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ADB to lend Bangladesh US$8B; Fed issues consent order to China AgBank

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


ADB to lend Bangladesh US$8B; Fed issues consent order to China AgBank

* The AsianDevelopment Bank will lend Bangladesh US$8 billion over the next five yearsfor infrastructure and skill building as part of efforts to strengthen thecountry's economy.

* The U.S. Federal Reserve a cease and desist order toAgricultural Bank of ChinaLtd. and its New York branch related to weaknesses in the lender's BankSecrecy Act and Anti-Money Laundering compliance program. Under the terms ofthe consent order, Agricultural Bank of China must submit a written action plandescribing the actions to be taken to improve the branch's BSA/AML complianceprogram.

* PacificInvestment Management Co. LLC is working to create an presence in China by2018, Bloomberg News reported. Eric Mogelof, head of Asia Pacific at PIMCO,reportedly said recent regulatory changes have prompted the move.

* Canada's Fairfax Financial Holdings Ltd. is seeking to US$500 million to fundpotential acquisitions in India, including a stake in Catholic Syrian Bank Ltd., Business Standard reported, citing "bankers close to thedevelopment."

* Thai Asset Bright Co. is collaborating with Chinesee-commerce firm Tencent Group to offer the latter's WeChat Pay facility inThailand, The Nation reported.The firms expect Chinese tourists to Thailand to benefit from the partnership.

* YuantaCommercial Bank Co. Ltd. said its first overseas subsidiary, TongYang Savings Bank, will be renamed Yuanta Savings Bank Philippines Inc., the Liberty Times reported.The bank's subsidiary in South Korea will also be renamed soon.

GREATER CHINA

* Chinese enterprises have raised US$109.9 billion in the globalequity capital market since January, down 4.6% year over year, Reuters reported.  Of that total, Chinese enterprises raisedUS$28.8 billion in overseas IPOs, down 31.6% year over year.

* Zhang Xiaoai, vice chairman of the Asset ManagementAssociation of China, said that qualified foreign-invested and joint ventureprivate equity funds are welcome to register with the association and startsecurities and fund operations in China, Caixinreported.

* A total of 7.83 billion yuan worth of Hong Kong funds weresold in China, while 81.76 million yuan of Chinese funds were sold in Hong Kongas of Aug. 31, Caixin reported.  Sally Wong, CEO of the Hong Kong InvestmentFunds Association, said that Chinese investors were seeking global allocationsof their assets with their increasing fortunes and expectations of the yuan'sdepreciation.

* Wei Benhua, former deputy administrator of China's StateAdministration of Foreign Exchange, said the country might consider furtherexpanding the yuan's fluctuation range and gradually adding other currenciesclosely related to China's trade to the China Foreign Exchange Trade System'scurrency basket, Reuters reported.Wei suggested adding the South Korean won, South African rand, Indian rupee andBrazilian real to the basket, which currently includes 13 currencies.

* China's State Administration of Foreign Exchange deniedreports that Deutsche Bank repatriated the proceeds from its sale of a stake inHuaxia Bank, China Business News reported.SAFE said that foreign institutions transferring shares in domesticinstitutions could apply for foreign currency transactions directly from banks,which can process such transactions following authentication and complianceaudits without the need to request approval from the regulator.

* The Li Ka Shing Foundation disclosed that Hong Kong tycoonLi Ka Shing, three of Li's foundations and his son Victor Li Tzar-kuoi own11.62% of Postal Savings Bank ofChina Co. Ltd.'s H shares, equivalent to 2.8% of the bank's totaloutstanding shares, Caixin reported. Li issaid to have absolute confidence in the postal bank, and is investing in it asa personal long-term investment.

* Perng Fai-nan, Taiwan's central bank governor, said hewould retire once his term expires in February 2018, after 20 years at the helmof the institution, the Liberty Timesreported.

JAPAN AND KOREA

* Japan's Financial Services Agency approved the of andJoyo Bank Ltd.,Tokyo's The Nikkei reported.The two companies will set up a new entity called Mebuki Financial Group byOct. 1 as part of the merger. The combined assets of the new entity areexpected to reach ¥15 trillion, which will make it the third-largest regionalbanking group by assets.

* The Financial Services Agency will investigate companiesthat do not procure venture funds from traditional banks to discover potentialneeds that have not surfaced, The Nikkeireported.

* Japan PostBank Co. Ltd. initiated discussions on increasing the deposit limitagain for two years, beginning April 2017, TheNikkei reported.The deposit limit was raised to ¥13 million in April from ¥10 million.

* According to the Bank of Korea, the interest rate of the country'smortgaged-backed loans increased to 2.7% as of Aug. 31, up 40 basis points fromthe previous month, the Dong-a Ilbo reported.

* South Korea's Credit Financing Research Institute saidthat the total transaction amount of credit card payments in August was 61.7trillion won, 14.9% higher than the prior-year period, the Asia Business Newspaper reported.The research institute cited the Rio Olympics as a contributing factor forincreased spending.

ASEAN

* Post Today reported that theBank of Thailand willoffer 50 billion baht of loans with a 14-day maturity in a bid to absorb excessliquidity.

* The Export-Import Bank of Thailand said it will be able toachieve a full-year lending target of 18 billion baht in 2016, Krungthep Turakij reported. As ofAug. 31, the bank had approved new loans totaling 16 billion baht.

* The board of Thailand's National Savings Fund intends toimprove investment returns for fund members by building a higher riskportfolio, Krungthep Turakij reported, citingSecretary-General Somporn Chitphentom. In 2017, the fund's new portfolio willhave 10% invested in debentures and equity instruments.

* Thailand's Fiscal Policy Office expects the Thai economyto have grown 3.5% in the third quarter, helped by expanding exports, publicinvestment and tourism, Krungthep Turakijreported. Theoffice forecasts full-year GDP growth of 3.3%.

* The Indonesian government booked a record high in bondissuances in 2016 of more than 600 trillion rupiah, Kompas reported,citing Loto Srianita Ginting, debt director at the Finance Ministry.

* Bank Indonesia Governor Agus Martowardojo said he expectsa US$38 billion increase in foreign exchange reserves by the end of 2017,partly due to the government's tax amnesty program, The Jakarta Globe reported,citing Reuters. Indonesia's forex reserves stood at $113.5 billion as of August.

* Vietnam enjoyed an economic growth rate of 6.4% during thethird quarter as both the agricultural and industrial sectors performed well,Bloomberg News reported.

* Several commercial banks in Vietnam are consideringcutting their lending rates by 0.3% to 0.5% following recent cuts in dongdeposit rates, Vietnam News reported.The central bank has asked the banks to lower lending rates to help boostbusiness activity.

SOUTH ASIA

* ReligareFinvest Ltd. intends to raise 6.5 billion Indian rupees through arights issue, Mint reported,citing two people close to the development. The company, which recently wroteoff a 1.8 billion rupee debt to ABG Shipyard Ltd., is looking to boost itscapital adequacy ratio to 15%.

* Utkarsh Micro Finance Pvt. Ltd. will reduce foreignholdings in the company as it raised 3.95 billion rupees from domesticinstitutional investors, Mint reported.Utkarsh is one of the ten nonbanking finance companies to receive a small-banklicense from the Reserve Bank of India.

* India's central bank wants commercial lenders to ease andexpedite the process of loan disbursement to farmers, Business Standard reported.

AUSTRALIA AND NEWZEALAND

* The Australian Prudential Regulation Authority madechanges to rules regarding net stable funding ratio requirements, which theregulator will implement in January 2018, TheAustralian reported.The revised requirements are expected to alleviate the risk of competingdeposit rates among lenders.

* The Australian Securities and Investments Commissionpermanently banned a former DeutscheBank AG foreign exchange trader for making false trade entries tooffset his trade losses, The Australianreported,citing the American Association of Publishers. The entries inflated the bank'srevenue by 28 million euros.

IN OTHER PARTS OF THEWORLD

Middle East & Africa: Saudi Arabia's bond issue; Ghana's e-fraud worries

Europe: Phoenix buys Abbey Life; Barclays, Credit Suisse in US MBStalks

Latin America: Generali selling Guatemalan business; no agreement in Brazilianbanking labor strike

North America: Senators not done with Stumpf; Scottrade Financial said to be forsale

North America Insurance: Assured Guaranty to acquire MBIA UK Insurance; Justice Departmentamends lawsuit to block Anthem/Cigna deal

Sally Wang, SarunSaelee, Cathy Hwang, Emi White and Aditya Suharmoko contributed to this report.

The Daily Dose has aneditorial deadline of 6:30 a.m. Hong Kong time. Some external links may requirea subscription.


Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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