimulate lending & also to stem the inflow of funds & the rise in the value of the ruble which is making the work of restoring competitiveness to the manufactured sector all the more difficult.

Six million Russians were added to the government’s official poverty count in the first quarter. By the end of 2009, 17.4% of the population or 24.6 million people will be living beneath the subsistence level of $185 per month, almost 5% more than before crisis, according to World Bank estimates. Unicredit analysts forecast that the number of Russians with disposable incomes of more than $1,000 per month will fall 48% this year to about 13.6 million, or roughly 10% of the population.

Russia’s consumer prices were flat in August, the lowest monthly reading in four years, but annual inflation was still running at 11.6%. Producer prices, on the other hand, are falling fast, and declined an annual 10.8 percent in August, compared with a record 12.3 percent in July. Today’s decision follows the announcement earlier this month that the Russian economy suffered a record economic contraction in the second three months of the year and refelect the growing recognition that the country now faces a painfully slow recovery. Just how painful things might become will form the subject matter of this report.

The full report from Bank Rosii can be accessed here : Country Briefing Report

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Positive figures from Redecard will push Brazilian retail bank shares

redecardAs we have discussed in previous articles, Brazil’s retail banking sector has been enjoying a buoyant 2009 so far. This would seem set to continue as payment card processor Redecard posts an 18% jump in financial volumes.

This should be seen as a positive for Itaú Unibanco (NYSE: ITUB), which controls Redecard, as net income for the third quarter rose to BR$333M ($195M), with financial transactions across the payment platform registering BR$ 24.7Bn ($14.52Bn) & more interestingly, the debit card side rising in step by 17% to BR$12.2Bn ($7.13Bn).

Although there is general negativity on global credit card companies, particularly in Western economies, Brazil’s nascent credit sector has benefitted from a wave of bank consolidation over the last 18 months, the strength of the real versus the US dollar & one of the strongest economies to exit the finiancial crisis. Earlier this year, Visa affiliate VisaNet was the star IPO on the BOVESPA, with the launch being hugely oversubscribed by both retail & institutional investors, raising a record of $4.5Bn.

“We think the results were solid and highlight the strength of the credit and debit card markets,” reported Deutsche Bank which keeps a buy rating on Redecard. “While regulation remains a key risk, we think that it is already priced in.”

For Redecard, it is also very much a case of being seen as a Brazilian brand, which seems to be helping it’s positioning against VisaNet, which although no longer owned by Visa, retains the association. Redecard has the benefit of being able to position itself as a multi-brand entity & is more popular with Brazilian retail customers, especially in the growing debit card sector, whilst VisaNet is to some extent still regarded as a premium brand.

So, short term one-up for ITUB & we expect to see shares taking a ride higher over the next few days. VisaNet reports later this week (October 28th), so it will be interesting to see if Bradesco will be able to catch the same sentiment wave.

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FDI growth & stable banking sector in the Phillipines

phillipine national bankThe Philippines boasts one of the few banking sectors around the world to have evaded many of the consequences of the US-led financial turmoil. Certainly much is owed to lessons learned in the form of strong monetary and fiscal policy reforms after the Asian financial crisis in 1997-98. Relatively conservative banking practices also played a significant role in sheltering the country’s finances during what has proven to be one of the most siginificant economic downturns in recent history.

The overall risk management framework of the banking industry has improved greatly, thanks to sensible banking supervision and monetary guidance. Reforms initiated by the country’s central bank, Bangko Sentral ng Pilipinas (BSP), have created solid fundamentals that are currently underpinning the banking sector today. The BSP’s adoption and implementation of Basel II in July 2007 was a significant step in ensuring that the Philippines’ banking sector is in line with international standards.

Sanjiv Vohra, the country officer of Citibank, told OBG, “There is certainly a correlation between the Asian countries that were impacted by the Asian crisis and those that have managed to limit the effects of the current financial turmoil. Those countries, such as the Philippines, that were affected in 1997-98 have generally been able to implement the necessary reforms to withstand the current crisis.”

In fact, today’s average capital adequacy ratios (CARs) among banks are pushing close to 15%, well above the international standard of 8%. Asset quality ratios also performed well in 2008, as non-performing loans (NPLs) fell below 5% of total assets last year.

Despite the solid progress made in the financial world, other sectors of the Philippine economy, particularly those heavily reliant on foreign demand, such as the manufacturing of semiconductors, have been caught up in the global economic slowdown. The decrease in activity in these sectors is expected to feed through to the banking sector.

Nevertheless, in recognition of its stability, especially within the financial arena, Moody’s Investors Service has upgraded the Philippines credit rating from B to Ba3 for the first time in over four years in late July. In a statement to the press Moody’s executive vice-president, Thomas Byrne, said, “The upgrade was prompted by the relatively high degree of resiliency exhibited by both the country’s financial system and external payments position in the face of the global financial and economic crises.”

Indeed, liquidity in the country has reached a new high as foreign currency reserves have peaked at $39.6bn, while some economies are suffering from declining foreign capital.

Headline inflation, which peaked just 12 months ago at 12.3%, dropped to a record low of 0.2% in July, bringing the average of the first seven months of 2009 to 4.3%, as increases in prices of commodities have slowed recently. The BSP predicts an annual inflation rate between 2.5% and 4.5% in 2009 and 3.5% and 5.5% in 2010.

The dramatic decrease in inflation over the past year has provided the BSP with adequate room for monetary policy easing. The crucial inter-bank lending rate is currently at an all-time low of 4%, having been decreased six times since December 2008.

Responding to questions from local press, the governor of the BSP, Armando Tetangco Jr, said, “We believe our current stance remains appropriate. Nevertheless, we are closely monitoring developments, particularly the firming of global demand to check for any price press build-ups. We will then make adjustments to our stance as needed.”

Perhaps one of the most positive signs of a return to substantial growth is the fact that foreign direct investment (FDI) in the Philippines, which dropped dramatically by 77% in 2008, has posted an 86% increase in the first seven months of 2009, reaching just over $1bn in FDI, according to the BSP. Tetangco later hinted at the emergence of some positive signals, stating, “The emerging signs of stabilisation of global financial markets and economic conditions are expected to encourage the gradual return of capital flows to Asia. With the ongoing realignment in risk perceptions, flows to emerging economies, particularly those with sound macroeconomic policy and good growth prospects, are expected to improve in the second half of 2009 and in 2010.”

Despite the current stability in the sector, some experts have observed a large number of relatively weak small and medium-sized banks in the industry. Consolidation within the sector has slowed due to the current economic climate and it is not likely to see any major movements within the top tier of the banking sector in the remainder of the year. The merger between Philippine National Bank and Allied Bank, which was due to take place in 2008, appears to have stalled again and likely won’t take place for another six to nine months. For its part the BSP has strongly encouraged mergers and acquisitions in an effort to strengthen efficiencies within the sector. Typically mergers are subject to regulatory penalties, which the Monetary Board has been willing to waive if the merging banks are able to prove substantial friction costs.

Although the financial industry of the Philippines remains strong, its overall economic performance continues to be called into question after posting a surprisingly low first quarter of just 0.4% growth. The slow economic growth of the country has created an air of caution among bankers as they have seen some adverse affects on profit margins. However, the financial stability of the country, combined with the resiliency of the economy will certainly bode well for the country in 2010.

Original editorial : MyStockVoice

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