New rule to strengthen capital positions of US banks proposed by Fed

BY Fraser Tennant

The Federal Reserve has proposed a rule to bolster the capital positions of the largest US banks.

Designed to maintain the strength of large banks such as JPMorgan Chase and Goldman Sachs, the Federal Reserve's proposal would involve increasing the capital requirements of the aforementioned banks as well as six others.

By increasing the requirements of these eight largest banks, the Federal Reserve is seeking to make them more shock resistant as, the Fed points out, a bank with more substantial levels of capital is less likely to depend on borrowed money during periods of financial distress.

The Fed’s proposed rule is also intended to reduce the impact a bank in distress can have on the domestic as well as global economy – effectively an attempt to reign in the ‘too big to fail’ mentality.

In addition to Goldman Sachs and JPMorgan Chase, the other banks involved in the proposed new regulation are Morgan Stanley, Citigroup, State Street, Bank of New York Mellon, Wells Fargo and Bank of America.

All these banks would be required to fully comply with the Federal Reserve’s new rule by early 2019.

Fed chairwoman Janet L. Yellen said that the proposed rule “might persuade banks to shrink” and “would encourage such firms to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability”.

Although the Fed has said that most of the eight banks already meet the new requirements of the new rule, having raised billions of dollars of new capital in the years since the financial crisis, a further $21bn in additional capital is understood to be necessary with JPMorgan Chase stating that it will be the “hardest hit”.

“While we’re still reviewing the Fed’s proposal, we are well capitalised and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders”, said Andrew Gray, a JPMorgan spokesman.

While responses to the Fed’s proposals have been broadly positive, some dissenting voices have been heard, including that of Richard Foster, a vice president of the Financial Services Roundtable. He said “Holding US banks to a more stringent capital framework than our global competitors could be a misguided economic decision”.

News: With New Capital Rule, Fed Nudges Big Banks to Shrink

Reducing income inequality is the key to driving economic growth

BY Fraser Tennant

Reducing income inequality is the key to boosting economic growth, according to new research by the Organisation for Economic Co-operation and Development (OECD).

In ‘Focus on Inequality and Growth’, the OECD offers evidence that inequality affects growth because it undermines educational opportunities for children from poor socio-economic backgrounds – lowering social mobility and hampering skills development.

"This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate," said OECD's secretary general, Angel Gurría. "Countries that promote equal opportunity for all from an early age are those that will grow and prosper."

OECD analysis shows that, in the UK, rising levels of inequality “cost the economy almost nine percentage points of GDP growth between 1990 and 2010”. In the US, over the same period, it was seven percentage points.

In Mexico and New Zealand, the research estimates, rising inequality has knocked more than 10 percentage points off growth. Italy, Sweden, Finland and Norway have also experienced depreciation, albeit at much lower levels. Conversely, greater equality in Spain, France and Ireland has led to an increase GDP per capita.

Key findings include: (i) the gap between rich and poor is now at its highest level in 30 years in most OECD countries; (ii) a long-term trend increase in income inequality has curbed economic growth significantly; (iii) although the overall increase in income inequality is driven by the very rich 1 percent pulling away, what matters most for growth are families with lower incomes slipping behind; and (iv) tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.

Making strong reference to this last point, the OECD is calling on governments to do more than just implement anti-poverty programs and to invest a great deal more in educating those on low incomes.

Mr Gurría said "Policy needs to confront the historical legacy of underinvestment by low income groups in formal education. Strategies to foster skills development must include improved job-related training and education for the low-skilled, over the whole working life."

The OECD believes that the countries which promote equality for all will be the ones to grow and prosper in future.

Report: Focus on Inequality and Growth

Sub-Saharan Africa to receive $180bn a year investment in infrastructure over 10 years

BY Fraser Tennant

Investment in infrastructure projects in Sub-Saharan Africa is expected to be $180bn a year over the next 10 years, according to a new PwC report.

The 'Capital Projects & infrastructure in East Africa, Southern Africa and West Africa' report suggests that, despite slow growth overall, multiple investment opportunities await global investors, developers and operators.

The 95 influential figures in the infrastructure sector surveyed by PwC indicated that they planned to spend 25 percent more on infrastructure projects this year than last. Fifty-one percent said that they planned to spend more than half of their budgets on new assets.

At present, South Africa and Nigeria have the most ambitious infrastructure programs and together make up almost 60 percent of the spend across Sub-Saharan Africa.

"The shallow economic recovery in most developed markets has shifted the focus to faster-growing regions. This is also true for the infrastructure development sector,” said Jonathan Cawood, capital projects & infrastructure leader for PwC Africa. "With an abundance of natural resources and recent mineral, oil and gas discoveries, demographic and political shifts and a more investor-friendly environment, the investor spotlight shines brightly on Africa."

Despite Cawood’s optimistic outlook, a number of key challenges face those looking to invest in the continent, including: (i) the limited availability of skills; (ii) a lack of internal capacity among state organisations to plan, procure, manage and implement capital infrastructure projects; (iii) the impact of political risk and government interference during project lifecycles; (iv) access to funding; and (v) an inhibiting regulatory environment.

Mr Cawood continued: "Infrastructure plays a key role in economic growth and reducing poverty having a 5-25 percent per annum return on investment as an economic multiplier. Those countries that have been most successful in developing and maintaining infrastructure have established programmes of prioritised investment opportunities with a number of features, including clear political support, a proper legal and regulatory structure, a procurement framework that can be understood by both procurers and bidders, and credible project timetables.”

As a relatively unexplored region with large natural resources, Sub-Saharan Africa is a hot spot of infrastructure investment potential.

Report: Trends, challenges and future outlook: Capital projects and infrastructure in East Africa, Southern Africa and West Africa

$6.1bn M&A deal sees LabCorp buy Covance

BY Richard Summerfield

A $6.1bn M&A deal which has seen Laboratory Corporation of America Holdings (LabCorp) agree to buy Covance Inc  will result in a major new company providing services to physicians, pharmaceutical companies and patients.

The deal will see LabCorp’s current chief executive officer, David King, lead the newly combined company, while Covance’s chairman and chief executive , Joe Herring, will continue to operate Covance as a division of LabCorp.

LabCorp and Covance are headquartered in North Carolina and Princeton respectively.

“As a combined company, we will be well positioned to respond to and benefit from the fundamental forces of change in our business, including payment for outcomes, pharmaceutical outsourcing, global trial support, trends in pharmaceutical R&D spending, personalised medicine, and big data and informatics,” said Mr King.

Mr King believes that the acquisition of Covance will result in cost reductions of around $100m annually within three years of closure, positioning LabCorp as the world’s leading healthcare diagnostics company.

Covance’s Joe Herring is equally sure as to the solidity of the deal. He said “Covance generates more safety and efficacy data for the approval of innovative medicines than any other company in the world, and LabCorp has longitudinal diagnostic data from more than 75 million patients.

“This combination leads the way to more cost-effective healthcare by improving the safety and efficacy of drug therapies, enabling accurate patient diagnostics, and advancing evidence-based medicines which will enable our clients to substantiate the value of their products and services to patients and payors.”

The deal, however, has attracted criticism from some analysts with the apparent incompatibility of the two firm’s businesses being a bone of contention: LabCorp’s core business entails the processing of patient samples for doctors and hospitals while Covance assists drug manufacturers with the running of clinical trials for their new products.

Although still subject to various approvals, the transaction is expected to close in the first quarter of 2015.

Perrigo to acquire Omega in $4.5bn M&A deal

BY Fraser Tennant

A major new pharmaceutical M&A deal will see Perrigo acquire Belgian firm Omega Pharma for $4.5bn – a deal which will transform the US consumer healthcare company into a top five global OTC company.

The deal between Perrigo, a leading global provider of quality affordable healthcare products, and Omega Pharma, one of the largest OTC healthcare companies in Europe, is being funded through a combination of cash, debt and equity. It is expected to significantly expand Perrigo’s international presence and provide the Dublin-based manufacturer with a much larger slice of the European over-the-counter healthcare sector.

No stranger to M&A, Perrigo bought the biotechnology company Elan in July 2013 for $8.6bn.

"The combination of these two great companies accelerates Perrigo's international growth strategy, substantially diversifies our business streams and establishes a durable leadership position in the European OTC marketplace," said Perrigo chairman, president and chief executive, Joseph C. Papa.

The Perrigo boss is confident that the deal will: (i) accelerate Perrigo's strategy to expand internationally; (ii) combine Perrigo's supply chain and operational excellence with Omega's OTC branding and regulatory expertise; (iii) create multiple opportunities to cross-sell Perrigo products in diverse new channels; (iv) position Perrigo to capture additional share of the $30bn European OTC market; (v) add approximately 2500 employees, including a large sales team of approximately 1100 individuals; and (vi) provide leadership position in a durable, European OTC cash pay market.

Mr Papa continued "Our strong financial performance and operational structure have enabled the continued growth and globalisation of our business model with Ireland as our gateway for this expansion. Together, our combined company will have an even larger product portfolio, broader geographic reach, and enhanced scale.”

“This is an exciting time in the history of our company,” added Omega Pharma founder and chief executive Marc Coucke. “My continued ownership investment demonstrates my confidence in the potential for the combined company. Together, we will have a substantially broader product portfolio with established global platforms and commercial channels to better serve our customers and patients."

The Perrigo/Omega Pharma deal is expected to close in the first quarter of next year.