Fear in the corridors of banks...

When did European banks start showing signs of a fatigue. Was it today, yesterday or the day before?

A few weeks ago, it was Deutsche Bank.

Yesterday it was HSBC.

Today it is Stanchart.  Standard Chartered Plc reported a loss of $981 million from its India operations. Loan impairments, including restructured loans, in India portfolio went up to $1.3 billion in 2015. It has also suffered on account of commodity price falls. Stanchart has run in to a loss of $1.5bn for 2015. Stanchart is an emerging market entrenched bank and reflects the agonies of the situation for financial institutions in these markets.

It seems that European big banks may have lost reflexes.  This fall in shareholder values  is not a sudden development ; it has been a developing story for quite a few years. Valueless banking (LIBOR fixing, money laundering involvement, breaching sanctions) all indicate a fall in value systems among bank managers in Europe.  It is not specific to a bank but across the industry.

It cannot be that economies do not do well and banks do. Banks are financial institutions that lubricate the real sector. They are at the heart  Example: Emerging markets are running out of steam with heavy stones of NPAs and slowing economies round their neck. example, the QE that was attempted by the ECB a few months ago,  is an aftermath of a stalled real sector. The latter state of affairs  had to affect the financial sector at least with some lag. Monetary pump priming also makes it easier to distribute credit but it also facilitates adverse selection. Banks dump credit on to customers who find it difficult to survive a difficult economic situation in the real world. Banks and other financial institutions cannot make profits even as the real sector is in a state of sluggishness.

Markets must run more on fundamental factors and less on sentimental expectations.

This blog recommends no investment. All views expressed are without any risk or responsibility.

Why the coming nervous week is not so reassuring:...

• Non-performing loans of banks are high or under-estimated in China, India, and Europe.
• Bank profitability will be consequentially affected.
• Losses and provision requirements would make holes in bank capital.
• Banks have to be further  capitalized as per regulatory norms.
• To facilitate stronger balance sheets, capital induction has to ensue.
• New investors will hold off in crashing equity markets and if Governments have to support as in the case of India, Government funding will hit Government's fiscal position; neutralizing moves towards fiscal  balancing.
• Bank businesses will improve but quite slowly even as banks struggle to redraft (clean up) balance sheets. Business growth, consequentially, will be halting, gradual and slow. There will be significant impacting on business and there will be differential impacting with many small businesses affected. Uncertainties will accelerate the market turmoil.
• The Chinese and Indian economic expansion represent how there is a debt overhang.   The strong asset price growth seems to wind up to a bubble. There has been apparent overinvestment in sectors like real estate. As growth decelerates, all these further credit excesses will expose banks anew and the business failures will accelerate the economies' downward moves. Leveraging will enhance risks. There will be adverse selection too as banks struggle to regain profitability.  
• Political risks will accentuate in Turkey and the Middle East. Commodity prices affect Gulf Cooperation countries, Australia, South Africa, Indonesia and Russia. Brazil and other Latam countries too look vulnerable.  
• Thus,  there is expectation of volatility global markets, in equities , foreign exchange and commodity prices. There should be widening in risk spreads as bank , corporate and emerging markets  are downgraded by rating agencies.   

 Volatility is the spice of a trader's losses.

This blog recommends no investment. All views expressed are without any risk or responsibility.
 

Growth without jobs: is monetary policy hurting the youth everywhere?

This has been a decade of the Monetarists. 

In the name of taming inflation and invoking fears of 'crowding out', the  focus shifted early on with the advent of the 21st century to managing economies through monetary inducements and averments. The fiscal spending had to contract as a ratio of fisc deficit to GDP was fixed by policy makers. The ratio of government borrowings was fixed too. The withering away of the fiscal state is almost there.  The policy setters are the central bankers. Finance ministry then is a broad brush institution. 

The monetary transmission mechanisms run through banks and they all look vulnerable as the cost of capital mobilization is high (capital decided by central bankers' forum and by individual central banks)  ; the monetary ease has added to the quantum of NPAs. So the efficiency of the private sector is hurt by lumps of non performing assets and the transmission mechanisms look more clogged as regulatory prescriptions go up. Less jobs are created as growth slows down. Add to that the fact as technology intervenes, there are more machines than men needed. Skill reorientation acts with a lag. In the overall, unemployment increases and it hits the youth most adversely and painfully.  

Euro area looks among the hardest hit among the advanced countries. The MENA region seems so fragile; the political instability is perhaps explained by economic reasons. There  might be under -reporting / disguised unemployment in the emerging economies. 

Growth without jobs is not just income discriminatory; it affects purchasing power and so lack of effective demand for goods. 

Source of Data 

World Development Indicators 2015, THE WORLD BANK

	Unemployment				Youth unemployment
	Male		Female		Male		Female
	% of male labor force		% of female labor force		% of male labor force ages 15-24		% of female labor force ages 15-24
		2011-14		2011-14		2011-14		2011-14
Australia		6		6		14		12
Brazil		5		9		12		19
Canada		7		7		15		12
China		5		4		12		9
Hong Kong SAR, China		4		3		10		7
Germany		5		5		8		7
Greece		23		31		49		60
India		4		4		10		11
Japan		4		3		7		6
Russian Federation		5		5		12		14
Switzerland		4		5		9		8
United Kingdom		7		6		19		14
United States		6		6		15		13
World		6		6		13		16
Low income		5		7		9		11
Middle income		5		6		13		16
Lower middle income		5		6		13		16
Upper middle income		6		6		14		16
Low & middle income		5		6		13		15
East Asia & Pacific		5		4		13		11
Europe & Central Asia		9		9		19		20
Latin America & Caribbean		5		8		11		16
Middle East & North Africa		10		23		27		49
South Asia		4		5		10		11
Sub-Saharan Africa		7		9		13		15
High income		7		7		17		18
Euro area		11		12		28		28

The paradox of the share market

Global share prices fell by almost 10 per cent over January[1]. This is even as commodity prices have been falling. Rationally one could expect that as input costs fall, cost of production and prices must consequentially fall, making it a stimulus for  consumer demand.  An increased demand from consumers  should have seen equity prices rising.  

However, in the recent instance, equity prices have fallen. This is even as economies strive to rebalance-  away from the resources sector towards non-resource sectors; away from mining and manufacturing to service sectors.

Growth in the services sector, should be welcomed as long as growth is labour-intensive; but the ability of the sector  to bring about voluminous employment  changes look bleak.  Given the technological intervention in the sector, a rise in employment is not a concomitant to growth. This unemployment bulge should lower labour costs and enhance competitiveness and encourage businesses to employ more labour. Goods-related production ought to go up .

All this does not seem to happen.   What moves markets today are sentiments rather than economic fundamentals.   

Central banks have limits. 


This blog recommends no investment. All views are without any risk or responsibility. 

---

[1] Reserve Bank of Australia,

Staring at a liquidity crisis?

As Asia wakes up on Monday morning, and as Chinese markets start trading, the world markets and more specifically bankers are on tenterhooks.

Banks  have had risks coming their way for some time. Credit risks took them the NPA express way  and along the stressed  assets on a rapidly converging highway  . 

This toxicity in credit has severely impacted profitability of banks. Consequential risks point to a structural mismatch that would have affected or are affecting banks' overall future assets and liabilities.  

The mismatch(es)  will   affect throughout not just on credit but on  liquidity, interest, and currency too.  Strategic balance sheet management seems quite a difficult task for banks in this scenario. 

Current setting stares at the likelihood of liquidity risk in the forthcoming weeks. Liquidity risk will see  discriminatory and burdensome interest rate risks which banks will find rather difficult. With asset prices falling, trading risk management is made even more tricky.

Funding and capital planning of not just banks but countries (think of the income slack Gulf countries trying to sell assets to meet developmental needs in a falling market!) will be adversely impacted. There can be little profit planning and growth projections for banks in the near short run. Rapid strategic exercises  are called for. 

Banks are but dinosaurs ?...

The views expressed are without any risk or responsibility. The blog recommends no investment. 

Blood in the financial streets...

Pablo Neruda wrote on the Spanish Civil War...
"Come and see the blood

In the streets! "

Coming events cast their shadow long before...

When the banks heaved, we should have sighed at what was coming.

Is it over? 

Not as yet. The agony is not as yet abated. 

If the Chinese bamboos turn dry and wilt, them trader animals have nowhere to hide. 

If the Bank of Japan  seeks out negative interest rates; why can't we be pessimistic? 

Quarterly results of Indian  banks are so frustrating , but then there is yet another quarter to go....

The bears have  golden swords...  

The sidelines are the best places to be there...

This blog recommends no investment. These views are expressed without any risk or responsibility.