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European Credit: More Trouble Ahead

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mike gordon

A survey of bank risk professionals shows a troubling picture of consumer and small business credit health
By Mike Gordon, FICOmike gordon
With all the focus on the macroeconomic troubles plaguing Europe, it’s easy to forget about the microeconomic troubles — the problems consumers and small businesses have paying their bills in the midst of a turbulent economy. For credit risk managers at banks across the region, these problems appear to be growing.
The problem is laid bare in the most recent European Credit Risk Outlook released by FICO, a leading provider of predictive analytics and decision management technology, and the European organization Efma. According to more than 100 European risk professionals surveyed in January and February, consumers and small businesses are going to find it harder to pay back credit of nearly every sort in the coming six months.
The forecast for credit delinquencies was worse across all credit products than in FICO and Efma’s last survey, conducted in fall 2011. Here are some of our top findings:

  • More than half of respondents now believe mortgage delinquencies will increase in the next six months, compared with 39 percent in the last survey.
  • Credit cards presented the biggest expected deterioration for the next six months: 65 percent of risk managers see increased delinquency, compared with 41 percent in fall 2011, an increase of 58 percent.
  • 70 percent of risk managers foresee an increase in delinquencies for small business loans.

The rise in small business delinquencies is a particular cause for concern. It’s a sharp increase from FICO and Efma’s last survey, where 52 percent of risk managers predicted credit quality deterioration. In the UK, the percentage of respondents that see an increase in small business loan delinquencies for the next six months jumped from 33 percent in the last survey to 61 percent. In Spain and Portugal, all respondents forecast an increase in delinquencies. The one bright spot was in Germany, Austria and Switzerland, where just 9 percent of respondents forecast an increase.
Now back to the macroeconomy – credit  problems reflect not just difficulties for consumers, small businesses and their creditors, but also for the economy overall. For example, when credit card delinquencies rise, card issuers will frequently reduce credit limits to reduce exposure, thus removing credit from the system and indirectly threatening retail sales. When small businesses can’t pay their bills, banks become less willing to lend to other small businesses, which crimps the economy and muffles job creation. Indeed, in our survey, 71 percent of respondents say that small businesses will find it harder to get credit in 2012.
The poor outlook for credit payments reflects a continuation of the vicious cycle that started with the global credit crisis: Credit problems reduce credit supply, which stalls economic recovery, which creates credit problems.
There are other factors straining credit supply right now as well. 68 percent of respondents reported that government deficit reduction measures will reduce bank’s profitability, which again causes banks to protect rather than lend capital. An even higher percentage, 78 percent, say that banking regulations will reduce credit availability. It certainly appears that regulations designed to keep the banking system from overheating are also delaying the thaw.
Furthermore, 55 percent of respondents said major banks will reduce their operations in Central and Eastern Europe, a trend that was just beginning to materialize in late 2011. Exposure in Central and Eastern Europe creates a need for the banks to hold more capital and, as capital is scarce, the normal reaction will be reduce exposure. However, credit demand in this region is still growing, and it can be more profitable for lenders to keep lending here, if they can cover the capital needs.
Where are things looking up? First, in the DACH region – Germany, Austria and Switzerland. The relative strength of these economies extends to consumers and small businesses, and lenders there were considerably more sanguine about the rest of the year.
For more economic good news, cross the pond. The responses to FICO’s latest survey in the U.S., conducted with PRMIA, shows a strong upward trend in optimism.

  • 35 percent of respondents expect mortgage delinquencies to rise during the next six months, which is 12 percentage points lower than last quarter and 17 points lower than the European forecast.
  • 32 percent of U.S. respondents expect delinquencies on credit cards to rise — about half of the forecast rise for Europe.
  • Only 28 percent of respondents expected delinquencies on small business loans to increase, which is 11 percentage points lower than last quarter, and less than half the European forecast.

With delinquencies rising and regulations tightening, what’s the game plan for European lenders? The challenges facing banks boil down to two overarching disciplines – capital management and risk management. Knowing where a bank stands today on these two measures will tell you what their strategic priorities will be for 2012.
Despite more stringent spending reviews, banks will invest in making sure their risk management teams, systems and processes for each product category are sound enough to enable responsible lending growth. They will also look for ways to make sure lending decisions are in synch with their capital management strategy, so that they neither increase the capital burden to an unsustainable level nor choke off profitable lending that could provide a strong return on capital.
Neither small businesses nor consumers are going to find their credit load easy to bear this year. But banks that excel at risk management and capital management will use this time to increase their lead in the market.
Mike Gordon is vice president and general manager for Europe, the Middle East and Africa at FICO. For a copy of the latest European Credit Risk Outlook, visit www.fico.com/news.

European Credit: More Trouble Ahead 3

Source: European Credit Risk Outlook, March 2012. Copyright 2012 Fair Isaac Corporation.

 

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Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 4

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 5

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 6

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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