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Monday, 17 December 2018

On yer bike

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“HSBC likes nice people,” said one banker when asked last week why co-head of global banking Matthew Westerman is suddenly leaving the bank.

“In which case, why did it hire Matthew Westerman?” an observer would be forgiven for thinking.

So while it’s true that the HSBC culture has ejected Westerman like an immune system ejects a foreign body, it’s also true that the bank knew exactly what it was getting when it plucked him out of impending retirement from Goldman Sachs.

Indeed, that’s the point: it was getting a 16-year Goldman banker. And being a clubbable fellow is not always top of the list of requirements for a successful career at that particular institution.

Outgoing CEO Stuart Gulliver, who was the driving force behind the hiring of Westerman less than two years ago, clearly thought that a hard-charging arse-kicker would do for that part of HSBC – advisory, corporate finance, M&A, ECM etc – what he himself had done for the FICC and DCM units during his rise to the top. That is, drive out any complacency and ensure that the people working in those businesses were not too comfortable.

Westerman sought to do that in precisely the way a senior ex-Goldman banker would be expected to: sack or sideline those he didn’t rate (which at times seemed to be everyone), bring in those he did, reward the best – or at least those he perceived to be the best – at the expense of others, and snub many of those who thought they deserved promotions. All while forcing people to attend 6am meetings.

So, for all the people who were queuing up last week to gleefully wave him goodbye (and there were lots), he can quite reasonably respond that he was doing what he’d been hired to do. And what he thought was necessary to ensure top performance at the bank.

His problem, in the end, was twofold. One, he seems to have been almost gratuitous in his willingness to be horrible – and was just as horrible to those who needed his unique style of motivation as to those who didn’t. Second, he had made himself so unpopular with so many people that he was always likely to be in trouble as soon as a successor to Gulliver had been confirmed.

The bigger question now for HSBC is what happens next.

This is, of course, only the latest time that HSBC has attempted to graft some investment-banking DNA onto what is essentially a debt-focused commercial and retail bank. Incoming CEO John Flint will have to decide how (or whether) to try again.

Whatever else, Flint should make sure that while many HSBC staffers breathe a sigh of relief at the removal of a man who has made their lives uncomfortable, those in the underperforming parts of the business do not take the chance to settle back into well-rewarded complacency. 

Dimon faces his demons

Unless you’ve been hiding under a rock for the last three months, you will be aware of the fact that Jamie Dimon hates bitcoin.

But somewhere in the hollows of JP Morgan’s London office – where fintech’s brightest and best go to rub shoulders with investment banking’s elite – the message seems to have got lost.

Last week, it emerged that Nivaura, an emerging star of JPM’s “In Residence” fintech incubator, has been dabbling in Dimon’s bete noire by leading the first fully-automated cryptocurrency-denominated bond issue.

The choice of currency might have been ether rather than Dimon’s despised bitcoin, but presumably he was alluding to cryptocurrencies generally when he threatened to sack any staff caught trading it.

Let’s hope he doesn’t follow through on his word – at least in Nivaura’s case – because the use of a cryptocurrency was vital in proving that the new issue process can be fully automated from start to finish. An earlier test in sterling required post-trade intervention given that fiat currencies can’t settle on a public blockchain.

The result is that Nivaura was able to collapse a bond issue down to a single step, from about 300. For Europe’s small cap issuers, largely locked out of capital markets due to high issuance costs, that could be a game-changer.

Even if Dimon is right and bitcoin is a “fraud”, blockchain clearly has legs and ultimately this was a test of a technology that is here to stay. If fiat currencies one day become clearable on a public blockchain – which many believe they will – Nivaura has shown how bonds will be issued in the future. 

Enter the dragon

Indonesia will be hoping that its first global offering of Komodo bonds proves as big an attraction as its namesake. Investors hope it will be rather less dangerous.

The officials behind Jasa Marga’s offshore rupiah bonds have named the format after the world’s largest living species of lizard. Native to Indonesia, the komodo dragon can grow up to three metres long and is a popular ecotourism attraction in South-East Indonesia. It is also a deadly predator with a toxic bite, capable of attacking large prey, and even – rarely – humans.

Indonesia’s biggest toll-road company has been tasked with introducing the Komodo bond to the global capital markets. On paper, it is a perfect fit: Jasa Marga has just the kind of long-term infrastructure assets that are attractive to international fixed-income investors, and needs to broaden its funding sources to meet the country’s ambitious infrastructure plans.

The question, then, is why it hasn’t been able to attract global investors before. Indonesia’s domestic debt market is already open to any international investor, subject to regulatory approval, and free from quotas or other restrictions. Around 40% of all government securities are held by foreign investors.

That makes the Komodo bond a very different proposition to the Dim Sum market, which caught on quickly after the first corporate issue in 2010 because global investors had few other ways of gaining exposure to renminbi securities. Now that a door to the onshore market is open, the Dim Sum format is losing its appeal.

India’s Masala bonds, too, offer a rupee investment option free from the quotas and restrictions of the domestic market.

Indonesia does not have those weapons to fall back on, and investors know that the rupiah can be a fickle beast itself. With that in mind, Jasa Marga can claim success if it builds global interest in Indonesia’s credit story, but it may need to be more focused on diversification than price.

If Indonesia is to meet its infrastructure targets, it needs to convince a new group of investors to enter the dragon’s den.

Policy risks

China’s clampdown on online consumer finance companies is a stark reminder of the risks that investors take on when they buy into a Chinese IPO.

Newly listed Qudian, Ppdai and Jianpu Technology have exciting stories to tell, and historical numbers to back up their rapid growth. They also offered US investors a chance to bet on a new area that combines the appeal of financial services, technology and a growing middle class.

But all Chinese companies operate under a regulatory environment that can change at any time. And in a young sector such as online finance, high-profile IPOs only increase the chances that their business model will attract regulatory scrutiny.

Rumours of a crackdown on the rampant growth of microlending had been circling for some time before last week’s edict appeared to confirm investors’ worst fears. A crackdown on new licences was quickly followed by mainland reports that regulators plan to review all existing licences in the microcredit sector. Qudian, Ppdai and Jianpu all slumped last Wednesday ahead of the Thanksgiving break.

The companies that survive the audit are likely to end up with a far greater share of this promising market, which will help their stock price as a result. But it is a brave investor who predicts the winners.

The wild swings in stock prices have so far been limited to this small group of newly listed US stocks. The lessons, however, are universal.

Following clampdowns on overseas acquisitions and mysterious investigations into various company chairmen under Xi Jinping’s presidency, it is clear that any Chinese investment today comes with a high level of policy risk.

While scrutiny of the rapidly growing micro-loan sector is arguably less of a shock, the old adage about stock market investments takes on new meaning when it comes to Chinese regulation: past performance is no guarantee of future success.

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