Banks find path to profitability blocked

BY Richard Summerfield

Banks across the continent have struggled to achieve profitability since the onset of the financial crisis nearly a decade ago. As the crisis disappears in the rear view mirror, many analysts had hoped that financial institutions would have returned to profitability by now, but as a result of numerous head winds many are still struggling - a situation that appears likely to continue for some time, according to new report from  KPMG.

The firm’s data suggests that banks across the continent will continue to struggle to achieve profitability in the coming years due to higher capital requirements, perpetually low interest rates and the weakness of the local economy.

Marcus Evans, a partner in KPMG’s European Central Bank office, said that European banks were still grappling with low or negative interest rates and mounting capital and regulatory costs. “The successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost‑to‑income ratios through smart use of technology,” he said. “Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”

KPMG’s report, 'The Profitability of EU Banks: Hard Work or a Lost Cause?', suggests that Europe’s banks are set to continue to see profitability slip out of reach with the average return on equity across all banks in the EU remaining static at around 3 percent. The cost of capital, however, is considered to be around 10 to 12 percent, according to KPMG.

Regulatory pressure, which has been a notable feature of the global financial market over the last decade, may also be ramped up in the near future. The Basel IV regulations, a more rigorous set of rules, could add almost 0.5 percent to the overall cost of European banks' funding. As Basel IV looms ever closer, the pressure on Europe’s banking sector is only set to increase.

The issue of non-performing loans (NPLs)  is also a major millstone around the neck of European banks. With a total of $1.3 trillion, these NPLs are beginning to weigh heavily and will likely have a detrimental effect on lending ability for the foreseeable future.

Report: The Profitability of EU Banks: Hard Work or a Lost Cause?

Volkswagen deal rubber stamped

BY Richard Summerfield

A US district judge in San Francisco has approved one of the biggest corporate settlements on record, stemming from the Volkswagen AG diesel emissions scandal which erupted last year. The company admitted last year that it had equipped its diesel powered vehicles with devices able to circumnavigate emissions testing, which allowed them to releases levels of pollutants far in excess of permitted levels.

Under the terms of the settlement, Volkswagen will offer drivers of 475,000 of the company’s diesel-powered vehicles with 2-litre engines the option of selling back their cars to Volkswagen or waiting for a government-approved fix which will allow the vehicles to remain in service. Consumers have until September 2018 to decide whether to accept the buyback offer. If Volkswagen does not repair or fix at least 85 percent of affected cars by June 2019, the company will incur further penalties. Nearly 340,000 owners of Volkswagen vehicles, including Beetles, Passats, and Audi A3s, have registered to take part in the settlement. About 3500 owners have opted out.

Volkswagen has had to allocate up to $10bn for consumers who wish to trade in their vehicles. Furthermore, Volkswagen’s customers will also receive an additional cash payment of between $5100 and $10,000 per person by way of an apology. The settlement deal also includes a $2.7bn contribution the company must make to an environmental trust over the three year period in order to offset the pollution caused by Volkswagen’s diesel vehicles. The company will also be required to invest $2bn in zero-emission vehicles over the next 10 years.

"Final approval of the 2.0L TDI settlement is an important milestone in our journey to making things right in the United States, and we appreciate the efforts of all parties involved in this process. Volkswagen is committed to ensuring that the program is now carried out as seamlessly as possible for our affected customers and has devoted significant resources and personnel to making their experience a positive one," said Hinrich J. Woebcken, president and CEO of Volkswagen Group of America, Inc., in a statement announcing the approval.

The court’s approva did not come as a surprise. Indeed, Judge Breyer, who presided over the hearing related to the settlement, had indicated over the summer that he would approve the deal. Both parties had been urged by the judge to settle the case in a timely fashion, noting that “intensive” negotiations would provide “benefits much sooner than if litigation were to continue” and reduce the prospect of “additional environmental damage".

News: U.S. judge approves $14.7 billion deal in VW diesel scandal

AT&T to acquire Time Warner in $86bn deal

BY Fraser Tennant

“A new company with complementary strengths to lead the next wave of innovation in converging media and communications industry”, is how the $86bn AT&T Inc. acquisition of Time Warner Inc. is being presented to the world.

The definitive agreement that will see the creation of a media-telecom giant is a stock-and-cash transaction valued at $107.50 per share. Time Warner shareholders will receive $53.75 per share in cash and $53.75 per share in AT&T stock.

AT&T expects to achieve $1bn in savings within years of the deal closing.

The combination of AT&T, which has unmatched direct-to-customer distribution across TV, mobile and broadband in the US, mobile in Mexico and TV in Latin America, with Time Warner, a global leader in creating premium content (which owns CNN and HBO), has been positioned to give customers unmatched choice, quality, value and experiences that will define the future of media and communications.

The transaction has been unanimously approved by the boards of directors of both companies.

“This is a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry works for customers, content creators, distributors and advertisers,” said Randall Stephenson, AT&T chairman and CEO. “Premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen. We’ll have the world’s best premium content with the networks to deliver it to every screen.”

The transaction will see Time Warner's vast library of content (which includes film franchises Harry Potter & DC Comics, as well as the Big Bang Theory and Gotham TV series) and ability to create new premium content, with AT&T's extensive customer relationships, world’s largest pay TV subscriber base and leading scale in TV, mobile and broadband distribution.

“This is a great day for Time Warner and its shareholders,” said Jeff Bewkes, chairman and CEO of Time Warner. “Combining with AT&T dramatically accelerates our ability to deliver our great brands and premium content to consumers on a multiplatform basis and to capitalize on the tremendous opportunities created by the growing demand for video content."

Expected to close before year-end 2017, the merger of AT&T and Time Warner is subject to approval by Time Warner Inc. shareholders and a review by the US Department of Justice. 

Bewkes concluded: “My senior management team and I are looking forward to working closely with Randall and our new colleagues as we begin to capture the tremendous opportunities this creates to make our content even more powerful, engaging and valuable for global audiences.”

Since the announcement of the deal, presidential candidates Hilary Clinton and Donald Trump, as well as US lawmakers, have raised queries. Furthermore, it has been announced that a Senate subcommittee will be held in November to consider the transaction.

News: AT&T to pay $85 billion for Time Warner, create telecom-media giant

Poverty levels hit new high as Greek woes continue

BY Fraser Tennant

In a further depressing development for the beleaguered citizens of Greece, new research shows the under pressure European Union (EU) member state as having the highest increase of people finding themselves at risk of poverty or social exclusion, some 800,000 compared to 2008.

According to data compiled annually by Eurostat (the statistical office of the EU) on poverty rates in Europe (EU28), more than one out of three (36 percent) of the Greek population is at risk of poverty and social exclusion – the highest level in the Eurozone. Cyprus is the next closest on 28.9 percent.

The average rate for the EU28 has remained at 23.7 percent between 2008 and 2016.

Additionally, and in what should perhaps be viewed as an unfortunate piece of timing, the Eurostat findings coincide with the International Day for the Eradication of Poverty – an initiative by European decision-makers known as the Europe 2020 strategy which aims to lift 20 million people out of poverty by 2020.  

"Austerity politics have failed in the Eurozone,” is the view of Dimitris Rapidis, a policy and communication advisor at Bridging Europe. “The poverty and social exclusion rate in Greece is worsening, despite the efforts by the government to balance side effects of austerity.

“We have reached a point where even those supporting extreme financial consolidation at the expense of social cohesion and development can no longer convince even the most conservative parts of the European electorate.”

The main challenge facing progressive EU leaders, according to Mr Rapidis, is to address the appeal of far-right parties that seek to capitalise on social grievances, and foster a broader democratic alliance that can deliver a fresh, growth-oriented vision for the EU.

“Broadly speaking, the leaders of the European South that have been direly hit by austerity and financial slowdown - such as Spain, Italy and Cyprus - need to push Brussels and Berlin for change of course in practice and not exhaust their will in statements,” says Rapidis. “The EU and Eurozone have to choose between two distinct options: either gradually collapse under the pressure of nationalism and the far-right or find a way out by reviewing and improving the Stability and Growth Pact so that it can be beneficial for all member-states and leave space for flexible economic policies."

Next up for Greece is a European Council meeting in Brussels on 20 and 21 October, where prime minister Alexis Tsipras will be focusing on the second programme review, as well as attempting to source further debt relief for his embattled country.

News: There is little indication Europe is winning the battle against poverty

Period of ‘prolonged weakness’ for UK

BY Richard Summerfield

Since the UK voted in June to break away from the European Union, the country’s economy has been surprisingly resilient. That durability has made a mockery of the many apocalyptic predictions around Brexit which preceded the vote. Although sterling has tumbled in recent weeks, dropping under $1.21, the UK’s economy has been relatively trouble-free since the summer vote. Indeed, according to the 'EY ITEM Club Autumn Forecast' released this week, the UK’s economy is still expected to grow by 1.9 percent this year, driven by strong consumer spending, which is up by 2.5 percent, and very low inflation of 0.8 percent.

Yet despite of this positive outlook, the report claims that the UK is set for a period of ‘prolonged weakness’, thanks, in part to rapidly increasing inflation which is expected to reach 2.6 percent in 2017, before easing back to 1.8 percent in 2018. Consumer spending, too, is expected to slow to 0.5 percent in 2017 and 0.9 percent in 2018.

Uncertainty surrounding the nature of the UK’s future relationship with the EU is also likely to adversely affect corporate confidence. EY expects business investment to decline by more than 2 percent in 2017, after a drop of 1.5 in 2016.

Peter Spencer, chief economic advisor to the EY ITEM Club, comments: “So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive. Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead. As inflation returns over the winter it will squeeze household incomes and spending. The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth.”

Though EY’s prediction is worrying, there is a silver lining: the pound’s weakened position is great news for the country’s exporters. Exports are likely to jump 4.5 percent in 2017 and 5.6 percent in 2018, according to the report. The resiliency of the export space is contingent, however, on the nature of the UK’s future relationship with the EU. Given that 45 percent of the country’s exports are to the EU, a ‘hard Brexit’ may spell trouble for the UK’s export industry.

Report: EY ITEM Club Autumn Forecast