May 1, 2014
The Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) improved slightly in April, rising from 55.5 to 56. The index has yet to rebound to where it was in January, but importantly is still firmly in the mid-50s and starting to trend in the right direction. The index of favorable factors improved from 59 to 60.7, which remains shy of Januaryâ€™s peak of 61.5, but happily back above 60. However, the index of unfavorable factors posted a disconcerting fall from 53.2 to 52.8, recording its worst performance since July and indicating definite signs of distress in the trade debtor community.
All four favorable factors improved: sales from 59.1 to 61.8, new credit applications from 57.3 to 59.3, dollar collections from 56.4 to 58.1 and amount of credit extended from 63.1 to 63.8. Sales and dollar collections improved enough to hit levels recorded at the start of the year. "It is always a good sign when an indicator exceeds 60, as sales did, and the increase in extended credit indicates more desire to expand now that winter is over and there are signs of improved business," said NACM Economist Chris Kuehl, PhD of the April figures.
"Good news did not come out of the unfavorable factors and these will be the ones to watch in the next month or so," Kuehl cautioned. "For the past several months, the most consistent part of the survey was the unfavorable factor index. Even as the favorable factor index numbers slipped, there was no real evidence of mounting distress. Now there are concerns that overall business suffered a little more than expected in the last few months."
Rejections of credit applications slipped just slightly from 52.4 to 52.3, but the problem is this category is down at the same time that applications are up. "This signals that some of those applying for credit are not in great shape," Kuehl said. Accounts placed for collection slipped dramatically from 54.1 to 51.7, while disputes bucked the downward trend by improving dramatically from 50.9 to 54.7. Dollar amount beyond terms slid right to the edge of contraction from 52.4 to 50 and dollar amount of customer deductions fell from 51.2 to 50.3, with Kuehl noting that both factors are trending too close to contraction for comfort. Filings for bankruptcies fell slightly from 58.4 to 58.1, but is still in pretty good shape for the year. "These readings would suggest that there is more than a little reversal taking place in the business community as a whole, but everything is still hanging on to that expansion placementâ€”even if only by the skin of its teeth," Kuehl said.
For a full breakdown of the manufacturing and service sector data and graphics, view the complete April 2014 report. CMI archives may also be viewed on NACMâ€™s website at http://web.nacm.org/cmi/cmi.asp.
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Though potentially expensive and technologically laborious for consumer and trade credit alike, the switch in the payments world from magnetic stripe-based credit card processing to a more secure, chip-based system seems more and more inevitable. Now, the company that unwittingly put payment and data security once again in the media spotlight because of its past mistakes is hurrying the timetable to make the big switch.
Target Corporation announced on April 29 that, following the massive data breach during the 2013 holiday shopping season, it would change its consumer "REDcards" to a MasterCard chip-and-PIN format, from the current magnetic stripe technology. It also announced the hire of an outside tech expert, one with experience at CitiBank, Home Depot and the US Justice and Homeland Security Departments, to lead the effort.
"Establishing a clear path forward for Target following the data breach has been my top priority," said Gregg Steinhafel, Target chairman, president and CEO. "I believe Target has a tremendous opportunity to take the lessons learned from this incident and enhance our overall approach to data security and information technology."
As noted in a related article in the May issue of Business Credit, chip-based or EMV (Europay, MasterCard and Visa) technology is considered much safer than its magnetic stripe counterpart, and is already widely used in Europe with fewer problems. Though companies may not want to pay for the changes to another system or go through the hassle of required evolution and innovation inside web portals, ERP systems and so on, the choice may be out of their control. Credit card companies have noted that by late 2015 the liability for charges incurred on fraudulent magstripe credit card transactions will shift to the seller, and a growing number of US lawmakers are pushing more forcefully for the change to a safer platform.
- Brian Shappell, CBA, CICP, NACM staff writer
NACM members can login to view the digital version of the May issue of Business Credit here.
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Bank of America acknowledged a significant accounting error this week, leading the Federal Reserve to require the bank to resubmit its capital plan and suspend a planned increase in capital distributions.
The error stemmed from Bank of America's problematic acquisition of Merrill Lynch during the financial crisis. As part of the deal, Bank of America assumed $60 billion worth of structured notes, which is to say debt, issued to investors by Merrill. Over time, Bank of America has paid off or bought back the notes, but when the payouts were higher than the value of the actual notes at the time they were acquired from Merrill, the bank should have registered a loss.
This loss should have reduced the bank's actual capital, but the bank erroneously didn't do that, allowing the mistake to slip by for several years and falsely increasing its capital levels in that period of time to the tune of a $4-billion overstatement. Bank of America's first-quarter earnings release said that it had $134 billion in Tier 1, high-quality capital, which regulators use to judge how well a bank can perform during hard times, but in its restatement after discovering the error, the bank reduced this figure to $130 billion.
The error and the Fed's resubmission requirement make Bank of America the second of the nation's largest banks to run afoul of the Fed's capital plan requirements, part of the central bank's Comprehensive Capital Analysis and Review (CCAR) program which stress tests bank holding companies to determine how well they can weather a hypothetical financial crisis. Previously Citigroup was forced to resubmit its capital plan after the Fed determined that the company suffered from significant weaknesses in its "ability to project revenue and losses under a stressful scenario" and its "ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."
Bank of America's issues are far more easily remedied than Citigroup's, as the bank is expected to resubmit its plan in time to still make payouts to shareholders, although to a lesser extent than it had previously planned, and regulators still believe Bank of America is secure enough in its capital levels to weather any issues, but the episode is a major embarrassment for the bank, raising questions about the complexity of every mega-bank's finances as well as the ability of auditors to accurately report to regulators and catch errors.
- Jacob Barron, CICP, NACM staff writer
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Fitch Ratings' Global Corporate Investor Chart Book 1Q14 noted that overall global market sentiment continues to improve with the reemergence of US growth and signs of stability among European Union member nations. Though a few industries face challenges on both sides of the Atlantic and growth remains somewhat underwhelming in spots, Fitch predicts those free of imminent political risk should face little in the way of danger for much of this year.
"A stable corporate sector rating outlook for 2014 is supported by generally low corporate default risk, and what downgrades we are likely to see over the next 12 months will predominantly be very modest, both in scale and breadth, driven by company-specific issues rather than sector trends," Fitch predicted in its Chart Book. Still, it expects corporate upper management to be "cautious" with financial expenditures this year.
Among the few industries Fitch spotlighted for elevated risks and negative outlooks are the US coal and agriculture industries, as well as European utilities, telecoms and chemical producers. Fitch also seemed wary of conditions for businesses in emerging markets such as Russia, because of the Ukraine conflict, as well as increasingly unstable Turkey, Brazil and South Africa. It appears these factors will drive investors wary of potential volatility in such recently celebrated emerging markets back to the US dollar.
Though Fitch is also closely monitoring the potential for a downturn in growth and corporate financial quality in China, its analysts predicted the Asian powerhouse will avoid a "hard-landing" and continue to generate high demand for commodities through 2020. The latter is of immense importance to other economies, like those of Australia and several Southeast Asian nations, dependent on selling natural resources to the Chinese.
- Brian Shappell, CBA, CICP, NACM staff writer
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Standard & Poor's (S&P) cut Russia's debt rating to BBB- late last week, citing capital flight from the increasingly sanction-beleaguered nation as the primary reason for the downgrade. This puts Russia one downgrade away from junk status, and S&P also noted that such a downgrade could very well arrive sooner than later if the effects of sanctions resulting from Russia's role in the ongoing conflict in Ukraine begin to be felt more acutely by Russia's economy.
"The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," S&P said in its rating decision, the latest in a series of downgrades that have accumulated as economic sanctions on Russia have continued to exacerbate what was already a tenuous economic situation.
S&P noted that economic growth in Russia had slowed to 1.3% in 2013, the lowest rate since 1999, excluding the economic downturn in 2009. In the best-case scenario, S&P projected GDP growth to average 2.3% in 2014-2017, which remains well below the pre-financial-crisis years of 2004-2007, when growth hovered around 8%. "We anticipate that real domestic demand growth is likely to remain weak, averaging about 3% over 2014-2017, having averaged about 8% over the earlier strong growth period of 2004-2007," S&P said, cautioning, however, that "in our view, if geopolitical tensions do not subside in 2014, there is significant downside risk that growth will fall well below 1%."
In response to the downgrade, Russia's central bank unexpectedly raised its benchmark interest rate in order to prop up the lagging ruble, reduce inflation and stem the tide of capital rushing out of the country. After temporarily raising the rate in March from 5.5% to 7%, the central bank on April 25, just hours after S&P's ruling, increased the rate another half a point to 7.5%.
Most recently, the US and European Union enacted a new set of sanctions aimed at hindering Russia's energy, banking and military sectors, with the US freezing the assets of seven Russian government officials and businessmen and 17 Russian companies, while further restricting high-tech trade with Russian entities, and the EU blacklisting 15 Russian and Ukrainian officials.
- Jacob Barron, CICP, NACM staff writer
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Statistics tracked for the S&P (Standard & Poor's)/Case-Shiller Home Price Indices through February demonstrate weakness in housing statistics that had been steadily improving in prior months.
The Case-Shiller Index showed that the rate of annual home price gains of nearly 13% in February was lower in 13 of the 20 major markets tracked than it was in the same month in 2013. The West is far outperforming the East, with California markets and Las Vegas setting the recovery pace, albeit from historically low levels. Only two cities, Denver and Dallas, have been able to reach new post-crisis price records.
"The annual rates cooled the most weâ€™ve seen in some time," said Index Committee Chairman David Blitzer of February's data. "Despite continued price gains, most other housing statistics are weak. Sales of both new and existing homes are flat-to-down. The recovery in housing starts is faltering. Home prices have not made it back to 2005." Blitzer added that those factors along with lack of availability in loans and threatened consumer confidence levels has reduced demand, which will continue to prevent a rise in new home construction.
Though the overall 10- and 20-city composites remained largely unchanged from January and February, the spreads between the winners and losers were notable. Thirteen markets experienced declines, with Cleveland taking the worst hit (-1.6%). Also troubling, Las Vegas posted its first, though very slight, decline in about two years, and Tampaâ€™s decrease in prices was the worst since January 2012, said S&P Dow Jones analysts. There was positive monthly growth, however, in markets like San Diego (+1%), Portland (+0.8%) and Seattle (+0.6%).
- Brian Shappell, CBA, CICP NACM staff writer
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