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    HSBC posts record annual profit but misses estimates on China write-down, shares tumble 7%

    HSBC pre-tax profit climbed about 78% to $30.3 billion in 2023 from a year earlier, but missed median estimates of $34.06 billion from analysts tracked by LSEG.
    Chief Executive Noel Quinn also announced an additional share buyback of up to $2 billion to be completed by the bank’s next quarterly report.

    Customers use automated teller machines (ATM) at an HSBC Holdings Plc bank branch at night in Hong Kong, China, on Saturday, Feb 16, 2019.
    Anthony Kwan | Bloomberg | Getty Images

    HSBC’s full-year 2023 pretax profit missed analysts’ estimates on Wednesday, hit by impairment costs linked to the lender’s stake in a Chinese bank, sinking its London-listed shares as much as 7%.
    Europe’s largest bank by assets saw its pre-tax profit climb about 78% to a record $30.3 billion in 2023 from a year ago, according to its statement released Wednesday during the mid-day trading break in Hong Kong. That missed median estimates of $34.06 billion from analysts tracked by LSEG.

    Chief Executive Noel Quinn also announced an additional share buyback of up to $2 billion to be completed ahead of the bank’s next quarterly earnings report. HSBC also said it would consider offering a special dividend of 21 cents per share in the first half of 2024 after it completes the sale of its Canada business.
    With the highest full-year dividend per share since 2008 and three share buy-backs in 2023 totaling $7 billion, Quinn said the bank returned $19 billion to shareholders last year.
    Quinn’s remuneration doubled to $10.6 million in 2023 from $5.6 million the year before, boosted in part by variable long-term incentives since his appointment in 2020.
    HSBC suffered a “valuation adjustment” of $3 billion on its 19% stake in China’s Bank of Communications, Quinn said. In an interview with CNBC following the earnings release, he said this is “a technical accounting adjustment” and “not a reflection” on BoComm.
    This write-down was among the items that plunged the bank’s fourth-quarter pretax profit by 80% to $1 billion from a year earlier.

    HSBC’s Hong Kong shares reversed gains of about 1% after trading resumed, falling as much as 5%. The benchmark Hang Seng Index was up about 2%. Shares in London were down around 7% in early deals, set for their biggest one-day drop since 2020, according to Reuters.

    Stock chart icon

    HSBC shares

    Here are the other highlights of the bank’s full year 2023 financial report card:

    Revenue for 2023 increased by 30% to $66.1 billion, compared with the median LSEG forecast for about $66 billion.
    Net interest margin, a measure of lending profitability, was 1.66% — compared with 1.48% in 2022.
    Common equity tier 1 ratio — which measures the bank’s capital in relation to its assets — was 14.8%, compared with 14.2% in 2022.
    Basic earnings per share was $1.15, compared with the median LSEG forecast for $1.28 in 2023 and 75 cents for 2022.
    Dividend per ordinary share was 61 cents — the highest since 2008 — compared with 32 cents in 2022.

    Outlook 2024

    HSBC, which has a second home in Hong Kong, said it was focusing on the fastest growing parts of Asia, a continent where the bank makes most of its profits.
    In an earnings briefing to investors and analysts, the bank said it has completed the sale of its businesses in France, Oman, Greece and New Zealand, and was in the process of exiting Russia, Canada, Mauritius and Armenia.

    The bank flagged two key macroeconomic trends: declining interest rates as inflation ebbs — a development that could eat into its interest income; and a continued reconfiguration of global supply chains and trade.
    “International expansion remains a core strategy for corporates and institutions seeking to develop and expand, especially the mid-market corporates that HSBC is very well-positioned to serve. Rather than de-globalizing, we are seeing the world re-globalize, as supply chains change and intraregional trade flows increase,” Quinn said in the earnings statement.
    The bank is targeting a mid-teens return on tangible equity for 2024, which was about 14.5% last year.
    HSBC said it will be focusing on an expansion of non-interest income revenue sources via its wealth and transaction banking business. It is expecting banking non interest income of at least $41 billion in financial year 2024.
    HSBC said it’s cautious about the loan growth outlook for the first half of 2024 amid economic uncertainty, expecting a mid-single digit annual percentage growth over the medium to long term. More

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    UK posts record budget surplus in January

    The Office for National Statistics noted that the country’s public finances usually run a surplus in January, unlike in other months, as receipts from self-assessed annual income tax payments come in.
    Total government tax receipts came in at a record £90.8 billion, up £2.9 billion compared to January 2023.
    The figures of Wednesday mark the final set of public finances data before Finance Minister Jeremy Hunt delivers his Spring Budget on March 6.

    Jeremy Hunt, UK chancellor of the exchequer, holding the despatch box as he stands with treasury colleagues outside 11 Downing Street in London, UK..
    Bloomberg | Bloomberg | Getty Images

    LONDON — The U.K. logged a record £16.7 billion ($21.1 billion) net budget surplus in January, according to official figures released on Wednesday.
    The Office for National Statistics noted that the country’s public finances usually run a surplus in January, unlike during other months, as receipts from self-assessed annual income tax payments come in.

    Combined self-assessed income and capital gains tax receipts totaled £33 billion in January, the ONS said, down £1.8 billion from the same period of last year.
    Total government tax receipts came in at a record £90.8 billion, up £2.9 billion compared to January 2023.
    Government borrowing during the financial year spanning to the end of January 2024 was £96.6 billion, £3.1 billion lower than over the same 10-month period a year ago and £9.2 billion lower than the £105.8 billion previously forecast by the independent Office for Budget Responsibility.

    Public debt was estimated at around 96.5% of annual gross domestic product, up 1.8 percentage points from January 2023 and holding at levels last seen in the early 1960s, the ONS highlighted.
    “We provided hundreds of billions to pay wages, support business and protect lives during Covid, and to pay half of people’s energy bills after Putin’s invasion of Ukraine,” the government’s chief secretary to the Treasury, Laura Trott, said in a statement.

    “But we can’t leave future generations to pick up the tab, which is why we have taken tough decisions to help reduce borrowing versus what the OBR expected in March.”
    The figures on Wednesday mark the final set of public finances data before Finance Minister Jeremy Hunt delivers his Spring Budget, which outlines the government’s fiscal policy for the year, on March 6.
    With a general election due before the end of January 2025 and the main opposition Labour Party leading by more than 20 points in the polls, there has been much speculation about whether Hunt will try to find the headroom for tax cuts next month.

    “With recent U.K. by-election results suggesting that the Labour party continues to have the advantage as we head towards the general election, Hunt will be under pressure to offer tax cuts,” said Lindsay James, investment strategist at Quilter Investors.
    “However, with his hands largely tied by the state of the nation’s finances, investors must be realistic about the prospects for the extent of this, or prepare for more savage cuts to the U.K.’s already under-strain public services.”
    Despite the record January surplus, weaker-than-expected self-assessment receipts meant the figure was actually slightly below that forecast by the OBR in November.
    However, Hunt will take solace in the downside revision to borrowing figures over the first 10 months of the financial year, according to Martin Mikloš, research economist at the Institute for Fiscal Studies.
    “While lower borrowing over the last ten months is welcome news, as the OBR prepares a new set of forecasts for the upcoming March Budget much more important will be the judgement they make on the outlook for growth and inflation,” Mikloš said.
    “With public services under strain, pressures to offset some of the record-breaking tax rise seen since 2019, and the need for a credible plan to get debt on a falling path the Chancellor’s forthcoming Budget will not be an easy one to navigate.” More

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    Barclays jumps 5% after announcing major strategic overhaul

    Barclays on Tuesday reported a fourth-quarter net loss of £111 million ($139.8 million) as the British lender announced an extensive strategic overhaul.
    On Tuesday, the bank announced a huge operational restructure, including substantial cost cuts, asset sales and a reorganization of its business divisions.
    It promised to return £10 billion to shareholders between 2024 and 2026 through dividends and share buybacks.

    LONDON – Nov. 5, 2020: Fog shrouds the Canary Wharf business district including global financial institutions Citigroup Inc., State Street Corp., Barclays Plc, HSBC Holdings Plc and the commercial office block No. 1 Canada Square.
    Dan Kitwood | Getty Images News | Getty Images

    LONDON — Barclays on Tuesday reported a fourth-quarter net loss of £111 million ($139.8 million) as the British lender announced an extensive strategic overhaul, boosting its shares more than 5% in early trade.
    Analysts polled by Reuters had expected net profit attributable to shareholders of £60.95 million for the quarter, according to LSEG data, as Barclays embarks on a major restructuring program in a bid to reverse declining profits.

    For the full year, net attributable profit came to £4.27 billion, down from £5.023 billion in 2022 and below a consensus forecast of £4.59 billion.
    The bank also announced an additional share buyback of £1 billion, and will set out a new three-year plan designed to further improve operational and financial performance, CEO C.S. Venkatakrishnan said in a statement.
    Barclays took a £900 million hit in the fourth quarter from structural cost-cutting measures, which are expected to result in gross cost savings of around £500 million this year, with an expected payback period of less than two years.
    Here are some other highlights:

    Fourth-quarter group revenue was £5.6 billion, down 3% from the same period last year.
    Credit impairment charges were £552 million, up from £498 million in the fourth quarter of 2022.
    Common equity tier one (CET1) capital ratio, a measure of bank’s financial strength was 13.8%, down from 14% the previous quarter.
    Full-year return on tangible equity (RoTE) was 10.6% excluding fourth-quarter restructuring costs. Fourth-quarter RoTE was 5.1%, down from 8.9% in the final quarter of 2022.
    Quarterly total operating expenses were roughly unchanged year-on-year at £4 billion.

    Momentum in Barclays’ traditionally strong corporate and investment bank (CIB) — particularly in its fixed income, currency and commodities trading division — waned in 2023, as market volatility moderated.

    On Tuesday, the bank announced a huge operational overhaul, including substantial cost cuts, asset sales and a reorganization of its business divisions, while promising to return £10 billion to shareholders between 2024 and 2026 through dividends and share buybacks.
    The business will now be divided into five operating divisions, separating the corporate and investment bank to form: Barclays U.K., Barclays U.K. Corporate Bank, Barclays Private Bank and Wealth Management, Barclays Investment Bank and Barclays U.S. Consumer Bank.
    “This resegmentation will provide an enhanced and more granular disclosure of the performance of each of these operating divisions, alongside more accountability from an operational and management standpoint,” the bank said in its report.
    Barclays is targeting total gross cost savings of £2 billion and an RoTE of greater than 12% by 2026.
    This is a breaking news story and will be updated shortly. More

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    Should you put all your savings into stocks?

    Less than two months of 2024 have passed, but the year has already been a pleasing one for stockmarket investors. The S&P 500 index of big American companies is up by 6%, and has passed 5,000 for the first time ever, driven by a surge in enthusiasm for tech giants, such as Meta and Nvidia. Japan’s Nikkei 225 is tantalisingly close to passing its own record, set in 1989. The roaring start to the year has revived an old debate: should investors go all in on equities?A few bits of research are being discussed in financial circles. One was published in October by Aizhan Anarkulova, Scott Cederburg and Michael O’Doherty, a trio of academics. They make the case for a portfolio of 100% equities, an approach that flies in the face of longstanding mainstream advice, which suggests a mixture of stocks and bonds is best for most investors. A portfolio solely made up of stocks (albeit half American and half global) is likely to beat a diversified approach, the authors argue—a finding based on data going back to 1890.Why stop there? Although the idea might sound absurd, the notion of ordinary investors levering up to buy assets is considered normal in the housing market. Some advocate a similar approach in the stockmarket. Ian Ayres and Barry Nalebuff, both at Yale University, have previously noted that young people stand to gain the most from the long-run compounding effect of capital growth, but have the least to invest. Thus, the duo has argued, youngsters should borrow in order to buy stocks, before deleveraging and diversifying later on in life.Leading the other side of the argument is Cliff Asness, founder of AQR Capital Management, a quantitative hedge fund. He agrees that a portfolio of stocks has a higher expected return than one of stocks and bonds. But he argues that it might not have a higher return based on risk taken. For investors able to use leverage, Mr Asness argues it is better to choose a portfolio with the best balance of risk and reward, and then to borrow to invest in more of it. He has previously argued that this strategy can achieve a higher return than a portfolio entirely made up entirely of equities, with the same volatility. Even for those who cannot easily borrow, a 100% equity allocation might not offer the best return based on how much risk investors want to take.The problem when deciding between a 60%, 100% or even 200% equity allocation is that the history of financial markets is too short. Arguments on both sides rely—either explicitly or otherwise—on a judgment about how stocks and other assets perform over the very long run. And most of the research which finds that stocks outperform other options refers to their track record since the late 19th century (as is the case in the work by Ms Anarkulova and Messrs Cederburg and O’Doherty) or even the early 20th century.Although that may sound like a long time, it is an unsatisfyingly thin amount of data for a young investor thinking about how to invest for the rest of their working life, a period of perhaps half a century. To address this problem, most investigations use rolling periods that overlap with one another in order to create hundreds or thousands of data points. But because they overlap, the data are not statistically independent, reducing their value if employed for forecasts.Moreover, when researchers take an even longer-term view, the picture can look different. Analysis published in November by Edward McQuarrie of Santa Clara University looks at data on stocks and bonds dating back to the late 18th century. It finds that stocks did not consistently outperform bonds between 1792 and 1941. Indeed, there were decades where bonds outperformed stocks.The notion of using data from such a distant era to inform investment decisions today might seem slightly ridiculous. After all, finance has changed immeasurably since 1941, not to mention since 1792. Yet by 2074 finance will almost certainly look wildly different to the recent era of rampant stockmarket outperformance. As well as measurable risk, investors must contend with unknowable uncertainty.Advocates for diversification find life difficult when stocks are in the middle of a rally, since a cautious approach can appear timid. However financial history—both the lack of recent evidence on relative returns and glimpses at what went on in earlier periods—provides plenty of reason for them to stand firm. At the very least, advocates for a 100% equity allocation cannot rely on appeals to what happens in the long run: it simply is not long enough. ■ More

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    Shopping online at 2 a.m.? That’s a red flag for buy now, pay later lender Affirm

    Americans shopping online after midnight are often making riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
    “Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”
    Last week, Affirm reported that 30-day delinquencies on monthly loans held steady from a year earlier at 2.4%, even as total purchase volumes surged 32% during that time.

    A young man holds a credit card and uses a laptop for online shopping.
    Diy13 | Istock | Getty Images

    Americans shopping online after midnight often make riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
    The fintech firm uses the hour a consumer attempts a transaction as a key data point to help determine whether to approve loans, Linford told CNBC in a recent interview. Other factors include a user’s repayment history with Affirm and transaction data from credit bureau Experian.

    “Local time of day is a signal that we use in underwriting, and most times of day have the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
    “Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”
    While the data is clear that late-night financial decisions are riskier, the reasons for it are less so. Shoppers could be inebriated or under financial or emotional duress and desperately seeking credit, Linford said.
    Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for longer-term credit.

    Real-time approvals

    Firms including Affirm, Klarna and Sezzle have embedded their services in the online checkout pages of retailers.

    A key to their business model is the ability to approve or reject customers in real time and at the transaction level, using data to help judge the odds of being repaid.
    “We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay back the $700 purchase you’re making right now. That is very different from credit cards, where they give you a line and say, ‘Godspeed.'”
    The use of buy now, pay later loans has grown along with the overall rise in consumer debt. While the industry touts up-front rates and fewer fees compared to credit cards, critics have said they enable users to overspend.
    But Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023 from a year earlier, even as total purchase volumes surged 32% in that time.
    Affirm has little incentive to allow users to pile up debts, according to the CFO.
    “If you can’t pay us back, we’ve lost, unlike with credit cards,” Linford said. “We don’t charge late fees. We don’t revolve, we don’t compound.”

    Arrows pointing outwards

    The rates at Affirm are in contrast to credit card delinquencies at the four biggest U.S. banks, which have been climbing since 2021 as loan balances have grown. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, a $50 billion increase from the previous quarter amid higher interest rates and persistent inflation, according to a Federal Reserve Bank of New York report.
    “The job environment is good, so it begs the question, why are credit card delinquencies creeping up?” Linford said. “The answer is, they took their eye off of underwriting and from my perspective, they got aggressive in a time when consumers were beginning to show stress.”Don’t miss these stories from CNBC PRO: More

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    Wells Fargo says regulator has lifted a key penalty tied to its 2016 fake accounts scandal

    Wells Fargo said Thursday one of its primary regulators lifted a key penalty from its 2016 fake accounts scandal.
    The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order that forced it to revamp how it sells its retail products and services.
    Eight consent orders remain, including one from the Federal Reserve that caps the bank’s asset size, according to a person with knowledge of the situation.

    Wells Fargo President and CEO Charlie Scharf attends The Future of Everything presented by The Wall Street Journal at Spring Studios in New York City, on May 17, 2022.
    Steven Ferdman | Getty Images Entertainment | Getty Images

    Wells Fargo said Thursday one of its primary regulators has lifted a key penalty tied to its 2016 fake accounts scandal.
    The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order that forced it to revamp how it sells its retail products and services.

    Shares of the bank jumped more than 6% on the news.
    Wells Fargo, one of the country’s largest retail banks, has retired six consent orders since 2019, the year CEO Charlie Scharf took over. Eight more remain, most notably one from the Federal Reserve that caps the bank’s asset size, according to a person with knowledge of the matter.
    In a memo sent to employees, Scharf called the development a “milestone” for the lender. The 2016 fake accounts scandal — in which the bank admitted to putting customers into more than 3 million unauthorized accounts — unleashed a wave of scrutiny that revealed problems related to the servicing of mortgages, auto loans and other consumer accounts.
    The attention tarnished the bank’s reputation and forced the retirement of both ex-CEO John Stumpf in 2016 and successor Tim Sloan in 2019.”The OCC’s action is confirmation that we have effectively put in place new systems, processes, and controls to serve our customers differently today than we did a decade ago,” Scharf said. “It is our responsibility to ensure we continue to operate with these disciplines.”
    The termination of the OCC order “paves the way” for the Fed asset cap to ultimately be removed, RBC analyst Gerard Cassidy said Thursday in a research note.

    — CNBC’s Leslie Picker contributed to this report.
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    How to avoid the top scam of 2023: The internet has ‘really supercharged’ it, expert says

    Imposter scams were the most prevalent type of consumer fraud in 2023, according to the Federal Trade Commission.
    There are many forms, but they share a basic premise: Criminals pretend to be someone you trust, such as a romantic interest, government agent, relative or well-known business, to persuade you to send them money.
    The best way for consumers to counter imposter scams is by pausing and verifying that a communication is accurate, according to fraud experts.

    Vasily Pindyurin | fStop | Getty Images

    Consumers lost a record $10 billion to fraud in 2023, and imposter scams were the most prevalent swindle, according to the Federal Trade Commission.
    Nearly 854,000 people filed complaints to the FTC about imposter scams in 2023. This represents 33% of the total consumer fraud reports filed to the agency.

    Consumers lost $2.7 billion to such scams in 2023, according to FTC data. The average loss was $800.

    Imposter scams come in many forms, but share a basic premise: Criminals pretend to be someone you trust to persuade you to send them money, or to get information that can later be leveraged for money, experts said.
    People may falsely claim to be a romantic interest, the government, a relative in distress, a well-known business or a technical support expert, the FTC said in a recent report.
    Fraudsters, often part of sophisticated organized crime networks, may contact potential victims via channels such as e-mail, phone call, text, mobile apps, social media or traditional snail mail.

    The internet has ‘really supercharged’ imposter scams

    Government impersonators, for example, might suggest they work for the Social Security Administration, IRS, Medicare or even the FTC. Others may say they’re from a company such as Amazon or Apple and claim there’s something wrong with your account, or from your utility company threatening to turn off service. Others may say they’re a close friend or family member and need money for an emergency.

    More from Personal Finance:FBI: ‘Financial sextortion’ of teens is ‘rapidly escalating threat’How this 77-year-old widow lost $661,000 in a common tech scamWhy this popular service is like ‘payday lending on steroids’
    Nascent and improving technology, such as artificial intelligence and voice cloning, has made these frauds more convincing, experts said.
    “These scams have been around forever, really, but the internet has really supercharged them,” said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League. “The scammers seem to be getting better at what they’re doing.”

    Additionally, imposter scams have a low barrier to entry for criminals, another likely reason they’ve proliferated, said Hardeep Rai, product director at Feedzai, a fraud detection service used by financial institutions.
    “You get [hold of] a bunch of phone numbers and call,” Rai said. “It’s an infinitely scalable fraud in that sense.”

    Older adults tend to lose more money

    Older victims were less likely than younger ones to report losing money to all types of fraud, but their typical loss was higher. For example, victims age 80 and older had a median loss of $1,450; by comparison, the typical loss didn’t exceed $500 for those younger than 70.
    The FBI reported last year that a subset of imposter scam — a type of tech-support fraud known as a “phantom hacker” scam — was on the rise nationally, “significantly impacting” older Americans.
    Such cybercrimes are multilayered: Initially, fraudsters generally pose as computer technicians from well-known companies and persuade victims they have a serious computer issue such as a virus, and that their financial accounts may also be at risk from foreign hackers.

    Accomplices then pose as officials from financial institutions or the U.S. government and persuade victims to move their money from accounts that are supposedly at risk to new “safe” accounts, under the guise of protecting their assets.
    These tech-support scams often wipe out seniors’ entire bank, savings, retirement or investment accounts, the FBI said.
    “This is money people have worked for a lifetime to build up,” Breyault said. “For many victims, they don’t have time to recover: They’re older people or people of limited means.”
    In addition to financial loss, “we know fraud causes significant emotional and psychological harm,” he added.

    Cryptocurrency accounted for the largest fraud losses relative to other payment methods, while bank transfers and payments were No. 2, according to FTC data. Fraud victims lost $1.9 billion and $1.4 billion via these payment channels, respectively, in 2023.
    Consumers often have limited legal recourse to get their money back in these cases: Victims who are duped into authorizing a transaction (i.e., voluntarily sending money to criminals) generally have weaker financial protections than those ripped off by unauthorized transactions, Breyault said.

    How to protect yourself from imposter scams

    The most effective steps consumers can take to protect themselves from imposter scams are to “pause and verify,” Rai said.
    Fraudsters prey on fear and urgency, hoping to trigger a knee-jerk emotional reaction from victims.
    “They’re playing a nasty psychological game,” Rai said.
    Consumers who receive an unsolicited message from someone — even if it appears to be someone they know — asking them to move money or make a transaction should pause, think about the request and avoid being pressured into it, he said. This may make a fraudster go off-script and remind consumers to engage their rational decision-making, he added.
    “It pays to be skeptical,” Breyault said.

    They’re playing a nasty psychological game.

    Hardeep Rai
    product director at Feedzai

    Additionally, consumers should verify who they’re communicating with, experts said.
    Don’t respond to an unsolicited message, Breyault said. Instead, call the official number on your bill or the back of your bank card and ask the representative to verify the veracity of the initial communication.
    Likewise, don’t click a link or call a number in an unsolicited message or pop-up window; independently seek out the respective official website or other communication channel.
    In that case, “you are the one controlling that communication,” Breyault said.
    “It’s easy to think this wouldn’t happen to you,” Rai said. “But everyone is susceptible to fraud. Fraudsters are very, very advanced.”
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    The Ukraine war offers energy arbitrage opportunities

    Europe had weathered one winter since Russia’s invasion of Ukraine in 2022. But although gas prices had returned to Earth, they were sure to rise in the colder months to come. Thus if commodity merchants bought at rock-bottom rates in the summer, they could offer future delivery at much higher prices on the forward market. To make the deal work, all they needed was somewhere to store the product. The EU’s underground capacity was almost full; parking the gas in tankers offshore would have been expensive. Their solution was unorthodox: pumping 3bn cubic metres (bcm) of natural gas eastward to Ukraine.Stashing hydrocarbons in a war zone might seem ill-advised. Indeed, last spring analysts assumed that companies would require publicly guaranteed war insurance in order to risk such a trade. But by June the spread between summer and winter prices had widened enough that the gamble seemed worthwhile. Ukraine’s generous customs regime for short-term storage, combined with promises that gas would not be requisitioned under martial law, provided traders with extra incentive. The resulting trade helped keep the EU’s reserves stocked throughout this winter, suppressing gas prices across the continent. It also provided healthy profits for the firms involved. Akos Losz of Columbia University estimates that merchants made up to €300m ($320m) from the play.Now the trade is looking like a test run for Europe’s future energy strategy. Ukraine is home to the continent’s second-largest gas-storage capacity, after Russia, totalling nearly 33bcm. It has more storage space than big economies like Germany, which boasts around 24bcm, and dwarfs that of next-door Poland by a factor of ten. Having mostly been developed as part of the Soviet Union’s energy infrastructure, the facilities massively exceed Ukraine’s domestic needs. Both the EU and the Ukrainian government are keen to put them to work. Denys Shmyhal, Ukraine’s prime minister, has said that he wants to turn his country into Europe’s “gas safe”. Naftogaz, a state-owned energy company, has offered up to half its storage space to European energy firms. Traders are now poised to repeat last year’s trade at bigger volumes this spring, starting from an earlier date.The firms involved in the trade have kept quiet, partly for security reasons. Trafigura, a commodities giant, is the only one whose involvement has been confirmed, but Naftogaz reports that more than 100 European companies have made use of its storage sites. According to Natasha Fielding of Argus Media, an energy-information firm, these include “large energy companies with trading desks and smaller, local utility firms in eastern Europe”. The latter, she says, could have the most to gain from the arrangement. Countries including Moldova and Slovakia not only lack significant storage capacity of their own, but also remain heavily dependent on Russian gas, which is still delivered through Ukraine under a long-term transit agreement due to expire in December.Although Europe’s energy problems have become less acute, storage provides a hedge against future disruption. Ukraine is eyeing the future, too. The country still receives up to $1.5bn a year from Russian companies, which use its pipelines to deliver gas under the existing transit deal. Once that agreement lapses, the government intends to make up some of the shortfall using storage fees paid by Western firms. There is also another consideration for Ukraine’s leaders. The more they can integrate their country’s energy industry with European markets, the more invested the EU will be in their defence. At a time when support from their allies appears shaky, that is worth quite a lot. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More