For the first time in history, banks are earning more fee revenue from listing and advising private Chinese companies than state-owned enterprises. The revelation, which is provided by data from Dealogic, proves a landmark shift for the Chinese economy, which for so long has been dominated by the increasingly international ambitions of large state-owned SOEs. So far in 2014, only a third of all investment banking fees came from SOEs, compared with over half in 2013, and a long-term average of two-thirds between 2005 and 2010. The change is said to reflect the growing interest of private companies in following in the footsteps of SOEs, which were pioneers in opening themselves to international business and investment. It also reflects a growing interest on the investment side for sectors that are privately-dominated, such as technology. Bankers says Chinese companies are growing more sophisticated as well, seeking funding options outside of just IPOs. The figures do not include fees from the Alibaba IPO, which would skew the data even more towards the private side.
FINSUM: This is quite a change of direction for the Chinese economy and may be a sign that the Chinese government’s pledge to “open” the economy is actually ringing true.
In news that is likely to reignite the passion of Eurozone bears and trouble risk managers, Banco Espirito Santo yesterday announced a $4.8 bn loss for the first half, the largest ever by a Portuguese company. The announcement shows the full extent of the bank’s exposure to the Espirito Santo family’s business empire, and the total amount lost means that the bank’s €2.1 capital buffer has been completely wiped out. The loss of the buffer means the bank is in contravention of EU rules and must raise fresh capital, which it says it is preparing to do. The bank is also under investigation for accounting fraud, and now investors are likely to sue the bank for failing to disclose its problems before a rights issue in June that raised €1 bn. Fortunately for the bank, the Portuguese government is willing to lend it €15 bn to help it stay solvent.
FINSUM: All signs point to the Banco Espirito Santo mess being an isolated one-off event, but where trouble festers for one bank, others are likely having issues too.
Despite a serious push by the US government to try to create negative sentiment against corporate tax inversions, and a series of legislative proposals to stop them, Wall Street’s major investment banks are raking in fees for helping US companies move their headquarters overseas. Goldman Sachs and J.P. Morgan lead the league tables in fees earned from moving companies overseas, with Goldman totaling over $200m in fees since 2011 and JPM coming in a close second with $185m. Many bankers say they have mixed feelings about the deals, but that their goal is to serve clients, so they feel compelled to help their customers, especially because they know that if they turn away the deal, their competitor will pick it up. President Obama and Senator Carl Levin are leading a push to raise the barrier for moving companies overseas, but so far the movement has gained little traction because of Republican disapproval. In defense of his bank’s practices, J.P. Morgan CEO Jamie Dimon compared inversions to consumers going to Walmart, saying companies had the right to “get the lowest prices”.
FINSUM: Whatever ones views on the inversions, the bottom line is that America’s corporate tax system is broken—despite the highest corporate tax level in the developed world, the US only collects 10% of its total tax revenue from businesses, down from 33% in the 1950s. America needs to end the bleeding of inversions now as a stopgap to a major overhaul of the tax system, however, that appears unlikely to happen.
Those focused on the Indian economy know that one of the major issues holding back growth is the stifling level of bad corporate debt throughout the country, which has cut back on banks’ ability to lend. Fully 35% of the Indian corporate sector has an interest cover of less than one on their debt. However, the country appears to have taken a major first step towards cleaning up its collective balance sheet, as in the last few weeks it has begun to hold loan portfolio auctions and is attracting major international investors, such as KKR’s special situations arm. The Indian government had formerly been reluctant to see any writedowns on the bad debt so it had said that all debts needed to be bought near par, but mandating that only 5% of the portfolio’s purchase price needed to be paid immediately, which obviously made the auctions less appealing for companies. Further, buyers could not take drastic action for at least six months, meaning they could not do things like replace management. However, this is all changing, and the government is reforming the system, which will likely mean a great deal more auctions, and ultimately banks that are freer to lend to the country’s economy, which analysts estimate is only receiving 50% of the funding it needs to grow.
FINSUM: This is a good story for gaining insight into India’s troubled corporate sector, and how the country needs to overcome the problem in order to flourish. It also serves as an interesting foil to China, where tightness of credit has never proved a barrier to growth.
In a new development that seemed unlikely just days ago, Washington and Brussels have announced that they have worked together and come to an agreement on a comprehensive set of new sanctions against Moscow. Much press had been given to the idea that the EU would be unable to agree to new sanctions because of internal differences between countries, but evidently many of the measures the EU proposed were actually tougher than Washington’s, forcing the US to catch up. The new sanctions were finalized over a rare five-way video conference between the leaders of the US, Germany, Italy, France, and Britain, and include further measures to limit Moscow’s financial, energy, and military sectors. All countries recognised that the threat of a full-scale Russian invasion had grown instead of abated since the downing of MH-17. Evidently, Angela Merkel was key to the US-EU agreement, as she finally relented on protecting her country’s economic interests in Russia, which then compelled France and Italy to fall into agreement.
FINSUM: It is an encouraging sign to see that Europe was able to put aside its economic differences and come to a broad agreement to punish Russia for its actions in Ukraine. It is one of the few signs of late that there may still be some unity left in the EU. It also raises the interesting question of how Russia will go about financing its economy without access to western capital markets.