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Sompo Holdings to acquire Endurance Specialty; India cuts policy rates

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


Sompo Holdings to acquire Endurance Specialty; India cuts policy rates

*Japan's Sompo HoldingsInc. is likely to acquire Bermuda's in adeal valued at more than US$6 billion, InsuranceInsider reported.The deal, expected to be completed by March 2017, will be finalized Oct. 5,Tokyo's The Nikkei reportedseparately.

*The Reserve Bank of India cut policy rates amid an improving inflation outlook.India's central bank slashed the policy repo rate under the liquidity adjustmentfacility by 25 basis points to 6.25% from 6.5%. The reverse repo rate under theliquidity adjustment facility was adjusted to 5.75% and the marginal standingfacility rate and the bank rate to 6.75%.

*Qatar Reinsurance Co.Ltd. obtained regulatory approval to operate a branch officein Singapore.

*MUFG Investor Services has completed its purchase of Rydex Fund Services, a 1940Act mutual fund administration business, from Guggenheim Investments. MUFGInvestor Services is MitsubishiUFJ Financial Group Inc.'s global asset servicing group.

GREATER CHINA

* Asurvey conducted by Deutsche Bank showed that fixed-income investors arepreparing to increase the share of onshore yuan bonds in their Asianlocal-currency bond portfolio to 13% in 2017 and 26% in five years, up from thecurrent level of 5%, Caijing reported.Deutsche Bank research estimates that China's onshore yuan bond market reached60.2 trillion yuan as of the end of August, with the interbank bond marketaccounting for more than 90% of the total onshore bond market.

*China will issue a series of measures to expand and support private investmentin the country, Economic InformationDaily reported.Private investment growth in China declined steadily in the first half.

*China's State Administration of Foreign Exchange said in a report on thecountry's international payments for 2016 that China will continue to have a substantialsurplus in its current account in the second half, Shanghai Securities News reported.

*The IMF adjusted down its forecasts for Taiwan's GDP growth rates for 2016 and2017 to 1.0% and 1.7%, respectively, in its World Economic Outlook report, theCentral News Agency reported.The organization's previous GDP forecasts for Taiwan were 1.5% and 2.2% for2016 and 2017, respectively.

*Taiwanese prosecutors sought to detain Mckinney Tsai and Wang Chi-pang, twoformer top executives at MegaFinancial Holdings Co. Ltd., after they accused the two offinancial irregularities, breach of trust, forgery and other related offenses,the Taipei Times reported.Officials at the Taipei District Prosecutors' Office said Tsai and Wang hadbeen evasive and had attempted to shirk their responsibility on allegations ofquestionable loans of up to NT$20 billion to Chien Chi Asset Management Co. inearly 2016.

JAPAN AND KOREA

*Symetra FinancialCorp. CEO Thomas Marra toldThe Sankei Shimbun that the companywill work with Sumitomo LifeInsurance Co. on investing in U.S. bonds. The company was acquiredby Sumitomo Life in February.   

*Fukuoka Financial GroupInc. said it is establishing an equity tie-up between its fintechunit, iBank Marketing Co. Ltd., and Sompo Japan Nipponkoa Himawari Life Insurance Inc.,Tokyo's The Nikkei reported.

*Osaka City ShinkinBank and MS&ADInsurance Group Holdings Inc.'s Mitsui Sumitomo Insurance Co. Ltd. will in supporting theircustomers' overseas expansion.

*Dai-ichi Life HoldingsInc. completed its transition into a holding companystructure, effective Oct. 1. With the completion of the transition, Dai-ichiLife Insurance Co. Ltd. became Dai-ichi Life Holdings Inc.

*South Korea's Financial Industry Trade Union warned that it will stronglyreject any political appointments to CEO posts to be vacated at a number offinancial institutions including Industrial Bank of Korea, Yonhap News Agency reported.

*The amount of bad debt written off by NongHyup Bank as of the end of June in connection withthe restructuring of shipbuilders and ocean carriers stood at 1.2 trillion won,Yonhap News Agency reported.

*Hyundai Securities Co.Ltd. shareholders approved a five-for-one share swap withKB Financial GroupInc. paving the way for a merger in December, Yonhap News Agency reported.

ASEAN

*The Bank of Thailand asked commercial banks to prepare more "normal"ATM cards and debit cards to meet customer demand, Thailand's Krungthep Turakij reported. The movewas made after the central bank received complaints from bank customers whosaid lenders often claimed to have run out of normal cards, forcing customersto request other types of cards with more expensive fees.

*Thai Finance Minister Apisak Tantivorawong will attend upcoming annual meetingshosted by the IMF, the World Bank Group and APEC finance ministers, with theaim of meeting key figures from a number of countries and explaining thepolitical and economic climate in Thailand, DailyNews reported.

*Malaysia's Association of Banks refuted a World Economic Forum report that saidaccess to financing is a problematic factor for doing business in Malaysia, thecountry's The Star reported.The group said that financing is available, with the total amount ofoutstanding business loans at 532.6 billion ringgit.

*Indonesia's Financial Services Authority has given pawnshop businesses twoyears to register and obtain a business license from the regulator, Bisnis Indonesia reported.

*Cristina Orbeta, president of the Philippine Deposit Insurance Corp., said theproposal to sell GSIS Family Bank by the Philippine government did not gothrough as none of the potential buyers went through a bidding process, thecountry's BusinessWorld reported.GSIS Family Bank is owned by the Philippines' Government Service InsuranceSystem.

SOUTH ASIA

*Reserve Bank of India Governor Urjit Patel said India's central bank will have"firmness but also pragmatism" in handling and resolving the issue ofnonperforming loans of commercial lenders in the country, Reuters reported.

*YES BANK Ltd. CEORana Kapoor said that there would likely be further easing by 75 basis pointsin the months ahead due to a "healthy set of domestic macros and sustainedglobal deflation," Reuters reported.

*ICICI Bank Ltd. cutits marginal cost of funds-based lending rate by five basis points to 9.05% peryear, effective Oct. 1, India's BusinessStandard reported.The lending rate was also cut to 8.85% from 8.90% per month.

AUSTRALIA AND NEW ZEALAND

*The Reserve Bank of Australia kept the cash rate unchanged at 1.50%.

*The Australian government is crackingdown on rate rigging of the country's financial benchmarks as theheads of the country's four major banks face a parliamentary committee overunethical bank practices.

*AMP Ltd. rolled out itsnew financial advice business, dubbed AMP Advice, The Australian reported.The new business aims to make "goals-based advice" more accessible toAustralians who do not have a financial adviser, said Rob Caprioli, groupexecutive for advice and banking at AMP.

IN OTHER PARTS OF THE WORLD

MiddleEast & Africa: Kenya's FamilyBank to shed jobs; Mozambican banks 'in good health'

Europe:ING faces union ire; Novo Bancosees Chinese interest; Russian central bank overhauls

LatinAmerica: Porto Seguro, AIGSeguros in auto portfolio deal; BNDES shifts focus to clean energy

NorthAmerica: Wells says loss fromIllinois suspension only $50,000, not 'millions'

NorthAmerica Insurance: HurricaneMatthew poses threat to reinsurers; insurer to exit ACA exchange

Sally Wang, Jonathan Cheah,Jaekwon Lim and Santibhap Ussavasodhi 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.

Learn more about Market Intelligence
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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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