Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Archive for 6. April 2019

Capitalism Gone Wild

Posted by hkarner - 6. April 2019

By John Mauldin

April 5, 2019

Unwise Investment
Zombie Companies
Gummed-Up Economy
Uncreative Destruction
The Drive for Scale
Helicopter Governments

Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.

In addition to when it will happen, there’s also the question of how deep the next recession will be. A shallow downturn wouldn’t be fun, but compared to the last one might feel relatively refreshing.

Alas, I don’t think we will be that lucky. I think the opposite: The next recession will be deeper, longer and far more painful to many more people than your average recession, and could persist as long as the last one. That is because the next recession in all likelihood will be truly global. If you sailed through 2007–2009 without your lifestyle changing, I wouldn’t assume it will happen that way again.

Ironically, but not surprisingly, it will be the response to the last recession that makes the next one so much worse. Part of the reason is that investors once again “learned” that if you simply stay the course, the market will get you back to where you were and more. The massive move into low-fee index investing instead of active management will make the next recession more painful. Den Rest des Beitrags lesen »

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Google and the ethics of business in China

Posted by hkarner - 6. April 2019

Date: 04-04-2019
Source: The Economist: Schumpeter

For American firms, it feels like a Chinese burn

Anyone who has suffered a Chinese burn as a child will remember the pain when two hands grip the forearm and twist the skin in opposite directions. Americans doing business in China know the feeling well. The growing strategic rivalry between the two superpowers is putting pressure on American businesses and investors in two ways. One grip on the forearm is that of the American government, which is increasing scrutiny of American firms operating in China on national-security and human-rights grounds. The other is that of China’s Communist regime, which is attempting to force companies in China, including foreign ones, to bend to its rules. At worst, this means pushing them to assist China’s armed forces and its police state. That presents firms with a big ethical quandary.

The predicament is unprecedented. During the cold war business was largely untroubled by superpower rivalry because the Soviet Union was an unwelcoming, closed economy. China, by contrast, is America’s biggest trading partner. Americans have invested more than $250bn in the country since 1990. The weight that Chinese firms listed on the mainland have in equity benchmarks such as the msci index is rising. Whatever the outcome of trade talks between President Donald Trump and his Chinese counterpart, Xi Jinping, heightened attention to security-related matters has made life uncomfortable for Chinese firms like Huawei. American companies are smarting, too. Den Rest des Beitrags lesen »

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Fixing Europe’s zombie banks

Posted by hkarner - 6. April 2019

Date: 04-04-2019
Source: The Economist

How to deal with poor performance, defeatism and complacency

Is there any more miserable spectacle in global business than that of Europe’s lenders? A decade after the crisis they are stumbling around in a fog of bad performance, defeatism and complacency. European bank shares have sunk by 22% in the past 12 months. Deutsche Bank and Commerzbank are conducting merger talks with all the skill and clarity of purpose of Britain’s Brexit negotiators. Two Nordic lenders, Danske Bank and Swedbank, are embroiled in a giant money-laundering scandal. The industry makes a puny return on equity of 6.5% and investors think it is worth less than its liquidation value. Amazingly, many European banks and regulators are resigned to this state of affairs. In fact it is a danger to investors and to Europe’s faltering economy.

The banks make two excuses, both of which are largely rubbish. One is that it is not their fault. Unlike America, where banks have a return on equity of 12%, Europe does not have strongly positive government-bond yields, or a pool of investment-banking profits like that on Wall Street, or a vast, integrated home market. All this is true, but European banks have been lamentably slow at cutting their costs, something which is well within their control. As a rough rule of thumb, efficient banks report cost-to-income ratios below 50%. Yet almost three-quarters of European lenders have ratios above 60%. Redundant property, inefficient technology and bloated executive perks are the order of the day.

The banks’ second excuse is that their lousy profitability does not really matter. Their capital buffers have been boosted, they argue, so why should regulators and taxpayers care about the bottom line? And shareholders, the banks hint, have learned to live with the idea that European lenders are unable to make a return of 10%, the hurdle rate investors demand from American banks and most other sectors (see article).

This is bunkum, too. Profits do matter. They make banks safer: they can be used to absorb bad-debt costs or rebuild capital buffers when recession strikes. Depressed valuations show that far from tolerating European banks, most investors eschew them. As a result many lenders, including Deutsche, have too few blue-chip long-term institutional shareholders who are prepared to hold serially incompetent managers to account. And when the next downturn comes and banks need to raise capital, which investor would be foolish enough to give even more money to firms that do not regard allocating resources profitably as one of their responsibilities?

Rather than accept this miserable situation, European banks need to do two things. First, embrace an efficiency and digitisation drive. Costs are falling at an annual rate of about 4%, according to analysts at ubs. This is not enough. As consumers switch to banking on their phones there are big opportunities to cut legacy it spending and back-office and branch expenses. Lloyds, in Britain, has cut its cost-income ratio to 49% and expects to get to close to 40% by 2020. The digital German arm of ing, a Dutch bank, boasts a return on equity of over 20% in a country that is supposedly a bankers’ graveyard. If other banks do not do this they will soon find that they have lost market share to new digital finance and payments competitors—both fintech firms and the Silicon Valley giants such as Amazon—that can operate with a fraction of their costs and which treat customers better.

Second, banks need to push for consolidation. The evidence from America and Asia suggests that scale is becoming a bigger advantage in banking than ever before, allowing the huge investments in technology platforms and data-analysis to take place. Europe has too many lenders—48 firms are considered important enough to be subject to regular “stress tests”. The banks complain that the reason for this is that Europe has not harmonised its rules and regulations. But this is only half the story. Most big banks are loth to cede their independence, and their bosses love the status that comes with running a big lender. And banks’ failure to get their own houses in order means that investors doubt that managers can handle integrating two big firms.

European banks face two paths. The one they are on promises financial and economic instability when the next recession strikes, and long-term decline. The other path is to get fit for the digital age and subject themselves to the financial disciplines that American banks, and almost all other industries, accept as a fact of life. It should not be a hard decision.

Date: 04-04-2019
Source: The Economist
Subject: How to fix Europe’s lenders

Europe needs its banks to perform better

It’s not all bad. In 2008 Lloyds, a large British bank, took over hbos, a rival that was being sucked beneath the rising waters of the global financial crisis. hbos nearly dragged Lloyds under with it; £20.3bn (then about $30bn) of public money was needed to keep the combined group afloat. But these days Lloyds is doing all right.

Under António Horta-Osório, its chief executive since 2011, Lloyds has ditched almost all its foreign operations, narrowed its product range and (like many other banks) poured money into digitisation. The state sold its last shares in 2017. Last year the bank’s return on tangible equity (rote), a measure of profitability, was a decent 11.7%. This year Mr Horta-Osório is aiming for 14-15%, Brexit notwithstanding.

Some other European banks also have good stories to tell. The Netherlands’ ing is also a refurbished state-aid case. Its online German bank, ing-DiBa, claims to return over 20%. Spain’s Santander, the euro area’s biggest bank by market capitalisation, sailed through its homeland’s financial storm without a single loss-making quarter. On April 3rd it set out plans to lift its rote from 11.7% last year to 13-15% by cutting costs and exploiting digitisation. Nordic banks make bonny returns—although both Danske Bank and Swedbank, beset by money-laundering scandals, have sacked their chief executives recently.

But the overall picture is glum. In a quarterly survey published on March 29th, the European Banking Authority (eba), a supervisor, found that in the last three months of 2018 the weighted average return on equity (roe) of 190 European Union banks was 6.5%. (roe is a little lower than rote because goodwill and other intangible assets are deducted from the denominator of the latter.) Over the past four years the average roe in the eba’s report has fluctuated between 3.3% and 7.3% (see chart).

That is not enough to keep shareholders happy. They want 10% or so. At a recent conference hosted by Morgan Stanley, 70% of attendees estimated European banks’ cost of equity (coe)—the minimum roe shareholders consider acceptable—to be between 9% and 11%. Twice a year the eba also asks banks to estimate their coes. Last December two-thirds put their benchmarks at 8-10% and another one-sixth said 10-12%. Only 55% said that they were earning more than their coe.

That 6.5% is also well below the returns enjoyed by investors on the other side of the Atlantic. Among America’s biggest banks, only Citigroup reported an roe of below 10% last year, and, at 9.4%, not by much. us Bancorp, the seventh-biggest by assets, weighed in with 15.4%. The Europeans underperform on whatever measure you care to choose—for example, rote or return on assets (roa), which strips out the effect of gearing (the share of assets funded by equity). Figures supplied by Stuart Graham of Autonomous Research indicate that the average roa of nine big American banks was double that of 24 leading European lenders.

All this is reflected in stockmarkets’ assessment of the relative worth of European banks. Markets value most big American banks at more than the net book value of their equity; but the shares of most leading European lenders trade below that mark. The price-to-book ratio of Deutsche Bank, Germany’s largest bank, which squeaked into profit in 2018 (with an roe of 0.4%) after three years of losses, languishes at a feeble 25%. Deutsche is in merger talks with its neighbour, Commerzbank, which is rated little better, with a ratio of 31%. Unicredit, Italy’s biggest bank, is rumoured to be considering a bid for Commerzbank if the talks with Deutsche stall.

Explanations for European banks’ poor performance start with the aftermath of the financial crisis of 2007-08. American banks were swiftly and forcibly recapitalised through the Troubled Asset Relief Programme, whether they needed it or not (“They got tarped,” in the words of one European banker). Most European countries (though not Britain, the Netherlands and Switzerland) were slow to act. The euro area lacked a single supervisor and a common authority for resolving failed banks. Both were established several years later—and only after the euro area’s sovereign-debt crises had compounded the troubles of many lenders.

Banks complain that policymakers have since made their lives hard. In the euro area net interest income, which makes up the bulk of banks’ revenues, has been ground down by slow growth and years of ultra-low, even negative, interest rates—banks must pay the European Central Bank (ecb) 0.4% a year to deposit money. In the past three years, reports the eba, net interest margins have fallen from 1.57% to 1.47%. Mario Draghi, the president of the ecb, said on March 27th that “low bank profitability is not an inevitable consequence of negative rates”, although he admitted that the central bank would consider “mitigating the side-effects”. In March the ecb announced further operations to provide banks with cheap long-term finance.

Bankers also complain about capital requirements. Not only have these been tightened since the financial crisis, but the new rules, known as Basel 3, were finalised only at the end of 2017. Banks are having to raise billions in debt that would be able to absorb losses, should some catastrophe wipe out their equity. Magdalena Stoklosa of Morgan Stanley says that resolution regulation is obliging banks to finance themselves by fairly expensive means when deposits cost them nothing and margins are wafer-thin.

European banks also lack the scale of America’s biggest. Differences among national markets and the eu’s failure to complete its “banking union” thwart cross-border mergers that might create continent-spanning giants. Peer more closely at specific countries, and further burdens on profitability become visible. Banks in Cyprus, Greece, Italy and Portugal are still weighed down by bad loans, even if the load is getting lighter. Overcrowding is common; so is competition from publicly owned and co-operative banks, which have other goals besides profit. Germany is the harshest environment on both counts. Even combined, Deutsche and Commerzbank would struggle for elbow room.

But struggling banks cannot simply blame history, officialdom and market structure for their troubles. They could do a lot more to help themselves. The eba’s new survey finds, for instance, that at almost three-quarters of European banks, costs consume more than 60% of income. The average cost-income ratio, 64.6%, is higher than it was four years ago.

Europe’s most successful banks show what can be done. A study by five ecb economists published last November—and commended to banks by Mr Draghi—found that euro-zone banks which have cut costs, spent heavily on information technology, are geographically diverse (like ing, Santander and bbva, another Spanish bank) and rely less on interest income tend to be more profitable. Banks that carry lower credit risks (ie, that are safer) also do better.

None of this will transform European banking into a magic money tree. Banking everywhere is less lucrative than it was before the crisis. Banks can take some comfort from evidence in the ecb economists’ study and the eba’s survey that coes are coming down, largely as a by-product of persistently low official rates. But bank bosses would be foolish to rely on that—or to suppose that they are not ultimately responsible for their own fates.

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The Tories are transforming into a party of populist nationalism

Posted by hkarner - 6. April 2019

Date: 04-04-2019
Source: The Economist: Bagehot

Theresa May’s decision to work with Labour will hasten the transition

A prime minister with a well-deserved reputation for dullness and dithering has finally done something dramatic and bold. This week she broke with the Brexit-right of her party and decided to put national interest above party unity. In a lengthy cabinet meeting on April 2nd Theresa May forged a radically new policy—working with the leader of the opposition Labour Party, Jeremy Corbyn, to produce a compromise Brexit and, if that doesn’t work, holding another round of indicative votes in the House of Commons and going with the winner.

Her move has left the hard Brexiteers in her party even more apoplectic than usual. Boris Johnson pronounced that “Brexit is now soft to the point of disintegration.” Jacob Rees-Mogg accused Mrs May of being keener to work with a Marxist than with her fellow Tories. Iain Duncan Smith opined that “the spectre of Corbyn lording it over us in a prime-ministerial way as he wrecks Brexit makes my blood run cold and fear for my party and my country.” So far a couple of junior ministers have resigned. Den Rest des Beitrags lesen »

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Manufacturing blame

Posted by hkarner - 6. April 2019

Date: 04-04-2019
Source: The Economist

The gloom hanging over the world economy is confined to manufacturing
Service industries have defied the sinking mood

Pessimism about the world economy has grown throughout 2019. Disappointing data, tumbling bond yields, the trade war between China and America and political crisis in Britain have all played a part. The only bright spot has been mostly buoyant stockmarkets. On April 9th the imf will probably report a downgrade to its forecast for global growth this year, which in January stood at 3.5%. But there has so far been only a deceleration, not a downturn, because economic weakness has been contained mostly to manufacturing, rather than afflicting the service sector (see chart). And a manufacturing rebound might soon lift the global mood.

Manufacturing’s woes can be blamed primarily on falling global trade growth. That is down partly to the trade war, and partly to Chinese policymakers’ attempts to reduce leverage, which slowed domestic growth late last year, curtailing demand for imports. The pain has been felt most in Europe, which is more exposed than America to emerging markets. It has been particularly acute in Germany. On April 1st a survey of German manufacturers, a preview of which buffeted bond markets in March, turned out even worse than expected. Industrial production has slowed even more sharply in Germany than in Italy, which is in recession, note economists at Goldman Sachs, a bank. Yet Germany’s service sector appears to be growing strongly, as does that of the euro zone as a whole. Den Rest des Beitrags lesen »

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