TheChek News Flow

Banks will pay less on deposits to reduce the impact of mortgage-rate cuts

Large commercial banks in China are planning to lower some deposit rates starting Friday, softening the blow of mortgage-rate cuts that will further squeeze their profit margins at a crucial economic juncture.

Major state-owned banks are expected to cut interest rates on time deposits by up to a quarter of a percentage point, according to a Chinese state-media outlet.

A customer-service representative at one of the country’s biggest banks confirmed on Thursday that rates on its one-year deposits would be trimmed by 0.1 percentage point, while those on three- and five-year time deposits would be cut by 0.25 percentage point. One lender, Industrial Bank, announced its new deposit rates late Thursday night.

The deposit rate cuts will help cushion banks from taking another big hit to their profits after regulators pushed through widely-anticipated changes to mortgage rules on Thursday.

Chinese commercial banks can now reduce the rates they charge on existing loans, a move partly designed to discourage a recent trend of Chinese citizens using their money to pay back mortgages rather than spend in restaurants, bars and shops.

The exact size of the cuts will still be left to commercial banks and their customers to negotiate. The central bank has set a floor for how cheap loans can be, compared with a benchmark rate.

The country’s banks have been doling out cheaper corporate and personal loans to help stimulate the flagging economy. The People’s Bank of China has cut a key lending rate twice in the past year, and commercial banks have trimmed loan benchmarks that are used to price mortgages and other debt.

Those moves have come at a significant cost to lenders. Several large banks that released first-half results this week said their net interest margins—which reflect the difference between what they earn from their assets and what they pay for deposits and other funding—dropped to new lows.

Large Chinese banks’ time deposits currently earn 1.25% to 2.5% annually. Many of them have slashed their deposit rates already this year.

Industrial & Commercial Bank of China, the world’s largest bank by assets, reported a net interest margin of 1.72%, which was below regulators’ recommended level of at least 1.8%. ICBC pointed to multiple reductions in the loan prime rate, decreasing loan yields, as well as higher average deposit rates that were a result of more time deposits. The net interest margins of the next three biggest Chinese state-owned banks were also below that threshold at the end of June.

The recent wave of mortgage prepayments has been bad news for banks, because it reduces some of the income they can expect to earn in the future.

Chinese borrowers repaid the equivalent of around $508 billion in mortgages ahead of schedule in the first half of 2023, estimates Zhaopeng Xing, a senior China strategist at ANZ. He said that represents around 10% of Chinese banks’ outstanding mortgage loans.

“That has a very big impact on banks’ profits,” Xing added. He predicted that the coming mortgage-rate cuts may cost Chinese banks $110 billion a year in profits, but a deposit rate cut of 0.1 percentage point will roughly offset that.

The savings people can get by renegotiating their interest rates still might not be enough to deter them from paying back mortgages early, said Ting Lu, chief China economist at Nomura, in a research note on Thursday.

Many people who took out home loans in the past few years have been locked into paying higher rates than what banks are offering on newly issued mortgages. Unlike in the U.S., borrowers in China were previously barred from refinancing their mortgages by taking out new home loans at lower rates to pay down the old ones.

In mid-July, a senior official acknowledged that the gap between rates on new mortgages and existing ones has caused some home buyers to repay mortgages early and hinted that the central bank would change that.

The average rate on new residential mortgages in August was 3.9% for new homes, according to Beike Research Institute, which sampled 100 Chinese cities. That is 0.3 percentage point lower than China’s five-year loan prime rate, the benchmark that banks typically use to price mortgages. Mortgage rates in China had been above 5% from mid-2017 to mid-2021, according to Wind data.

Shortly after Chinese regulators pushed through the changes to lower existing mortgage rates, some major banks issued statements saying they were preparing to implement the policy. They included China Construction Bank, which has lent outstanding mortgages worth around $880 billion, and Agricultural Bank of China, which has a $739 billion mortgage book.

Investor interest in small modular reactors is growing as demand for electricity is set to soar

Last month Sam Altman, the (in)famous founder of OpenAI, posted a picture on social media of an elegant A-frame wooden building in a verdant tropical setting.

It looks like a billionaire’s weekend pad. However, what the image actually depicts is the putative design of a small modular (nuclear) reactor invented by Oklo, a company that Altman has chaired since 2015. And it was posted because Oklo has just merged with a special purpose acquisition company created by Altman and Michael Klein, the Wall Street dealmaker, valuing it at $850mn. 

That will make some observers wince. The acronym “Spac” became toxic two years ago because the concept was badly abused during the last credit bubble. Adding “nuclear” into the mix risks making it doubly radioactive, in the public mind, given past accidents at the Chernobyl and Fukushima plants (and current Russian threats to Ukraine’s Zaporizhzhia plant).

Nevertheless, investors and policymakers should pay attention. On Thursday the United States Air Force announced plans to use Oklo’s reactor for the Eielson Air Force Base in Alaska — seemingly the first potential use of commercial SMRs by the Federal Government on American soil.

And activity — and investor interest — around SMRs is rising elsewhere. A rival company called TerraPower, backed by Bill Gates, is also developing reactors. So is NuScale, which listed via a Spac last year and recently received $275mn in funding from variety of governments for a Romanian project.

Industrial giants such as Britain’s Rolls-Royce are jumping into the action while GE Hitachi is building an SMR plant in Canada. And last month Britain launched an international competition for the best SMR design, pledging to take “up to a quarter of the UK’s electricity from homegrown nuclear energy by 2050”.

There are three factors sparking this. One is a recognition that demand for electricity will soar in coming years, because of global growth and the fact that digital innovations such as AI need “a lot” of additional electricity. This creates, as Altman admits, “urgent demand for tons and tons of cheap, safe, clean energy at scale”. 

Second, relying on fossil fuels to generate this electricity will exacerbate global warming — but renewable sources, such as wind and solar, cannot plug the gap without major breakthroughs in battery storage.

Third, the nuclear tech has changed. In the 20th century, this was generated in massive power plants that were costly and time-consuming to build. The cost of Britain’s planned Hinkley Point C nuclear power station, for example, has surged to £32bn, while the bill for America’s new Vogtle plants has doubled from $14bn to over $30bn.

But since SMRs are small and use factory-produced designs, they are much cheaper and faster to build, and can be moved close to the electricity demand. Moreover, the tech developed at companies such as Oklo and TerraPower uses recycled nuclear waste as fuel, potentially reducing the waste disposal headache.

Indeed, Oklo’s officials claim that just the “existing inventories of used fuel in the US could power the country’s energy needs for over 150 years” — if their tech is adopted. “It’s the best way to decarbonise,” Jacob DeWitte, Oklo founder, tells me.

Not everybody agrees. Many environmentalists detest nuclear power so deeply that they want to exclude it from green taxonomies. Parts of the traditional nuclear establishment also hate the idea that libertarian “tech bros” — like Altman — are now becoming “nuclear bros”, says Allison Macfarlane, a former head of the US Nuclear Regulatory Commission.

“Very few of the proposed SMRs have been demonstrated and none are commercially available, let alone licensed by a nuclear regulator,” she noted in a recent essay that decries the Spac structures and hype. “Existing nuclear power plants play a significant role in greenhouse gas reductions and will continue to do so. But the promise of SMRs is questionable.”

She has a point: Oklo’s first US federal licensing application was rejected last year. And while DeWitte tells me he will refile next year, and is optimistic about the result, he also admits that the plants will not start until at least 2027. 

But even with these caveats, I personally welcome these initiatives. Yes, SMR tech is still unproven, and Spacs have a mixed record. But the dirty truth is that we urgently need to experiment with all the clean energy ideas we can find, given climate change.

And while it was the US government that initially unleashed nuclear innovation in the west — as seen recently in the movie Oppenheimer — the dismal truth is that public sector agencies have since become lamentably slow-moving and risk averse. Hence why China and Russia are now running the first SMR pilots, along with Argentina.

If nothing else, let us hope that the competitive threat from the “tech bros” will prod western governments and the traditional nuclear establishment into moving faster. And if Oklo’s new recycling tech actually works and can produce clean and safe power, that would be even better — not just for the US air force but for the wider world.

Revelations exposed opaque offshore structures that shielded some of the Indian group’s largest shareholders from public sight

Shares in Indian industrial conglomerate Adani slid and opposition politicians demanded action after the Financial Times and two other media outlets reported new revelations about family-linked shareholders in the company’s stock. 

The reports shone a spotlight on Indian institutions and the relationship between the conglomerate’s founder Gautam Adani and Prime Minister Narendra Modi, in a febrile atmosphere ahead of elections early next year. 

The value of the group’s 10 listed companies dropped by $4.2bn, or 3.3 per cent, on Thursday after the FT and The Guardian exposed opaque offshore structures that shielded some of the group’s largest shareholders, and their connections to the Adani family, from public sight. 

Rahul Gandhi, India’s most prominent opposition figure, said “this is a matter of India’s global reputation and it should be investigated”, at a news conference in Mumbai. “We are trying to show the world and our businesses that India has a level playing field,” he added. India is hosting the G-20 summit on September 9-10.

Adani said it categorically rejected what it called “recycled allegations”, and sought to link the reports to billionaire philanthropist George Soros.

The reports were based on documents obtained by the Organised Crime and Corruption Reporting Project, a global network of investigative journalists that is part funded by Soros’ Open Society Foundations. They also revealed the existence of an investigation of the Adani Group by India’s stock market regulator that was closed after Modi came to power in 2014. 

After Hindenburg, a US short selling group, had accused Adani of manipulating its share prices in a report published in January, India’s financial regulator told the Supreme Court there had been no such investigations before 2020. 

Hindenburg told the FT: “The independent evidence corroborating our work is overwhelming. All eyes are on Indian regulators to see if they will act on that which is now completely obvious.”

Saket Gokhale, spokesperson for the Trinamool National Congress, an opposition party, said he had written to the chair of the Securities and Exchange Board of India “demanding an urgent probe into these allegations against Adani”.

The Adani Group said: “These news reports appear to be yet another concerted bid by Soros-funded interests supported by a section of the foreign media to revive the meritless Hindenburg Report.”

After Adani was contacted for comment last week, BQ Prime, a financial news website that it owns, published an opinion piece that said “known India and Modi government baiters in foreign shores along with their allied toolkit groups were preparing to make another strike in garb of investigative reportage”.

Soros became unpopular among officials in Modi’s government and its supporters after the 93-year old financier and philanthropist said in February that “Modi and business tycoon Adani are close allies; their fate is intertwined”, predicting that the controversy would weaken the administration.

The Open Society Foundation said it was “proud to be amongst a number of organisations providing support to the OCCRP, which acts entirely independently regarding the issues it chooses to investigate. What we are seeing now in India is a bogus attempt to discredit OCCRP’s work without engaging with its findings.” 

Adani’s interests range across infrastructure, power, construction, fuel and media. From a peak market capitalisation of $288bn last year, its 10 listed companies were worth $127bn at the market close on Thursday.

Over the past five years, Morgan Stanley CEO James Gorman spent $14 billion buying the pieces of what is now the world’s second-biggest provider of corporate stock plans. It was a bold bet to get an inside track to people sitting on valuable company equity who one day will be rich.

The business now oversees plans with 12 million individual participants at 2,100 public companies and 1,000 private companies, bank executives told The Information. Clients include Stripe, Uber and Dropbox. Now the open question is whether Morgan Stanley can convince those individuals to let it manage their wealth whenever they’re able to cash in on the equity.

• Bank has 1,000 private companies as stock-plan clients

• Workplace business key to CEO’s goal of $10 trillion in client assets

• Gorman quietly built the No. 2 provider of stock-plan services

Gorman, who is stepping down within the coming year, envisions workplace stock plans as the main way Morgan Stanley will keep growing its wealth business, already one of the world’s largest with nearly $5 trillion in client money under management.

That’s a big departure from how the bank traditionally nabbed wealthy clients, who usually came through its financial advisers, and part of Gorman’s lofty goal of growing Morgan Stanley’s wealth and asset management businesses to $10 trillion in assets over the next five to 10 years. Wealth represents about $8 trillion of that goal.

Part of the appeal is that workers with equity in corporate stock plans tend to be younger—their average age is 40, the executives said, while typical clients of Morgan Stanley financial advisers have an average age of 60. If Morgan Stanley can hold onto the workers once their stock converts to cash, those customers will prove valuable for years to come. That could help boost profit margins in the wealth business to at least 30%—another goal Gorman set—up from around 25% now.

“If we get it right, if the formula works, we get the chance to be their wealth manager—from someone who just has $5,000 starting out, to the founders,” said Brian McDonald, who heads Morgan Stanley at Work.

Gorman’s grand plan dates back more than a decade, to when Morgan Stanley acquired brokerage firm Smith Barney, inheriting a small stock plan administrator as part of the deal. It would take years for Morgan Stanley to take full control of Smith Barney. In 2018, Gorman was ready to expand further. The bank started by buying Canadian stock-plan administrator Solium for $900 million. Two years later, in 2020, it added Barclays’ stock-plan business and another more sizable one through its $13 billion acquisition of E-Trade, better known as a low-cost online trading company. Last year Morgan Stanley also bought American Financial Systems for around $117 million.

Morgan Stanley has not ruled out another acquisition in the workspace realm, people familiar with the strategy said.

Morgan Stanley oversees $402 billion in unvested employee stock, as of June 30, and ranks No. 1 in stock-plan services and No. 2 among workplace providers, according to its own analysis. It competes against money managers like Fidelity, banks like UBS and Bank of America, benefits firms like Voya Financial and startups like Carta, which is popular with venture-backed private companies.

The bank earns fees for overseeing stock plans and advising companies on cap-table management, retirement plans, benefits and tax strategies. But the bigger play is when workers’ stock awards vest and they can sell, giving them money for other investments.

One customer using Morgan Stanley at Work is StockTwits, a stock and crypto trading platform and social network. While smaller than the typical Morgan Stanley customer, with around 60 employees, it uses Morgan Stanley because rival providers do not offer the same breadth of services and switching can be an expensive hassle, said StockTwits CEO Rishi Khanna. “You get all these other services from Morgan Stanley,” he said. “You get the wealth management; you get all the banking services."

Other companies that have used its services include Stripe, Uber, Dropbox, Shopify, Atlassian, Grammarly and Hootsuite. More than 260 companies that are now part of Morgan Stanley at Work went public between 2017 and 2021, before the IPO boom went bust.

Morgan Stanley faces a challenge in convincing people to keep money at the bank once their stock awards vest. E-Trade historically struggled to hold onto most of its workplace customers’ money, though that situation started to improve once Morgan Stanley bought it. The rate has so far doubled from 15% of client assets managed under E-Trade to 30% at Morgan Stanley.

“It’s a good strategy because they’re getting a first look at converting those people into clients,” said David Donovan, a consultant with Publicis Sapient who focuses on financial services. “It’ll still be incumbent upon them to create a service that resonates with the employees.”

Morgan Stanley has had some success in retaining those clients. It moved $150 billion from workplace customers into accounts with advisers over the past few years, Chief Financial Officer Sharon Yeshaya told analysts last month. Another $350 billion in vested shares shifted into Morgan Stanley brokerage accounts, teeing clients up for a pitch on the bank’s wealth services.

And the bank is working on different ways of keeping people. As soon as September it will be providing a single login for stock-plan customers and later do so across the Morgan Stanley wealth platform. That one sign-in is important because it can help customers see all available options without having to follow prompts that take them to new websites—the kind of friction that leads people to bounce rather than want to talk to an adviser or open a trading account.

Another important effort underway, Project Genome, uses machine-learning tools to analyze workplace customers, determine what products or services they may need and refer them to the appropriate adviser when it makes sense to do so.

However, the process is complex: The bank needs to make sure employers contractually allow Morgan Stanley to perform such an analysis, identify which employees are relevant and then convince them they should work with an adviser. From there it can figure out what wealth products they might want and find the best adviser for them to work with.

Once all of that occurs, Morgan Stanley can share data and analytics with the adviser for a sales pitch. But it has to do so in a way that doesn’t run afoul of data-privacy rules as well as fiduciary and suitability standards for how advisers can pitch clients. Genome is now deployed through the workplace business, but is not yet running at full capacity. The process requires a tremendous amount of work, sources said, and Morgan Stanley is still ironing out some of the kinks.