Economy

LONDON (Reuters) – Banks globally will likely rack up further losses on office property loans as a bruising crash in valuations leads to more defaults, credit rating agency Morningstar DBRS said on Wednesday.Higher borrowing costs and a sharp fall in demand for office space as more people work from home has punished commercial landlords, increasing the risk of their bank loans going unpaid.Several lenders including Wells Fargo and JPMorgan in the United States and Deutsche Bank in Germany have set aside more cash to cover potential losses on office loans, particularly to cover exposure in the United States.Markets are increasingly concerned about banks’ real estate exposures, with jitters this month focusing on smaller lenders New York Community Bank and Deutsche Pfandbriefbank, leading to sharp falls in their respective share prices.Morningstar DBRS researchers said they expected further provisioning.”In our view, many banks will need to make some downward revisions to property valuations and, as a result, incur higher provisions and loan losses,” said Nicola De Caro, Senior Vice President of Global Financial Institutions at Morningstar DBRS.”Given the renewed market pressure after the banking turmoil of last spring, we will continue to monitor closely any potential implications on depositor confidence and liquidity at banks.” Deteriorating sentiment will likely contribute to higher financing costs, including outside the United States, Moringstar DBRS said in a note, with risks exacerbated by a tightening of bank lending standards.While the impact of lower office prices remained largely contained for most lenders, banks might need to make further adjustments in the absence of a “true recovery” for the sector, the note added. More

This article is an on-site version of our Moral Money newsletter. Sign up here to get the newsletter sent straight to your inbox.Visit our Moral Money hub for all the latest ESG news, opinion and analysis from around the FT Welcome back. The ExxonMobil vs Follow This dispute rumbles on, with the US oil major pursuing legal action against the Dutch non-profit group over the latter’s attempt to use a shareholder resolution to drive climate action at Exxon.As the FT’s Attracta Mooney reports, Follow This has now filed a motion to dismiss Exxon’s suit, accusing it of “intimidation and bullying”. The oil company’s real target here is the Securities and Exchange Commission: Exxon thinks the SEC has been taking too permissive a stance on allowing activist groups to file disruptive resolutions. If it proceeds, this case could set a very important precedent.In today’s newsletter we focus on a similarly intense controversy on the other side of the Atlantic, over the EU’s attempt to hold companies accountable for their international supply chains. Many readers will have their own views on this subject: let us know them at [email protected] does a responsible approach to artificial intelligence look like in business and finance? That will be the focus of our next Moral Money Forum deep-dive report — and, as always, we want to hear from readers. Please have your say by completing this short survey.The sputtering push for accountability in global supply chainsIn September 2012, the Ali Enterprises clothing factory in the Pakistani port city of Karachi caught fire. Workers found escape routes blocked, windows barred and fire extinguishers inoperable. Over 250 of them burned or suffocated to death.In the months after the disaster, victims’ families organised in search of justice. In 2015, they brought a lawsuit in Dortmund against KiK, the German discount retailer that was the factory’s biggest customer. That case was thrown out by the court four years later.Such lawsuits might turn out very differently under a new EU directive currently being thrashed out in Brussels, which would hold companies accountable for human rights abuses by their international suppliers. Yet serious political divisions over this legislation have highlighted wider tensions in the European sustainability project — and cast doubt on whether this particular act will be passed at all.The legislation in question is the Corporate Sustainability Due Diligence Directive (CSDDD). First proposed by the European Commission in 2022, it would require companies to identify any environmental and social harms in their supply chains, and act to address them. Crucially, it would assert civil legal liability for companies that fail to take appropriate action.In December, EU officials celebrated a provisional agreement on the basics of the CSDDD after negotiations that ran late into the night. The directive seemed set for final approval in the following months (although financial companies were not initially to be made subject to the directive’s full requirements, in a compromise that frustrated many).Those celebrations now look decidedly premature. Last Friday, a decision by member state governments on whether to endorse the CSDDD was postponed after it became clear that it lacked sufficient support. The question was then put on the agenda for another meeting today — only to be pushed back again, with consensus still not forthcoming.To a large extent, this is a story about a German governing coalition undergoing severe strain amid mounting concern over the country’s sluggish economy. Calling the CSDDD a bureaucratic danger to German business, justice minister Marco Buschmann and finance minister Christian Lindner have been openly lobbying against it — including through a letter from Buschmann to other EU member governments. This has sparked tension with CSDDD supporters in Berlin, including labour minister Hubertus Heil and development minister Svenja Schulze, who told the Süddeutsche Zeitung: “Politics should not be based on the few black sheep who declare the fight against child labour to be a bureaucratic monster.”This internal division pushed Germany’s government to abstain from the decision on the CSDDD — a move that has thrown the directive’s prospects into uncertainty, given that it needs at this stage to be backed by governments representing 65 per cent of the EU population. (It also needs to be passed by the European parliament, and then transposed by member states into national law.)But this is not just about Germany. The Italian government has also reportedly been getting cold feet on this legislation. More broadly, green-sceptic right-wing parties have been gaining strength across much of the EU ahead of its parliamentary election in June.If the CSDDD does not pass before then, the project might be killed off in a more right-leaning parliament. If, on the other hand, a problematic piece of legislation is seen to have been rushed through before an election, the perceived legitimacy of the EU’s larger green regulation platform will take a hit.But are the CSDDD’s critics right to call it problematic? The letter from Buschmann outlines several concerns that have also been raised by German business lobby groups.He criticises as overly broad the scope of the directive, which will apply to companies with at least 500 employees and worldwide revenue exceeding €150mn ($161mn); and companies in specified “high-impact” sectors with at least 250 employees and revenue exceeding €40mn. This will saddle many mid-sized companies with excessive bureaucracy that will undermine economic performance, he claims. (Here is a really interesting academic paper on this question: the authors argue for a supplier certification system that would reduce the compliance burden on individual companies.)Perhaps Buschmann’s strongest argument is on unwelcome side effects from the legislation, with companies likely to cut ties altogether with some suppliers in developing countries, to the potential detriment of the people in those nations. The draft directive states that companies should do this only as a last resort — but it may well look like the most attractive, low-risk option to many companies.On the question of legal liability, however, the CSDDD’s opponents are on shakier ground. Buschmann’s letter warns that there is still too much uncertainty around this element of the directive — largely stemming from the possibility that companies could be held responsible for indirect suppliers far down their supply chain whom they may never have heard of.Yet the draft directive makes clear that a company will be held liable only if it “intentionally or negligently failed to prevent and mitigate potential adverse impacts or to bring actual impacts to an end and minimise their extent”. Just as with any other area of corporate law, it will be up to the courts to apply a reasonable standard of expected behaviour.The broader principle, that a company should bear a certain level of legal responsibility for any abuses perpetrated in the making of its products, is by now hard for a reasonable person to dismiss. For decades, companies (and their customers) have reaped the economic benefits of outsourcing manufacturing to countries with weaker labour and environmental standards. A basic level of accountability to the people in those supply chains seems only fair. (Simon Mundy)Smart readClimate change is now reshaping the insurance industry, with severe consequences for some homeowners in vulnerable regions, this FT Big Read explains.Recommended newsletters for youFT Asset Management — The inside story on the movers and shakers behind a multitrillion-dollar industry. Sign up hereEnergy Source — Essential energy news, analysis and insider intelligence. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Global liquefied natural gas demand is forecast to surge 50 per cent by 2040 as the world transitions to cleaner fuel, Shell said in its latest annual LNG outlook.Demand for natural gas globally will then peak after 2040, although appetite for LNG will continue growing as China and developing Asian nations switch from dirtier coal to the comparatively cleaner fuel.The growth forecast is slightly lower than predictions last year, but energy majors still expect a strong rise in LNG demand as the world’s economies target net zero carbon emissions by 2050.LNG has grown in importance since Russia’s full-scale invasion of Ukraine as the Kremlin slashed its pipeline gas supplies to Europe, prompting the region to secure the supercooled fuel to replace the lost volumes.“The global LNG market will continue growing into the 2040s, mostly driven by China’s industrial decarbonisation and strengthening demand in other Asian countries,” Shell said on Wednesday.The oil major added that demand for natural gas “has peaked in some regions and globally is set to peak after 2040”.LNG is natural gas liquefied by cooling it to minus 162C. Like many other energy majors, Shell, the world’s largest private LNG trader, is keen to position natural gas as a transition fuel as the world aims to decarbonise. Although natural gas is cleaner than other fossil fuel alternatives, it still releases substantial amounts of carbon dioxide when burnt. Natural gas is also mostly composed of methane, which generates more warming than carbon dioxide but is shorter-lived.Cutting methane emissions is regarded by scientists as among the cheapest and quickest ways to tackle global climate change.Shell said LNG demand was expected to reach 625mn to 685mn tonnes in 2040, from 404mn tonnes in 2023. This is lower than its forecast a year ago, when it predicted LNG demand to reach 650mn to 700mn tonnes. China was likely to dominate LNG demand growth this decade, while over the following decade, south Asia and south-east Asia would drive sales as they increasingly needed fuel to power their gas-fired power plants, Shell said.The company added that LNG continued to play a “vital role” in Europe’s energy security last year, with imports remaining at similar levels to the record highs in 2022 following Russia’s war in Ukraine, despite an overall decline for gas demand in the region.The global gas market remained structurally tight, owing to the lack of Russian pipeline gas supply to Europe, Shell said. More

NEW YORK (Reuters) – Wall Street banks are raising billions of dollars to regain ground in lending to companies in debt-backed deals after giant private equity and asset management firms muscled in on the business over the last two years.U.S. banks reduced lending to lower-quality corporate borrowers in 2022 as the Federal Reserve aggressively raised interest rates. Rising borrowing costs also derailed deal markets, particularly for transactions underpinned by high levels of debt. Credit markets recovered after the Fed paused its monetary tightening late last year, encouraging banks to make a comeback in leveraged finance using their own capital and outside institutional money to expand private credit businesses.The broader $1.5 trillion syndicated loan market has already seen a revival this year, according to Chris Long, founder and CEO of Palmer Square Capital Management, a Kansas City-based credit manager. The direct lending market is roughly half the size of the syndicated market, bankers estimate.Private equity firm KKR’s has made a bid to buy healthcare technology firm Cotiviti Inc from Veritas Capital. Mounting competition to fund the potential deal highlights the overlapping relationships in the era of private credit. KKR, leading contender to buy a 50% stake in Cotiviti, is in talks with both a syndicate of banks and a group of private creditors to finance a transaction that would value Cotiviti between $10 billion to $11 billion, sources familiar with the matter said. KKR is leaning toward the syndicate of banks to finance the deal, one of the sources said. KKR declined to comment.Meanwhile, private credit firms are entering into activities once dominated by regional banks. Broadening their lending businesses beyond financing deals, investment firms have entered consumer lending and real estate.PacWest Bancorp last year sold a $3.54 billion lender finance portfolio to asset manager Ares Management (NYSE:ARES). KKR acquired a $373 million portfolio of prime auto loans from Synovus (NYSE:SNV) Bank and purchased $7.2 billion portfolio of super-prime recreational vehicle (RV) loans from a unit of BMO Financial Group. Markets for syndicated loans and private credit “are going to converge and will look more alike over time,” said Kevin Foley, global head of debt capital markets at JPMorgan Chase (NYSE:JPM), the biggest U.S. lender. “It’s not new to us,” Foley said. “We are agnostic, we want the right solution for our clients.” JPMorgan Chase has set aside $10 billion of its own capital for private credit, but that could grow significantly depending on demand, said sources familiar with the matter who declined to be identified discussing financial details. It has also received inquiries from potential partners seeking to put in private capital for lending, with the bank convening the deals, one of the people said. Private credit is “continuing to grow as you see more and more private equity firms choose that route to finance their deals,” said Long, who opened a business development company focused on credit in January.Financing volumes will be determined by mergers and acquisitions, and whether participants can agree on prices, said Foley at JPMorgan. “We are seeing the gap between buyers and sellers expectations shrink, but it will also depend on conviction around the state of the economy,” he said. DIRECT LENDERS Banks in the syndicated loan market compete with direct lenders including private equity firms and others.”Direct lenders have grown to a point where they can legitimately compete with the syndication banks for the biggest deals,” said Greg Olafson, global head of private credit at Goldman Sachs. Goldman has been active in private credit for almost three decades, via mostly its asset management arm, which gathers client money and lends it out for a return. It aims to raise $40 billion to $50 billion in alternative funding this year, with private credit accounting for a large share of the total. Goldman raised $23 billion in private credit last year, and its asset and wealth unit manages $110 billion in private credit funds.As investors and money managers take a greater role in lending, potential risks may be obscured because they are not as tightly regulated as banks, according to Ana Arsov, global head of private credit and financial institutions at Moody’s (NYSE:MCO) Investors Service. “Transparency is key, and we would like to see more information about the funding, in which balance sheets these credits are booked, and on the portfolio performance,” she said. “It would be useful to compare delinquencies in the private credit space with the public syndicated loans.”Direct lending is also fueling new partnerships. Wells Fargo teamed up with private equity firm Centerbridge Partners to build a business focused on direct lending to midsize, family-owned and private companies in North America. “Our first thought was about how we give our middle market clients access to another form of financing for their most strategic and transformational transactions,” said David Marks, executive vice president of Wells Fargo Commercial Banking. “It wasn’t about ‘how do we get into private credit?’ We decided to enter into this relationship with Centerbridge because our clients’ expectations were changing.” Loans from private creditors often trade at a premium to traditional syndicated loans because the borrowers pose higher risks and underlying loans are harder to sell to other participants, industry executives and analysts said. “There has been a consistent premium for private credit relative to public markets, averaging several hundred basis points, and it tends to tighten as the market gets bigger,” David Miller, global head of private credit and equity at Morgan Stanley. But in the long run, private credit markets will remain more expensive and less liquid than public markets, he said. “There is a limit to the compression of spreads.” More

The U.K. economy is worse off today than before Brexit, according to new analysis from Goldman Sachs.
Britain’s decision to leave the European Union has hampered the economy to the tune of 5% versus other comparable countries, the estimates showed.
The Wall Street bank attributed the shortfall to three key factors: reduced trade; weaker business investment; and lower immigration from the EU.

Pro-EU demonstrators protest outside Parliament against Brexit on the fourth anniversary of Britain’s official departure from the European Union in London, United Kingdom on January 31, 2024.
Future Publishing | Getty Images

LONDON — Post-Brexit Britain has “significantly underperformed” other advanced economies since the 2016 EU referendum, according to new analysis from Goldman Sachs, which aims to quantify the economic cost of the Leave vote.
In a note last week entitled “The Structural and Cyclical Costs of Brexit,” the Wall Street bank estimates that the U.K. economy grew 5% less over the past eight years than other comparable countries.

The true hit to the British economy could be anywhere from 4% to 8% of real gross domestic product (GDP), however, the bank said, acknowledging the difficulties of extracting the impact of Brexit from other simultaneous economic events including the Covid-19 pandemic and the 2022 energy crisis. Real GDP is a growth metric that has been adjusted for inflation.
Goldman Sachs attributed the economic shortfall to three key factors: reduced trade; weaker business investment; and labor shortages as a result of lower immigration from the EU.
A Treasury spokesperson told CNBC that the government was “making the most of Brexit freedoms to grow the economy,” including repealing EU financial services law, which it said could unlock a potential £100 billion in investment over the next decade.

Trade and investment down

The U.K. voted 52% to 48% to leave the EU on June 23, 2016, but officially exited the union on Jan. 31, 2020.
Over that period until today, U.K. goods trade has underperformed other advanced economies by around 15% since the Leave vote, according to the bank’s estimates, while business investment has fallen “notably short” of pre-referendum levels.

Meantime, immigration from the EU has fallen — a key pledge of the Vote Leave campaign — only to be replaced by a less economically active cohort of non-EU migrants, primarily students, the research said.

“Taken together, the evidence points to a significant long-run output cost of Brexit,” the report’s authors said.
The bank noted the reduction in trade was in line with expectations and the underperformance in investment was “more pronounced” that anticipated. However, it said the shifts in immigration patterns posed the most important cyclical repercussions for the U.K. economy — and inflation in particular.
“The post-Brexit change in immigration flows has reduced the elasticity of labor supply in the U.K., contributing to the post-pandemic surge in inflation and pointing to more cyclical labor market and inflation pressures going forward,” the report said.
U.K. real GDP per capita has barely risen above pre-Covid levels and currently stands 4% above the mid-2016 level, it said. That compares to 8% for the euro zone area and 15% for the U.S.
Meantime, the U.K. has recorded higher inflation over the period, with U.K. consumer prices rising 31% since mid-2016 compared with 27% in the U.S. and 24% in the euro zone, it added.
While the report noted that new non-EU trade agreements could potentially mitigate the costs of Brexit, estimates suggest that the benefit is likely to be small.
The British government estimates that its free trade agreement with Australia will boost U.K. GDP by 0.08% per year, while the economic impact of a new trade deal with Switzerland is unclear.
Meantime, the timelines for prospective new trade deals with major partners such as the U.S. and India have not yet been announced. More

The southern African country’s repo rate has been at 7.75% since June 2023.”With real interest rates remaining positive, and slow credit growth, amid a fair level of international reserves, the MPC (Monetary Policy Committee) decided to maintain the repo rate at its current level,” the Bank of Namibia said in a statement.Inflation edged up to 5.4% year on year in January from 5.3% in December.It is projected to average 4.8% in 2024, the bank said, sticking to the same forecast given at its last MPC meeting in December.The bank sees the economy growing 3.4% this year, down from 3.9% in 2023, the same projection given in December.As well as price stability, the Bank of Namibia tries to safeguard the 1:1 link between the Namibian dollar and neighbouring South Africa’s rand.Central bank governor Johannes !Gawaxab said the economy was seeing healthy foreign direct investment flows related to energy exploration, but that had yet to translate into large benefits for Namibians via jobs or an improvement in the country’s international reserves.”The benefits will probably come through once we have constructed the production fields,” !Gawaxab told reporters.Namibia has no oil and gas production but has attracted huge interest from energy companies after the discovery of resources by TotalEnergies (EPA:TTEF) and Shell (LON:SHEL). More

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1. Futures edge higherU.S. stock futures advanced slightly on Wednesday, suggesting a small rebound on Wall Street after equities notched their worst day so far this month following a stronger-than-anticipated U.S. inflation reading.By 04:59 ET (09:59 GMT), the S&P 500 futures contract had added 21 points or 0.4%, Nasdaq 100 futures had risen by 110 points or 0.7%, and Dow futures had ticked up by 94 points or 0.3%.The main indices in New York all tumbled in the prior session, with the benchmark S&P 500 dropping by 1.4%, the tech-heavy Nasdaq Composite losing 1.8%, and the blue-chip Dow Jones Industrial Average dipping by 1.4%. Traders were reacting to data on Tuesday which showed that overall U.S. consumer price gains were hotter than economists had predicted in January, pointing to a lingering stickiness in inflationary pressures that further dashed hopes for an imminent interest rate cut by the Federal Reserve.Analysts at ING said the release was “uncomfortable reading” for the Fed. The U.S. central bank has made defeating price growth one of the main targets of an aggressive tightening campaign, but inflation remains stubbornly above its stated 2% target.Markets all but erased their previous bets for a 25 basis point reduction at the Fed’s March policy meeting and lowered the chances of one in May. U.S. government bond yields, which typically move inversely to prices, climbed in the wake of the figures, weighing in particular on rate-sensitive megacaps like Google-parent Alphabet (NASDAQ:GOOGL), Facebook-owner Meta Platforms (NASDAQ:META) and tech titan Microsoft (NASDAQ:MSFT).2. Lyft shares curb aftermarket gains on guidance typoShares of ride-sharing firm Lyft severely curbed their aftermarket gains on Tuesday after its chief financial officer said that the company had erroneously overstated a key full-year margin forecast.Lyft had initally said that it expects to post 500 basis points of margin expansion in 2024, sending shares soaring in extended hours dealmaking. But the euphoria was later doused when CFO Erin Brewer told analysts in an earnings call that Lyft had misstated this outlook in its press release. Instead, the company actually sees growth at a more modest 50 basis points.In premarket trading, Lyft shares retained some of that earlier surge thanks in part to predictions that it will be free cash flow positive this year for the first time ever. Fourth-quarter earnings also topped Wall Street estimates.Other corporate reports are slated for release on Wednesday, including quarterly results from cloud solutions provider Cisco Systems (NASDAQ:CSCO), hydrocarbon exploration business Occidental Petroleum (NYSE:OXY), and packaged food group Kraft Heinz (NASDAQ:KHC).3. Sony confirms plan to list financial services unitSony (TYO:6758) has said it will move to list its financial services arm next year, granting some support to shares after the Japanese conglomerate slashed its forecast for sales of its all-important PS5 gaming console.In a statement, Sony confirmed earlier plans to list the division, which includes services like insurance and digital banking, adding that it will keep a stake of just under 20% in the business.But Sony warned that sales of the PS5 for the year ending in March will come in at 21 million units, down from its prior guidance of 25 million units, due to weak demand over the all-important holiday shopping season. Operating profit at its games unit also declined by around a quarter on hardware promotions and lower sales of first-party titles, although this was partially offset by strength at its movies, music and chips segments.Overall operating income at the Walkman inventor grew by 10% to 463.3 billion yen ($1 = 150.66 yen), above expectations. Japan-listed shares in Sony closed marginally lower on Wednesday.4. Bezos sells $4 billion in Amazon stock in past weekAmazon.com’s (NASDAQ:AMZN) multi-billionaire founder Jeff Bezos has sold more stock in the e-commerce behemoth, increasing the total value of his share sales over the past week to around $4 billion.In a securities filing on Tuesday, Amazon said that Bezos, the firm’s executive chairman who boasts an estimated net worth of over $190B according to Forbes, had offloaded 12 million shares for about $2B between Friday and Monday. Bezos has now sold 24 million shares this month.Amazon had earlier announced that Bezos is planning to sell 50 million shares — worth approximately $8.4B at current prices — by the end of next January. The move comes as Amazon’s stock price has spiked by over 50% over the past twelve months, and is currently hovering close to an all-time high.Even after the sales, Bezos remains the largest shareholder in the company, according to S&P Capital IQ data cited by the Financial Times.5. Oil mutedOil prices hovered around the flatline in European trade on Wednesday as traders gauged an outsized build in U.S. crude inventories and the hot U.S. inflation reading.Brent oil futures expiring in April had added 0.1% to $82.82 a barrel, while West Texas Intermediate crude futures were broadly unchanged at $77.57 per barrel by 05:00 ET. Both contracts were in sight of a two-week high.Crude prices were earlier hit by signs of sticky U.S. price gains, which were viewed as a potential cause for the Fed to keep interest rates higher for longer — a trend that could stymie economic activity and, in turn, oil demand in the coming months.But the declines were partly mitigated by data from the American Petroleum Institute (API) showing that U.S. crude inventories grew by 8.5 million barrels in the week to February 9, much more than estimates for an increase of 2.6 million barrels. Government inventory numbers are due later on Wednesday.Meanwhile, geopolitical tensions persist in the Middle East and Russia, threatening to exacerbate concerns around supplies out of these crucial production regions. More