Finance

“We still believe an Evergrande default is highly likely,” S&P Global Ratings analysts said in a report Thursday.
“The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct,” the report said.

The logo of China Evergrande is seen at outside China Evergrande Centre building in Hong Kong, China September 23, 2021.
Tyrone Siu | Reuters

BEIJING — Highly indebted property developer China Evergrande will likely default because the company has essentially lost its main business, S&P Global Ratings analysts said in a report Thursday.
Evergrande was China’s second-largest developer by sales last year. Like many Chinese developers, the company sold apartments to consumers before completion, helping to generate capital for future projects.

But that cash flow cycle is running into problems. Despite the company’s ability to sell assets and find ways to make payments in time, “Evergrande’s massive debt will catch up with it,” the S&P report said.
“The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct. This makes full repayment of its debts unlikely,” the analysts said.
“We still believe an Evergrande default is highly likely,” the report said.
Evergrande did not immediately respond to a CNBC request for comment on the S&P report.
While the developer has managed to stave off default with last-minute payments, the analysts said Evergrande’s bigger test will be when $3.5 billion comes due for U.S. dollar-denominated notes in March and April next year.

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China Evergrande has teetered on the edge of official default this year.
The sale of HengTen is Evergrande’s latest effort to raise capital.
The deal is worth 2.13 billion Hong Kong dollars ($273.2 million) and represents about 18% of HengTen’s issued shares.

An exterior view of China Evergrande Centre in Hong Kong, China March 26, 2018.
Bobby Yip | Reuters

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The sale of HengTen is Evergrande’s latest effort to raise capital. The deal is worth 2.13 billion Hong Kong dollars ($273.2 million), with 20% — or $54.6 million — due within five business days, and the rest in two months, the filing said.
The developer said it reached an agreement Wednesday to sell about 1.66 billion HengTen shares to Allied Resources Investment Holdings for 1.28 Hong Kong dollars each, according to a filing with the Hong Kong stock exchange.
That’s about 24% below HengTen’s closing price Wednesday of 1.69 Hong Kong dollars a share.

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The transaction represents about 18% of HengTen’s issued shares. An Aug. 1 filing showed a Tencent subsidiary agreed to buy 7% of the company from an Evergrande subsidiary in a deal worth 2.07 billion Hong Kong dollars.

HengTen’s subsidiary Ruyi Films was one of the producers of “Hi, Mom,‘’ a hit move in China earlier this year. It grossed 5.41 billion yuan, or about $838 million at the time, making it the top-grossing movie by a female director, according to Chinese ticketing platform Maoyan.
Evergrande was founded in the late 1990s as a real estate developer, before expanding into industries such as new energy vehicles, life insurance and spring water.

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Fraudulent activity is on the rise at some of the largest buy now, pay later (BNPL) platforms, experts say.
Criminals are exploiting weaknesses in the application process for BNPL loans and stealing items ranging from pizza to video game consoles.
Warnings of BNPL fraud are particularly timely as Black Friday kicks off the critical holiday shopping season next week.

The Klarna logo displayed on a phone screen.
Jakub Porzycki | NurPhoto | Getty Images

LONDON — Buy now, pay later services aren’t just popular among consumers. They’re also proving to be a hit with criminals.
Fraudulent activity is on the rise at some of the largest buy now, pay later (BNPL) platforms in the industry, which include Klarna, Afterpay and Affirm, according to fraud experts who spoke with CNBC.

BNPL products let shoppers split the cost of their purchases over three or four months, often interest-free. They’ve become massively popular in the U.S. and Europe, and generated almost $100 billion in transactions globally in 2020 alone.
“Criminals love buy now, pay later,” Martin Rehak, CEO and co-founder of Czech fraud detection start-up Resistant AI, told CNBC. “You can already see crime on multiple levels.”
Criminal gangs are exploiting weaknesses in the application process for BNPL loans, experts say, using clever tactics to slip through undetected and steal items ranging from pizza and booze to video game consoles.
One of the vulnerabilities, Rehak says, is BNPL firms’ reliance on data for approving new clients. Many companies in the industry don’t conduct formal credit checks, instead using internal algorithms to determine creditworthiness based on the information they have available to them.
Retailers working with BNPL platforms “categorize things differently,” Rehak said, adding that this can lead to inconsistency. “There is always a way to exploit this and basically steal from you using someone else’s mistake.”

For example, a partner merchant may run a special promotion event for alcohol but assign a vague category like “special event.” This runs the risk of fraud falling through the cracks if an artificial intelligence system doesn’t recognize the category and gives it a more generic label with low default risk.
Rehak said many scammers are stealing people’s identities or taking over their accounts to evade detection, making unsuspecting victims foot the bill. He declined to name any specific companies being targeted, however, saying Resistant AI counts a number of BNPL businesses as clients.

‘Very lucrative’

Kevin Gosschalk, founder and CEO of American fraud-prevention start-up Arkose Labs, said criminals are increasingly targeting BNPL platforms as they have “softer” controls than the big banks and credit card companies.
“Fintechs are very lucrative because they’re typically fast-growing, early-stage companies,” he told CNBC. “They have much lower controls than the big banks that have been around for many years on the security side, so it makes them a good target.”
Klarna refuted claims that its fraud checks and controls were more lax than that of banks, while Afterpay said it has “extensive back-end fraud processes” in place to verify new users.
Gosschalk said scammers in the U.S. are using such services to exploit supply shortages. He gave the example of criminals getting PlayStation 5 consoles on BNPL and flipping them at much higher prices online to make a profit.
Because BNPL services let users spread their purchases across four equal installments, fraudsters are able to pay just 25% base value — about $125 for a PS5 — and avoid paying back the rest, Arkose Labs’ CEO said.
Arkose Labs says its main clientele consists of financial institutions, tech giants and video game companies. The firm’s customers include the likes of Microsoft and PayPal, the latter of which offers its own BNPL product.
Experts say another reason BNPL systems are being targeted is their popularity — it’s much easier to go unnoticed when there’s a sea of other people applying for credit.
“If you want to survive in the payments business, you must grow very quickly,” Rehak said.

And it’s not just individuals who are working to defraud these services, according to Rehak. Criminals are also enlisting the help of others to cheat the system, offering their know-how to commit fraud at scale.

Holiday shopping

Warnings of BNPL fraud are particularly timely as Black Friday kicks off the critical holiday shopping season next week.
“There’s going to be a huge amount of fraud hidden in there because they always lower their security checks during those events because they don’t want it to impact sales,” Gottchalk said.
Unlike credit card companies, the bulk of BNPL companies’ revenue comes from merchants. Companies like Klarna and Afterpay charge retailers a small fee on all transactions processed through their platforms.
The key selling point for merchants is that they often see their sales volumes increase as a result. This has led to concerns that BNPL plans are encouraging consumers to live beyond their means.
Retailers are usually happy to accept some level of fraud as the price of doing business, Gottchalk said.
Alex Marsh, Klarna’s U.K. chief, said the firm conducts “advanced and extensive checks internally and externally.”
“These comments based on observations of other BNPL firms do not bear any resemblance to Klarna’s business or fraud prevention capabilities,” Marsh said. “Our fraud rates are half that of credit card fraud and we have far more sophisticated technology in our checkout and products than the banks and credit card issuers.
“We work closer with merchants than the average bank or credit card issuer which means we get a richer level of product data to put in place stronger and more dynamic  protections than outdated payment methods such as credit cards.”
Afterpay said managing fraud was a “top priority” for the company and that losses as a result of fraud accounted for less than 1% of its global sales in the last financial year.
“Our risk management system is based on market-leading proprietary machine learning algorithms that are constantly adjusted to counteract any potential threats,” Rich Bayer, U.K. country manager for Clearpay, Afterpay’s international division, told CNBC.
“Our global risk team is very close to any potential attack or loss abnormality and reacts fast to keep both our customers and merchants safe at all times.”
The BNPL sector has attracted interest from major corporations, with companies from PayPal and Square jostling to play a role in the space. PayPal started offering its own BNPL feature last year, while Square recently agreed to acquire Afterpay for $29 billion.
At the same time, the rapid growth of the industry is worrying regulators. The U.K. government wants to bring BNPL products under regulatory oversight, and is currently running a consultation to determine how to move forward with its plans.
For their part, BNPL platforms like Klarna and Afterpay say they would welcome regulation so long as it’s “proportionate.”

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U.S. stock futures were flat in overnight trading after the major averages pulled back, albeit close to records, on Wednesday.
Dow futures fell just 20 points. S&P 500 futures gained 0.05% and Nasdaq 100 futures rose 0.14%.

Nvidia shares popped in extended trading after beating on the top and bottom lines of its quarterly results. Cisco Systems’ stock went the other direction due to weaker revenue guidance and a revenue miss.
On Wednesday, the Dow Jones Industrial Average lost 211 points, dragged down by a 4.7% loss in Visa shares. The S&P 500 dipped 0.26%. The Nasdaq Composite ticked 0.33% lower, despite most mega-cap technology companies closing in the green.
The small-cap benchmark Russell 2000 was the relative underperformer on Wednesday, dropping 1.2%.
“Recent economic reports remain strong, but today’s stock market action highlights that it is already discounting another covid cycle,” said Jim Paulsen, chief investment strategist for Leuthold Group.

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“Concerns about covid also caused the 10-year bond yield to decline for the first time in 6 days and kept downward pressure on commodity prices including another sizable drop in crude oil prices. If inflation keeps rising while another Covid surge again stalls real economic activity, we may find out how the stock market handles a pseudo-stagflationary episode,” he added.

Still, stocks are hovering near their record highs. The Dow is 1.7% from its all-time high and the S&P 500 and Nasdaq Composite are 0.6% and 0.8% from their records, respectively.
A slew of retail earnings moved several names on Wednesday. Lowe’s and TJX Companies gained after reporting better-than-expected results. Target shares dipped despite strong earnings.
Investors await more retail earnings on Thursday with Macy’s and Kohl’s reporting before the bell. Alibaba and JD.com also report before the opening bell. Applied Materials and Palo Alto Networks report later on Thursday.
The Labor Department will report last week’s jobless claims data at 8:30 a.m. on Thursday. Economists polled by Dow Jones are expecting initial filings for unemployment insurance fell to 260,000 for the week ending November 13, from the previous week’s 267,000 claims.

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It may be evidence inflation is meaningfully stretching budgets.
According to economic forecaster Lakshman Achuthan, Wall Street is ignoring a striking consumer spending slowdown that will translate into an underwhelming holiday season.

“There’s still this narrative that the rebound is there,” the Economic Cycle Research Institute co-founder told CNBC’s “Trading Nation” on Wednesday. “The hope had been people would shift from goods to services, and that would keep reaccelerating… That hasn’t happened.”
Achuthan highlights the downturn in a chart reflecting real consumer spending data from the U.S. Bureau of Economic Analysis.

Arrows pointing outwards

“It shows consumer spending for goods and services. And, you could see that spike in the spring of ’21, and that’s right following all those stimulus checks,” he said. “Ever since then, things have really been slowing quite sharply. You could see goods growth coming down. Services growth also coming down.”
Achuthan contends rising prices for housing, energy and food are leaving consumers with less money to spend on discretionary purchase.
“I don’t think we could just pretend that that’s not going to have some sort of impact,” he said.

U.S. consumer prices jumped to the highest level in more than 30 years in October, according to the Labor Department.
Achuthan is no stranger to inflation warnings.
On “Trading Nation” in October 2020, he warned inflation was making a “pervasive and persistent” comeback. Now, he’s not ruling out stagflation, which refers to pressures that push prices higher during periods of slowing growth.
“I don’t know about decades long stagflation. But I think we could have a snapshot here of what I would call cyclical stagflation,” Achuthan said. “You could have some cyclical slowing while inflation is rising. That’s a snapshot. It’s like a polaroid shot of stagflation for a little bit. But we have to see where the inflation cycle goes. That remains to be seen.”
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Saule Omarova, President Joe Biden’s pick to lead the OCC as one of the nation’s top bank regulators, is set for a fiery nomination hearing.
While Republicans warn against recommending a candidate whose academic work calls to “end banking as we know it,” she has also faced skepticism from Sen. Jon Tester, a Democrat.
Just one Democratic defection on a committee vote to recommend her to the broader Senate would likely end her nomination.
“I know that difference between the job of an academic … and the job of a regulator, which is very circumscribed,” Omarova said Tuesday.

Saule Omarova
United States Committee on Banking, Housing and Urban Affairs

WASHINGTON— Saule Omarova, President Joe Biden’s pick to be one of the nation’s top bank regulators, is expected to face a tough round of questioning Thursday morning from senators concerned by her research that explores fundamental changes to the financial industry.
The Cornell University law professor is scheduled to appear before the Senate Banking Committee, where Republicans and at least one Democrat are likely to pepper the administration’s choice to be the comptroller of the currency.

Lawmakers are all but certain to grill Omarova over unconventional ideas she’s advocated, including magnifying the power of the Federal Reserve to include consumer banking and sweeping checks to the power of the likes of JPMorgan Chase and Wells Fargo.
While Republicans, including Ranking Member Pat Toomey of Pennsylvania, have long warned against recommending a candidate whose academic work calls to “end banking as we know it,” she has also faced skepticism from Sen. Jon Tester, a Democrat from Montana.
Just one Democratic defection on a committee vote to recommend her to the broader Senate would likely end her nomination. And, even if she were to advance to the Senate with the committee’s endorsement, a single “nay” vote from Democratic ranks could doom her appointment.
Testimony is set to begin at 9:30 a.m. Thursday morning in Washington.
As one of the nation’s top bank watchdogs, the comptroller regulates about 1,200 banks with total assets of around $14 trillion, or two-thirds of the entire U.S. banking system. Its representatives work with big banks to ensure lenders are abiding by federal law, providing fair access to financial services and otherwise examining bank management.

Omarova has drawn fierce opposition from both the GOP and banking industry lobbyists, who say her ideas promote an excessive role for the government that would hurt business at lenders large and small.
“Dr. Omarova would relegate community banks to ‘pass through’ entities that hold their deposits on behalf of the Federal Reserve, effectively eliminating the community banking model,” American Bankers Association President Rob Nichols said in October. “We respectfully—but strenuously—disagree with those positions and believe they are out of step with the role for which she is being considered.”

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Asked about that characterization, Omarova said in an interview that her academic works are just that: Exploratory and theoretical.
“I am not a caricature that I often see when I see coverage of myself,” she said via video chat Tuesday afternoon. “I know that difference between the job of an academic, and the freedom that academics have in terms of exploring ideas … and the job of a regulator, which is very circumscribed.”
“There is a statutory mandate for the agency, there is a specific toolkit, there are goals that Congress has set for the agency,” she added. “The key that’s missing in all of these discussions is my understanding of that critical difference.”
Her supporters, including Banking Chairman Sen. Sherrod Brown, D-Ohio, say warnings from the industry and Republicans are misguided, unfairly paint her as anti-bank and fail to acknowledge her decades of experience in banking law.
“More than 70 financial regulatory experts from across the political spectrum, including many former bankers, have endorsed her nomination,” Brown’s opening statement reads. “From growing up in the Soviet Union, to escaping to build a new life here, to enduring this last month of personal attacks with dignity, Ms. Omarova has demonstrated the strength and independence she’ll need to be an be a fair, impartial, and tough Comptroller.”
Omarova has explained that many of her academic papers were motivated by her interest to protect American taxpayers from excessive risk-taking at lenders and prevent future bank bailouts akin to those seen during the financial crisis of 2007-2009.
Her supporters claim much of the criticism she faces is the product of discrimination based on where she was raised and educated. She grew up in Kazakhstan when it was part of the Soviet Union and is a graduate of Moscow State University. She later worked at the Treasury Department in the George W. Bush administration.
Wade Henderson, president of the Leadership Conference on Civil and Human Rights, wrote on Tuesday that he is disappointed in what he categorized as “shameful and discriminatory public attacks on” Omarova.
“We would note that if Professor Omarova were a candidate for virtually any other job, discrimination on the basis of her national origin would violate Title VII of the Civil Rights Act of 1964 and numerous other civil rights laws,” he wrote in his letter to ABA’s Nichols and other banking-industry advocates.
Nichols insists that his grievances with Omarova’s candidacy “have nothing to do with her impressive personal background.”

Sens. Jon Tester, D-Mont., and Joe Manchin, D-W.Va.
Tom Williams | CQ Roll Call | Getty Images

Looking forward, Omarova said that if she’s confirmed she’d like to coordinate with the Federal Reserve and Federal Deposit Insurance Corp. to study how best to protect smaller banks in more rural areas of the country like upstate New York.
“Having a local bank that knows what small businesses on the ground need and can actually make a credit decision based on their understanding of who these people are and what they’re doing is such a bread-and-butter, American ingredient of economic prosperity and local job creation,” she said.
“I think it would be important to understand where the community banks may be overly burdened by various requirements,” she added.
Those comments may not be enough to convince the Independent Community Bankers of America — a trade group representing thousands of small and mid-sized banks across the U.S. — which on Wednesday voiced its opposition to her candidacy.
In a letter to Brown and Toomey, the ICBA said its objection stems from a review of Omarova’s years of research, including an October article in which she explores the idea of placing consumers’ deposits at the Fed and licensing local banks and credit unions to “operate physical branches and ATMs on the Fed’s behalf and receive a fee for their services.”
It remains to be seen how her recent statements and writings will influence Democratic holdout Tester, a moderate and community bank advocate who joined Republicans last month in expressing reservations about her candidacy.
His office told CNBC in October that her “past statements about the role of government in the financial system raise concerns about her ability to impartially serve,” but that he looked forward to speaking with her one-on-one about his concerns.
Tester’s office confirmed that the two had since met, and that the senator looked forward to hearing from her again on Thursday. A spokesman declined to say whether their meeting was enough to earn his support.
Even if Tester ultimately agrees to support Biden’s choice to lead the OCC, she could face a razor-thin vote in the broader Senate, split 50-50 between the two parties. That’s because Democratic Sen. Joe Manchin of West Virginia and Sen. Kyrsten Sinema of Arizona both told the White House that they had misgivings about her candidacy, according to Axios.
Sinema’s office did not reply to CNBC’s request for comment, while a representative for Manchin declined to comment.

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A shopping cart is seen in a Target store in the Brooklyn borough of New York, U.S., November 14, 2017.
Brendan McDermid | Reuters

Check out the companies making headlines in midday trading.
Target — The retail giant saw shares fall 4.7% despite posting beats on the top and bottom lines. CEO Brian Cornell noted rising costs may have an impact on the company going forward as it plans to absorb those costs rather than pass them onto the customer.

Visa – Shares of the card giant dropped 4.7% following reports that Amazon will stop accepting payments made with Visa credit cards issued in the U.K. starting next year. That change came shortly after Visa raised its interchange fees for transactions between the U.K. and European Union. Mastercard, which has also increased its U.K.-EU interchange fees, fell 4.5% with Visa.
Lowe’s — Shares of the home improvement retailer rose 0.4% after a better-than-expected quarterly report. Lowe’s beat analysts’ expectations for fiscal third-quarter earnings as the company got a bump in business from home professionals and online sales. The company also raised its 2021 forecast, saying it anticipates $95 billion in sales, up from $92 billion.
Tesla — Tesla continued to be on watch after big moves in the stock price recently after CEO Elon Musk sold shares in the past week. The electric vehicle stock gained 3.3% Wednesday.
Rivian — Rivian fell 15.1% in its first losing session since the electric vehicle maker went public last Wednesday. The company quickly surpassed traditional automakers like Ford and GM in market value since its IPO.
Lucid Group — The electric vehicle stock slid 5.4% Wednesday following a nearly 24% surge Tuesday. Morgan Stanley reiterated its underweight rating on Lucid, saying there are better EV plays.

Baidu — Baidu shares fell 5.5% even after the China-based e-commerce company beat revenue estimates for its latest quarter. Baidu said it benefited from stronger ad sales as well as strength in cloud and artificial intelligence products.
Pfizer, BioNTech – Shares of the Covid vaccine makers gained after The New York Times reported the FDA is looking to approve the Pfizer/BioNTech Covid-19 booster dose for all adults as soon as Thursday. BioNTech rose about 5.4%, while Pfizer gained 2.6%.
Roku — Roku shares fell 11.3% after the stock was downgraded to “sell” from “neutral” at MoffettNathanson. The firm cited signs of slowing revenue growth for the streaming company.
TJX — Shares of TJX jumped 5.8% after the apparel and home retailer reported a quarterly earnings beat on the top and bottom lines. Same-store sales also increased 14% over the same period in fiscal year 2020.
Activision Blizzard — Activision BIizzard’s stock dropped 2.9% after a group of shareholders called for CEO Bobby Kotick’s resignation, the Washington Post reported. The letter comes after a Wall Street Journal report that alleged Kotick knew about sexual misconduct allegations at the company for years.
— CNBC’s Yun Li and Tanaya Macheel contributed reporting

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Nvidia founder, President and CEO Jen-Hsun Huang
Getty Images

Check out the companies making headlines after the bell:
Nvidia — Shares of the chip stock gained about 3% in extended trading after issuing strong fourth quarter revenue guidance and beating on the top and bottom lines of its quarterly results. Nvidia reported EPS of $1.17 per share, compared to estimates of $1.11 per share, according to Refinitiv. The company made $7.1 billion in revenue, more than the expected $6.83 billion.

Sonos — Shares of Sonos rose 4% in after hours trading after issuing strong full-year revenue guidance. The music device company also reported a loss of cents per share last quarter, in-line with estimates, according to Refinitiv. Revenue fell short of analysts” forecasts.
Cisco Systems — Shares of the technology company dropped 6% in after hours trading after issuing next quarter earnings guidance at the low end of estimates. Cisco Systems called for revenue growth between 4.5% and 6.5% in the second quarter, below estimates of 7.4%, according to Refinitiv. Fiscal first quarter earnings beat expectations but revenue fell short of estimates.
Victoria’s Secret —Shares of the lingerie company popped 14% in after hours trading after reporting quarterly earnings of 81 cents per share. Revenue came in at $1.44 billion, missing estimates of $1.46 billion, according to Refinitiv.
Bath & Body Works — Shares of the beauty company rose slightly in extended trading after reporting a quarterly profit of 66 cents per share. Bath & Body Works made $1.68 billion in revenue last quarter, topping estimates of $1.6 billion, according to Refinitiv.

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