Quote of the Week

You have the Barons, who perceive change as a risk to their fiefdoms and personal importance. You have the Creationists, who feel comfortable with things as they are and distrust evolution. And you have the Romantics, who hark back to some imagined Camelot, when every subject in the kingdom was happy and prosperous.

~ Friedman, on the three camps that resisted change in Goldman Sachs

Moody’s cuts outlook on local banking system

Moody’s cuts outlook on local banking system

Impact of likely rise in interest rates on growing debt levels raises concern
By Yasmine Yahya

RATINGS agency Moody’s Investors Service has revised its outlook on Singapore’s banking system from “stable” to “negative”. The agency is concerned that with debt levels here rising, some households may struggle to pay off loans such as mortgages if interest rates rise, as is expected.

A rise in rates could erode the local lenders’ credit profile in the next 12 to 18 months, it said. Other agencies such as Fitch still have a rating of “stable” on the outlook for the banking system.

Moody’s also maintained its outlook for the three local banks: “negative” for DBS since August last year, and “stable” for OCBC Bank and United Overseas Bank. In its report, published yesterday, it said consistently low interest rates and strong economic growth here have encouraged borrowing and boosted asset prices.

The ratio of Singapore dollar loans to deposits has risen steadily and is now at its highest level in six years, at 79 per cent last year. Since 2009, household debt has risen 40.4 per cent as monthly incomes rose 26.3 per cent. These numbers could spell trouble when interest rates rise, Moody’s said.

Higher debt “may leave some households with less flexibility to adjust to higher interest rates or cope with the increasing risk of rising unemployment brought about by more challenging economic conditions”. The banking system will likely face challenges from local banks’ overseas expansion forays too. “Problem loans from outside Singapore, South-east Asia and Greater China increased to 45 per cent of total non-performing loans last year, up from 11 per cent in 2008,” Moody’s said.

Global interest rate rises may also cause investors to shift funds out of emerging markets, which could “place downward pressure on asset prices and collateral in several of the emerging markets where Singapore banks operate”.

The danger of rising interest rates and household debts was also flagged by Standard Chartered in a report earlier this month. It had noted that Singapore households are among the most indebted in Asia relative to what they earn. Indeed, the Monetary Authority of Singapore has also recognised the risk of rising rates on home mortgages. Late last month, it introduced caps on total debt service ratios – this means property buyers may take on new mortgages only if their total monthly repayments, including other outstanding debt obligations, do not exceed 60 per cent of their monthly income.

Banks are also required to compute mortgages based on a notional medium-term interest rate of 3.5 per cent. Moody’s noted that Singapore banks have sufficient capital buffers to withstand losses under stress test scenarios, and have the ability to remain “comfortably solvent” under adverse conditions. Even under severe scenarios, the banks’ extra capital needs would be manageable, it added. “Singapore banks have strong financial metrics that explain why we continue to assign them the highest average ratings…”

DBS chief financial officer Chng Sok Hui said Singapore firms and households can withstand financial shocks better than those in other countries. “For DBS in particular, a rise in short-term interest rates will lift our net interest income, which will help mitigate the higher credit costs from a rise in interest rates.”

Kuok says with right heir his empire can last ‘four generations’

Billionaire Robert Kuok says that with the right heir, his extensive network of businesses can continue well beyond him into the future

When billionaire Robert Kuok introduced a luxury hotel brand in 1971, he named it Shangri-La, after the fictional utopia in which inhabitants enjoy unheard-of longevity.

Ensconced in his executive suite 32 floors above Hong Kong’s Victoria Harbour — the room decorated with a pair of elephant tusks gifted by the late Tunku Abdul Rahman, the first prime minister of Malaysia — the world’s 38th-richest person appears to have defied the ageing process himself.

Kuok had accumulated a fortune of $19.2 billion (HK$149 billion) as of Jan. 31, according to the Bloomberg Billionaires Index. Trim, dapper and straight backed at 89, he shows no signs of stopping there, Bloomberg Markets magazine will report in its March issue.

This year, the media-shy Malaysian-born magnate will likely open his 71st sumptuously appointed Shangri-La. Six of them are scheduled to be opened in the third quarter alone, including one perched in the Shard, the 72-story London skyscraper that’s the tallest office building in Western Europe.
Continue reading Kuok says with right heir his empire can last ‘four generations’

S'pore growth will shudder if eurozone breaks: report

S’pore growth will shudder if eurozone breaks: report
It is likely to be most affected among Asian countries, ex-Japan
By Teh Shi Ning, Business Times

[SINGAPORE] Singapore’s growth will be hardest hit in non-Japan Asia if the eurozone should break up, Credit Suisse’s projections show.

While the estimates come with a “sizeable health warning” given huge uncertainty, they do shed light on how Asia’s economies might fare relative to one another if Greece should exit the eurozone, Credit Suisse economist Robert Prior-Wandesforde wrote in a report released yesterday.

In a more severe scenario of a break-up triggered by a Greek exit or escalated Spanish problems, Singapore’s GDP could suffer a blow of 9.4 percentage points, a tad higher than Hong Kong’s 9.3 percentage points and the largest hit of the 10 Asian economies surveyed.

This scenario, which assumes a 7 to 10 per cent contraction in eurozone GDP, a 25 per cent drop in eurozone imports and 8 per cent US import demand, would probably send Singapore, Hong Kong, Taiwan and Malaysia into a deep recession, Mr Prior-Wandesforde said.

A eurozone break-up could send Korea’s year-on-year GDP growth into negative territory by year-end too, while China and India’s growth could slip to what may “feel like a hard landing”.

Even in a milder scenario, which assumes that Greece exits the eurozone in the next few weeks but with little contagion to the rest of the currency area, Mr Prior-Wandesforde estimates that Singapore’s growth will again be worst-hit, along with Hong Kong.

The estimated negative impact on Taiwan was slightly less at 2.2 percentage points.

Estimates of the trade effects of a limited Greek exit were calculated based on a 2 per cent peak-to-trough fall in eurozone GDP, a 6 per cent drop in eurozone imports and 2 per cent drop in US import demand.

They can be considered optimistic forecasts, since they only account for the impact of weaker external demand on trade, and not other modes of transmission such as a drying up of trade finance or a withdrawal of funds from Asia to pad up European balance sheets.

After the initial blow, which could be at least as large as that dealt by the global financial crisis, the subsequent recovery in Asia is likely to be less impressive this time round.

“The Western world has largely run out of policy ammunition, Asian interest rates are lower than they were in mid-2008 and budget deficits are generally higher in the region,” he wrote.

Mr Prior-Wandesforde said he attempted to quantify the impact of weaker trade on GDP growth, despite the huge range of potential outcomes, as the potential impact from a eurozone break-up is an issue that “cannot be ignored or wished away”.

One consolation is that these scenarios, while possible, are not Credit Suisse’s central view for the year. Its research team believes the eurozone will “muddle through” the rest of the year intact.

If that comes to pass, Credit Suisse projects that the local economy will grow 3 per cent this year, at the top end of the government’s 1 to 3 per cent forecast range.

Economists warn of deep recession for Singapore if euro zone breaks up

Singapore could sink into a deep recession if Greece’s debt crisis leads to a break-up of the euro zone and causes another global downturn.

The warning came from economists on Wednesday who outlined a range of nightmare scenarios that, while appearing unlikely at present, remain possible if events spiral out of control.

The downbeat assessment also dovetailed with a new survey on Wednesday showing that Asia’s top companies are less optimistic about their business outlook.

Credit Suisse economist Robert Prior-Wandesforde painted two gloomy narratives that could result in the European monetary union falling apart in the coming months.

The first is one where Greece leaves the grouping but contagion to other European countries is limited; the second involves Greece leaving and contagion spreading.

If this second scenario transpires, Mr Prior-Wandesforde said Singapore would likely experience a deep recession by the year end with the economy contracting 4.6 per cent in the fourth quarter.

If this happens, the economy would be down 0.6 per cent for the whole year, similar to the 1 per cent fall in gross domestic product experienced in 2009 following the financial crisis.

Singapore is officially expected to grow between 1 per cent and 3 per cent this year, the Trade and Industry Ministry has said, although it too has warned of rising risks over the euro zone crisis.

‘This scenario assumes the most immediate impact, through the trade channels and exports to Europe and the United States,’ said Mr Prior-Wandesforde yesterday.

‘There are likely to be other negative implications as well. These include a drying up of trade finance, as witnessed during the financial crisis, as well as a withdrawal of funds from the Asian region to shore up European balance sheets.’

Bank of America Merrill Lynch economist Chua Hak Bin agreed, saying his model showed that an ‘ugly bear case’ could mean a 1 per cent contraction for Singapore’s economy this year.

‘We are worried about the financial contagion channel, which could see credit freeze up and affect many businesses,’ he added.

Mr Prior-Wandesforde was also less optimistic on the prospect of a quick recovery this time as governments have less financial power for another huge stimulus.

In 2010, Asia saw a quick and remarkable V-shaped recovery from the 2009 recession.

Singapore grew at a rapid 14.8 per cent that year, more than making up for the 1 per cent contraction.

Capital Economics noted that Asian governments are better placed than their Western counterparts to pump prime their economies this time but the region also has less firepower than in 2010.

It noted that both Hong Kong and Singapore have the healthiest fiscal positions in Asia, with large surpluses and reserves.

‘However, as trade-dependent economies with big financial sectors, they are the two places in Asia most vulnerable to a crisis in the euro zone and most exposed to another global downturn,’ it said.

‘As a result, even expansionary fiscal policy is unlikely to prevent these two economies from falling into a deep recession if exports slump.’

Fortunately a Greek exit is unlikely to happen in the next six months. Credit Suisse puts the probability at about 20 per cent while Swiss bank UBS says the chances of Greece leaving the euro zone are less than 10 per cent.

Meanwhile, a recent survey showed that Asia’s top companies are now less upbeat about their business outlook than in the first quarter.

The Thomson Reuters/Insead Asia Business Sentiment Index fell to 69 last month from 74 in March.

A reading above 50 indicates an overall positive outlook.

Of the 177 companies polled, 78 said their business outlook for the next six months was positive, while 87 said it was neutral, and 12 said it was negative, Reuters reported.

The poll was conducted between June 4 and 15.

Asked what the biggest risk factor they faced was, 111 companies said global economic uncertainty, and 28 cited rising costs.

‘Things are looking tougher with what’s happening in the global economy. Asia is not fully insulated but will still do relatively better, given that most governments in the region still have leeway to stimulate domestic economies,’ Aberdeen Asset Management Asia investment manager Kristy Fong told Reuters.

‘Cost pressures are another issue, such as rising inflationary pressures in Singapore (and) infrastructure and logistical bottlenecks in India.’

OCBC Investment Research analyst Carey Wong noted that consumers were turning more cautious in placing orders.

‘As long as customers don’t give them very clear order indications, sentiment won’t be that good. As a business owner, you can’t plan ahead, such as planning capital expenditure.’

HSBC lays off HK investment bankers

HSBC lays off HK investment bankers
Reuters in London
Nov 11, 2011

HSBC Holdings is laying off several hundred investment bankers in Hong Kong, London and elsewhere this week as part of its jobs cull to save billions of dollars, people familiar with the matter said.

Staff in the global banking and markets (GBM) investment bank arm were being told of the cuts this week, and some had already been told, several sources said. It is expected to affect several hundred of GBM’s 20,000 staff.

Europe’s biggest bank plans to axe 30,000 jobs by the end of 2013 under a revamp by Chief Executive Stuart Gulliver to cut annual costs by US$3.5 billion. It has shed 5,000 to date, it said on Wednesday.

The bank had 296,000 staff at the end of last year, so the cuts represent 10 per cent of the workforce. That would equate to about 2,000 staff at GBM, although that could be more as investment banking revenue has been hit hard by recent euro zone turmoil, especially in credit and rates. The bank has also said it will hire in some growth areas and countries.

HSBC has pinpointed five countries and its UK headquarters for the first wave to face cuts, mostly by the end of the year. It has said 3,000 jobs would go in Hong Kong, but not detailed any more specific cuts. The other affected countries are the United States, Brazil, Canada and Mexico.

“We are not commenting on specifics but HSBC is going through an efficiency programme as described at the investor day in May. The programme is about reducing bureacracy and enhancing organisational effectiveness,” a spokesman for the bank said.

Gulliver has said the cost base is “unacceptable” and wants to get expenses below 52 per cent of income. He has some way to go – costs represented 59.1 per cent of underlying income in the first nine months of this year, up from 54.4 per cent a year ago.

The Carrian Group

The Carrian Group was a Hong Kong conglomerate founded by George Tan, a Singaporean Civil Engineer working in Hong Kong as a project manager for a land development company. The Group’s principal holding company Carrian Holdings, Ltd. was founded in 1977.

In January 1980, the group, through a 75% owned subsidiary, purchased Gammon House (a commercial Office building, now Bank of America Tower) in Central District, Hong Kong for $998 million. It grabbed the limelight in April 1980 when it announced the sale of Gammon House for a staggering HK$1.68 billion, a price that surprised Hong Kong’s Property and Financial markets and developed public interest in Carrian.

In the same year, Carrian capitalized on its notoriety by acquiring a publicly listed Hong Kong company, renaming it Carrian Investments Ltd., and using it as a vehicle to raise funds from the financial markets.

The group grew rapidly in the early 1980s to include properties in Malaysia, Thailand, Singapore, Philippines, Japan, and the United States. At its peak, the Carrian Group owned businesses in Real Estate, Finance, Shipping, Insurance (China Insurance Underwriters Ltd), Hotels, Catering and Transportation (A Taxi fleet that was the largest ever in Hong Kong).

Carrian Group became involved in a scandal with Bank Bumiputra Malaysia Berhad of Malaysia and Hong Kong-based Bumiputra Malaysia Finance. Following allegations of accounting fraud, a murder of a bank auditor, and the suicide of the firm’s adviser, the Carrian Group collapsed in 1983, the largest bankruptcy in Hong Kong.

The interview was all going well until he asked me: "How much of a pay cut are you willing to take?"

From an anonymous candidate

One of the amazing job-hunting experiences I had recently was with an investment firm. I went through the interview rounds, answering standard questions about specific sectors and proposing investment strategies on selected companies. Everything went well until my meeting with one of the fund’s partners. We had a chat about how the market was really low and how it had been impacting finance professionals.

He showed me a small stack of CVs he had received for the vacancy and congratulated me on being among the few selected for face-to-face interviews. I felt good for a moment, but in hindsight he was just preparing me for his following questions: What was your last salary? How much of a pay cut are you willing to take?

Given recent market conditions, it was obvious that the competition for any job would be fierce and that salary negotiations would be difficult. I was expecting the first question about my previous salary and I was prepared to defend my worth. However, I was definitely not prepared for the second question. I had no idea it would come to that. What answer could one possibly give?

A 10 per cent cut would appear too low. Twenty per cent could potentially be competitive enough to get me the position, although it was probably not the best offer this hiring manager had on his table. But how much further could I possibly go?

Thirty per cent would mean that I would need a 50 per cent bump to get back to where I was – that would take either a miracle, or one or two well-placed job hops within a short space of time, which would badly hurt my CV.

Cutting by 40 per cent would mean that I would pretty much need to double my salary in order to get back to pre-crisis levels. That would take years. I was at a loss.

Pain but no gain

What is so painful about salary cuts? Is it because it confronts us with our newly depreciated market value in the finance industry? Is it the fear of how we will be perceived by our family and friends? Is it because we are lose the ground we have won through years of blood sweat and tears?

My thoughts raced back through my career history to the time when I was still a struggling junior in the finance industry: the cancelled lunches and dinners, the weekends in the office, the inability to maintain a stable relationship, the physical exhaustion, the insomnia, and the addiction to burning cash for instant self-gratification. Have all those years of sacrifice really been swiped away?

But my pain did not stop with a simple reminiscence about the past. My life has moved on over the past few years – I am now thinking about a mortgage, buying big-ticket items like an engagement ring, and paying for my upcoming wedding. I’m also worried about what my future in-laws will think if my pay drops dramatically.

My thoughts finally halted at the image of Joshua Persky, the famous unemployed MIT graduate who went from mainstream New York banker to human billboard in 2008 because he needed to support his wife and five children. Apparently, he’s had one proper job since then, which lasted five months, and has been selling Iphone apps to make ends-meat.

Coming back to my interview with the buy-side firm: I left the meeting saying that the salary cut was an interesting question and that I will need to think about it.