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We always shudder slightly when we discuss ABN Amro, since nothing ever seems straightforward in the ongoing saga of the Dutch bank. However, this time at least nobody has died. In 2015, we noted that Chris Van Eeghen, head of the bank’s corporate finance and capital markets “startled” friends and colleagues after the “always cheerful” banker reportedly committed suicide. Van Eeghen was the fourth ABN banker suicide since the financial crisis. When it comes to bonuses, ABN also has a chequered history. The Dutch government nationalised the bank at the height of the financial crisis at a cost to Dutch taxpayers of 22 billion Euros. There was a national outcry in 2015 over bonuses ABN paid to its top executives, as Business Insider reported. Public outcry over bankers' bonuses is pretty common, but the anger sweeping the Netherlands, over nationalised ABN Amro's executive pay packets is on a completely different level. Over the last week, Dutch newspapers Financieele Dagblad and NOS (Holland's version of the BBC), and other media outlets were awash with debates over the justification of how ABN Amro’s high ranking executives were getting huge bonuses ahead of the bank being re-privatised. In fact, the outcry was, and continues to be, so bad that Dutch finance minister Jeroen Dijsselbloem delayed the IPO of the nationalised bank at the end of March because the row over giving six executives a €100,000 (£73,000) bonus on top of their salaries escalated so greatly. He even went to parliament on Thursday to answer questions over how the government is "allowing" the bank to pay hefty bonuses, compared what the average Dutch person receives in a year, even though it is still yet to be privatised, after being taken over by the state in 2008. As we said, nothing is ever straightforward with ABN and Dutch financial newspaper, Het Financieele Dagblad, is reporting that Dutch bank ABN Amro is poised to scrap the bonus system for almost all of its roughly 20,000 staff. Unusually, the calls for ending the bonus scheme came from the staff, not ABN management. According to dutchnews.nl. ABN Amro bank is planning to overhaul its current bonus structure for the 17,000 members of staff who are covered by a formal pay and conditions agreement, the Financieele Dagblad said on Thursday. The paper bases its claim on people involved in the current talks between unions and the bank on a new pay deal (CAO) for 2018. A spokesman for the bank told the paper (that) company surveys showed a large part of the bank’s personnel want to get rid of the ‘performance-related bonus’. ‘We want a complete new structure: no performance assessments and no performance-related bonuses,’ he said. How very “equitable”…as long as they’re happy. There will be a few exceptions, however, although that doesn’t include the board of directors, since the Dutch state still owns 56.26% of the equity through the NLFI investment vehicle. The directors are prohibited from receiving bonuses until the state disposes of its holding. Dutchnews.nl continues. The plans will cover all members of staff who are paid according to the CAO (collective labour agreement). Around 100 specialists, including traders and corporate bankers, will still be eligible for a bonus. The bank’s board do not qualify for bonuses because the Dutch state still owns a majority stake. The FD says the bank’s plan is in line with developments elsewhere in the financial services sector. Former finance minister Jeroen Dijsselbloem fought hard against the bonus culture, which he saw as a major cause of the financial crisis and introduced a 20% of salary ceiling. Even Dutch bankers, it seems, aren’t totally magnanimous as negotiations between unions and the bank are continuing with staff demanding a 9% pay rise as compensation. We’re not sure precisely what’s behind the motivation of ABN’s staff, although it could have something to do with the bank’s interminable restructuring. As Bloomberg noted following the release of its 3Q 2017 results. ABN Amro Group NV fell the most since May after the Dutch lender reported a third-quarter decline in earnings from banking and a capital ratio that fell short of estimates. The stock dropped as much as 3.3 percent in Amsterdam trading and was down 1.8 percent as of 9:15 a.m. Net interest income declined 1 percent to 1.57 billion euros ($1.82 billion), which is about 2 percent below consensus estimates, according to a Kepler Cheuvreux note. Chief Executive Officer Kees van Dijkhuizen has focused on lowering costs while the bank seeks to grow its domestic retail, private-banking and investment units…While net income beat analyst estimates, much of the result was driven by cost cuts. Operating expenses dropped 12 percent in the third quarter from a year earlier, the Dutch state-controlled bank said in a statement on Wednesday. The former global banking giant was cut back to a largely domestic Dutch lender in the wake of the financial crisis and the CEO has focused on lowering costs while the bank seeks to grow its domestic retail, private-banking and investment units. The shares have climbed 23 percent since the beginning of the year, when van Dijkhuizen took over.
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"It Feels Like An Avalanche": China's Crackdown On Conglomerates Has Sent A "Shock Wave" Across Markets
The first to suffer Beijing's crackdown against China's private merger-crazy conglomerates, wave was the acquisitive "insurance" behemoth, Anbang, whose CEO Wu Xiaohui briefly disappeared as the Politburo made it clear that the "old way" of money laundering - via offshore deals - is no longer tolerated. Then, several weeks later and shortly after the stocks of the "famous four" Chinese conglomerates plunged after China officially launched a crackdown on foreign acquirers amid concerns of "systemic risk", it was HNA's turn, which as we described last week, risks becoming a "reverse rollup from hell", as HNA's stock tumbled, sending the LTV of billions in loans collateralized by the company's shares soaring and in danger of unleashing an catastrophic margin call among the company's lenders. Then Beijing's attention shifted to the biggest conglomerate of them all: billionaire Wang Jianlin’s Dalian Wanda Group, which as the WSJ and Bloomberg reported was being "punished" by Beijing, and would see its funding cutoff after China "concluded the conglomerate breached restrictions for overseas investments." The scrutiny could rein in Wang’s ambitious attempt to create a global entertainment empire, including Hollywood production companies and a giant cinema chain he’s built up through acquisitions from the U.S. to the U.K. Six investments, such as the purchases of Nordic Cinema Group Holding AB and Carmike Cinemas Inc., were found to have violations, said the people, who asked not to be identified discussing a private matter. The retaliatory measures will include banning banks from providing Wanda with financial support linked to these projects and barring the company from selling those assets to any local companies, the people said. The move is an unprecedented setback for the country’s second-richest man, who has announced more than $20 billion of deals since the beginning of 2016. By targeting one of the nation’s top businessmen, the government is escalating its broader crackdown on capital outflows and further chilling the prospects of overseas acquisitions during a politically sensitive year in China. Summarizing the abrupt shift in sentiment in China was Castor Pang, head of research at Core-Pacific Yamaichi, who said that “to investors, political risk is now the biggest concern when investing in Chinese companies. Not only Wanda, every Chinese company won’t find it easy anymore to acquire assets overseas. Stabilizing the yuan is the top priority for Beijing now.” While it is not exactly clear just why Beijing so quickly soured on foreign transactions - as we explained back in 2015, it was abundantly clear back then these were nothing more than a less than sophisticated way to launder money offshore - unless of course the capital flight out of China is far worse than what Beijing would disclose, what has become quite clear is that Wanda was among the conglomerates including Fosun International, HNA Group and Anbang Insurance whose loans are under government scrutiny after China’s banking regulator asked some lenders to provide information on overseas loans to the companies. In other words, the foreign merger party is over. In fact, for some of the above listed 4 conglomerates, the party may be over, period. And now as the WSJ reported over the weekend, it has become clear that China’s government reined in one of its brashest conglomerates with the explicit approval of President Xi Jinping, "according to people with knowledge of the action—a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership." The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion. The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced. In short, and as noted above, Yuan stability above all. For the local market, the shift in Beijing's strategy is nothing short of a seismic shift: “It feels like an avalanche,” said Jingzhou Tao, a lawyer at Dechert LLP in Beijing, who does mergers and acquisitions work. “This is sending a shock wave through the business community.” * * * Regular readers are aware of what, until recently, was China's unquenchable thirst for foreign money laundering transactions, something we first pointed out at the start of 2016, and which had - until recently - grown exponentially. Since 2015, the four companies completed a combined $55 billion in overseas acquisitions, 18% of Chinese companies’ total. In recent days, however, as reported here 2 weeks ago, Wanda’s billionaire founder Wang Jianlin has been shrinking his empire by selling off assets and paying back the company’s bank loans. What is surprising about the sudden shift, is that Beijing had for years been encouraged Chinese companies to scour the globe for deals. Now, in a dramatic U-turn, it is reining in some of its highest-profile private entrepreneurs in what officials say is growing unease with their high leverage and growing influence. As the WSJ notes, "the measures serve as a stern warning for other big companies that loaded up on debt to buy overseas assets, officials and analysts say." How does the president fit into all of this? According to the WSJ, "Xi acted after China’s cabinet set the government machinery in gear by directing financial regulators, the economic planning agency and other bureaucracies to take a hard look at foreign acquisitions, once seen as a means for China to showcase its economic might." And, as previously reported, the crackdown started at Anbang and HNA, when Chinese banking regulators first ordered banks to scrutinize loans to Anbang in June, and other highfliers including airlines-and-hotels conglomerate HNA Group, which has pulled back on overseas investments. HNA said in a statement it continues to take a “disciplined approach” to identifying “strategic acquisitions across our core areas of focus.” Discussing the government's crackdown on conglomerates, officials at Fosun said the firm has “overseas funds and other stable financing channels,” including a fund of around U.S. $1 billion to invest, but emphasized it “fully respects the government regulations both in China and overseas markets.” Fosun has a listed unit in Hong Kong, and its strategy to invest in health care and technology “adheres to China’s global investment strategy,” said a spokesman, Chen Bo. In any case, the most likely outcome is that in the future China’s private companies will have trouble getting capital, which would help shift financial clout further in favor of big state-owned enterprises, which may also explain President Xi's change in opinion. Beijing’s sterner line comes as big private businesses and others have been amassing capital and influence that challenge the authoritarian Chinese leadership’s firm hold on the economy. Its grip has been tested over a bumpy few years. After a 2015 stock market meltdown and a botched government rescue, a gush of money flowed out of the country looking for better returns. That in turn put pressure on China’s tightly controlled yuan and foreign-exchange reserves, both seen by Beijing as barometers of confidence in the economy. It has also led to a chilling effect on Chinese outbound investment which has crashed as shown in the chart below. Putting the foreign merger spree in context, Chinese firms completed $187 billion in outbound deals last year, according to Dealogic, as private companies snapped up trophy properties, soccer clubs and hotels, while Chinese with means bought homes and pushed up real-estate prices from Texas to Sydney. The private sector’s share of overseas spending shot up from barely above zero about a decade ago to nearly half of China’s total overseas investments in 2016, before slipping back to 36.9% in the first half of 2017, according to Derek Scissors, a China expert at the American Enterprise Institute. But the most important factor, and among the main reasons for the current crackdown, is that amid the rush of investments, Beijing burned through nearly a trillion dollars in foreign-exchange reserves trying to steady the yuan. That ultimately led government regulators to clamp controls on money exiting the country and to scrutinize all proposed major offshore investments. Just as we predicted over a year ago would happen, once the government finally realized that all that M&A is nothing more than capital flight. As the WSJ puts it, "the latest scrutiny is a watershed moment in the Communist government’s relations with a private sector it has never been comfortable with. Though some senior leaders, particularly Premier Li Keqiang, are urging a new culture of startups and small businesses, Mr. Xi has promoted plans to make already-large state enterprises larger and strengthen their sway over the economy." There are other reasons for the crackdown too: one is the still fresh memory of what happened in Japan when it did the exact same thing. China is acutely aware that as Japan rose to economic prominence in the 1980s, its companies splurged on American real estate and other trophy assets, resulting in losses that cascaded through Japan’s banking sector. But mostly, it is about power and control: Mr. Tao, the Beijing lawyer, says the government’s new aggressive posture is driven in large measure by a need for control. “State-owned assets, whether in China or abroad, are still state assets,” he said. “But when private entrepreneurs take their money out, it’s gone. It’s no longer something that China can benefit from or the Chinese government can get a handle on.” And since in any power struggle between Chinese companies and Beijing in general, and Xi Jinping in particular, the latter will always win, the market's reaction was to violently selloff any big Chinese conglomerate stocks. An early sign of government discomfort with overseas spending was Anbang’s unsuccessful $14 billion bid for Starwood Hotels & Resorts Worldwide Inc. in 2016. Authorities expressed displeasure with the bold move, believing that Anbang had offered too much, according to a person with knowledge of the situation. Anbang, which had appeared unstoppable in 2014 when it struck a $2 billion deal to buy the U.S. Waldorf Astoria hotel, fell deeper in trouble. This past June, special government investigators looking into economic crimes detained Anbang’s chairman, Wu Xiaohui, who hasn’t appeared in public since. Separately, in the case of Wanda, regulators acted in the belief the company overpaid in efforts to expand beyond shopping centers and hotels and into entertainment, according to the people with knowledge of the action. Its largest such acquisition was of Legendary Entertainment, the Hollywood producer and financier behind films including “Jurassic World” and “The Dark Knight.” Wanda spent $3.5 billion to buy Legendary in 2016; In Hollywood, industry insiders widely believed the company paid too much. Legendary said this week that it is well-capitalized, operating normally and able to fund its film and television productions. As for HNA, recall that it was the stealthy buyer of Anthony Scaramucci's SkyBridge Capital, another deal which will soon fall under tremendous scrutiny, and which could be unwound in the coming weeks if concerns about conflicts of interest emerge again, only this time not between the US and Russia - especially once the "Russia collusion" story is finally over - but the White House and Beijing.