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The big week of banks

Feb. 23: HSBC in the hot seat and Canada’s Big Six prepare to report earnings, as the Ukrainian currency crashes


 

MORNING-PLAYBOOK-STORY
It’s another big banking week.

This morning, HSBC is in the hot seat once again, with an earnings report that came up billions short of expectations, amid ever-growing controversy over the use of secretive Swiss accounts by the bank (and its CEO). It doesn’t help the bank is also paying off massive fines for its last scandal, involving currency rigging in London forex offices.

In Canada, banks are on the agenda as well, with first-quarter reporting for the country’s big six beginning tomorrow, and there’s also big news in the pharmaceutical industry over an acquisition by Quebec-based Valeant. Greece, as ever, remains on the agenda: after a nail-biter of a deal between the country and its creditors on Friday, markets sprung a relief rally: both the Dow and the European FTSE 100 hit new records. But the drama could still blow up: the country still needs to get its reform proposals approved today.

The loonie goes into the new week sitting right under 80 cents once again, after retail sales over the holiday season had their largest one-month drop in five years, despite low oil prices. Over the course of this morning in Europe, the price of oil (West Texas Intermediate) has dipped under $50 again.

In other economic news, the governor of the Bank of Canada will make a speech tomorrow, and on Thursday we’ll get the survey of payrolls, employment and hours, as well as inflation numbers for January. Tomorrow will also see the Federal Treasury’s Janet Yellen address the Senate Banking Committee, and there will be a clutch of inflation statistics from the eurozone, as well as fourth-quarter GDP from the eurozone’s brightest economies, the U.K. and Germany. Chinese markets are shut until Wednesday for Chinese New Year holidays.

HSBC feels the burn. The bank, Europe’s largest by assets, announced its profits this morning, and the response was not good: gross profits were at $18.7 billion, a 17 per cent fall from the previous year, and a few billion less than general expectations by investors. As of this morning, shares have already fallen by more than five per cent. The announcement was made by the company’s chief executive, who over the weekend became another twist in the ballooning scandal over the company’s past efforts to help clients dodge taxes using shell companies and secret Swiss accounts. In a Guardian article, it was alleged that Stuart Gulliver, who has pledged to clean up the culture of the bank, was himself using both a Panamanian shell company and a Swiss account to evade taxes on his multi-million-dollar bonuses. Gulliver also has “non-domiciled tax status” in the U.K., which means that though he works in London, he “officially” lives in Hong Kong. While the Swiss scandal is recent, the bank also had to account for fees and settlements as part of a previous scandal, where London foreign exchange traders were found to be colluding to set exchange prices. The bank paid out almost $1.2 billion in fines and settlements, and set aside almost $1.25 billion in compensation for UK customers who were impacted.

Canadian banks prepare to report first-quarter earnings. But the expectations aren’t entirely optimistic. As banks began warning last year that they expect to see profits weaken in 2015, since then, oil has dropped still further, and the Bank of Canada has cut the benchmark rate to 0.75 per cent. Both have hurt banks’ bottom lines, analysts warn, with the oil rout undercutting a valuable source of profits in the form of major mergers and IPOs, and lower returns for borrowing. Tomorrow, BMO will start reporting season, followed by RBC and National Bank on Wednesday, and CIBC and TD on Thursday. Scotiabank will report next week.

A big buy for pharmaceutical company Valeant. The Quebec-based company purchased – in cash – an American pharmaceutical company known for making “gastrotechnology drugs” (otherwise known as drugs to treat irritable bowel syndrome). The cost for Salix was more than $10 billon, after Valeant beat out two Irish competitors. The company is known for a failed attempt to buy Allergen, known for making Botox, last year. Valeant is often described as using its Canadian location and an “advantageous tax structure” to aggressively acquire companies and then cut costs, including research and development.

Greece has yet another deadline. After a sigh of relief from across the eurozone over a Friday agreement between the country’s new government and the European creditors, Greece is facing yet another deadline. The government has to present proposals for reform by tonight, which then must be approved by the EU and IMF. If they’re not, the eurozone finance ministers are back at the table again tomorrow in Brussels. The ultimate deadline is looming: the bailout will expire this weekend if another solution isn’t approved. Potential bumps could come from concerns by finance ministers that the reforms do not include sufficiently detailed breakdowns of costs, and rumblings from within SYRIZA that any changes to the original 172-billion-euro bailout terms have been largely semantic, not substantive.

The Ukrainian currency is crashing. The hryvnia has not been looking good for a while, even after another agreement for an emergency bailout from the IMF, but this morning the currency has fallen a full 10 per cent on fears a shaky ceasefire won’t hold up. That’s a new low against the U.S. dollar for the currency. On optimism over the ceasefire, the Russian ruble seemed to be rallying last week but now it, too, is falling, as yet another ratings agency downgraded the country’s sovereign bonds to junk status.

Need to know:
TSX: 15, 172.24 (-8.09), Friday
Loonie: 79.91 (-0.3 cents), Friday
Oil (WTI): $49.67, Monday morning (7 a.m.)


 

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