Day: June 28, 2017

The Federal Reserve has given the green light to all 34 of the biggest banks in the U.S. to raise their dividends and buy back shares, judging their financial foundations sturdy enough to withstand a major economic downturn.

It was the first time in seven years of annual “stress tests” that every bank assessed by the Fed won approval for its capital plans. All have at least $50 billion in assets.

The Fed on Wednesday announced the results of the second round of its annual stress tests. Those allowed to raise dividends or repurchase shares include the four biggest U.S. banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.

Capital One’s plan only got conditional approval and it has six months to revise it. But the bank was still allowed to return profits to shareholders.

After the results were made public, the banks quickly jumped in with announcements of dividend boosts and share buyback plans. They included a doubling of Citigroup’s dividend, a 60 percent dividend increase by Bank of America and a 12 percent hike for JPMorgan.

Capital One, because of its conditional status, opted to keep its dividend at its current level but is planning a share repurchase.

The second part of the seventh yearly checkup tested the banks to determine if their current plans for paying out capital to shareholders would still allow them to keep lending if hit by another financial crisis and severe recession.

Results show strength

With the 34 banks holding more than three-quarters of total assets of all U.S. financial companies, the results showed strength in an industry that nearly toppled the financial system — and has recovered handily nearly nine years on from the 2008-09 crisis. Banks large and small across the U.S. received hundreds of billions in taxpayer funds to prop them up during the financial meltdown.

Now the banks have a total of about $1.2 trillion in capital reserves as of the fourth quarter of last year, an increase of $750 billion over the beginning of 2009, in the depths of the crisis, according to the Fed. They are expected to pay out to shareholders nearly 100 percent of their net revenue over the next four quarters, compared with 65 percent in the same period last year.

“They can now more freely pay out dividends and buy back stock without worrying whether they are resilient in a financial crisis,” said David Wright, a managing director at Deloitte who formerly worked on bank supervision at the Fed.

The results may not be an explicit seal of approval for the banks by the Fed, but that’s the conclusion that can be drawn, Wright said.

“I don’t think they [the Fed] are quite ready to declare victory, though,” he added. “Some of the smaller firms still struggled to identify risks and there is more work to be done. But I think we are at, or close to, the summit.”

Fed Gov. Jerome Powell said in a statement the Fed’s assessment of banks’ capital plans in light of their reserves “has motivated all of the largest banks to achieve healthy capital levels, and most to substantially improve their capital planning processes.”

The financial industry has seized on the strong showing to buttress its assertion that regulations it sees as excessive should be rolled back. After the crisis that plunged the U.S. into the worst economic meltdown since the Great Depression of the 1930s, banking industry profits have been steadily rising and banks have been lending more freely. The Trump administration and Republicans in Congress have taken major steps this year toward easing the financial rules that came in under the Dodd-Frank law enacted by Democrats and President Barack Obama in response to the crisis.  

Worst-case scenario

Wednesday’s announcement on the second round of the tests followed last week’s initial results. There, the regulators determined that the 34 big banks are adequately fortified with capital buffers to withstand a severe U.S. and global recession and continue lending.

The Fed’s most extreme hypothetical scenario in this year’s tests envisions the U.S. economy falling into a deep recession causing the stock market to plunge about 40 percent. Under that scenario, unemployment — now at a 16-year low of 4.3 percent — climbs to at least 10 percent, while home prices drop 25 percent and commercial real estate prices tumble 30 percent.

The Fed said the 34 big banks would sustain $383 billion in loan losses under the most dire scenario. That’s down from $526 billion in losses for 33 banks last year. Even with $383 billion in losses, all the banks would still together hold a high-quality capital ratio of 9.2 percent, far above the 4.5 percent minimum and showing improvement from last year’s 8.4 percent. Capital ratios are an industry measure of how strong a cushion a bank holds against unexpected losses.

The dividend increases and share buyback plans are important to ordinary investors, and to banks. The banks know that their investors suffered big losses in the crisis, and they are eager to reward them. Some shareholders, especially retirees, rely on dividends for a portion of their income. For the banks, raising dividends can drive up their share prices and make their stock more valuable to investors.

But raising dividends is costly, and regulators don’t want banks to run down their capital reserves, making them vulnerable in another recession. Buybacks also are aimed at helping shareholders. By reducing the number of a company’s outstanding shares, earnings per share can increase.

CIT was added this year to the banks tested by the Fed. They are: Ally Financial, American Express, BancWest, Bank of America, Bank of New York Mellon, BB&T, BBVA Compass, BMO Financial, Capital One, Citigroup, Citizens Financial, Comerica, Deutsche Bank, Discover, Fifth Third, Goldman Sachs, HSBC, Huntington Bancshares, JPMorgan, KeyCorp, M&T, Morgan Stanley, MUFG Americas Holdings, Northern Trust, PNC, Regions Financial, Santander Holdings, State Street, SunTrust, TD Group, U.S. Bancorp, Wells Fargo and Zions Bancorp.
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Iceland spent nearly a decade trying to keep foreign money in the country after a financial collapse, now it is trying to keep some of it out.

The economy is booming again and hedge funds and other foreign investors want exposure to a surging tourism sector, banks, property, infrastructure and the soaring krona currency.

Most capital controls from the 2008 banking crisis were lifted in March, allowing money to flow in and out of the country more freely.

But with over 20 financial crises since 1875 and warnings from economists about the risk of overheating again, the government is being cautious.

It has left in place restrictions making it prohibitively expensive to buy government bonds which offer returns of 4.5 percent, the highest of any developed economy.

On Monday, the central bank took another step to try and break the cycle of boom and bust on the isolated North Atlantic island, clamping down on derivatives and other avenues it was worried were being used to bet on the krona.

“There are a bunch of people I know who would love to put money into Iceland but they simply can’t because of restrictions on the inflows,” said Mark Dowding, who runs a hedge fund at BlueBay Asset Management and bought into the Icelandic government bond market in 2015, before the central bank rules were introduced.

The government is preparing other steps to make Iceland less attractive — a contrast to other economies recovering from crisis which have welcomed inflows of money.

The government is preparing to raise taxes for the tourism industry which has been growing at 20 to 25 percent a year as foreigners flock to its volcanoes, glaciers and geysers. It is also considering a currency peg for the krona.

Opportunities

Iceland offers other exciting investment opportunities.

Growth of more than 6 percent is forecast this year and the krona is up 20 percent versus both the dollar and euro over the last 12 months.

The central bank has cut interest rates four times in the last year and analysts say it would need to cut further if it wants to slow the rise of the currency. That could further stimulate the economy.

“Once every decade or two, I come across a market overseas which is most attractive and is worth considering,” said Gervais Williams, a portfolio manager at London-based Miton Group. “That last happened in 1995 in Ireland, and Iceland is the market I now like.”

Cumulative net capital inflows have gone from almost nothing to 150 billion crown ($1.45 billion) in two years.

New cars sales are at the highest in 10 years, Marriott will open Iceland’s first five-star hotel next year. Data center firms are also moving in as the climate and cheap geothermal energy cut the costs of cooling huge server stacks.

A potential float of Arion Bank, the domestic arm that emerged from the collapsed Kaupthing bank, meanwhile is expected to lead to a surge of new foreign money into the stock market which currently lists just 17 firms.

Several hedge funds — Och-Ziff Capital Management Group, Taconic Capital Advisors and Attestor Capital — bought stakes in Arion privately, after the bulk of capital controls were lifted earlier in the year.

On the back of the shifts, London and Iceland-based fund firm GAMMA Capital Management launched its first two funds — including one hedge fund — for foreign investors in November last year after requests from abroad.

“We have been getting a lot of interest … but investing in Iceland brings a lot of hurdles, so we created a simple conduit,” said Hafsteinn Hauksson, economist at GAMMA. Both funds have more than doubled in size this year, he said.

Red hot

Nevertheless, there are concerns that Iceland could overheat again.

The International Monetary Fund said in a report last week that there was a need for “vigilance with regards to credit growth and the real estate sector, labour market tightening and wage increases.”

It called for capital inflows to be managed carefully.

Iceland has a history of spectacular booms and bust.

The head of Iceland’s central bank regularly describes its 2007-2008 banking bust — when the top-three banks, Kaupthing, Glitnir and Landsbanki collapsed under heavy debts — as “the third-biggest bankruptcy in the history of mankind.”

A 2015 report by Bank of Iceland economists noted that this was not Iceland’s first financial crisis.

“In fact, over a period spanning almost one and a half century [1875-2013], we identify over twenty instances of financial crises of different types,” it said. “Recognizing that crises tend to come in clusters, we identify six serious multiple financial crisis episodes occurring every fifteen years on average.”

The report said the crises typically involved a sudden collapse in the currency and capital inflows.

Glacier bonds

Wary of its history and nervous that the end of capital controls would bring a wave of foreign money, the central bank brought in a rule in May 2016 forcing buyers of its bonds to park additional money in a low interest account.

That costly “special reserve ratio” arrangement has meant foreign investment in Icelandic debt has dropped close to zero.

Along with repeated interest rate cuts, it has taken some of the steam out of the crown over the last month.

“In the current domestic and global circumstances, the risk of excessive and volatile carry-trade type capital inflows was becoming significant,” a central bank spokesman said of why the measure was brought in.

Monday’s decision to scale back some exemptions aimed to make it harder for foreign investors to bet on the krona.

Those exemptions had made it possible to conduct carry trades by issuing krona-denominated bonds — nicknamed Glacier bonds — and entering derivatives contracts with domestic banks.

“Experience has shown that capital inflows in connection with foreign issuance of krona-denominated bonds [Glacier bonds] could weaken monetary policy,” the central bank said.

Iceland also still has controls in place that prevent proceeds from the sale of pre-crisis bonds leaving the country unless the investor signs up to the terms of the central bank’s buyback arrangement, which offer a punitive exchange rate.
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Samsung is investing $380 million in South Carolina to manufacture home appliances, creating an estimated 950 jobs over the next three years.

State and company officials said Wednesday that Samsung is locating in the former Caterpillar plant in Newberry. Production is expected to start early next year.

The company says “premium home appliances” made in Newberry will include washing machines.

An event was to be held later Wednesday to celebrate the announcement.

Samsung Electronics America CEO Tim Baxter says the investment represents the South Korean company’s commitment to expanding its U.S. operations.

Samsung already operates a call center in Greenville County employing 800 people.

Gov. Henry McMaster says Samsung’s decision will “change the very fabric of the Newberry community.”

Rural Newberry County is home to fewer than 40,000 people.

 
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Businessman Pankaj Jain is so worried about the impending launch of a new sales tax in India that he is thinking of shutting down his tiny textile factory for a month to give himself time to adjust.

Jain is one of millions of small business owners who face wrenching change from India’s biggest tax reform since independence that will unify the country’s $2 trillion economy and 1.3 billion people into a common market.

But he is simply not ready for a regime that from July 1 will for the first time tax the bed linen his 10 workers make, and require him to file his taxes every month online.

On the desk in his tiny office in Meerut, two hours drive northeast of New Delhi, lay two calculators. Turning to open a metal cabinet, he pulled out a hand-written ledger to show how he keeps his books.

“We will have to hire an accountant – and get a computer,” the thickset 52-year-old told Reuters, as a dozen ancient power looms clattered away in the ramshackle workshop next door. Prime Minister Narendra Modi’s government says that by replacing several federal and state taxes, the new Goods and Services Tax (GST) will make life simpler for business.

To drive home the point, Bollywood superstar Amitabh Bachchan has appeared in a promotional video in which he weaves a cat’s cradle between the fingers of his hands – symbolizing

India’s thicket of old taxes. With a flourish, the tangle is gone and Bachchan proclaims: “One nation, one tax, one market!”

Not so simple

By tearing down barriers between India’s 29 states, the GST should deliver efficiency gains to larger businesses. HSBC estimates the reform could add 0.4 percent to economic growth.

Yet at the local chapter of the Indian Industries Association, which groups 6,500 smaller enterprises nationwide, the talk is about how to cope in the aftermath of the GST rollout.

“In the initial months, there may be utter confusion,” said chairman Ashok Malhotra, who runs one firm that manufactures voltage stabilizers and a second that makes timing equipment for boxing contests.

A big concern is the Indian GST’s sheer complexity – with rates of 5, 12, 18 and 28 percent, and myriad exceptions, it contrasts with simpler, flatter and broader sales taxes in other countries.

The official schedule of GST rates runs to 213 pages and has undergone repeated last-minute changes.

“Rubber goods are taxed at 12 percent; sporting goods at 18 percent. I make rubber sporting goods — so what tax am I supposed to pay?” asks Anurag Agarwal, the local IIA secretary.

Grace period?

The top government official responsible for coordinating the GST rollout rebuts complaints from bosses that the tax is too complex, adding that the IT back-end that will drive it – crunching up to 5 billion invoices a month – is robust.

“It is a technological marvel, as well as a fiscal marvel,” Revenue Secretary Hasmukh Adhia told Reuters in an interview.

The government will, however, allow firms to file simplified returns for July and August. From September they must file a total of 37 online returns annually – three each month and one at the year’s end – for each state they operate in.

One particular concern is how a new feature of the GST, the input tax credit, will work. This allows a company to claim refunds on its inputs and means it should only pay tax on the value it adds.

The structure will encourage companies to buy from suppliers that are GST-compliant, so that tax credits can flow down a supply chain.

That spells bad news for small firms hesitating to shift into the formal economy. The government estimates smaller companies account for 45 percent of manufacturing and employ more than 117 million people.

Adhia played down the risk of job losses, however, saying this would be offset by new service sector jobs.

Demonetization 2.0

The prospect of disruption is drawing comparisons with Modi’s decision last November to scrap high-value bank notes that made up 86 percent of the cash in circulation, in a bid to purge illicit “black money” from the system.

The note ban caused severe disruption to India’s cash-driven economy and slammed the brakes on growth, which slowed to a two-year low in the quarter to March.

“It could throw the business out of gear – it can affect your volumes by at least 30 percent,” said the head of one large cement company in the Delhi region.

Back in Meerut, Pankaj Jain worries that hiring an accountant and charging 5 percent GST on his bedsheets could eat up to two-thirds of his annual profits of 400,000-500,000 rupees ($6,210-$7,760).

“I know my costs will go up, but I don’t know about my income,” he said. “I might even have to shut up shop completely and go into trading.”
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European regulators fined Google a record 2.42 billion euros ($2.72 billion) for abusing its dominance of the online search market in a case that could be just the opening salvo in Europe’s attempt to curb the company’s clout on that continent.

The decision announced Tuesday by the European Commission punished Google for unfairly favoring its own online shopping recommendations in its search results. The commission is also conducting at least two other probes into the company’s business practices that could force Google to make even more changes in the way it bundles services on mobile devices and sells digital advertising.

Even so, Europe’s crackdown is unlikely to affect Google’s products in the U.S. or elsewhere. But it could provide an opportunity to contrast how consumers fare when the company operates under constraints compared with an unfettered Google.

The fine immediately triggered debate about whether European regulators were taking prudent steps to preserve competition or overstepping their bounds to save companies being shunned by consumers who have overwhelmingly embraced an alternative.

Margrethe Vestager, Europe’s top antitrust regulator, said her agency’s nearly seven-year investigation left no doubt something had to be done to rein in Google.

“What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation,” Vestager told reporters Tuesday.

The fine was the highest ever imposed in Europe for anti-competitive behavior, exceeding a 1.06 billion euros penalty on Silicon Valley chip maker Intel in 2009.

The penalty itself is unlikely to leave a dent in Google’s finances. Parent company Alphabet Inc. has more than $92 billion (82 billion euros) in cash, including nearly $56 billion (50 billion euros) in accounts outside of the U.S.

The findings in Europe contrasted sharply with those reached by the U.S. Federal Trade Commission in a similar investigation of Google completed in 2013. The FTC absolved Google of any serious wrongdoing after concluding that its search recommendations did not undermine competition or hurt consumers.

Leading up to that unanimous decision, though, some of the FTC’s staff sent a memo to the agency’s commissioners recommending legal action because Google’s “conduct has resulted – and will result – in real harm to consumers and to innovation in the online search and advertising markets,” according to a memo inadvertently released to The Wall Street Journal two years ago.

Google’s misbehavior in Europe boiled down to its practice of highlighting its own online shopping service above those of its rivals. Merchants pay Google for the right to show summaries of their products in small boxes displayed near the top of search results when someone seems to be interested in a purchase.

Meanwhile, Google lists search results of its biggest rivals in online shopping on page 4 – and smaller rivals even lower, based on the calculations of European regulators. That’s a huge advantage for Google when 90 percent of user clicks are on the first page.

Google says consumers like its shopping thumbnails because they are concise and convenient.

The commission’s decision “underestimates the value of those kinds of fast and easy connections,” Kent Walker, Google’s general counsel, wrote in a blog post.

Europe’s investigation did not present any concrete evidence that consumers had been financially damaged by Google’s online shopping tactics, said Ibanez Colomo, a law professor at the London School of Economics.

“The only harm being alleged here is that competing services have suffered a decrease in traffic coming from Google,” Colomo said on a call organized by the Computer & Communications Industry Association, a tech lobbying group.

Alphabet is mulling an appeal of Tuesday’s penalty, but even if that is filed, the Mountain View, California, company will still only have 90 days to comply with an order to stop favoring its own links to online shopping. If it does not, Alphabet faces more fines of up to 5 percent of its average daily revenue worldwide. That would translate into roughly $14 million (12 million euros), based on Alphabet’s revenue during the first three months of the year.

Rather than comply, Google could shut down its shopping service in Europe.

If that happens, “it will mean consumers in Europe are going to be worse off than consumers in the rest of the world,” predicted David Balto, a consumer advocate and antitrust expert who formerly served as the FTC’s policy director. “Consumers rarely benefit when bureaucrats put their thumbs on the economic scales to tip them one way or the other.”

Google’s critics applauded the EU for standing up to the company after the FTC backed down.

“Some may object to the EU moving so aggressively against U.S.-based companies, but these authorities are at least trying to deal with some of the new competitive challenges facing our economy,” said the News Media Alliance, a group representing U.S. newspapers whose revenue has plunged as more advertising flowed to Google during the past decade.

Other antitrust experts believe the fine levied on Google means European regulators are more likely to rein in other U.S. technology companies such as Apple, Amazon, Facebook and Netflix as they win over more European consumers at the expense of homegrown companies.

“We already have been in an information trade war,” said Larry Downs, who studies antitrust issues as project director at Georgetown University’s Center for Business and Public Policy. “But I think it just went from being a cold war to a hot war with Europe.”
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