Economy

LONDON (Reuters) – Climbing costs at HSBC have added to growing investor concerns about how big banks manage their expenses, putting executives under pressure to quickly address spending.Although banks have seen revenues balloon in the higher interest rate environment of recent years, fast-rising costs are now beginning to pinch, consultants and shareholders said.Recent results have shown lenders struggling with wage bills, regulatory costs and accelerating investment plans.HSBC on Wednesday reported a 6% hike in costs in 2023, blaming spending on levies in the U.S. and Britain. Europe’s biggest bank by assets also forecast a 5% rise in costs in 2024, after committing to invest despite stubbornly high inflation.A report last year by consultants Oliver Wyman and investment bank Morgan Stanley highlighted the need for banks to avoid one-size-fits-all cost-cutting strategies, in order to achieve savings with minimal effect on revenues.HSBC’s 2023 pretax profit jumped 78% to $30.3 billion, but missed consensus estimates due to an unexpected $3 billion writedown on its stake in China’s Bank of Communications.And while a fresh $2 billion stock buyback went some way to soften these blows, some fund managers expressed concern.”Costs are clearly disappointing, with inflation and investment casting a shadow and posing a risk to earnings,” Hywel Franklin, head of European Equities at Mirabaud Asset Management told Reuters after the HSBC results.British bank Barclays on Tuesday set out savings and cost-income ratio (CIR) targets that also fell short for some investors.Barclays said it hoped to shave around 2 billion pounds off its costs over the next three years, lowering its CIR to “high-50s” by 2026, from 63% at end-2023.HSBC Chief Executive Noel Quinn said his bank was navigating the cost strains better than the surprise overspend implied, with its CIR for 2023 down to 48% last year, from 64% in 2022.Asset sales were also proving a useful cost management tool.”We are actually selling a billion dollars worth of costs,” Quinn said, pointing to sales of HSBC’s French retail and Canadian arms which were completed in recent weeks.”We continue to try and offset investment in the business for growth and efficiency reasons with savings elsewhere,” Quinn added on a media call.Other European banks have also felt the squeeze. Credit Agricole (OTC:CRARY) this month reported a 15% jump in year-on-year underlying operating expenses in its fourth quarter, more than expected, and flagged a further 8% rise in costs for 2024.Deutsche Bank said on Feb. 1 it would cut 3,500 roles as it tackles a 75% CIR and a 6% rise in 2023 non-interest expenses.COMPENSATIONThe Oliver Wyman and Morgan Stanley report said that global banks could redesign their workforce to clarify roles and align compensation, while corporate specialists should trim regional footprints to prioritise on recession-proof revenues. As inflation continues to pressure their returns, some investors and analysts said bank executives needed to exercise restraint on share buybacks and pay, pending further progress on broader savings and in case of possible economic shocks. “Buybacks artificially inflate earnings per share, potentially leading to unsustainable practices over quarterly periods,” Allen He, Research Director at FCLTGlobal, told Reuters, in comments about companies in general. Meanwhile, compensation is being viewed as an increasingly significant component of banks’ rising cost bases.A report on Feb. 8 from shareholder advisory firm Glass Lewis said it would “carefully review the strategic rationale for any rebalancing of bankers’ pay packages” in view of changes to regulation that removed caps on bonuses.Quinn saw his total pay double in 2023 to $10.6 million from $5.6 million the year before, as long-term incentives from his appointment in 2020 began to vest, boosting his variable pay.HSBC’s bonus pool rose to $3.8 billion from $3.4 billion in 2022, reflecting improved performance, and it would launch a variable pay scheme for junior and middle management staff.That contrasted with Barclays where the bonus pool dipped 3% in 2023 to 1.75 billion pounds and CEO C.S. Venkatakrishnan saw his total pay fall from 5.2 million pounds to 4.6 million.The Glass Lewis report said it would “generally expect increases in variable incentive opportunity to be accompanied by an appropriate reduction in fixed pay”, adding that the first bank to propose substantial changes may act as a litmus test.”If an overhaul of pay is well-supported by shareholders, the other banks’ interest may well be piqued,” it said. More

ORLANDO, Florida (Reuters) -The yen’s slide below 150 per dollar has fired up warnings from Japanese officials that the pace of depreciation is “excessive” and “undesirable,” but a repeat of the yen-buying intervention frenzy of 2022 seems unlikely.Tokyo may not intervene at all. Its tolerance for a weaker exchange rate may be greater now than it was then, lower yen volatility points to a pretty relaxed FX market, and U.S.-Japanese yield spreads are probably more likely to narrow than widen from here.In Japan, inflation has peaked and is now falling, pipeline price pressures have cooled significantly, the economy is in recession, and the country’s terms of trade have improved from 2022.What’s more, the Bank of Japan still appears to be on track to end negative interest rates soon, so a “natural” turn in the yen is a distinct possibility. Globally, while there may be increasing uncertainty around the timing and extent of the next interest rate moves by the Federal Reserve, European Central Bank and Bank of England, they will almost certainly be lower.None of that points to as pressing a need for policymakers in Japan to wade into the market spending tens of billions of dollars to prevent the yen from making new historic lows through 152 per dollar. NO HURRYTo be sure, they may want to prevent the yen’s slide from spiraling into a more damaging selloff that threatens the functioning of Japanese financial markets. It is already down a hefty 6% against the dollar this year.But a re-run of September and October 2022 when Japanese authorities bought yen in the FX market for the first time since 1998, and in record quantities, is a remote prospect.Annual consumer inflation at that time was above 3% and rising, and producer price inflation was a sizzling 10%. While authorities had for years been trying to escape deflation, an exchange rate/import price spiral was never the desired alternative.Inflation is close to the BOJ’s 2% target and slowing, and producer price inflation has virtually disappeared. Analysts at Morgan Stanley note that Japan’s terms of trade are not as bad as they were 16 months ago and import costs are nowhere near as high.This comes against the surprise news that the economy has slipped into recession, meaning Japan is no longer the third-largest economy in the world.Will policymakers want to drive up an exchange rate that is currently giving the export-heavy economy a path out of recession, boosting corporate profits, and thereby increasing the prospect of higher wage settlements they want to see?”Our suspicion is thus that the Kishida administration … will be in no particular hurry to curb the yen’s slide and thereby risk depressing corporate profits,” Morgan Stanley’s Koichi Sugisaki wrote on Sunday. ORDERLY FX MARKET If the domestic backdrop suggests less need for Japan to wade in with huge yen-buying intervention, so too does the international picture.In 2022 the Fed was undertaking its most aggressive rate-hiking campaign in 40 years and U.S.-Japanese yield spreads were widening sharply. The dollar’s surge above 150.00 yen was in line with exploding rate differentials.Intervention, therefore, maybe flew in the face of these fundamentals, but was understandable from the point of view of wanting to prevent the yen-selling mania from spiraling out of control.Today, the Fed has almost certainly topped out, U.S. yields are more finely balanced, and the BOJ is nearer “liftoff.” The yen may benefit from a natural narrowing of the U.S.-Japanese yield gap, without an official push.The risk for the BOJ is if its G4 peers don’t cut rates as quickly or as much as predicted. The yen could come under renewed downward pressure, testing the central bank’s intervention resolve. But right now, currency markets appear perfectly relaxed. Despite falling every week this year, the kind of one-way market that Japanese officials want to avoid, the yen’s decline has been anything but volatile. One-month and three-month implied dollar/yen volatility is at three-month lows around 7% and 8%, respectively, notably lower than in September and October 2022.”The risk of material intervention is still modest,” said Marc Chandler, managing director at Bannockburn Global Forex. (The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Paul Simao) More

WASHINGTON (Reuters) – The Internal Revenue Service said on Wednesday it plans to crack down on wealthy executives who may be using company jets for personal trips but claiming the costs as business expenses for tax purposes, as part of a new audit push to boost revenue collections.The IRS announced that it will begin dozens of audits involving personal use of business aircraft, focusing on large corporations, large partnerships and high-income taxpayers.The agency said it would use “advanced analytics” and other resources from the 2022 Inflation Reduction Act, which provided $80 billion in new funding over a decade for the IRS to modernize, improve taxpayer services and beef up enforcement and compliance. The IRS said the audits aim to determine “whether for tax purposes, the use of jets is being properly allocated between business and personal reasons.” Audits could increase based on initial results and as the agency hires more examiners. The use of business aircraft is an allowable expense against a company’s profit, reducing its tax liability. But U.S. tax laws require that such costs be allocated between business and personal use, requiring detailed record-keeping.IRS Commissioner Danny Werfel said this was a complex audit area where the agency’s work has been stretched thin by more than a decade of reduced funding and declining staffing. “With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure that high-income groups aren’t flying under the radar with their tax responsibilities,” Werfel said in a statement.The IRS did not specify how much additional taxes could be collected from the audits. But for an executive using the company jet for personal travel, the costs should be included as additional personal income, and may reduce the firm’s ability to deduct expenses associated with the flight.The Inflation Reduction Act funds allowed the IRS to hire more than 5,000 staff to answer phones and process tax returns promptly, modernize antiquated technology and rebuild enforcement by hiring thousands of staff capable of handling audits of sophisticated partnerships and tax avoidance schemes.Republicans in the U.S. Congress have accused the Biden administration of building an “army” of IRS agents to harass Americans over their tax bills and have sought to rescind the funding at every opportunity. A bipartisan top-line spending deal for fiscal 2024 would cut $20 billion from the total over a year.After an initial success of collecting $38 million from more than 175 high-income taxpayers, the IRS is pursuing audits of 1,600 other wealthy taxpayers, with $482 million collected so far.The Treasury and IRS now estimate that spending the full $80 billion would increase tax collections by $561 billion over 10 years. More

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(Reuters) – A look at the day ahead in Asian markets.Equity markets across Asia are likely to rise on Thursday, assuming the initial gains in Nvidia (NASDAQ:NVDA) shares in after-hours U.S. trading on Wednesday following the company’s fourth-quarter earnings are sustained.The U.S. chip-making and artificial intelligence giant won’t be the only influence – traders in Asia have on their plate PMI reports from Japan, Australia and India; inflation data from Hong Kong; and South Korea’s latest interest rate decision and guidance. They will also have the chance to digest the U.S. Fed’s January meeting minutes that showed policymakers were concerned about the risks of cutting interest rates too soon, and a spike in U.S. bond yields following an extremely weak 20-year auction. But for stocks, at the open at least, it will be all about Nvidia. Fourth-quarter revenue beat forecasts and the first-quarter outlook also exceeded analysts’ expectations. Its shares rose 7% after the bell on Wednesday, but trading was extremely volatile. The recovery in Chinese stocks from recent five-year lows, meanwhile, continues. The Shanghai Composite and CSI 300 index of blue chip shares both gained around 1% and chalked up their longest winning streaks in over a year.Another up day on Thursday will seal their best runs since July 2020. The CSI 300 is now in the green for the year and the Shanghai Composite is creeping into positive territory.While investors have responded favorably to Beijing’s efforts to prop up the market, inject liquidity into the banking system and boost economic activity, how long that positivity lasts is an open question.The latest market measure, reported by Bloomberg on Wednesday, is a ban on major institutional investors reducing equity holdings at the open and close of each trading day. Japan’s Nikkei, meanwhile, continues to pause for breath at its recent lofty 34-year heights just below 39,000 points, as dollar/yen consolidates around the 150.00 level.Japan’s purchasing managers index reports on Thursday could reveal whether the economy is any closer to exiting recession. Manufacturing activity has contracted every month except one since October 2022. Japan’s government on Wednesday downgraded its view on the economy for the first time in three months on sluggish consumer spending, suggesting a bumpy path out of a recession in the face of slow wage recovery and lackluster industrial output.    The Bank of Korea will keep its key policy rate on hold at 2.50% for a ninth consecutive meeting, according to all economists polled by Reuters, who stuck to their long-held view the first rate cut will be in the third quarter.Money markets indicate one 25-basis point rate cut will be delivered by August, and another by the end of the year.The won has weakened 3% against the U.S. dollar so far this year, but has strengthened 3% against Japan’s yen. Here are key developments that could provide more direction to markets on Thursday:- Australia, India, Japan PMIs (February)- South Korea interest rate decision- Hong Kong inflation (January) (By Jamie McGeever; Editing by Josie Kao) More

NEW YORK (Reuters) -The Federal Reserve’s internal debate over the fate of its balance sheet reduction effort is set to quicken at its March policy meeting, with policymakers first setting the stage for how they’ll likely slow the drawdown, likely deferring a decision on when to stop the process altogether to a later date. Minutes of the central bank’s Jan. 30-31 Federal Open Market Committee meeting, released on Wednesday, showed “many participants” were eager to kick off “in-depth discussions” at their March 19-20 meeting on how they will conclude what has been a steady reduction in the Fed’s bond holdings. Officials reckoned with cash draining steadily out of a key central bank tool known as the overnight reverse repo facility -it’s viewed as a proxy for excess financial sector liquidity -the time is close at hand for managing an endgame that will keep financial markets unruffled. To get there, officials are ready for a full-scope debate over how to eventually slow the process commonly referred to as quantitative tightening, or QT, at their March FOMC meeting. While there’s uncertainty whether all the cash will drain out of the reverse repo facility, wherever it stabilizes means bank reserves will start falling quickly. This overall tightening in liquidity means the Fed must be prepared to shift the QT process. Some Fed officials said at the January meeting that amid uncertainty over how much liquidity the financial system needs, slowing the pace of the contraction is a good first step. The minutes also said “a few” policymakers believe QT can proceed “for some time” even after the Fed starts cutting its short-term interest rate target.Fed Chair Jerome Powell flagged the upcoming debate at the press conference following last month’s FOMC meeting. The minutes also echo views of policymakers who have started debating how the Fed can complete QT smoothly. ENDGAME IN SIGHTThe Fed more the doubled the size of its holdings starting in March 2020 to a peak of nearly $9 trillion by the summer of 2022, using bond purchases to stabilize markets and provide stimulus beyond the near zero federal funds rate then in place. The current size of the Fed’s balance sheet is $7.7 trillion.The Fed has been reducing the size of its holdings since 2022. It is allowing up to $95 billion in Treasury and mortgage bonds to expire each month and not be replaced. With a QT slowdown, or taper, officials would likely lower that cap to buy the central bank time on deciding when to stop altogether. The QT process complements Fed rate hikes aimed at cooling high levels of inflation. With price pressures heading back to the 2% target Fed officials are openly weighing when they can lower the federal funds target rate from its current 5.25% to 5.5% level. “March is the first time they’ll do a deep dive into how to taper,” said Derek Tang, an analyst at forecasting firm LH Meyer. “The end point will take a lot more work to suss out since it hinges on things outside of their control like market sentiment and regulatory reform.” Tapering the drawdown is important because both inside and outside the Fed there is great uncertainty over the level of liquidity that’s needed to afford the central bank control over its short-term rate target while allowing for acceptable levels of volatility in money markets. When the Fed last engaged in a QT process it unexpectedly withdrew liquidity to such a level in September 2019 that it was forced to start adding it back in large amounts to restore stability to short-term markets. The Fed doesn’t expect a replay of that in part due to new tools, but even so, most believe it doesn’t want to test the market by withdrawing liquidity too aggressively. “We believe the Fed does not want to repeat its past errors with quantitative tightening, which led to a disruption in the repo market,” which makes the case for starting the process with a taper, said Ryan Sweet, U.S. economist with Oxford Economics. “Ending QT does not appear on the horizon and tapering soon would allow the process to last longer.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Pakistan’s traditional political power-brokers have unveiled a new coalition government, breaking a two-week impasse following elections, but the incoming administration will be quickly tested by the country’s dire economic circumstances.The Pakistan Muslim League-N of three-time former prime minister Nawaz Sharif and the Pakistan People’s party, led by Bilawal Bhutto Zardari, announced late on Tuesday they had agreed to form a government. The parties, which have historically dominated Pakistan’s politics, came second and third in the February 8 elections, when independent candidates loyal to imprisoned former prime minister Imran Khan shocked observers by winning the most seats despite suffering a military crackdown.The new government will be led by Shehbaz Sharif, Nawaz’s brother, while Zardari’s father Asif Ali Zardari, the husband of slain former prime minister Benazir Bhutto, has been put forward for the mostly ceremonial role of president.The administration will be forced immediately to contend with Pakistan’s acute economic plight, after Islamabad narrowly averted default last year with the help of an emergency IMF lending agreement. That programme is due to expire in April, meaning the country’s new rulers are expected to need to return to the fund for more support. The populist Khan’s Pakistan Tehreek-e-Insaf party, meanwhile, has claimed that its candidates were robbed of a majority by vote rigging and vowed to topple any rival coalition, raising the prospect of more political instability that could derail any economic recovery.Fitch Ratings warned this week that finalising a new IMF deal was “likely to be challenging”, but Pakistan had little choice: “Failure to secure it would increase external liquidity stress and raise the probability of default,” the credit rating agency said.Pakistan’s debt has soared since 2007 as authorities failed to invest borrowing from international bondholders and countries, including China, into productive sectors. “Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy,” according to Tabadlab, a think-tank in Islamabad.This means the government has had to borrow even more in order to meet its existing debts.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.As a result, most government revenues now go to repaying interest, while Pakistan’s foreign reserves, at $8bn, are only enough for around six weeks’ worth of imports. Tabadlab warned on Sunday that this vicious cycle had become “unsustainable”.“Unless there are sweeping reforms and dramatic changes to the status quo, Pakistan will continue to sink deeper, headed towards an inevitable default,” it said.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.One reason for this is weak growth. Unlike in nearby India or Bangladesh, Pakistan has been unable to sustain growth levels and suffered regular boom-and-bust cycles, with the economy contracting in 2023. Asad Sayeed, an economist at the Collective for Social Science Research in Karachi, said this was unlikely to change until Pakistan increased exports and boosted tax collection enough to fund badly needed government investment. “Unless you resolve [this], you’re not going to grow,” he said.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The most painful manifestation of Pakistan’s economic crisis has been inflation, which peaked at 38 per cent last year and remains near 30 per cent.Pakistan’s import-dependent economy was hit by the surge in commodity prices following Russia’s full-scale invasion of Ukraine in 2022. Subsequent cuts to fuel subsidies — a condition of the IMF lending — exacerbated the pain.Sayeed said he thought the worst was over, unless the new government succumbed to pressure to increase spending, such as offering additional subsidies. “If the new government starts behaving badly again . . . then [inflation] will increase further.”You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.One consequence of Pakistan’s tepid growth is that it is not able to create enough jobs. More than half of the country’s population is under the age of 30, and the majority of working-age women do not participate in the country’s labour force due to lack of opportunities and entrenched patriarchy. Improvements in living standards have also stalled, with poverty increasing.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The economic malaise has fuelled popular anger towards the government, which Shehbaz Sharif headed in 2022 and 2023 after Khan was ousted by parliament. It also increased the appeal of the PTI.Analysts said Pakistan needed both a new IMF programme and painful economic reforms to avoid a debt restructuring. But while a new government will offer some certainty, it may struggle to improve Pakistan’s parlous finances.“The good thing [would be] that there’s a government,” said Bilal Gilani, a political scientist. “The bad thing is that the government might be much weaker.” More

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