Janet Hontoir's News Round-up

18 February, 2016

Each month Janet Hontoir, Academic Course Leader for ifs University College's BSc (Hons) Banking Practice & Management, will be producing a round-up of the what she sees as the biggest financial news stories of the month. Aside from this edition, the news round-up will be published on the first Friday of each month. 

1. Greek businesses ‘migrate’ to Bulgaria

Since 2012, 11,500 Greek businesses have either opened bank accounts or registered for operations in Bulgaria because of Greek capital controls and because costs and tax are lower in Bulgaria. Firms have also moved from Greece to Cyprus and Malta. So government actions to reduce the public sector deficit are leading to more cuts in GDP and jobs, not to mention tax revenues.

Financialpress.gr (2015) More than 60,000 Greek companies have ‘migrgated’ to Bulgaria’ (Online) Available at:http://www.fpress.gr/epiheiriseis/item/40703-pano-apo-60000-ellinikes-epiheiriseis-ehoyn-metanasteysei-sti-voylgaria [Accessed 2 February 2016]

Focus Information Agency (2016) Experts concerned over Greek business moving to Bulgaria, Cyprus, Malta (Online) Available at: http://www.focus-fen.net/news/2016/01/12/394886/afp-experts-concerned-over-greek-business-moving-to-bulgaria-cyprus-malta.html [Accessed 2 February 2016]

2. Bank of Japan to pay a negative interest rate on reserve deposits

The Bank of Japan is to pay a negative interest rate of –0.1% on some deposits made with it by commercial banks. So banks will actually be charged for making these deposits to discourage them from holding too much liquidity and to encourage more lending to businesses, an yet another attempt to combat economic stagnation. The negative interest rate does not apply to savers’ accounts but, if banks are paying the central bank for holding their liquidity, they may pass it on and charge their customers for keeping their money safe. This in turn would be an incentive to consumers to spend more.

BBC (2016) Japan adopts negative interest rate in surprise move (Online) Available at: http://www.bbc.co.uk/news/business-35436187 [Accessed 1 February 2016]

Bank of Japan (2016) Introduction of ‘Quantitative and Qualitative Monetary Easing with a Negative Interest Rate’ (Online) Available at: http://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf  [Accessed 1 February 2016]

3. Saudi oil giant considering a share sale

The oil company Saudi Aramco, which is owned by the Saudi Arabian state, is ‘reviewing’ a decision to sell off some of its shares to the public. It is estimated that a full listing of Aramco’s shares would be worth more than $1tr. Falling oil prices have hit Aramco and the Saudi government badly as the company holds more than 15% of the global deposits of crude oil and produces more than 10m barrels of oil a day. Saudi Arabia has a balance of payments deficit of around $100bn and a share sale would raise a lot of money for the government.

BBC (2016) Saudi Arabia’s Aramco considering share sale (Online) Available at: http://www.bbc.co.uk/news/business-35259190 [Accessed 1 February 2016]

4. Economic headlines from the Bank of England’s Monetary Policy Committee

Sterling has fallen, corporate bond spreads have risen, global equity prices have fallen and oil prices are still falling. Growth is sluggish in the US, UK and eurozone and Chinese growth has fallen. Credit growth has picked up a little in the UK but is still weak. Mortgage approvals and housing transactions are much lower than pre-crisis levels but buy-to-let mortgages have increased, although tax rises will hit this sector. CPI inflation is well below target and the projection is only a small rise. Wage growth has moderated, unemployment fell but weekly hours worked have also fallen. Productivity growth has fallen back a little. Bank Rate is on hold at 0.5%.

Bank of England (2016) Minutes of the Monetary Policy Committee meeting ending on 13 January 2016 (Online) Available at: http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2016/jan.pdf [Accessed 2 February 2016]

5. Profit warnings rise

During November and December 2015, there were 100 profit warnings from listed companies, the highest number since 2009. Most came from companies in the oil sector but retailers and travel firms were also in the list.

BBC (2016) Profit warnings reach highest level since recession – report (Online) Available at: http://www.bbc.co.uk/news/business-35394180 [Accessed 3 February 2016]

6. Low oil price causing insolvencies

The crash in oil prices is causing insolvencies among firms in ancillary sectors because the fall in price has caused their customers to cancel projects. Many of these service companies had expanded their operations during the years of high oil prices but now there are downgrades and job losses. A corollary of this is that larger oil services companies are buying up distressed firms – yet another example of a crisis leading to higher concentration.

BBC (2016) Oil price fall blamed for sharp rise in UK firms folding (Online) Available at: http://www.bbc.co.uk/news/business-35397038 [Accessed 1 February 2016]

7. Lloyds share sale postponed

The Chancellor of the Exchequer has postponed the sale of the government’s final 9% stake in Lloyds Banking Group because of volatility in the markets and the low share price. The government paid 74p per share in 2008 but it has fallen to 64p and a sale now would mean a loss on the buying price. This postponement will be disappointing for those hoping to buy shares but they can still hope to get their chance when markets settle and the price rises.

BBC (2016) Sale of Lloyds shares to public delayed by George Osborne (Online) Available at: http://www.bbc.co.uk/news/business-35429472 [Accessed 3 February 2016]

8. RBS making more provisions

RBS is to make provisions of a total of £2.5bn – £1.5bn for US litigation (legal actions connected to the failure of its mortgage products) and £500m for PPI claims. It will also be writing down its private bank Coutts by £498m. It is accelerating the payment of sums into the pension fund to help to reduce the £4.2bn deficit The combined effect of these decisions is that the group will make a loss for 2015 and indeed, it has not made a profit for 7 years. The reason behind these accounting moves is to make the bank ready for the privatisation which the government is keen to go ahead with. The government paid 502p per share when it rescued the bank in 2008 and the price now is only 260p.

Royal Bank of Scotland (2016) The Royal Bank of Scotland Group plc (Online) Available at: http://www.rbs.com/content/dam/rbs/Documents/News/2016/January/Updates%20to%20the%20market%20Jan%202016.pdf [Accessed 1 February 2016]

BBC (2016) RBS ‘clean-up’ to push it into 2015 loss (Online) Available at: http://www.bbc.co.uk/news/business-35416967 [Accessed 1 February 2016]

9. ABI statistics on insurance claim payments

The Association of British Insurers has published statistics analysing payout rates for motor, home and travel insurance during 2013 and 2014. The figures show up some interesting differences between product types. In motor insurance, 10% of motor customers make claims each year, 99% of which are successful. In travel insurance, only 2% of customers make a claim and 87% of these are successful. In home insurance 4% of customers make a claim but only 79% actually receive a payout.

Some of the reasons for the failure of claims are people making claims for wear and tear or for damage caused by lack of maintenance, claims falling below the policy excess and claims by people who failed to purchase the added extra of accidental damage. These reasons lead to the conclusion that many customers are unaware of the details of the cover they have purchased. A Renewable Code for Vulnerable Customers has just been published so that both insurers and brokers can help people needing guidance.

Association of British Insurers (2016) There when it matters – ABI publishes insurance claims success rates for the first time (Online) Available at: https://www.abi.org.uk/News/News-releases/2016/01/There-when-it-matters-ABI-publishes-insurance-claims-success-rates-for-the-first-time [Accessed 1 February 2016]

Association of British Insurers (2016) ABI and BIBA Code of Good Practice regarding support for potentially vulnerable motor and household customers at renewal (Online) Available at https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2016/Vulnerable%20customers/ABI%20BIBA%20Code%20Good%20Practice%20support%20potentially%20vulnerable%20motor%20household%20customers%20renewal.pdf [Accessed 1 February 2016]

10. Co-op Bank's former executives prohibited from senior functions

The Prudential Regulation Authority has prohibited two former executives of the Co-op Bank from ‘holding a significant influence function in a PRA-authorised firm’ and has imposed fines on them. The Bank concluded that the two men failed to ‘exercise due skill, care and diligence’ in carrying out their roles. They were involved in a culture which had put short-term objectives before long-term safety and did not take ‘prudent and sustainable actions’; and the managing of the capital position was ‘not in line with the firm’s own stated cautious risk appetite’. The new Senior Managers Regime is to be introduced in March and this will ‘further ensure that senior managers are held duly responsible for their actions’.

Bank of England (2016) PRA takes enforcement action against former Coop Bank individuals (Online) Available at: http://www.bankofengland.co.uk/publications/Pages/news/2016/022.aspx [Accessed 1 February 2016]