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from Breakingviews:

French banks hope to end balance-sheet shrinking

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BNP Paribas and Société Générale are nearing the end of their crash diets. At least, that’s what the French top banking duo hope after a first quarter in which they shrank their balance sheets following last year’s euro zone-induced funding squeeze.

BNP, France’s largest bank, says it has completed 80 percent of its asset disposal programme, which will be over by the summer. In the rush to deleverage and refocus on euro-denominated funding, both banks have offloaded a mixture of legacy assets, loans and corporate and sovereign bonds. Some buyers have even paid cash, as in the sale of BNP’s majority holding in real-estate group Klepierre, which allowed the bank to book a handy 1.5 billion euro capital gain.

Both banks can still rely on strong retail arms that show no signs of suffering from the euro zone’s economic woes - at least not yet. SocGen is arguably less vulnerable to a euro-wide recession if it eventually hits, as the lender is less exposed to the zone than its larger rival. Strip out the Klepierre sale, and both banks moved in sync during the quarter, with revenue down 6 percent at BNP and 5 percent at SocGen. Net profit at both banks fell by roughly 20 percent.

BNP, however, has a head start when strengthening its capital buffers. The bank says it will have reached a core Tier 1 capital ratio of 9 percent - assuming the full implementation of new Basel III rules - by January 2013. Under its current assumptions, BNP will get there this June. SocGen reckons its core Tier 1 ratio will be in the range of 9 percent to 9.5 percent at the end of next year.

Their association with the euro zone will continue to afflict BNP and SocGen for some time. And they may seriously suffer if France finds itself at the centre of the storm after its presidential election. Both banks trade at a fraction of their book value. But on that metric SocGen trades at a 34 percent discount to BNP. There’s no obvious reason for the discrepancy, save for the contrast between BNP’s traditional, robust model and SocGen’s sexier but more troubled past. Even for slimmed-down banks, reputation still matters.

from Breakingviews:

French banks face tough 2012 after rocky 2011

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Last year wasn’t much fun for France’s two largest banks. After a relatively benign first half, the euro zone crisis hit BNP Paribas and Société Générale with a vengeance: their shares finished the year down 38 and 58 percent respectively, while the cost of insuring their debt tripled. For good measure, the European Banking Authority forced them to raise capital.

Full-year results bear the scars. Both banks saw top-line income fall by around 3 percent as they embarked on deleveraging. Returns dipped below the cost of capital. BNP did a better job of protecting its bottom line – net income was down 23 percent compared to SocGen’s 39 percent – and it is still paying a dividend, contrary to its smaller rival. But both banks are feeling the pinch from shrinking investment bank revenues, asset disposals and provisions on Greek sovereign debt now reaching 75 percent.

Yet if everything else was set fair, both BNP and SocGen could roll with the punches. BNP has already done almost a third of its programme to cut risk-weighted assets by 75 billion euros, and its investment bank’s reliance on flighty dollar funding dropped by 57 billion euros in the second half. SocGen has reduced its dollar funding by almost the same amount. Both lenders have already hit their EBA capital targets, while the combination of three-year liquidity from the European Central Bank and an expanded collateral pool has removed fears a French bank could fall over.

This year may prove just as rocky as last year for the French banks – albeit for different reasons. France’s GDP will grow by a meagre 0.5 percent, according to the government forecast, while the threat of a Greek disorderly default doesn’t do much to boost confidence.

But the real concern is within France itself. The election of uber-favorite socialist candidate François Hollande to the country’s presidency in May could be a cause for worry. He is campaigning against the “faceless finance” he wants to “subjugate”, and advocates a UK-style split between retail and investment banking. As for incumbent Nicolas Sarkozy, he has started to unilaterally bring in a tax on financial transactions. So BNP and SocGen may have to stay in restructuring mode a bit longer than planned.

from Global Investing:

Without real sign of rate cuts, Indian equity rally still fragile

Indian equities are among the best emerging markets performers this year, with the Mumbai market having posted its best January rise since 1994. That's quite a reversal from last year's 24 percent slump. The bet is faltering economic growth will force the central bank to cut interest rates from a crippling 8.5 percent. So, how safe is the rally?

Some conditions are already in place. Valuations look decent after last year's drop. There has been a surge in global investors' appetite for emerging market assets. So Apurva Shah, who helps manage $600 million at the BNP Paribas Mutual Fund in Mumbai, expects positive returns from Indian stocks this year. But for a decent rally to be sustained, interest rates have to fall in order to kickstart faltering growth, he says.

The risk is really the assumption that interest rates and inflation are actually on the way down. We've seen the first leg of that happening, but it's just the beginning. Rates are still way too high. To trigger off any real revival in economic growth they need to fall a lot more.

The market may be pricing Indian interest rates to fall between 75 to 100 basis points this year but there is little indication this will actually happen. The central bank, the most hawkish in the developing world, has cut reserve requirements and voiced concern about growth. But a senior central bank official has made clear only a sustained fall in inflation will prompt a rate cut.

Inflation is indeed easing but elevated food prices, infrastructure bottlenecks, and the government's seeming inability to cut back on budget spending mean the battle is not over yet.  Shah says that for the time being he is sticking to long positions in consumer stocks with a domestic focus, including consumer banking companies, and shying away from rate-sensitive stocks such as state-controlled wholesale banks. That will change if rates actually start to fall.

There have been a few false starts in the past, so we will want to be doubly sure that it's actually happening

(By Alessandra Prentice)

from Funds Hub:

Yen? Too late.

European investors have missed the boat if they wanted to adjust their portfolio to take advantage of a rising yen as the currency has peaked, says BNP Paribas Asset Management's Hubert Goye.

You can watch his interview with Reuters Insider here: http://link.reuters.com/ket58n

from Global Investing:

Brazil-style tax may not work for South Africa

Traders in South African securities woke to a nasty surprise this morning -- media reports that the ruling ANC party is considering slapping a tax on "short-term" financial market flows, possibly similar to the 2 percent tax Brazil brought in last October.  Luckily for them,  it may not happen.

Like Brazil, South Africa is worried about the strength of its currency, the rand, which rose almost 30 percent last year against the dollar and has firmed a further 1.5 percent this year to trade near 7.25 per dollar. Analysts like Elisabeth Gruie at BNP Paribas reckon fair value would be around 9 per dollar.  South Africa, like Brazil, is a commodity exporter so needs a fairly valued currency. Hence the call for capital controls to keep out foreign speculative cash.

But the similarities stop there.

Investors may not have cheered the Brazilian tax but few have pulled their cash from the country, betting the returns on offer make the 2 percent levy worthwhile. But South Africa may have a harder time.  Its economy may grow this year by 3 percent compared to Brazil's 7.6 percent. Johannesburg stocks, especially those of multinational precious metals firms are attractive but they are not cheap -- they trade at 11.5 times forward earnings while Brazil's are at 10.6 times. And the domestic consumption story is still weak in South Africa which makes its companies more vulnerable to the global growth picture.

But the crux of the matter is: South Africa needs foreign portfolio investments more than Brazil does because its record on foreign direct investments is so poor -- it ran a current account deficit last year of  96.6 billion rand, ($13.4 billion) which was more than financed by portfolio inflows of 107 billion rand. FDI in contrast was just $6.8 billion or less  than half.  Brazil too expects a large current account deficit this year of $49 billion but 80 percent of this will be financed by FDI.

So South Africa needs that foreign portfolio cash coming into its stock and bond markets or it must work to lure direct investment to its factories and mines. Otherwise it may end up borrowing to fill the deficit. Gruie says the finance ministry and central bank have rightly in the past opposed such capital controls. That's why when the ANC considers the capital tax proposal at its Sept 20-24 meeting, the answer may well be -- No.

from Global Investing:

Sustainable investing in emerging markets?

Emerging markets may not be the obvious destination for your ethical investment. Rapidly expanding economies are consuming a lot of energy, pumping CO2 in return. Many of these markets suffer from legal and political problems that keep investors on their guard.  BRIC legal systems have room for development.  Their financial disclosure is still patchy. 

However, BNP Paribas sees opportunities as it believes fast growth in these markets and increased inflows would create the need for a socially sustainable environment for investment.

“Our analysis has unearthed a number of particularly promising sustainable investment strategies in emerging markets. In each of these cases we see a real economic need linked to maintaining high growth rates, but also evidence that policymakers are recognising this need and are putting in place the necessary policy measures to facilitate this development," the French bank said in its latest Sustainable and Responsible Investment (SRI) newsletter.

In other words, emerging market expansion creates growing environmental problems and thus a desire from emerging market economies for sustainable investments.

Emerging market countries are also most vulnerable geographically to climate change, said the bank.  It's targetting its investment in industries including education, water, waste, mobile phone banking, microfinance and clean transport.  Among others, it likes Nine Dragons, a Chinese waste paper company and SABSEP, a Brazilian state owned sewage and water utility.

All of which makes sense.   If there’s any place where people would benefit greatly from SRI, it’s probably emerging markets. SRI, as the name suggests, targets ethical investments, evaluating them through environmental, social and governance criteria (ESG).   With the global downturn, the world has now turned to emerging markets, namely the BRIC economies – Brazil, Russia, India and China - which Goldman Sachs predicts will be the biggest economies alongside the United States in 2050. 

But if emerging economies were to attract more SRI investment, they must do a lot more. Some 70 percent of investors surveyed in 2009 by the Social Investment Forum, a US non-profit association for SRI professionals, saw the lack of corporate ESG disclosure there as their biggest concern. 

from Financial Regulatory Forum:

FACTBOX – Britain makes arrests in insider dealing probe

LONDON, March 24 (Reuters) - A raid on top banks and a hedge fund on Tuesday as part of an insider dealing investigation sent shockwaves through London's financial centre, as British authorities try to establish their crime-fighting credentials.

It was the fifth set of arrests carried out by the Financial Services Authority (FSA) into insider dealing in the past two years. Here are key facts and recent events:

* March 23, 2010: A sweep by the FSA and the Serious Organised Crime Agency (SOCA), a special police unit, involved individuals from Deutsche Bank AG, Exane, part-owned by BNP Paribas SA, and U.S. hedge fund Moore Capital, among others. Seven people were arrested.

A squad of 143 officers raided 16 residential and business addresses in London and southeast England, seizing documents and computers. None of the six arrested have been charged or formally identified by British authorities, but some have been identified by sources.

City professionals passed inside information to traders who traded on the information and made "significant profits", the FSA said.

* Ongoing: The FSA is prosecuting three other insider dealing criminal cases: Andrew King, Andrew Rimmington and Michael McFall (trial set for April 19): Christian and Angie Littlewood; and Neil Rollins.

from Summit Notebook:

Awaiting the alternative energy sukuk: Innovation vs conservatism

MANAMA, Feb 18 (Reuters) - Dubai’s debt fiasco and real estate bubble bust pushes investors to look out for alternative assets underlying Islamic finance products – could renewable energy provide a way-out?

Predominantly, Islamic finance and investment products have been backed by infrastructure or commodities assets. But executives at the 2010 Reuters Islamic Banking and Finance Summit said product diversification was needed to cut the over-reliance on real estate in the Gulf.

“Sharia scholars are eager to support the renewable energy initiative, but the Islamic banking industry (in the Gulf) does not seem to be overly interested in this area although I am aware of a couple of deals involving acquisitions of clean tech companies in the U.S. and wind farms in the UK," said Ayman Khaleq, partner at the Vinson & Elkins law firm in Dubai.

“The big banks have teams that focus on renewable energy as an asset class. However, the problem is that Islamic banks are not big enough to be able to cover specific sectors such as alternative energy,” he added.

In order to launch an alternative energy sukuk, the Gulf's small local banks would need to team up with bigger international players such as Deutsche Bank, Barclays, or BNP Paribas, which have been active on the renewable horizon.

But some experts have warned more originality in the Islamic finance industry could alienate investors, who are reluctant to take on fresh risk in the wake of Dubai’s debt crisis and recent sukuk defaults in the region.

WAITING FOR THE GREEN PUSH

from Breakingviews:

What ING, Erste say about capital raising

Both ING and Erste Bank have unveiled rights issues this week but neither yet has any guarantee of the price that they will get for their shares. This shows that -- despite the stock market rally and the apparently insatiable appetite for fresh bank equity -- investors are still jittery. Goldman Sachs and JP Morgan, are underwriting the Dutch bancassurer's 7.5 billion euro fund-raising. However,while they have guaranteed the total sum to be raised, they have said nothing about price per share. The terms will only be agreed after shareholders approve the fund-raising in four weeks. The lack of certainty over price contributed to a sell-off earlier this week that saw ING shares lose more than a fifth of their value. This "volume" underwriting is reasonably common in continental Europe, where it has been used by Sweden's Nordea, SEB and Swedbank  and Italy's Unicredit. In Erste's case, the Austrian bank will not know how much money it has managed to raise from the sale of 60 million shares until Nov. 17, when the rights subscription and parallel book-building, for non-shareholders, ends. However, this rights issue does not come with any corresponding obligations as it is not underwritten. Erste has brought in Goldman and JP Morgan to market the shares both to existing and new investors, but are not underwriting the issue. Both of these methods of fund-raising shift at least some of the risks onto shareholders and -- in Erste's case -- onto the institution itself. The fact that both institutions are raising money from private sources, and at a yet-to-be determined price, is evidence of a certain confidence. A year ago when banks were at risk of collapse, it would have been unthinkable that they would launch these kinds of offerings. However, the absence of a price guarantee also illustrates the ongoing nervousness about bank shares among underwriters. This can express itself in different ways. The alternative approach, seen with French banks BNP Paribas and Societe Generale, is for investment banks only to underwrite new shares at a steep discount. Despite this the fees they charge have remained high. A further test of institutions' appetite for bank paper is likely to come over the next few weeks when Lloyds Banking Group is expected to launch an 11 billion pound rights issue. True, it's widely expected, and the government is likely to put up almost half that amount, in line with its existing shareholding. Investment banks point to the volatility in bank share prices to defend their reluctance to take on greater underwriting risk. As long as this remains the case, the investment banks are likely to demand a steep discount, a shorter underwriting period or even refuse to underwrite certain share issues for their bank clients at all. The sell-off in bank shares this week will only strengthen their hand.

from Financial Regulatory Forum:

Dutch government, Deutsche Bank in ABN AMRO deal

By Ben Berkowitz and Edward Taylor AMSTERDAM/FRANKFURT, Oct 20 (Reuters) - Deutsche Bank AG agreed in principle to buy some ABN AMRO assets from the Dutch state in a deal which should clear the way for a merger of nationalised banks ABN and Fortis Bank Nederland.

Under the deal, 15 months and two ABN owners in the making, the acquisitive German lender will boost its Dutch operations by acquiring commercial bank HBU, 13 advisory branches, two corporate client units and a factoring business.

The pact, which is not final and depends on negotiations and a host of regulatory approvals, is the same in terms of assets as the deal Deutsche, Germany's biggest bank, agreed with former ABN owner Fortis in July 2008.

The European Commission mandated the sale of those assets in late 2007 to preserve competition in the Dutch market after a consortium took over ABN AMRO that year.

The financial terms of the proposed deal were not disclosed. The Dutch government said on Tuesday it will seek an extension of the EU deadline to finalise agreement. The commission had no immediate comment, and ABN AMRO said it could not comment beyond the finance ministry's statement.

The merger of ABN and Fortis, followed by an eventual IPO, is core to the Dutch state's exit strategy for the banks, which it nationalised in Oct. 2008 for 16.8 billion euros ($25.16 billion).