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ICBC Plans No Fund Raising; Loans Jump to Record in 2009

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, said it has no fund-raising plan at the moment even as it boosted lending by 24 percent to a record last year.

ICBC’s capital adequacy ratio is “sound” and the highest among rivals, and pressure on capital raising is “not big,” President Yang Kaisheng said at a press conference in Beijing yesterday.

China’s banks doled out a combined 9.59 trillion yuan ($1.4 trillion) in new loans last year, helping the government engineer a turnaround in the world’s third- largest economy. The credit binge drained lenders’ capital and sparked concerns about asset bubbles, a higher number of bad loans and increased inflation pressure.

China’s publicly-traded banks have already raised about 131 billion yuan from bond and share sales since the second half of last year to replenish capital drained by loan growth, and they have announced plans to raise a further 127 billion yuan, according to Bloomberg data.

Beijing-based ICBC’s capital adequacy ratio, a measure of the bank’s financial strength, fell to 12.60 percent at the end of third quarter, from 13.06 percent at the end of 2008.

The nation’s policy makers aim to avert asset bubbles and restrain inflation by limiting new credit at 7.5 trillion yuan this year. China’s growth accelerated to 10.7 percent in the fourth quarter, the fastest pace since 2007, and property prices climbed the most in 21 months.

Boost Financing

ICBC said it will boost financing to projects already under construction and to small-and-medium sized firms and cut loans to new projects that are not government-backed and if they’re energy-intensive or polluting. Loans would also be reduced to sectors with overcapacity, Yang said.

Loans by the bank this year will be less than in 2009, Yang said. ICBC’s new loans were 1.03 trillion yuan last year, Yang said. That’s a record, according to calculations based on Bloomberg data.

After a government bailout five years ago, ICBC is now the world’s biggest bank by value. The lender has more than doubled profit during the past three years and has more than 16,000 outlets nationwide and 112 branches outside China, and 190 million personal customers — equivalent to the populations of Russia and Canada combined.

ICBC on March 4 submitted a tender offer to buy all shares in Thailand’s ACL Bank Pcl in a deal that would give ICBC a foothold in the southeastern Asian nation after acquisitions in Indonesia, Macau, South Africa and Canada since 2007. The bank aims to triple the share of profit coming from abroad to 10 percent.

ICBC will be “active and prudent” with overseas expansion this year, Yang said.

Mar

07

2010

SEC Mulled National Security Status for AIG Bailout Details

U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

The request to keep the details secret were made by the New York Federal Reserve—a regulator that helped orchestrate the bailout—and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on Jan. 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored “in a special area where national security related files are kept,” the lawyer wrote.

In another email, a New York Fed official said the SEC suggested in late December 2008, that AIG file the document under seal and then apply to the regulatory agency for so-called confidential treatment, if central bankers wanted to stop the information from becoming public.

The emails were included in the mountain of documents the New York Fed turned over last week to the House Committee on Oversight and Government Reform, which will hold a hearing Wednesday into the AIG bailout and the New York Fed’s role in trying keep the specific terms of that Fed-engineered rescue in November 2008, from being made public.

More than a year later, the Fed’s bailout of AIG remains controversial because it funneled nearly $70 billion to 16 big U.S. and European banks that had bought credit default swaps from AIG. Banks like Goldman Sachs, Societe Generale and Deutsche Bank had bought those insurance-like derivatives to guard against defaults on hundreds of securities backed by subprime mortgages.

‘Backdoor Bailout’

Lawmakers on Capitol Hill have labeled the AIG bailout, in which the New York Fed created a special entity to purchase those securities from the banks at essentially their face value, a “backdoor bailout” for the 16 financial institutions.

The new batch of emails, along with others that have become public in recent weeks, reveal that some at the New York Fed had gone to great lengths to keep the terms of the bailout private and the SEC may have played a role in contributing to some of the secrecy surrounding the AIG rescue package.

“The New York Fed was orchestrating what can only be characterized as an extreme effort to ensure that details of the counterparty deal stayed secret,” Rep. Darrell Issa from California, the ranking Republican on the House Oversight Committee, said through a spokesman. “More and more it looks as if they would’ve kept the details of the deal secret indefinitely, if they could have.”

In March, some of the secrecy surrounding the AIG bailout began to fall away when the insurer, under pressure from Congress and the SEC, agreed to publicly name the 16 banks that got money in the rescue package and how much each received.

But AIG, largely at the prodding of the New York Fed, refused to make public all of the information in the controversial document, officially called “Schedule A—List of Derivative Transactions,” according to the emails turned over by the central bank to Capitol Hill. AIG continued to seek confidential treatment from the SEC for the redacted portions of the five-page filing.

Last May, the SEC did grant AIG’s request for confidential treatment for the remaining redacted portions of the Schedule A filing. The redacted parts include the CUSIP, or trading ID, number for each security on which AIG wrote a CDS contract, as well as the face value of each individual security that AIG had insured against default.

The SEC agreed to let AIG keep that information confidential until November 2018—or the 10th anniversary of the bailout. Critics contend that without the redacted information, it is difficult to determine which of the 16 banks had held the worst-performing securities, and which banks originated the worst of the troubled securities.

Geithner Under Microscope

The New York Fed has argued the information needs to remain confidential to enable BlackRock Inc , which manages the portfolio of securities bought from the banks, to compete with hedge funds on an even playing field.

U.S. Treasury Secretary Timothy Geithner, who has drawn fire for his role in the bailout, was set to testify before the House Oversight Committee on Wednesday. Geithner, who led the New York Fed at the time of the AIG bailout, has said he was not privy to the discussions about what information AIG should or should not release to the public and the SEC.

New York Fed spokeswoman Deborah Kilroe said on Friday that the more than 250,000 pages of documents provided by the central bank to Congress “demonstrate that the FBNY’s actions assisted AIG in ensuring the accuracy of its disclosures and protected important U.S. taxpayer interests.”

For its part, SEC has said it pushed AIG to make public the list of banks getting bailout money and only signed off on the request for confidential treatment after the insurer released that information. SEC spokesman John Nestor said: “The SEC required AIG to make public all of the information in Schedule A that was material to an investor in AIG.”

But this latest round of emails reveals that it was an official with the SEC in December 2008 who recommended that AIG and the New York Fed could seek confidential treatment for the Schedule A document as an alternative to making the entire document public.

In November, a New York Fed lawyer, in another email, had said he thought it was “highly unlikely” the SEC would grant confidential treatment for the document.

AIG and the New York Fed took the SEC’s advice and filed a heavily redacted version of the Schedule A on Jan. 14, 2009, and at the same time requested confidential treatment for the redacted portions.

The emails also discuss that BusinessWeek magazine had submitted a Freedom of Information Act request for the document and the confidential treatment request was a way of dealing with that and other possible requests by the media for the document.

Jan

29

2010

Four Things to Watch for in 4Q Earnings

The holidays have come and gone, and earnings season is once again upon us. Here are four things that The Finance Professor will be focusing on as companies report their fourth-quarter earnings over the course of the next few weeks.

1. Revenue Growth

2009 was marked by net income stabilization and moderate growth, a feat achieved primarily through cost reduction. Top-line revenue growth, however, was stunted due to poor comparisons with the prior year and a strengthening U.S. dollar. If we are truly going to experience an economic rebound, earnings growth is going to have to be sourced from top-line revenue growth.

Indications are that holiday season sales were better than expected. This was due to both improving consumer demand and smaller markdowns taken by retailers.

2. Corporate Actions

- Corporations have been stockpiling cash throughout 2009. The increase in cash balances is being generated from multiple sources of cash flow: Normal operations aided by lower payrolls and reduced selling, general and administrative expenses

- Additional debt issuance as interest remains low and appetite for corporate debt remains high

- Cutbacks on stock repurchases

I would expect corporations to announce corporate actions in the first quarter of 2010. This would take the form of increased dividends, stock repurchase authorizations or, more important, acquisitions. I believe that the best way to play M&A is not to try to guess which companies will be acquired but rather to predict which will benefit from the M&A process.

3. Improvement in Auto Sales

Cash for Clunkers not only boosted auto sales in the summer but also depleted inventories. December auto sales showed some improvement, especially for Ford Motor, which appears to be the strength of the U.S. automobile industry. It is likely that the need to replenish inventories at the auto manufacturing plants also had the secondary effect of boosting auto supply and component earnings.

If my assumptions are correct, then we should see improved results and guidance from the entire auto supply and component chain.

4. Financials

There has been dramatic improvement in the financial industry, especially the banks. As a group, the banks have raised capital, lowered costs, sold off some businesses, laid off employees and been forcibly restrained from paying excessive bonuses. In the prior quarter, we began to see that capital ratios — primarily tier I capital — were back up to healthy levels. Tier 1 capital, defined by international agreement under the Basel accords, is considered the primary measure of a bank’s financial strength from regulatory and investor perspectives.

The last laggard indicator for the financials is on the consumer credit side. Specifically, we need to focus on nonperforming loans, credit card and loan delinquencies, and mortgage defaults. In the third quarter, the industry in the aggregate reported that these metrics were no longer deteriorating on a significant basis. Some firms, such as American Express, reported stabilization and minor improvement in these metrics. Should we see the entire industry report stabilization and improvement, then the true bottom in this industry will be in place.

Jan

26

2010

Citi, Wells Fargo to Repay $45 Billion in Bailout Funds

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Citigroup [C 3.70 -0.25 (-6.33%) ] and Wells Fargo [WFC 25.49 0.08 (+0.31%) ] said they were paying back funds to the U.S. government, in transactions that will end taxpayers’ capital support of the biggest U.S. banks much sooner than had been expected.

Uncle Sam and money

With regulators signing off on the plans, the U.S. government is signaling that it is comfortable removing some of the support it has provided to banks since the failure of Lehman Brothers created pandemonium in financial markets in the fall of 2008.

The banks are hoping to escape some of the added regulatory scrutiny that came with U.S. support. The Obama administration’s pay czar, Kenneth Feinberg, had to sign off on pay for Citigroup’s top 100 employees after the bank received more than $45 billion of capital over three bailouts.

Wells Fargo received only one government capital injection of $25 billion and was subject to fewer restrictions.

Both banks faced pressure to repay the United States after Bank of America[BAC 15.63 --- UNCH (0) ] announced plans to sell more than $18 billion of equity to help repay the $45 billion it received from the government under the Troubled Asset Relief Program, analysts said.

Citi and Wells Fargo became the last big banks to leave TARP.

But the government and the banks that have left TARP are taking a risk. If the economy weakens considerably next year, more bailouts could be necesssary.

Citigroup Chief Executive Vikram Pandit is giving up a government guarantee the bank had against excessive losses on $250 billion of assets. The bank has yet to consistently post real profits from its banking operations.

Banks are evidently concerned about the economy, and have been reducing their loan books and boosting their investments in risk-free securities.

President Barack Obama told top U.S. bankers on Monday that they had to open up the credit spigot for small businesses and start lending again.

Still, many investors now believe the worst is behind the U.S. economy, in part because of extreme efforts by the government and the Federal Reserve to rescue the financial system.

The United States is more optimistic about the outlook for the banking sector as well. The Obama administration’s projected cost to taxpayers for TARP was cut by about $200 billion last week.

Citigroup said it plans to issue $17 billion of common shares and $3.5 billion of securities that convert into shares in three years to help repay $20 billion of capital it received late last year from TARP.

Citigroup’s share offering is expected to be sold on Wednesday.

The government, which owns about 7.7 billion of the bank’s shares worth about $28.5 billion, plans to sell up to $5 billion of Citi shares alongside the bank’s offering.

Wells Fargo plans to sell $10.4 billion of shares, and also raise up to $1.5 billion of equity through asset sales.

Both Citigroup and Wells Fargo are offloading stock to their employees, with Wells selling $1.35 billion to benefit plans instead of contributing cash to them, and Citigroup selling $1.7 billion of common stock to staff pending shareholder approval.

Beyond Wells Fargo’s share sales and asset sales, the bank did not specify how it would fund the rest of its payment to the government.

PAYING THE PRICE TO EXIT

Both banks will enjoy some benefits from exiting TARP. Citigroup will save about $2 billion of interest expense annually by exiting TARP, while Wells Fargo will reduce annual dividend expense by $1.25 billion.

Citigroup will also reduce the government’s say over the bank’s compensation packages beginning in 2010, although the bank cannot pay employees more for 2010 to make up for 2009 pay cuts mandated by Feinberg, a Treasury official said.

But both deals are also bruising for the banks. Citigroup is taking an $8 billion pre-tax loss on the trust preferred purchase, because the securities were recorded on the bank’s books at less than their face amount.

Canceling securities linked to the government’s asset guarantee will result in another $2.1 billion of pre-tax losses for Citigroup. Those losses eat into the benefit of raising capital.

Wells Fargo’s hit to common shareholders will be $2 billion in the fourth quarter.

Both banks are also diluting shareholders, something Wells Fargo executives had said they wished to minimize or avoid.

To avoid extra dilution, Wells Fargo said it was buying out Prudential Financial Inc’s [PRU 49.45 0.56 (+1.15%) ] stake in a brokerage joint venture for cash instead of its prior plans to use cash and stock. Prudential said last week that deal, which closes in January, will boost its investable funds by about $4 billion.

For Citigroup, the dilution to shareholders from its deal is about 15 percent. That is much higher than the dilution to Bank of America Corp’s shareholders when the bank repaid the government earlier this month.

Citigroup received $45 billion last year under TARP. This year, the government agreed to convert $25 billion of those funds into Citigroup common stock, leaving the United States with a stake of roughly 34 percent in the bank.

Dec

14

2009

U.S. regulators unlikely to break up biggest banks

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U.S. lawmakers are looking at ways to limit the damage that large banks, insurers and funds can wreak on the financial system, but breaking up healthy companies is unlikely to be part of the mix because it is too difficult to implement.

The Federal Reserve already has the authority to force banks to shed businesses that pose a risk to the banking system, but that power is rarely, if ever, used.

The issue of breaking up banks deemed “too big to fail” has been discussed for months as lawmakers and regulators look to reduce the chances of a meltdown like the recent financial crisis, which cost taxpayers hundreds of billions of dollars and hobbled major financial institutions.

It flared up again when U.S. Representative Paul Kanjorski added an amendment to proposed financial reform legislation allowing regulators to break up healthy companies that posed a risk to the financial system.

On Wednesday, the House’s lead financial rule-writing panel voted to approve the amendment, and it may well pass the full House of Representatives. But it is seen as less likely to make it through the Senate. And even if it does, regulators are unlikely to use their new power, analysts say.

Although experts may continue to discuss the idea of breaking up large, healthy institutions, many argue it deserves to die because of the myriad logistical obstacles.

“Capping the size of financial institutions is just the wrong thing to do,” said Dan Alpert, managing director at boutique investment bank Westwood Capital.

One problem is determining which institutions are too big to fail. If a major bank were split up, the individual businesses might still be too big to fail, and those units would in turn have to be divided. Determining how to best divide them is difficult.

Meanwhile, a number of businesses that did not seem systemically important five years ago were in fact critical during the credit crunch. A good example is the bond insurers, which were seen for years as small companies interesting mainly to short-sellers. That changed in early 2008, when bond insurers’ difficulties suddenly seemed important to the entire financial system.

“The whole idea of a top 20 list of financial institutions that are systemically important does not make sense, because No. 21 might have problems, and that might create problems for Nos. 1 and 2. It’s not always clear who is too big to fail,” said Christopher Laursen, a senior consultant at NERA Economic Consulting who previously worked at the Federal Reserve.

CAPITALIZING THE PARTS

Another possible problem in breaking up healthy financial institutions is capitalizing the parts. A company’s individual businesses may need more capital if they are separate than if they are together, said Tanya Azarchs, a bank ratings analyst at Standard & Poor’s.

“The market is more tolerant of lower capital levels for a company if there is more diversification,” Azarchs said.

Diversification makes a financial company’s earnings more stable — when one business is weak, another may be flourishing. Regulators don’t give financial companies credit for diversification, but investors and to a lesser extent rating agencies do.

So regulators breaking up a company may also have to figure out how the resulting businesses will raise capital. Convincing investors to provide more equity may be difficult.

“You’re breaking up a company because you’re concerned it will hurt the financial system, even though to everyone else it seems healthy. Is that a good story to tell investors?” said one hedge fund manager.

Breaking up healthy companies may not make sense, but few analysts dispute that the government needs a way to break up large financial firms on the brink of collapse.

The regular bankruptcy process is not ideal for winding down a major bank in a way that minimizes the impact on the financial system, as evident from the demise of Lehman Brothers Holdings in September 2008.

And some experts believe breaking up even healthy banks may be a good idea.

Large banks can help companies and governments globally raise capital, but the financial crisis revealed the enormous cost of that benefit, said Steve Kohlhagen, who built the derivatives business at First Union and later Wachovia.

Even if the United States is the only country to break up its banks, and foreign banks start winning more global business, over time smaller institutions will prove to have an advantage, Kohlhagen said.

“There’s a cost, but in the long run I think breaking up institutions is the only way to do it,” he said. Breaking up large institutions makes sense if Americans are generally uncomfortable with taking over large failed institutions from time to time, he added.

But to many analysts, the seemingly simple fix of breaking up big healthy institutions is anything but simple.

“Breaking up these institutions is not an easy thing to do, and if it’s not done right, it could create an unlevel playing field based on potentially arbitrary criteria,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a research and consulting firm focusing on political and regulatory risk.

Dec

07

2009

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