2015 to bring uncertainty and optimism for largest UK companies suggests Deloitte survey

BY Fraser Tennant

Uncertainty over domestic policy as well as foreign economic and geopolitical risks are the biggest challenges facing the UK’s largest companies in 2015, according to a survey of chief financial officers (CFOs) carried out by Deloitte.

The survey, which features the views of 119 CFOs of FTSE 350 and other large private UK companies, also shows that, despite uncertainties, CFOs are confident as to the prospects for UK growth and business investment in 2015, with their businesses expected to see earnings rise by 2.9 percent. 

Carried out between 27 November and 15 December, Deloitte’s Q4 2014 CFO Survey highlights that: (i) 56 percent of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a record reading of 71 percent in Q3 2014 but still well above the long-term average; (ii) 60 percent of CFOs enter 2015 with above normal, high or very high levels of uncertainty facing their businesses, up from a low of 49 percent in Q2 2014 but at the same level seen 12 months ago; and (iii) 88 percent of CFOs rate the UK as a “good” or “excellent” place to do business, with a quarter placing it in the top-tier of industrialised economies.

“The central challenges facing the UK’s largest companies as they enter 2015 are policy uncertainty at home and economic and geopolitical risks overseas," said Ian Stewart, chief economist at Deloitte. “Rising levels of uncertainty have caused a weakening of corporate risk appetite which, nonetheless, remains well above the long-term average.

“Concerns about policy change after May’s General Election have risen significantly and this is seen as the biggest risk facing UK business in 2015.  Deflation and weakness in the euro area is a growing concern and is now the second greatest business risk, followed by a UK referendum on EU membership and by emerging market weakness.

“This marks a big shift in thinking. Going into each year, from 2008 to 2013, CFOs’ main concern was the state of the UK economy. Now the risks are seen as lying elsewhere.” 

The Deloitte Q4 2014 CFO Survey is the 30th quarterly analysis of CFOs of major UK companies. It is the only survey concerning valuations, risk and financing which seeks the views of major financial players in the UK.

Report: The Deloitte CFO Survey: 2014 Q4

BoE health checks result in an unhealthy diagnosis for top UK banks

BY Fraser Tennant

The Bank of England’s opportune health checks on the UK’s top banks has delivered a resoundingly unhealthy diagnosis for three of the financial institutions tested.

The central bank’s ‘Stress testing the UK banking system: 2014 results’ report reveals that the Royal Bank of Scotland (RBS) only just passed the test, Co-operative Bank failed the test, and Lloyds Banking Group was in such bad shape at the end of 2013 that it required a significant injection of capital.  

The report also highlights the fact that all three would not have possessed sufficient amounts of capital in 2013 to have been able to deal with severe a financial difficulties, should they have occurred.

During the testing process, RBS submitted a revised capital plan announcing its intention to raise £2bn ($3.13bn) in debt capital to help bolster its position.

The Co-operative Bank, the only financial institution tested to have completely failed, was requested by the central bank to submit a new capital plan, which was approved, designed to reduce its risky assets by £5.5bn by the end of 2018.

And Lloyds was able to raise enough capital in 2014 to be deemed out of danger.

“This was a demanding test," said the governor of the Bank of England, Mark J. Carney. “The results show the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress."

The Bank of England’s health check tests were performed on the following: Co-Operative Bank, the Royal Bank of Scotland, Lloyds, Barclays, HSBC, Santander UK, Standard Chartered, and the Nationwide building society.  All bar the initial three were found to have no problems.

Coinciding with the results of the tests was the publication of the central bank’s Financial Stability Report, which gives a snapshot of the strength of the UK financial system. This report states that concerns over the global economy have risen, but suggests that “banks are in better shape to cope with any headwinds”.

Report: Stress testing the UK banking system: 2014 results

KPMG showcases 100 of world’s best infrastructure projects

BY Fraser Tennant

One hundred of the world’s most innovative, inspirational and impactful infrastructure projects are showcased in KPMG’s new ‘Infrastructure 100: World Markets Report’.

A result of in-depth discussions with a panel of independent industry experts from across the globe, the report focuses on infrastructure in four key markets: mature International markets, economic powerhouses, smaller established markets, and emerging markets.

Hundreds of global projects were considered by the panel before the final 100 were selected.

Assessments were based on the following criteria: (i) scale – how does the scale of the project relate to similar developments in its class?; (ii) feasibility – is the project plan feasible and sustainable?; (iii) complexity – how challenging or complex is it to get stakeholder support?; (iv) innovation – is there a particular challenge the project overcomes?; and (v) impact on society – does it improve quality of life or promote economic growth?

Some of the global projects featured in the report include: Hinkley Point C Nuclear Power Station (UK); George Massey Tunnel replacement (Canada); Southern SeaWater Desalination Plant (Australia); the Scandinavian 8 Million City (Norway); Buenos Aires Bus Rapid Transit Corridors (Argentina); New York City Resiliency Plan (US); and Moscow-Kazan High Speed Rail (Russia).

Transformational, with the capacity to change the face of nations and drive economic growth, the value of global infrastructure projects is estimated by KPMG to be in the region of US$1.73 trillion.

Referencing the key trends driving global investment in the infrastructure sector, Richard Threlfall, KPMG’s UK head of infrastructure, building and construction, said “Our latest showcase of projects from around the world highlight the vision, determination and innovation required to drive economic prosperity and social impact through infrastructure development.

“Each country has its own approach to developing and funding infrastructure, yet all share the challenge of creating the right conditions to attract investment. We see infrastructure investment improving lives, creating opportunity, and bringing the world closer together – ultimately creating a better world”.

Report: Infrastructure 100 World Markets Report

New rule to strengthen capital positions of US banks proposed by Fed

BY Fraser Tennant

The Federal Reserve has proposed a rule to bolster the capital positions of the largest US banks.

Designed to maintain the strength of large banks such as JPMorgan Chase and Goldman Sachs, the Federal Reserve's proposal would involve increasing the capital requirements of the aforementioned banks as well as six others.

By increasing the requirements of these eight largest banks, the Federal Reserve is seeking to make them more shock resistant as, the Fed points out, a bank with more substantial levels of capital is less likely to depend on borrowed money during periods of financial distress.

The Fed’s proposed rule is also intended to reduce the impact a bank in distress can have on the domestic as well as global economy – effectively an attempt to reign in the ‘too big to fail’ mentality.

In addition to Goldman Sachs and JPMorgan Chase, the other banks involved in the proposed new regulation are Morgan Stanley, Citigroup, State Street, Bank of New York Mellon, Wells Fargo and Bank of America.

All these banks would be required to fully comply with the Federal Reserve’s new rule by early 2019.

Fed chairwoman Janet L. Yellen said that the proposed rule “might persuade banks to shrink” and “would encourage such firms to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability”.

Although the Fed has said that most of the eight banks already meet the new requirements of the new rule, having raised billions of dollars of new capital in the years since the financial crisis, a further $21bn in additional capital is understood to be necessary with JPMorgan Chase stating that it will be the “hardest hit”.

“While we’re still reviewing the Fed’s proposal, we are well capitalised and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders”, said Andrew Gray, a JPMorgan spokesman.

While responses to the Fed’s proposals have been broadly positive, some dissenting voices have been heard, including that of Richard Foster, a vice president of the Financial Services Roundtable. He said “Holding US banks to a more stringent capital framework than our global competitors could be a misguided economic decision”.

News: With New Capital Rule, Fed Nudges Big Banks to Shrink

Sub-Saharan Africa to receive $180bn a year investment in infrastructure over 10 years

BY Fraser Tennant

Investment in infrastructure projects in Sub-Saharan Africa is expected to be $180bn a year over the next 10 years, according to a new PwC report.

The 'Capital Projects & infrastructure in East Africa, Southern Africa and West Africa' report suggests that, despite slow growth overall, multiple investment opportunities await global investors, developers and operators.

The 95 influential figures in the infrastructure sector surveyed by PwC indicated that they planned to spend 25 percent more on infrastructure projects this year than last. Fifty-one percent said that they planned to spend more than half of their budgets on new assets.

At present, South Africa and Nigeria have the most ambitious infrastructure programs and together make up almost 60 percent of the spend across Sub-Saharan Africa.

"The shallow economic recovery in most developed markets has shifted the focus to faster-growing regions. This is also true for the infrastructure development sector,” said Jonathan Cawood, capital projects & infrastructure leader for PwC Africa. "With an abundance of natural resources and recent mineral, oil and gas discoveries, demographic and political shifts and a more investor-friendly environment, the investor spotlight shines brightly on Africa."

Despite Cawood’s optimistic outlook, a number of key challenges face those looking to invest in the continent, including: (i) the limited availability of skills; (ii) a lack of internal capacity among state organisations to plan, procure, manage and implement capital infrastructure projects; (iii) the impact of political risk and government interference during project lifecycles; (iv) access to funding; and (v) an inhibiting regulatory environment.

Mr Cawood continued: "Infrastructure plays a key role in economic growth and reducing poverty having a 5-25 percent per annum return on investment as an economic multiplier. Those countries that have been most successful in developing and maintaining infrastructure have established programmes of prioritised investment opportunities with a number of features, including clear political support, a proper legal and regulatory structure, a procurement framework that can be understood by both procurers and bidders, and credible project timetables.”

As a relatively unexplored region with large natural resources, Sub-Saharan Africa is a hot spot of infrastructure investment potential.

Report: Trends, challenges and future outlook: Capital projects and infrastructure in East Africa, Southern Africa and West Africa