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Banamex – Citigroup forced sales on the table of Mexican Court

Citigroup’s dismal financial state doesn’t grant its chief, Vikram Pandit, much leverage in negotiations these days.

He conceded defeat to Washington on Phibro, deciding that it was simpler to sell the profitable commodities trading unit rather than argue for keeping a risk-taking, capital intensive business that pays megabonuses. But Mr. Pandit has no reason to cave so easily if Citi’s ownership of the Mexican bank Banamex is threatened.

For now, that’s just a possibility. Mexico’s high court is set to decide this week whether to hear a case brought by a contingent of Mexican senators that Citi must offload Banamex because a foreign government owns more than 10 percent of its stock. They want the court to decide whether the finance ministry had the constitutional right to decree in March that the United States government’s 34 percent slice of Citi was acceptable because it was intended to be short term.

FiNETIK Note: The Banamex- Citi cases could also extend to other banks with foreign government holdings like AIG, Bank of America, Bank of New York Mellon, Royal Bank of Scotland. However the strong nationalist sentiments about Banamex do set it above the others.

So Citi is hardly up against a wall just yet — and it reckons any decision to force a sale would breach the North American Free Trade Agreement anyway. But if push comes to shove, the bank should be prepared to put up more of a fight than it did for Phibro.

For starters, Banamex is a full-service bank, not just a trading operation, so Citi has a stronger claim for keeping it. Second, it turns a pretty handy profit. It earned about $750 million in the first half of the year, about half of Citi’s profits from Latin America. As a whole, Citi lost money in the first six months of 2009, omitting one-time items.

And Banamex’s relative success as a retail, commercial and investment bank has turned it into a celebrity within the bank’s corridors of power. At last year’s investor day, Mr. Pandit held the Mexican unit up as an example for how the rest of Citi ought to look.

That makes it a powerful business worth holding on to. And Citi, in large part because of $45 billion in United States taxpayer aid, no longer has to sell profitable businesses just to bolster its balance sheet. Should decisions in Mexico start going against it, the bank has every reason to hunker down for a standoff.

An Alternative View

Just because Banamex is good for Citi doesn’t necessarily mean ownership by Citi is great for Banamex. The United States bank doesn’t help Banamex’s financing costs much, and non-United States ownership could help it attract previously reluctant customers.

Banks in emerging markets can benefit from foreign ownership through lower financing costs, access to an international network and the adoption of proven and trusted processes and technology. It’s not obvious how any of these apply to Banamex.

Its obligations receive no guarantee from the Citi parent company, and its access to financing could even suffer as a result of Citi’s troubles. Moreover, as the second largest bank in Mexico, it is big enough in its own right to get access to international services and acquire the staff and technology needed to be at least as up to date as Citi.

Mexico is a big enough market that its bigger banks are fully competitive, even internationally, without needing help from multinational groups as banks in smaller markets often do. The country is also intensely nationalist, particularly in relation to its neighbor to the north.

Hence, while an independent Banamex might see little difference in relationships with large and sophisticated Mexican companies, it could well benefit from having greater appeal to small businesses, consumers and, from time to time, the Mexican government.

There would be other advantages to Banamex from independence. As a stand-alone bank, it could decide its own strategic goals, organizational priorities and structure. That would most likely be an improvement on fitting in with Citi’s plans, which are currently heavily influenced by its recent losses and government bailouts. Its senior management would have more independence, which might help in attracting the best people.

A ruling forcing Citi to divest Banamex would be hugely disruptive for the bank, but it’s still a possibility. It is in Citi’s interest to object, and there’s a risk any new Banamex owner might not develop the franchise properly. Even so, for Banamex independence could offer attractions.

Source: New York Times, 19.10.2009

Filed under: Latin America, Mexico, News, Risk Management, Services, , , , , , , , , , ,

Investors turn underweight China and India

Portfolio managers’ optimism about China’s economy falls for the third month running, according to Merrill Lynch’s fund manager poll for September.

Confidence in China and India slumped this month, while optimism over the overall global economy held steady from August, according to Merrill Lynch’s survey of fund managers for September.

A net 35% of fund managers expect the Chinese economy to strengthen over the next year, down from 49% last month and a peak of 62% in June. Emerging market investors are now 9% underweight on China, after 13 months of being overweight. They have also gone from being around 5% overweight India in August to at least 25% underweight this month.

Asian Investor

Yet confidence in the global economy remains strong, with 72% of investors expecting it to strengthen over the next year,    about the same as last month. But 72% also believe both growth and inflation will be below trend. Less than one-third of investors now see the global economy in recession compared to two-thirds only two months ago.

Despite the improving macro backdrop, investors have not increased their appetite for risk. Globally, cash levels increased in September, with average cash balances rising to 4.1% of total assets, compared with 3.7% in August, which had been the lowest level since July 2007. It was a similar story for global emerging market investors, with average cash balances rising to 4.1% from 3.5%.

In terms of global asset allocation, the proportion of investors overweight equities slipped to a net 27% from a net 34% in August. Investors lowered their allocations to eight out of 11 industry sectors. August’s tentative steps back to cyclical stocks were reversed. Panelists reduced their positions in materials, industrials and discretionary stocks.

Asset allocators now see equities as undervalued (net -4% against the net 1% overvalued last month). However, they continue to see bonds as overvalued, with net 38% against net 34% last month.

As for regional allocation, global emerging markets remain strongly overweight, but fell to 40% from 52% overweight. But asset allocators are the most confident they’ve been on Europe in 18 months. Only a net 1% of respondents is underweight the eurozone, down from 13% in August. That’s the most positive stance on the region since February 2008, when asset allocators held a slight overweight position.

Global inflation expectations over the next 12 months have dropped from a net 30% last month to a net 21%, helping explain how bonds are rallying despite growing economic optimism. A net 70% of investors still see higher short rates 12 months out.

“September’s jump in cash levels and lower equity exposure shows that investors’ risk appetite lags their confidence in the recovery,” says Gary Baker, head of European equity strategy at Banc of America Securities-Merrill Lynch Research.

Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research, adds: “Goldilocks is back in town. The consensus expects a global recovery, but expects it to be below trend and not inflationary.”

A total of 234 fund managers, managing a total of $667 billion, participated in the global survey from September 4-10. A total of 189 managers, managing $408 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities-Merrill Lynch Research, with the help of market research company TNS.

Source: AsianInvestors, 18.09.2009 Jospeh Marsch

Filed under: China, India, News, Risk Management, Services, , , , , ,

BoA-Merrill Lynch adds A-shares to DMA platform in Shanghai

The US bank provides direct market access to China A-shares for clients via its QFII account.

Slowly, quietly, with little fanfare or braggadocio, changes are taking place in the way foreign traders execute their orders in China’s A-share market. At least, so the service recently introduced by Bank of America-Merrill Lynch would imply. And that’s despite the fact that the bank does not yet possess a Chinese broking licence.

About a month ago, on May 14, the first trade was transacted on the Shanghai stock exchange using the US bank’s direct market access (DMA) platform. It was the first ever instance of DMA trading in the A-share market and saw one of BoA-Merrill’s “high frequency clients” buy 300,000 shares of the China 50 ETF, which is managed by China Asset Management, according to Mark Wheatley, the bank’s head of Asia-Pacific electronic trading.

Since then, BoA-Merrill has transacted an increasing number of deals each day for three Asia-based clients, said Wheatley. The DMA platform provides an advantage for traders who need rapid execution, as orders are filled almost instantaneously. It is also anonymous. Arguably, it has less obvious attractions for buy-and-hold fund managers, and Wheatley concedes that “we have seen less immediate interest from traditional long-only funds”.

DMA is a method of trading that allows buy-side institutional traders to place orders on the market without any manual intervention. Orders are placed electronically using a variety of execution management systems (EMS) set up on clients’ desktops. The orders are then automatically routed to the relevant exchange and order fills are sent back on the EMS. This process is instantaneous and conceals the identity of the buyer and seller.

BoA-Merrill Lynch already offers DMA to clients trading stocks in Australia, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore and Taiwan. It has sales and execution desks in Sydney, Hong Kong, Tokyo and Mumbai to service these customers.

But, “the Chinese A-share market has developed into an important and large component of the Asian stock universe despite its access limitations”, said Wheatley. “Our A-share DMA platform allows our clients to trade this market in the most efficient manner,” he added.

Bank of America-Merrill Lynch’s China A-share DMA platform is traded on “swap” via the bank’s qualified foreign institutional investor (QFII) quota and is subject to both the aggregate and individual foreign ownership levels associated with QFII. The investor enjoys the economic benefit but not direct ownership of the A-shares, which are retained in BoA-Merrill Lynch’s QFII account. Payment is made into a reserve account which is part of the client’s swap account with Merrill Lynch International.

BoA-Merrill Lynch had to step over many hurdles in a process that took several months, negotiating with various Chinese regulatory bodies and providing assurances about operational standards and diligence before approval was granted.

FiNETIK’s Choice:

Merrill’s Electronic Trading is King in BofA-Merrill Combo

Bank of America-Merrill Lynch Combo Decides On DMA, 17.06.2009 Rupert Walker

Filed under: China, News, Trading Technology, , , , , , , ,

Bank of America-Merrill Lynch Combo Decides On DMA

The newly merged Bank of America Merrill Lynch is scrapping the direct market access platform developed by Merrill and using one owned by Bank of America. As part of the integration of the firms’ electronic trading departments, the combined entity will mothball Merrill’s X-Trade in favor of BofA’s Instaquote.

Merrill’s X-Trade, developed internally, never gained sway among clients and could not compete with platforms like Goldman Sachs’ REDIPlus or Townsend’s RealTick (owned by Barclays). “The underlying technology and infrastructure for InstaQuote was better and more scalable,” said Roger Anerella, head of global execution services in the bank’s equities global markets division.

InstaQuote, which BofA acquired in 2004 from Direct Access Financial Corp., was a proven third-party trading platform. Several years ago, according to BofA, the platform had grown to more than 6,000 users, mostly from small and midsize hedge funds. “It’s a good solid prime brokerage product with a top-notch tech group,” said William Harts, former head of electronic trading services and equity strategy for Banc of America Securities, who now consults for financial services companies and exchanges.  Several dozen people from the original Texas-based technology group that BofA gained as part of the InstaQuote acquisition five years ago still develop, run and support the trading platform.

BofA-Merrill is continuing to offer clients a version of the Portware EMS, which is geared to portfolios, as part of a deal put in place two years ago. The broker-dealer’s algos and trading analytics are also integrated into all major buyside order management systems, proprietary OMSs and broker-neutral EMSs.

Source: TradersMagazine, 20.05.2009 by Nina Mehta

Filed under: News, Trading Technology, , , , , , ,