Friday, 31 March 2017

ICC Global Survey on Trade Finance 2016

The ICC just released an excellent report on trade finance

While the title suggests the report is about 2016, it's actually on 2015.  The report is based on a survey, input from a range of third party public and private sector entities, and SWIFT-provided data.

The report is a comprehensive analysis of trends in the global economy, international and regional trade, various trade finance instruments (including forfaiting) supported by some 95 tables.  SWIFT-provided data on letter of credit and collections messages sent, including data on average L/C size (including by regions with separate data for import and export L/Cs), proposed and rejected transactions by region and country (e.g., Russia). 

There is literally something for everyone with an interest in global trade.

Well worth a close read.

Wednesday, 22 March 2017

Saudi Investment Banking Fee Riches – Just How “Rich”?

Happy Banker Counts His Legendary Saudi Fees

March 16 Bloomberg reported that Saudi Fee Riches Will Keep Citicorp and Credit Suisse Waiting.  Bloomberg didn’t say how long but the article implies it could be a bit of a wait.
AA thinks it will be even longer before banks get “rich” off Saudi or MENA fees.  (Editor’s Note:  With this post SAM has adopted the Spicer Style Book convention on the use of quotation marks.) 
"Rich” is a relative term.  A chap or chapette with US$10,000 equivalent in Pakistan is doing quite well.  That same amount in Luxembourg not so well.   AA is assuming talk of “riches” is in relation to the latter, though ...
The 2015 net income figures cited by Bloomberg in the article for net profits at HSBC KSA and  JPMorgan KSA (respectively US$75 million and US$10 million) indicate just how far there is to go.   For these banks this is "hobby" not mainframe LOB income.   
A few quotes from the Bloomberg article to set the stage.
Saudi Arabia and its ambitious reform plans are the focus of all the hype in Middle Eastern financial circles these days, but it’s still in the United Arab Emirates where banks are earning most of their money.

Investment banking fees paid to lenders in the U.A.E. were 45 percent higher than in the kingdom last year, according to New York-based research firm Freeman & Co. Saudi Arabia has trailed the U.A.E. for fees earned from merger and acquisitions, equity capital market and financing deals since 2011, and is off to a slower start this year, according to the data.

Global banks are investing in Saudi Arabia in preparation for an expected fee bonanza.
Sounds fantastic.  45% higher.  Fee bonanza, albeit “expected”.
There is no sweeter song to banks and bankers than of outsized fee revenue which carries the happy implication of the bonuses such flows imply.  Think on average near to 50%--at least in happier days—shared with self-professed hard working and “savvy” bankers.
But let’s take a closer look.
First at the quantum of fees as per Bloomberg.
Banks earned $237 million in investment banking fees in the U.A.E. last year, compared with $164 million in Saudi Arabia, the Freeman data shows. Lenders secured $154 million from financing deals in the Emirates, compared with $121 million in Saudi Arabia, even after the kingdom raised $17.5 billion in the largest-ever emerging-market debt sale. M&A fees in the U.A.E. were $70 million, almost triple the $24 million earned in Saudi Arabia.
Just how big are these numbers in the global context?
Charitably speaking, rounding errors.
Thomson Reuters (TR) estimates that global investment banking fees in 2016 were approximately US$85 billion.   The fee rich geographical areas are USA and Europe (primarily Western Europe). As per TR’s report roughly US$45 billion of the US$85 billion related to US deals.
On that basis, parsing UAE and KSA fee levels either individually or in total is like analyzing the relative positions of Sunderland and Middlesbrough.  Which is the better team?  Which of the two  will take home silver next season? 
If that US$85 billion total hasn’t already well and truly taken the luster off talk of KSA IB fee “riches”, or for that matter UAE or MENA IB fee riches, let's drill down a bit further..
The charts below are compiled from Thomson Reuters individual LOB reports on estimated full-year 2016 global investment banking fees for just three IB revenue streams so they don’t total to US$85 billion mentioned.  Just three to provide a bit more granular detail on where MENA fits in the global fee picture.
2016 Estimated Investment Banking Fees
Billions of US Dollars

Debt Capital Markets

Global Syndicated Loans



MENA Share of Estimated Global Fees

Debt Capital Markets

Global Syndicated Loans


Note: 0.083% is 0.00083 in decimal terms.  
MENA fees at their highest don’t reach 1% of total global estimated fees in any of the categories above.    
Side note:  You can sign up for free copies of TR’s reports (which are quarterly) if you have a corporate email or so AA has been told.  Disclosure:  I didn’t hear this from a Fox News commentator, but the information is almost certainly as, if not more, credible, if you can believe that.
Seems to AA that not too many banks or bankers are going to get rich off this level of MENA fees. 
These MENA M&A fees are less than the fees for some single deals in the USA or Europe.  Profit-oriented banks and bonus-hungry bankers are likely to focus elsewhere, particularly where the same or similar templates can be applied to a greater flow of transactions.
Typical AA Irrelevant Aside:  Once some years ago in one of our weekly deal review meetings with some of the highest life forms in the firm present ethereally electronically as befits their exalted existence, one of my colleagues began touting a deal with $6 million in revenue.  A rather distraught team leader jumped in to minimize embarrassment by noting the deal was significant for “potential market development”.  An unfortunate turn of phrase.  The “big” man or others of nearly the same rarefied stature would periodically ask how PMD was coming along when they wanted to tweak a tail.  PMD thereafter became a sort of tag line in the group to justify “certain” behaviors.  There was the case of a rather large beverage expense incurred with several colleagues that AA successfully explained as “PMD brainstorming”.   
What could change to propel MENA into relevant fee territory?
Fees are the product of volume and pricing.  (Math pun intended).
US and Europe have volume.  MENA doesn’t have the volumes.  Even with KSA’s economic plans sustained volumes at the US/Europe level are unlikely.
But there’s another problem.  Low fee levels, particularly in KSA, as Bloomberg notes.
Banks and advisers working on Saudi Arabia’s $6 billion National Commercial Bank IPO, the world’s second-largest IPO in 2014 after Alibaba Group Holding Ltd., received about $6.7 million in fees, or about 0.1 percent of the offering’s value. By comparison, Credit Suisse and Morgan Stanley took about 1.2 percent of proceeds on the Alibaba sale.
"The Aramco IPO is likely to have fees hugely squeezed," said Emad Mostaque, chief investment officer of emerging market hedge fund Capricorn Fund Managers.

One might argue that MENA fees are depressed now because current clients are predominantly public sector entities that generally pay lower fees.
What are the prospects for a local private sector Alibaba (other than the one pictured above) and the sort of private sector deals we see in the USA or Europe?
Off in the distant future if at all.
After the successful National Commercial Bank IPO, KSA state entities retained some 60% of the bank.  The planned Aramco IPO targets placing a whopping 5% of existing shares, leaving 95% in government hands.  In neither case are private sector fees likely to apply to follow-on deals.  And if the initial performance holds (NCB was wildly oversubscribed and Aramco is likely to be as well), market demand will bolster client demand for lower fees. 
That doesn’t mean that foreign banks will shun Saudi or other MENA deals.
Fees aren’t the sole criterion for participating in a deal. 
Sometimes “maintaining relationships” or “creating” them is a compelling motive.  The mantra goes: Do a cut-price deal, gain admission to the client’s magic circle of favored banks, be repaid many times with  subsequent richly priced deals.  But often the subsequent “rich” deal is a mirage.  If the client is used to “cut rate” prices, future transactions are likely to be just as “fee skinny” as the entrée deal. 
Or if the deal is strategically important to the country, your reward will be a fast track to a banking license in the country where you can earn above average profits from private sector clients. That’s the theory, though this also often doesn’t work out in practice.
Banks have other motives, e.g., doing deals to enhance league table position to bolster their image and marketing.  That’s why you’ll see more than the necessary number of banks on very large or very prestigious deals often working for a song.  But without sustained substantial fee revenue such efforts come to naught. 
Also sadly, as history shows, despite self-proclaimed “smarts”, IBs are prone to fads, fashions, and, yes, hype.  See Lehman, Bear, Citi, et al.  Or dotcoms,mortgages, whales, etc.  If the music is playing, there is a strong compulsion to get up and dance.

Important Disclosure re Abu Arqala's Position at Suq al Mal

Divinely and Wifely Guided

Sadly, neither God nor my wife insisted that I take my current position at Suq al Mal.  It seems that not all are called.

On a positive note, I rather like what I do here.

Friday, 10 March 2017

Indian Banks: Sadly Things are Looking More “Subdued”

It's Not Cricket!

Things are looking mighty “subdued” as careful observers might say.

Some quotes from Bloomberg followed by (AA) comments.

Stressed assets -- made up of bad loans, restructured debt and advances to companies that can’t meet servicing requirements -- have risen to about 16.6 percent of total loans in India, the highest level among major economies, data compiled by the nation’s Finance Ministry show.

AA is puzzled.  I would think that “advances to companies that can’t meet servicing requirements” would qualify as “bad” loans.  And that restructured debt that was performing, i.e., meeting servicing requirements would not be bad debt.  On the other hand if restructurings were “cosmetic” in nature, then they are indeed bad loans.  If loans aren’t performing, they’re “bad” loans.  If loans are restructured at lower rates perhaps even below market rates but are performing, shouldn’t banks bear this cost? 


Ratings companies including Fitch Ratings Ltd have come out in favor of setting up a state-backed “bad bank” to tackle India’s ballooning stressed assets problem, a move resisted by Raghuram Rajan, the former governor of the Reserve Bank of India.

Seems to AA if banks’ “bad” loans are ballooning, the country probably already has more than one “bad” bank, particularly when one factors in the comments in the article about “hiding” bad loans, failing to take tough decisions.   


The RBI completed its audit of the nation’s 50 lenders last year, forcing them to lay bare previously hidden non-performing loans.

That sounds like rather “bad” behavior to AA.

Banks had been reluctant to offer discounts to offload bad loans even where they are clearly worth much less than their book value because such sales “invite the attention of anti-corruption agencies making bank officials reluctant to sign off on them,” Fitch analysts including Guha wrote in a Feb. 23 note.
AA wonders if the anti-corruption agencies should look earlier in the loan cycle, e.g., at initial underwriting and subsequent “hiding” stages?  Also are bankers looking for the “bad” bank to make “bad” pricing decisions and buy the duff loans at prices higher than their fair value?  Thus, bailing out the banks’ previous bad behavior?  Perhaps this explains former Governor Rajan’s reluctance.

Bankers selling bad loans to a national bad bank won’t be questioned, as this institution will be empowered by the government to take tough decisions,” said Rajesh Mokashi, managing director at CARE Ratings Ltd. in an interview. A bad bank will also bring to an end to fear of “witch-hunting” of lenders, if any, by anti-graft agencies, he said.

Is this an admission by bankers that they are restricted from taking “tough” decisions?  Or that they are incapable or unwilling to take “tough” decisions?  If either, then a sale to a bad bank does nothing to change this “bad” behavior and is likely to lead to a repeat of bad loan creation by these same banks that can’t or won’t take “tough” decisions.

With more than $180 billion in stressed assets, the government and regulators have to evaluate all avenues including a bad bank to drive better recovery rates,” said Nikhil Shah, managing director at Alvarez and Marsal, a firm that specializes in turnarounds.
AA wonders how selling duff assets to an asset manager--or “bad” bank, if you prefer--improves recovery rates.  Does this mean that banks are unwilling to take hard decisions or aren’t allowed to?  If so, what guarantee is there that the “bad” bank will?   If the fundamental problem is a slow moving erratic legal process, will the fact that the plaintiff is now a “bad” bank really speed up the legal process?  Or is the idea to buy the duff loans from the banks above market, thus improving their “recovery” rates and stick the “bad” bank with the losses?

All in all not a very pretty picture.  Subdued indeed.
But every situation has both positive and negative possibilities.  As this post about comments from the head of a distinguished bank in a  neighboring country shows, attitude can play a key role

Practical Application of Extreme Vetting to Secure the Homeland

Case in "Point"
As you no doubt recall Candidate Trump called for "extreme, extreme vetting" of immigrants to secure the Homeland.  While this call was focused on immigrants from certain Muslim majority countries, it would seem logical to expect that similar vetting would be applied to those in senior positions in the incoming Administration.  Like staffers with top secret security clearances allowing them access to intelligence reports, meetings of the National Security Council, etc. website  18 November 2016
“I am pleased that Lieutenant General Michael Flynn will be by my side as we work to defeat radical Islamic terrorism, navigate geopolitical challenges and keep Americans safe at home and abroad,” said President-elect Trump. “General Flynn is one of the country’s foremost experts on military and intelligence matters and he will be an invaluable asset to me and my administration.”

Washington Post  14 February 2017
Michael Flynn, the national security adviser to President Trump, resigned late Monday over revelations about his potentially illegal contacts with the Russian ambassador to the United States, and his misleading statements about the matter to senior Trump administration officials.

Business Insider   10 March 2017

President Donald Trump was not aware that his former national security adviser, Michael Flynn, was being paid to lobby for Turkish interests in the months leading up the US election, White House press secretary Sean Spicer said Thursday.
But Rep. Elijah Cummings, Ranking Member of the House Committee on Oversight and Government Reform, sent Pence a letter on November 18 requesting more information about the potential conflicts of interest posed by Flynn's lobbying work.
Cummings sent the letter four days after both the Daily Caller and Politico reported that Flynn's consulting firm, Flynn Intel Group, Inc., had been hired to lobby for Turkish interests.
rightscoop website 18 November. 

But Flynn was compensated by the Flynn Intel Group, where he serves as a principal and which has registered as a lobbying firm for a Dutch company owned by a Turkish businessman with close ties to Turkey’s President Recep Tayyip Erdogan. The relationship is more than professional, apparently. Flynn has called for the extradition to Turkey of the cleric Fethullah Gülen, whom he called a “shady Islamic mullah” who lives in exile in the Poconos and on whom Erdogan has blamed a failed July coup attempt (among a host of other sins).

Like The Daily Caller, RS is considered a "conservative" forum.  So both right and left and those in between called this back in November.

Right out in the open. 

Yet, the WH missed it  That's "extreme vetting" with both a capital "E" and "V"!