Finance

A long-term bull believes inflation shouldn’t scare investors.
According to Jim Paulsen of the Leuthold Group, rising prices should boost the market and economy.

“If we just end up elevating the rate of inflation a little bit on a permanent basis, I think that might actually do a lot of good,” the firm’s chief investment strategist told CNBC’s “Trading Nation” on Monday. “We’ve been fighting inflation for four decades in this country — always being quick to tighten, slow to ease. And the result is we’ve created some of the most sluggish growth over the last 15 years we’ve had in the entire postwar history.”
Paulsen contends higher inflation encourages more aggressive behaviors by both businesses and consumers with profitable results.
“It stokes animal spirits,” he said. “If people think prices are going to go up over time, that means you might feel better about getting higher wage hikes, for example. And, it might cause businesses to expand more operations because they know they can grow into it with pricing flexibility.”
He’s also not worried about the long-term impact of the supply chain turmoil. Paulsen attributes the backlog to a temporary shock caused by the Covid-19 lockdowns.
“When you get companies preparing for a depressionary bust and instead give them a postwar boom, they just can’t catch up,” said Paulsen. “They contracted operations to the minimums to survive a pandemic.”

Paulsen, who predicted on “Trading Nation” in August 2020 that the economic collapse would spark a massive comeback, expects the supply chain upheaval to moderate next year and leave a parting gift.
“I still think we might be left with a persistently higher average rate of inflation,” he said.
His base case calls for 3% to 3.25% inflation becoming the norm, and he suggests it’s a sweet spot for the economy. Over the past two decades years, it has hovered around 2%.
“There are some good things from a little higher inflation. Not runaway, but from a little higher inflation,” Paulsen said. “Maybe we’re headed to that environment. And if we are, maybe we’re going to get a little better economic outcome.”
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HSBC and Standard Chartered Bank are among more than a dozen lenders that can start selling investment products from Tuesday.
It comes as China continues to reform the mainland’s capital markets and raise their accessibility to international investors.
The Hong Kong Monetary Authority has approved 19 lenders under the Wealth Management Connect Scheme (WMC), which allows them to sell investment products in the Greater Bay Area — comprising of Guangdong, Hong Kong and Macao.

The HSBC Holdings Plc building, left, and the Standard Chartered Plc building stand in Hong Kong, China, on Thursday, June 4, 2020.
Roy Liu | Bloomberg | Getty Images

HSBC and Standard Chartered Bank are among more than a dozen lenders that can start selling investment products from Tuesday, under a new cross-border investment scheme that connects capital markets in the Greater Bay Area.
It comes as China continues to reform the mainland’s capital markets and raise their accessibility to international investors.

The Hong Kong Monetary Authority has approved 19 Hong Kong lenders under the Wealth Management Connect Scheme (WMC), which allows them to sell investment products in the Greater Bay Area — comprising of Guangdong province as well as the special administrative regions of Hong Kong and Macao.
This will mark the first time retail investors can engage in cross-boundary investments, according to Eddie Yue, chief executive of the HKMA.
Sixteen banks will be allowed to sell wealth management products in both Hong Kong and mainland China, while three lenders — Bank of East Asia, Dah Sing Bank, DBS Bank — can only sell products to mainland investors via the “Southbound Scheme.”
“We will closely monitor the operation of the Cross-boundary WMC and step up investor education and investor protection work together with the industry,” Yue said in a Monday release. He said the goal was to provide “more growth opportunities for Hong Kong’s banking and wealth management industry.”
Hong Kong-listed shares of HSBC slipped 0.11% while Standard Chartered closed flat on Tuesday following the announcement. Other banks that also received approval, such as Bank of China and China Construction Bank, rose 1.47% and 0.74% respectively.

On Monday, the Hong Kong Exchanges and Clearing launched its first A-share derivative product, the MSCI China A 50 Connect Index futures contract. A-shares refer to stocks of mainland China-based firms listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange.
“International investors’ interest in China A-shares has been increasing,” Wilfred Yiu, co-head of markets at Hong Kong Exchanges and Clearing, told CNBC’s “Squawk Box Asia” on Monday. He said the futures contract launch marked “a new chapter for Hong Kong,” and that global allocation to China’s markets is “still at a very, very early stage.”
“With the launch of the Connect A50 contract, which is a great index by MSCI, it’s going to help tremendously from the risk management perspective to international investor – and that will add on in terms of the interest of coming into the China market,” Yiu said.

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CNBC’s Sustainable Future Forum Asia on Tuesday focuses on providing energy.
No discussion on our Sustainable Future would be complete without taking a look at how we are going to power the change. Fossil fuels are still our main source of energy but things are changing.

CNBC takes a look at the energy transition, from the role incumbent energy providers will play, to the new start-ups that are looking to change the business model one green-step at a time.
The lineup for Tuesday’s sessions are below, and click here for the full schedule of the week.

Fireside: Financing Indonesia’s climate commitments2 p.m. SGT/HK | 7 a.m. BSTSri Mulyani Indrawati, minister of finance for Indonesia.
As the largest energy consumer in Southeast Asia, Indonesia is crucial to the region’s energy transition. The country’s finance minister, Sri Mulyani Indrawati, joins us to discuss the $5.7 billion she says is needed every year to fund its green energy transition, how it plans to finance the shift to net zero and what the government’s climate goals are ahead of COP26.

Panel: Where is Asia-Pacific on the road to decarbonization?2:15 p.m. SGT/HK | 7:15 a.m. BST 
Richard Lancaster, CEO of CLP Holdings, and Malcolm Turnbull, former prime minister of Australia.
As prime minister of Australia, Malcolm Turnbull played a pivotal part in putting climate change on the national agenda. In his latest role, as inaugural chairman of GH2, he aims to put green hydrogen production front and center of the region’s shift toward decarbonization. Joining him is Richard Lancaster, CEO of CLP Holdings, one of the largest investors in the electricity industry in Asia-Pacific, to discuss the task ahead and what steps they have been taking to phase out their coal-fired assets by 2040.

Panel: Can hydrogen power the energy transition?6:30 p.m. SGT/HK | 11:30 a.m. BST
Marco Alverà, CEO of Snam, and Christian Bruch, CEO of Siemens Energy. 
With the clean energy transition underway, hydrogen is back in the spotlight. Offering a light, storable and energy-dense solution to providing cleaner energy, green hydrogen is playing an increasingly important role in the journey to a low-carbon future. We’ll hear from Italian energy infrastructure operator Snam and Germany’s Siemens Energy about the role hydrogen can play in powering the energy transition, whether that transition is coming fast enough and what investment is still needed.
Add to calendar

Fireside: Accelerating the energy transition7 p.m. SGT/HK | 12 p.m. BST
Ignacio Galán, chairman and CEO of Iberdrola.
Ignacio Galán, the CEO of Iberdrola, has long been a champion of renewable energy, transforming the company from an operator of fossil fuel plants into an offshore wind and solar powerhouse. He wants there to be a sense of urgency in Europe’s transition to cleaner energy, and will discuss how we get there, what his strategy is to double Iberdrola’s renewable power capacity by 2025, and what impact the gas crisis will have on Europe’s long-term decarbonization goals.

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Worries about Evergrande’s ability to repay its debt and a total of $300 billion in liabilities has put global investors on edge about potential spillover into the rest of China’s real estate industry and economy.
A closer look at Evergrande revealed a company with many of the same problems as others in the Chinese property sector, but didn’t act as quickly to respond to government rules aimed at resolving those issues.
The company not only failed to address tighter regulation on debt levels, but was the biggest Chinese real estate issuer of overseas high-yield bonds.

High-rise apartment buildings at China Evergrande Group’s under-construction Riverside Palace development in Taicang, Jiangsu province, China, on Friday, Sept. 24, 2021.
Qilai Shen | Bloomberg | Getty Images

BEIJING — Chinese developer Evergrande made little progress toward complying with Beijing’s crackdown on real estate debt — until it was too late for investors who poured money into its offshore bonds, now worth at least $19 billion.
Worries about the giant developer’s ability to repay its debt and a total of $300 billion in liabilities have put global investors on edge. Beyond the company itself, there are worries about a potential spillover into the rest of China’s real estate industry or economy.

A closer look at Evergrande revealed a company with many of the same problems as others in the Chinese property sector, but didn’t act as quickly to respond to government rules aimed at resolving those issues.
Evergrande has failed to meet several payment deadlines since September, and the latest was on Oct. 11 for interest owed on one of its U.S. dollar-denominated bonds. That brought its total missed payment to $279 million since last month, according to Reuters.

While the developer had taken on debt for years, its latest problems really came after tighter regulation in the last two years, analysts said.
China’s central bank on Friday said most real estate developers had stable operations, and called Evergrande a unique case in which the company “blindly” diversified and expanded. There was little indication a full-on rescue plan was on its way.
Here’s how the world’s most indebted property developer ended up in such dire straits:

Evergrande crosses all three red lines

Chinese authorities met with 12 real estate developers in August 2020, and asked them to reduce their reliance on debt. Evergrande was among those at the meeting, state media said.
The report described a “three red lines” policy, which hasn’t been officially announced. State media describe the “red lines” as three specific balance sheet conditions developers must meet if they want to take on more debt. The rules require developers to limit their debt in relation to the company’s cash flows, assets and capital levels.
Last summer, all 12 of the developers at the meeting had crossed at least one of the red lines, said Julian Evans-Pritchard, senior China economist at Capital Economics.

The problem this entire industry faces is the entire model relies too much on finance.

Zhang Yingji
senior fellow, ICR

One year later, Evergrande and Greenland were the only companies of the original dozen that had still crossed at least one of the red lines, Evans-Pritchard said in a Sept. 22 report. As of the end of June, he said Greenland had crossed one, while Evergrande had breached all three red lines.
In contrast, “among the top 30 [developers], less than a third exceed any of the limits, compared with over two thirds a year ago,” he said. “Even firms that are not officially subject to the rules have generally complied.”
Evergrande warned investors of default in late August. Just days earlier, China’s central bank and other authorities told the company’s executives in a rare meeting to resolve their debt problems.

“The problem this entire industry faces is the entire model relies too much on finance,” said Zhang Yingji, senior fellow at Chinese real estate research institute ICR.
He said the restrictions on how quickly developers can expand come as ensuring affordable housing is a major part of China’s economic development plan for the next five years.
The average price for a residential home in China — typically an apartment — more than quadrupled between 2001 and 2019, while that of a new house in the U.S. rose 80% during the same time, according to official data from China and the U.S.
The price surge came even as Beijing began in 2016 to promote a slogan that “houses are for living in, not speculation.” It was an effort to control a property market that many likened to a bubble.

Evergrande’s U.S. dollar overseas debt

However, in the next few years, Chinese developers continued to take on debt, particularly in overseas markets.
Between 2016 and 2020, the industry’s value of offshore U.S. dollar bonds grew by 900 billion yuan ($139.75 billion) — that’s nearly two times the growth of 500 billion yuan in onshore yuan bonds, according to Nomura.
Evergrande was by far the leader in overseas debt issuance, accounting for six of the 10 largest offshore U.S. dollar-denominated bond deals by Chinese real estate companies between 2016 and 2021, according to Dealogic.
As of the first half of this year, Evergrande held 19% of U.S. dollar-denominated high yield bonds among Chinese real estate companies — the largest share, worth $19.24 billion, according to Natixis.
Next in line by overseas bond share were Kaisa, Yuzhou, China Fortune Land Development and Guangzhou R&F Properties, the data showed. All four of these companies crossed at least one red line, with China Fortune and R&F crossing all three, according to Natixis data analyzed by CNBC.
Hopson Development Holdings, which is reportedly set to acquire part of Evergrande, did not cross any of the red lines and ranks 28th by asset size, Natixis data showed.
Hopson declined to comment. Evergrande did not respond to a CNBC request for comment.

Heavy reliance on pre-sales

Like many developers in China, Evergrande sold apartments to individual consumers before the properties were completed. This allowed the company to generate cash, while taking out loans to develop the properties.
Over the last decade, the value of Evergrande’s properties under construction rose so quickly that it far exceeded the value of the company’s completed projects as well as what the company was able to sell.
By 2020, Evergrande had 1.26 trillion yuan ($195.89 billion) worth of projects under construction. But that was about 70% more than the properties the company was able to sell that year, at 723.2 billion yuan. Only about 148.47 billion yuan of projects were actually completed.
The value of properties under development accounted for just over half of Evergrande’s total assets, ticking up to 54.7% in the first half of this year, up from 54.3% at the end of last year.

Keeping up with such a high ratio of construction projects became unsustainable once the new regulation kicked in and affected Evergrande’s ability to obtain financing.
“Financial institutions have already curtailed their direct exposures to Evergrande over the past two years,” Moody’s analysts said in an Oct. 11 note.
They said there was a drop in the company’s borrowings from banks, trust companies and other financial firms to 393.9 billion yuan at the end of June, down sharply from 604.7 billion yuan at the end of 2019.
Many of Evergrande’s projects lie in smaller Chinese cities, where economists say there is an oversupply of housing, compared to China’s largest cities, where there is a housing shortage.

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The company is also in a tougher situation than other developers because of its heavy use of supplier commercial bills – tradeable contracts for paying suppliers and construction contractors, S&P Global Ratings analysts said in a Sept. 20 note.
“Evergrande’s contracted sales have fallen more than other issuers in the sector that have experienced distress,” the report said.
Without sufficient financing, it is harder to keep up construction and other assets that can be sold, S&P said. “This is shutting down Evergrande’s most important source of cash flow: contracted sales of its property projects.”

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IN 1977 A string of 12 characters ushered in a new age of global finance. Until then a bank wiring money abroad needed to relay up to ten instructions on public phone lines, which were then typed into forms, taking time and causing errors. Then payments began to be facilitated by a code and secure network created by the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a club of 500-odd banks. A surge in global trade and investment followed. Last year nearly $140trn was transmitted across borders (161% of global GDP; see chart 1). Analysts reckon about 90% of that went through SWIFT. Its 11,000 members in 200 countries ping each other 42m times a day.Now SWIFT confronts another financial revolution. Customers want faster payments. Fintechs, banks and governments are looking to rival the network. Facebook is muscling in: on October 19th it began a trial of its digital-currency wallet. SWIFT, for its part, is fighting back. On October 14th it said 100 banks had signed up to SWIFT Go, its high-speed transfer service. It is seeking to link instant-payment networks across countries, in order to make transfers more seamless. Whoever wins the race to redefine cross-border payments will determine the future shape of the financial system—and who holds sway over it.The system of correspondent banking through which cross-border payments flow works like air transport: when two faraway banks do not have a direct relationship, money travelling from one to the other stops over at banks in between. SWIFT provides the radio signal directing the money. The Belgium-based network, which is owned by its members, provides the standards and services that allow firms to exchange information on transactions.In recent years, however, SWIFT has faced three criticisms. One is that it is technologically backward, making transfers slow and costly. Here the problem lies with correspondent banking, not SWIFT. Time differences and banks’ limited opening hours hold back processing. Checks have intensified along with the fight against dirty money, adding to delays and costs.Security is another concern. In 2016 North Korean hackers stole the SWIFT credentials for the Central Bank of Bangladesh’s account at the New York Federal Reserve and sent transfer requests to various banks. Most were blocked, but $81m slipped through. A third gripe is that SWIFT is no longer a neutral part of the financial plumbing. In 2011 America leant on it to exclude Iranian banks by making various threats, including that of sanctions on the network itself, says a former official close to the talks. SWIFT eventually complied. It also came under pressure to cut off Russian banks after the invasion of Crimea in 2014. Although they remained connected, America’s foes now know that relying on SWIFT makes them vulnerable.SWIFT has gone some way towards placating its critics. It has bolstered its security defences, and its international governance, it says, reinforces its neutral status. In 2017 it launched SWIFT Global Payments Innovation (GPI), a network that allows banks to process wholesale (ie, high-value) payments faster and makes transfers trackable. It now accounts for three-quarters of SWIFT payments. Today 92% of these reach their destinations in less than 24 hours. In July it launched SWIFT Go, a similar service for retail (low-value) payments.All this may help neutralise the threat from fintech firms. Many do not bypass SWIFT entirely: they aggregate payments at one end and net them off against transactions going the opposite way, so as to make just one, smaller cross-border transfer, and then use fast, local networks to channel the money. That means fewer payments and less access to transaction data for SWIFT. Ripple, a more radical disrupter, evades the network altogether, and uses a cryptocurrency to facilitate transactions.Yet fintechs so far play a minuscule role in cross-border payments. Data crunched by FXC Intelligence, a consultancy, for The Economist suggest the share of cross-border payments by value going through SWIFT has remained broadly unchanged since 2019. The number of messages sent across the network has risen steadily (see chart 2). Ripple, by contrast, has struggled to gain traction. Last year it settled just $2.4bn in transactions.Instead the bigger threats to SWIFT come from bigger beasts. Credit-card giants are building the infrastructure to process retail, “push” payments (those initiated by the sender, rather than the receiver, as is usually the case with credit cards) that largely runs parallel to SWIFT. Both Visa and Mastercard have bought startups that facilitate account-to-account transfers. Facebook’s wallet could make cross-border payments cheaper.Big banks are developing payment networks to serve wholesale clients. Earlier this year JPMorgan Chase, which accounts for a quarter of dollar payments going through SWIFT, teamed up with DBS, a Singaporean bank, and Temasek, Singapore’s sovereign-wealth fund, to launch Partior. This is a network that aims to get around the flaws of correspondent banking by recording transfers on “permissioned” blockchain ledgers, where only vetted members can validate transactions. The network will allow for payments that are instant, transparent and “programmable” (ie, the funds move only if certain conditions are met).Another threat is state-sponsored. Many central banks are developing their own digital currencies (known as CBDCs). In time these could allow banks to conduct overseas transactions across a shared ledger, undercutting SWIFT. America’s foes are building new plumbing. In 2015 China launched its Cross Border Interbank System (CIPS), which offers clearing and settlement for renminbi payments. The system, which processed $7trn in 2020, uses SWIFT as its main messaging channel, but has the tools to become a rival.SWIFT has responded by schmoozing with central banks and running experiments of its own, in the hope of securing a place at the heart of any cross-border CBDC infrastructure. In February it also formed a tie-up with CIPS and China’s central bank. And sheer force of habit could mean international finance continues to be bound by its current nervous system, even if the institutional muscle and monetary blood that compose it evolve, says Markos Zachariadis, the co-author of a book on SWIFT.But it is also possible to imagine a scenario in which banks gravitate towards a new platform. Most are not especially loyal to SWIFT: America’s biggest banks feel they have no voice, says an executive at one of them. Only one—Citigroup—sits on its board. Meanwhile Partior, which aims in time to host both central-bank and commercial-bank digital money, is in talks to recruit core settlement banks for euro, yen and renminbi payments, says one of its sponsors. China is touting CIPS’s messaging skills, says Eswar Prasad, a former official at the IMF. SWIFT may not be in immediate danger, but the next decade is full of uncertainty. An epic battle over how money travels is just beginning. More

U.S. stock futures were steady in overnight trading Monday as investors geared up for a big day of earnings on Tuesday.
Dow futures fell just 30 points. S&P 500 futures fell less than 0.1% and Nasdaq 100 futures were down about 0.05%.

On Monday, the S&P 500 and Nasdaq Composite notched their fourth day of gains. The S&P 500 rose 0.34%. The Nasdaq was the relative outperformer, gaining 0.84% as Facebook, Amazon, Apple, Netflix and Google-parent Alphabet all closed higher.
The Dow Jones Industrial Average lost 36 points, dragged down by a 3% drop in Disney’s stock.
Earnings season continues on Tuesday with major reports from Johnson & Johnson, Procter & Gamble, Netflix and United Airlines.
Of the 41 S&P 500 companies that have reported third-quarter results, 80% beat earnings expectations, according to FactSet. While reports have been strong, investors are looking for commentary from corporate America about supply chain issues and inflation.
“The financials got earnings season off to another strong start, but let’s be honest, COVID and supply chain issues aren’t going to impact this group. Now it gets very interesting to see what other industries will have to say about the health of the economic recovery,” said Ryan Detrick, chief market strategist at LPL Financial.

Netflix could set the tone for technology earnings this season. Three months ago, the streaming giant forecasted paid net subscriber adds of 3.5 million, while analysts expect about 3.84 million, according to StreetAccount. Analysts are also forecasting fourth-quarter subscriber guidance of 8.5 million, which would be the highest outlook since the first quarter of 2019.
Netflix’s stock has traded lower on six of its last seven earnings releases.
Earnings from United Airlines should give investors a gauge on the travel recovery from the pandemic and Procter & Gamble earnings could show how strong the consumer is in the goods sector.
Stocks are coming off of a winning week but have been volatile since September. Morgan Stanley’s chief U.S. equity strategist Mike Wilson — who has been calling for a correction in the broader market — told clients on Monday that although fundamentals are deteriorating, the market seems to be resilient to a bigger pullback.
“Whether we end up getting this finishing move at the index level this year or not will depend largely on retail participation, the message that 3Q earnings brings from a guidance standpoint, and the path of PMIs into year end,” said Wilson.
Economic data from China weighed on investor sentiment after it reported low GDP and industrial production for September that fell short of expectations. Industrial production in the U.S. also fell for September as supply constraints continued to hinder manufacturing, the Federal Reserve reported Monday.
— with reporting from CNBC’s Robert Hum.

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Wall Street’s main regulator released its highly anticipated report on the GameStop mania on Monday.
The SEC said online brokerages, enticed to increase revenue through payment for order flow, are turning stock-trading into a game in order to encourage activity from retail investors.
“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” the agency said.

Rafael Henrique | LightRocket | Getty Images

The Securities and Exchange Commission said online brokerages, enticed to increase revenue through the controversial industry practice of payment for order flow, are turning stock-trading into a game in order to encourage activity from retail investors.
Wall Street’s main regulator on Monday released its highly anticipated report on the GameStop mania earlier this year. The 44-page report detailed how the trading frenzy went down and raised red flags on a number of issues, including the back-end payments that brokerages receive, gamification of trading, as well as disclosures on short sales. But it stopped short of laying blame on a single cause or entity.

“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” SEC officials said in the report.
Payment for order flow is one of the largest revenue sources at Robinhood, the millennial-favored stock trading app that raked in a record number of new customers over the past year and went public in August. The practice, though, is under increased scrutiny as many say it has a conflict of interest with brokerages incentivized to send orders to the market-maker that pays them the biggest rebate. SEC chair Gary Gensler had warned that banning this practice is not off the table.
To motivate trading, some brokers including Robinhood made their platforms visually enticing and offer game-like features such as points, rewards, leaderboards and bonuses to increase engagement. Amid criticism, Robinhood got rid of its confetti animation in March.
“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” the report said.
Still, the SEC review may fall short to some in terms of making concrete recommendations and laying the groundwork for potential changes to U.S. trading practices. The agency also didn’t reach a conclusion as to whether any of the trading — and the restrictions on trading — was manipulative and whether brokerages played by the rules during the mania.

The agency acknowledge that the extreme volatility in meme stocks tested the capacity and resiliency of the markets.

Risk management and transparency

At the height of the mania in January, a band of amateur traders in Reddit’s WallStreetBets forum bid up heavily shorted stocks “to the moon,” creating massive short squeezes in names like GameStop and AMC. The unprecedented volatility backfired on Robinhood, which had to tap credit lines and restrict trading in a list of the short-squeeze names as the central Wall Street clearinghouse at one point mandated a ten-fold increase in the firm’s deposit requirements.
“This episode highlights the integral role clearing plays in risk management for equity trading, but raises questions about the possible effects of acute margin calls on more thinly-capitalized broker-dealers and other means of reducing their risks,” SEC’s report said. “One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.”
The SEC also brought up whether more transparency of short selling should be required. Right now, securities lending and borrowing is a relatively opaque system as investors aren’t required to report their bearish bets and the SEC only collects data on how much of a company’s stock is sold short.
“The interplay between shorting and price dynamics is more complex than these narratives would suggest,” SEC officials said in the report. “Improved reporting of short sales would allow regulators to better track these dynamics.”
Gensler will be on CNBC’s Squawk on the Street at 9:35 a.m. ET Tuesday to discuss the findings of the report.

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British online lending start-up Zopa has raised $300 million in a funding round led by SoftBank.
Zopa is now valued at $1 billion, making it the latest European fintech to achieve “unicorn” status.
The company aims to go public by late 2022, and CEO Jaidev Janardana says it’s likely to list in London.

Jaidev Janardana, CEO of peer-to-peer lender Zopa.

LONDON — British online lending start-up Zopa has raised $300 million in a funding round led by SoftBank, adding to the soaring investment flowing into Europe’s booming financial technology sector.
The company is now valued at $1 billion following the fresh cash injection, according to a source familiar with the deal, making it the latest European fintech to achieve “unicorn” status. The source preferred to remain anonymous as the information has not been disclosed publicly.

Founded in 2005, Zopa began life as a peer-to-peer lender, connecting investors with borrowers through a single online platform. The company has since shifted its focus toward becoming a fully fledged bank, after securing a banking license in the U.K., but still operates its peer-to-peer marketplace.
Zopa launched a credit card and savings account last year, hoping to capture a larger share of the British retail banking market and take on giants like Barclays and HSBC. It’s so far netted £700 million ($961 million) in deposits and attracted 150,000 credit card customers.
“We are growing our balance sheet rapidly,” Zopa CEO Jaidev Janardana told CNBC. “What this capital allows us to do is to accelerate that trajectory of growth.”
Zopa is one of several start-ups seeking to disrupt the banking sector. So-called neobanks like Monzo, Revolut and Starling have emerged in the last decade, luring millions of customers with fee-free checking accounts and a slick online interface. But so far they have struggled to make a profit.
Starling tipped into the black for the first time last year, and says it is on track to post its first annual profit. Revolut racked up £167.8 million ($230.6 million) in losses in 2020, while Monzo lost £130 million. Revolut did however manage to break even toward the end of last year.

Zopa is “more sustainable” than rivals, Janardana said, adding that the firm is on track to reach profitability within 10 weeks. This — along with Zopa’s use of artificial intelligence — was a key factor behind SoftBank’s investment, he added.
“[Softbank] share this belief that by using technology and AI a lot more, we are able to scale faster and compete with the incumbents because we bring both cost advantage and the advantage of making precise decisions,” Zopa’s CEO said.
Zopa said it generated net operating income of £21.9 million in the first half of 2021, more than double what it made at the end of 2020. The firm expecrts to more than double revenue this year.
Janardana believes Zopa will eventually become one of the U.K.’s “Big Four” lenders.
“Our view of the competition hasn’t changed much — it remains the big legacy banks,” he said.
Fintechs have raised huge sums of money this year as investors looked to capitalize on an acceleration of digital finance during the coronavirus pandemic. Klarna raised $1.6 billion across two funding rounds, while Revolut bagged $800 million. SoftBank is an investor in both firms.

IPO plans

Zopa said the latest fundraising would be its last before a planned initial public offering. Janardana is aiming to take the business public by the fourth quarter of 2022. But a stock market debut will only happen once Zopa has shown a “consistent track record of profitability,” he said. 
“Given the capital we have raised, it gives us flexibility about going then or a bit later, depending on market conditions,” Janardana said, adding that the London market was a “natural place for us” to list.
The U.K. is seeking to attract more high-growth tech companies to its stock market after Brexit. Reforms proposed earlier this year would see London relax its rules around blank-check companies and founder-friendly share structures.
Along with SoftBank, Zopa’s latest investment round was backed by Abu Dhabi-based asset management firm Chimera Capital and existing investors including IAG Silverstripe, Davidson Kempner and Northzone.
Zopa is one of the few fintechs in the social lending space that still runs a peer-to-peer marketplace. Domestic rival RateSetter closed its P2P business following a sale to British lender Metro Bank, while U.S. firm LendingClub did the same after acquiring a regulated bank.
Asked whether Zopa could eventually retire its P2P division, Janardana said the firm continues to review the market.
“We’ll see how the market evolves,” he said. “There are lots of things that we learned there around finding the right customers to lend to and ensuring that our investors can get a good return. And some of those things are really helpful in our future strategy.”

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