Thursday 5th May 2016
NEWS TICKER: MARKET ROUNDUP —Markets tanked today (almost everywhere bar the PRC) as economic data from China and an 18% lunge in profits at HSBC sapped market confidence. The bank reported an adjusted profit before tax of $5.4bn for the first quarter, down 18% on the same period last year. Citing challenging market conditions, the bank reported first quarter(Q1) pretax profit before adjustments of $6.1bn, down from $7.1bn in the first three months of 2015 but beating analysts’ forecasts of a pretax profit of $4.3bn, according to Reuters. In Hong Kong this morning the bank’s shares were up on the news, as expectations had been for much worse. Earnings per share came in at 20 cents, down from 26 cents per share in the same period last year. HSBC held its first-quarter dividend in line at 10 cents per share. In London HSBC fell 3.5p to 449p as the bank said it put in a "resilient" performance in difficult market conditions, with the entire investment banking sector suffering after stock markets tumbled at the start of 2016 amid an oil price rout. However, as we reported earlier today indexes across Europe paid the price of lower than expected manufacturing data from the Caixin/Markit Manufacturing Purchasing Managers' index (PMI), rather than Chinese bourses. The DAX fell 1.5% lower and the CAC40 dropped 1.1%. Commodity stocks were also on the back foot despite the price of oil rising 0.4% to 45.99 US dollars a barrel. Glencore ended the day down 7.5p to 155.5p, Rio Tinto fell 96.5p to 2205p and BHP Billiton slipped 34.8p to 897.4p – AQUISITION—M&A maven Cavendish Corporate Finance has advised bfinance on the investment in the company by private equity funds managed by Baird Capital. Current bfinance CEO David Vafai will continue to lead the consultancy in this next, exciting phase of its growth. He will be joined on the board by Andrew Ferguson, managing director at Baird Capital, and CFO Mark Brownlie, as directors. Also joining the board as chairman is Tim Trotter, who founded public relations group Ludgate, co-founded Citywire, the information service for the global fund management industry and is a non-executive chairman at a number of financial services and asset management related blue-chip companies. The deal with Baird follows a strong period of successes for bfinance. Recent high-profile mandates for bfinance include advising on a $1bn alternative beta strategy programme for a U.S. corporate pension plan, a USD 1.2bn private equity search for Swedish State pension fund AP7, and multiple searches across asset classes on behalf of Australian superannuation funds. The deal marks a strong start to the year for Cavendish. It follows shortly after the sale of Periproducts to Venture Life Plc, the sale of Gloucester Rugby club to new owner Martin St Quinton, the sale of B2B creative marketing agency Twogether to Next 15 Plc and the debt raise for Pets Corner following a highly successful 2015 during which the company completed over 20 deals –AIIB/ADB— In a shift in strategy the Asian Infrastructure Investment Bank has signed a financing memorandum of understanding (MoU) with the Asian Development Bank, the second partnership signed in the space of a few month by the challenger development bank. AIIB, set up to counter the ‘hegemony’ of Western dominated aid institutions, has been struggling to dispel its image as a rival to existing NGOs. The bank secured a similar arrangement with the World Bank during the International Monetary Fund-World Bank spring meetings in Washington last month. This MoU sets the stage for the banks to share funding costs for projects. The ADB said it is already in talks with the AIIB around ventures in the road and water sectors, the first of which is expected to be a 64-kilometre highway connecting two cities in Pakistan’s Punjab Province. - ASIAN TRADING SESSION - The Nikkei and Topix indexes took the brunt of risk off sentiment today as investors gave a distinct thumb down to last week’s decision by the Bank of Japan not to cut rates further. The Nikkei225 fell 7.41%, while the Topix went down 7.25% in a somewhat bloody trading session. Continuing with the pattern set down for most of this year, the yen by contrast continues to appreciate, touching at one point 105.81 again the dollar, the yen’s highest point for almost two years. The Bank of Japan in response rattled a few sabres, threatening to intervene should the yen appreciate further; but investors continued to test the yen’s upper limit. Yann Quelenn, market analyst at Swissquote noted this morning: “The yen has climbed 13% against the dollar since the start of the year and there a strong support lies at 105.23, which is now clearly on target.” The other story in the Asian session was the surprise move by the Reserve Bank of Australia to cut The Reserve Bank of Australia on Tuesday cut the cash rate to a record low of 1.75 per cent in a bid to head off falling prices and an economic downturn. Market commentators now expect a second cut before the end of the year, although some say the June quarter inflation figure, out in August, will determine the RBA's next move. The latest cut puts Australia firmly into the group of countries with an ultra-loose monetary programme, or should that be a noose around falling interest rates and bond yields. Reserve Bank governor Glenn Stevens said the decision was based on last week's surprisingly weak inflation figures. "Inflation has been quite low for some time and recent data were unexpectedly low," he said in a statement. The AUDUSD fell to 0.7572 from 0.7720 on the news, though the ASX All Ordinaries rose 1.94% on the day, with the S&P/ASX100 rising 2.24%. The index is now up 6.8% on the month, though up only 1.32% over the year. Aside from China and Australian indexes, boards across the region ran red for most of the session. The S&P BSE Senses was down 1.75%. The Kospi100 was also off by 1.50%, while in Singapore the Straits Times took a beating, losing 4.39% today, bringing it down 0.26% over the month and down 2.58% over the year. The Hang Seng also had a tough day, falling 3.68% today, though it is up by 0.87% over the month and down 5.65% over the year. In China, the Shanghai Composite was up 1.13% in trading today, though it is still down 0.56% over the month and down 15.44% over the year. The Shenzhen Composite had a better day, up 3.29%, and is up 1.45% over the month, but still down 16.45% on an annualised basis. The upbeat market sentiment was interesting, given that the Caixin Manufacturing PMI weakened to 49.4 in May from 49.7 in April, softer than market expectations and marking a 14th month of contraction; data that usually would have sent investors to the hills. Go figure. The data indicated that softness in labour markets and exports continue. Meantime, the central bank set the USDCNY mid-point at 6.4565. There is still mixed data emanating from China. Bank of America Merrill Lynch’s latest China: An Equity Strategist’s Diary research report highlights the nugget that YTD 241 non-government bond issuances have been cancelled or postponed, 120 of which were deferred in April, compared with 315 across the whole of last year. Some 709 bonds worth a total of RMB1.04trn came to market in last month (an 85% success rate). However, says the bank, if the bond market corrects sharply, sectors that rely most on the credit markets to support their day-to-day activities (including developers, banks, brokers, industrials and utilities) could suffer disproportionately as their reliance on credit has grown significantly during the past six months. Among the 120 bond issues affected in April, 70% were from industrials (50 bonds), financials (18) and materials (17). The bank also says a perceived implicit government guarantee on bonds and other moral hazards in the shadow banking sector, including wealth management products, is largely behind the mispricing in corporate credit. With the country’s overall default risk perceived to be low, bonds have become a cheap source of long-term financing for corporations compared to other traditional credit products. At the end of April, an AA+ rated five-year bond yielded 4.3% while the benchmark rate for a one-year to five-year loan was 4.75%. A five-year AA- rated bond offered 6.6%. The overnight repo rate annualised was 2%; seven-day repo, 2.5%; six-month discounted bill, 3%; and the one-year benchmark loan rate came in at 4.35%. Alternative sources of finance cost between 12% and 15% for P2P; 8% for a two-year trust; 19% for private lending in Wenzhou; and 18% to 20% for offline wealth management companies. BAML says a sharp uptick in the number of corporate defaults, coupled with the increasing number of cancelled or postponed bond issuances, shows that the market is starting to reprice risk although this process could last until the end this year. The peak maturing period is April/May with between RMB80bn and RMB790bn of bonds maturing over the period. From June onwards maturities fall to around RMB600bn a month for the rest of the year—SAUDI ARABIA—In another move to liberalise the Saudi Arabian capital markets, the Capital Market Authority (CMA) has approved a request by the Saudi bourse to relax settlement cycles for investors, making the country’s inclusion in the MSCI Emerging Markets Index more likely from next year. It has also announced an overhaul of foreign ownership regulations for listed companies, as it seeks to encourage participation by international institutional investors in a wide ranging programme of privatisations. The CMA announced today that it was widening the definition of Qualified Financial Investors (QFI) to include financial institutions such as sovereign wealth funds and university endowments as well as banks. The regulator says the minimum value of assets under management for QFIs will be reduced to SAR3.75bn (about $700m), compared with the current level of SAR18.75bn ($3.5bn). From the end of June 2017, QFIs will be able to own up to 49% of a company’s capital, “unless company’s bylaws or any other regulation provides for foreign ownership to be limited to a lower percentage". Individual QFIs will be able to own up to 10% of a company’s share capital, compared with the current level of 5%. Foreign investment is now an important element in the government’s wide-ranging economic diversification program, which will also involve partial privatisation of some of the country’s key state owned firms. Over the last few weeks Saudi has signalled its intention to list a 5% stake in Saudi Aramco, a move that could raise in excess of $100bn. The opening of the Saudi stock exchange, the GCC’s largest, to QFIs in June of last year was hailed as a milestone at the time, but has so far failed to attract large scale foreign investment into Saudi equities. Licensed QFIs to date include Blackrock, Ashmore Group, Citigroup and HSBC. However, up to now the firms, in combination own less than 0.1% of the Tawadul’s market capitalisation—STOCK EXCHANGE NEWS—Börse Stuttgart reports turnover in excess of €6.7bn in April 2016. The trading volume was almost on a par with the previous month. Securitised derivatives accounted for the largest share of the turnover. The trading volume in this asset class was more than €2.7bn. Leverage products contributed more than €1.4bn to the total turnover, while the trading volume of investment products was more than €1.2bn. At more than €1.4bn, turnover from equity trading at Börse Stuttgart was around 9% higher than in the previous month. German equities accounted for more than €1.1bn of the total turnover – an increase of more than 7% in comparison with March - while international equities contributed about €299m. Trading in debt instruments generated turnover of around €1.6bn in April, with trading volumes almost as high as in the previous month. Corporate bonds accounted for the largest share of the turnover, with approximately €918m.The order book turnover in exchange-traded products (ETPs) was more than €916m in April. Trading in investment fund units generated turnover of €8m —ASSET MANAGEMENT —Aberdeen Asset Management says pre-tax profits have fallen to £98.8m in the six months to March 31st, down from £185.4m over the same period a year earlier after investors have backed off from emerging markets. The asset management has been affected by changes in end investor asset allocation choices as fund outflows over the period amounted to £38.2bn (£16.7bn on a net basis says the asset management maven); however, the pace of outflows has slowed, compared with the previous six months, when investors withdrew £41.7bn (£22.6bn in net basis). Aberdeen has £292.8bn worth of assets under management, down from £330.6bn a year ago, although it marked an improvement on the £283.7bn at its financial year-end. Despite the challenges, Aberdeen has been active in turning around its fortunes, promising to cut annual costs by £70m by 2017 and has diversified its business proposition by a series of acquisitions, including the takeover of hedge-fund manager Arden, risk-graded portfolio provider Parmenion, and fund-of-funds investment manager—CORPORATE NEWS—Advance Utilico Emerging Markets Ltd says it has has extended its £50m senior secured multi-currency revolving credit facility with Scotiabank for a further two years to April 2018. Shares in Utilico are down 0.1% to 176.75 pence—SPANISH ELECTIONS – Looks like Spain is heading for another hung government. News agency The Spain Report says the latest poll of polls data from Electograph shows only minor changes compared to the results of the last general election on December 20th last year. The order of the parties remains the same: PP, PSOE, Podemos, Ciudadanos and United Left. No party is currently forecast to be close to an overall majority, of 176 out of 350 seats in Congress. Over the past four months, polls have at times suggested a slight shift towards a right-wing PP-Ciudadanos coalition and, in the latest round, the possibility that a joint Podemos-United Left electoral list might overtake the Spanish Socialist Party (PSOE) as the reference for the Spanish left, says the news agency—POLITICAL RISK—maven Red24 advises professionals to avoid visiting Kabul. The firm reports that yesterday, the US Embassy, issued a statement warning of an increased threat of attacks in the Taleban’s spring offensive (Operation Omari) against Afghanistan's government and its Western-backed allies, including the US, on April 12th. Crowded public areas, police and military interests, foreign embassies, foreign guest houses, hotels and government buildings/sites have been listed as probable targets; no information was provided regarding the timing of any planned attacks. Red24 says Taleban attacks in Afghanistan generally increase during the spring and summer months, which generally extend until September, when warmer weather allows militants greater access through usually snowed-in mountain passes from their traditional strongholds along the mountainous Afghanistan-Pakistan border. “Given the extreme and ongoing threat of terrorism in Afghanistan, such warnings by government authorities are taken seriously and regularly result in additional security force deployments. The warning is particularly pertinent given the attacks carried out in the capital on 19 April, following the launch of the offensive, in which at least 24 people were killed as a result of a car bomb attack, in the vicinity of several government ministries and the US Embassy in the Pul-e-Mahmood Khan and Shahr-E-Naw areas. Further incidents are expected to persist,” says the firm in an alert issued today.

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Hisham Ezz Al-Arab, CEO, CIB. Hisham Ezz Al-Arab, CEO, CIB. Photograph kindly supplied by CIB, November 2011.

20-20: CIB-Captain courageous

Thursday, 15 December 2011
20-20: CIB-Captain courageous CIB was borne in a cross-fire hurricane this year as the Arab Spring found form in Egypt with all the gusto of a force ten gale.  Despite the pouring rain of rubber bullets, tear gas and dissent, CIB kept at its job.  Like many chief executives in high-strung/high growth markets, Hisham Ezz Al-Arab, CIB’s chief executive officer, walks a tightrope between high finance and high politics.  Right now, it is a brave fellow who puts his head above the parapet in Cairo. In a heartfelt polemic on the hopes for change, Ezz Al-Arab shows how the staff of CIB are made of stern stuff. http://www.ftseglobalmarkets.com/media/k2/items/cache/c925b42be0bb1a72b320fe10c797fed2_XL.jpg

CIB was borne in a cross-fire hurricane this year as the Arab Spring found form in Egypt with all the gusto of a force ten gale.  Despite the pouring rain of rubber bullets, tear gas and dissent, CIB kept at its job.  Like many chief executives in high-strung/high growth markets, Hisham Ezz Al-Arab, CIB’s chief executive officer, walks a tightrope between high finance and high politics.  Right now, it is a brave fellow who puts his head above the parapet in Cairo. In a heartfelt polemic on the hopes for change, Ezz Al-Arab shows how the staff of CIB are made of stern stuff.

On February 11th 2011 Hisham Ezz Al-Arab, CIB’s chief executive officer was being interviewed by Bloomberg’s Margaret Brennan. As the interview went to air, the news came that President Hosni Mubarak had resigned. “Four days later at our board meeting we all agreed: it would be a rollercoaster ride so everyone would have to fasten their seat belt and enjoy it,” says Ezz Al Arab. “In practice, what this meant was that whatever was happening outside our doors, we had to remain focused. That focus kept us sane, it kept us in business and all the success we have enjoyed this year is build on that clear focus,” he adds.

The current troubles that blow through Egypt are not of the making of the so-called Arab Spring, suggests Ezz Al Arab. “It goes much further back, to before 2009 or even 2008. In the event, we firmly believe that change it is a good thing and forces us, as a country, to ask important questions of ourselves. Of course, in the run up to elections, there are and will be a lot of political games; and we reckon that it will be a good four to five years before everything settles down and we finally move along the right track. In the interim, we will continue to provide that focus to our clients and to our staff.”



For Ezz Al Arab, the strength to carry on as normal in the midst of apparent chaos is a mindset; and one that he has worked hard to instil in the day to day working culture of CIB “We are the only bank in Egypt where staff have not gone on strike.  We work hard to align our business culture both with our shareholders and our staff; we look after them as we would a family. In consequence we think the culture here at the bank is healthy and very strong,” he says. He explains that this cohesion has been built up over years and has involved some degree of ruthlessness.  “Most failures are down to having the wrong people in place and you are shy of changing them; we have no such qualms at the bank.”

All business sectors in Egypt have been affected by the aftermath of the collapse of former president Hosni Mubarak’s regime, particularly the country’s banking sector, which in recent years has worked hard to improve liquidity, introduce tighter monetary regulations and adopt various reforms. Although in general terms Egypt remains under-banked (only around 15% of the population have bank accounts); over the last decade the sector has undergone substantial consolidation, and the number of banks has decreased from 57 to 39. Both private and public banks were closed during the 18-day uprising that toppled Mubarak, then closed again for a week due to workers’ protests demanding wage parity. CIB was the exception.

Moreover, at the height of the crisis, on February 1st, CIB staff came into work to ensure that customer salaries were processed as normal. “We brought in our own security companies, to ensure that people needing cash could get it. The staff came in and secured our buildings over the worst of the crisis; it wasn’t a drill, but one of the best stress tests we could have had. It showed we could operate in the most uncertain of times. I am proud to say that the staff had the courage to do it.”

The crisis has been tough on the bank as most lending is for corporate business; with mortgages and car loans still a discrete business. “Most of this business is based around payroll and rolls through cards and personal loans,” says Ezz Al Arab, adding that: “the business was launched back in 2009. After the shutdown, the business came through at expected limits; so we cannot complain. The corporate side is a very deep culture at the bank and goes back to our Chase Manhattan days. We are still strongly committed to the cash flow based credit models that we adopted decades ago, and most players in the region followed later on.”

This year the banking segment has also had to work towards adopting Basel III requirements which, in practice, means banks have had to adopt broader measures of risk and demonstrate that they adhere to sound risk management practices that are publicly disclosed.  Basel III also solidifies the definition of capital and calls for stronger conditions for managing liquidity. The banking segment was set to conclude the final phase by this summer, but further reforms may be delayed due to the current circumstances. Even so, several banks continue to raise their capital reserves. What this means explains Ezz Al-Arab is capital adequacy running at 15%, double that of banks in the United States or Europe. We also run a loans/deposit ratio of around 50%, giving us the opportunity to grow. The financial strength of the bank surpasses Basel requirements; but we continue to be penalised by country ceilings.

Whatever the outcome of impending elections in Egypt in mid December 2011 (it appears to be a closing tie between the Muslim Brotherhood and the rising Noor Party), the challenge for any incoming government will be to integrate the official and the grey economy, tackle political corruption and lay the groundwork for economic prosperity. If the country is lucky, it will go down a similar route to Turkey where an Islamic governing party adheres to pragmatic capitalist principles; with all the attendant opportunities that this will provide for the Egyptian banking segment. “If the government insists on collections and paying of duties and the processing of these payments electronically, then obviously the banks will benefit,” explains Ezz Al Arab. “Traffic fines, car licences, etc all have to go through the banks; at the same time it will cut petty corruption and the grey economy. In Egypt the grey economy is at least equal to the GDP; in some ways it is good, because it employs the sometimes unemployable. In other ways it is bad, as the government misses out on substantial tax revenue.”

For Ezz Al Arab, the business of integrating political changes, of lessening corruption and creating conditions for growth centres around trust: “which must operate at every level of society,” he states.

For the time being CIB is focusing on doing more of the same:  “We will have opened five branches by the end of December in new urban areas and we are planning for more branches in 2012, with further growth on the loan book and deposits,” says Ezz Al Arab.  Up to now the policy has been working; the bank claims a growth of 10% in market share overall, backed up by growth of 8.4% in the bank’s loan book and 7.19% growth in deposits up to September 1st, despite  the introduction of some impairments which impacted on overall profits for the year. “The important thing in this regard, is that the bank did it by the book. That was important for us,” he says.

Ezz Al Arab, remains optimistic about the long term: “Our focus is Egypt and we are sure that political changes will bring the accountability that the market needs and we believe this will all be in place within the next three to four years. When you are accountable it changes everything; because everything is done properly, by the book and business is about what you know, rather than who you know. That has to be a good thing.”

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