17th January 2011

My week started with a two day trip to our office in Budapest so it seems appropriate to look at some of the issues that are affecting that region. The recession that followed the financial crisis has taken a heavy toll. Many permanent recruitment based businesses failed as opportunities dried up and companies cut staff to stay afloat. Politically the country has swung back to the centre right and we are seeing a more nationalistic approach that is at odds with Hungary’s presidency of the EU. Many years ago I was advised by a close Hungarian friend that I would find it hard to find business in this region as Hungarians did business with Hungarians. Now nothing could be further from the truth, as faced with a shrinking home market, Hungarian businesses and Hungarian individuals seek international opportunities, and recognise the need to add linguistic skills to achieve their objectives. I am always impressed by the creativity and educational abilities of the Hungarians that I work with, and PMi can often be a useful marketing partner to achieve international expansion and market penetration.

I was very interested to hear several bankers complaining about the impact of the governments new bank levy/tax which far exceeds the rates in neighbouring states. While some banks are achieving profitability despite the levy others such as Banco Populare have sought to achieve a sale of their Hungarian business at the difficult time. Populare is the successor to IC bank which it acquired some years ago and still runs on an Oracle Flexcube platform. Populare’s decision to sell is in part driven by the needs of its parent in Italy to restructure. Indeed with a large part of Hungary’s retail sector in the hands of other European banks we can expect more consolidation such as the FHB/Allianz Bank merger and the further sale of some distressed players. And who will the buyers be? Well in one case it looks as if the Russians may be coming in the form of Sberbank or even possibly VTB. It remains to see how depositors (especially expat Russians) might react to such a move.

 

Hungary will always be unique if only because of the insulation resulting from a difficult language. A colleague was telling me that there are some advantages and similarities when I go to Kazakstan. It’s speciality extends to its wonderful cuisine and wines and next month I hope to be back for the Mangelica pig festival, which is a good excuse for some pre Lent festivities.

One of the reasons for my visit was to cement our relationship with a local telecommunications resource management specialist so I am sure that there will be plenty of chances to learn more about these fascinating people.

David Lewis

CEO

PMi Global

3rd January 2011

This is the first week back for most of us after the holiday season, and all at PMI would like to add our own good wishes for a healthy and happy 2011 to all who may read this our new weekly editorial.

For many of our clients the hard work spent in October and November getting expenditure budgets prepared and approved for a new fiscal year, now needs to be translated into action. The projects that have been frozen for the last two years have in many cases had to be reassessed and brought back to the drawing board, often in a scaled down version. Now is a good time to look at the structure and experience levels of your internal teams and consider the need for resource augmentation either with permanent staff or project based contract teams. PMI’s workforce augmentation model is there to be of service and to provide an economic solution. Whether you are a financial institution, a system integrator, outsourcer or major consultancy operating in the BFSI sector, or a software vendor requiring additional support for a successful end of year sales push, PMI’s focused delivery model and domain expertise is available to help you meet your 2011 targets.

Banking and financial services is a very broad church which is one of the reasons that PMI has spent 15years refining its knowledge and delivery capability in this area without seeing a need to diversify into other industrial sectors. If I was to choose a couple of areas where we would expect to see significant growth in 2011, I would cite compliance and regulation, and the continued growth in sophistication in risk management. We would also expect to see a continued move towards shared and hosted facilities especially amongst new entrants and smaller specialist banks, and continued outsourcing of non-core functions.

PMI has always sought to retain independence for any particular software vendor as our job requires us to have knowledge of all the available solutions in the marketplace and to understand the reasons why some product prove more popular and are more successfully integrated than others. Now increasingly we resolve that dilemma by being a partner and ally to most of the major players and focusing our support on the pre-sale task of system selection and the post-sale requirements of project planning and change management, where the resources we deliver have the skills, that can have the greatest impact in protecting our clients’ reputation for successful on budget and on time results. Let’s make sure that in 2011 collaboration works.

David Lewis

CEO

10th January 2011

The political and media focus on the level of banking pay and bonuses since the financial crisis is collapsing into farce. This week the coalition government are seeking to agree a link between the level of lending to industry, (especially to SME’s such as PMi Global) and agreement to allow accrued bonuses to be paid. This is nonsense.

So many people working at the branch level of retail banks and in the back offices of most non-investment banks have never benefited in any significant way from the bonus culture. Mega bonuses only ever truly apply in the board rooms and the deal making departments and dealing rooms of the investment banking industry.

A 50% tax rate is a pretty big disincentive to taking a million pound plus bonus and allowing it to fall within the UK tax net. You can be fairly sure that sophisticated tax planning will ensure such things do not happen to senior managers. It is the middle managers who will pay the extra tax. Incentivising staff with performance related pay has long been seen as beneficial but must bear some relation to the long term performance of the overall business not a single unit. In that way we ensure team building and avoid the huge egos that lurk in every dealing room. It must also reflect the risks borne. Most proprietary traders are not risking their own money but rely on the bank’s corporate capital. They are not held accountable for the losses that may result, so it becomes a one way bet. They are expected to make a profit; that is the job, if you don’t do that you should be fired, but there should be no need to share the resultant profits with the trader. We need to break this culture of avarice.

There is little chance of a change in banking salary levels which are out of step with other career options and industry sectors until changes are made from the top down. That means shareholders telling their board that the remuneration committee has to find new ways of retaining the most talented people, and that head-hunters need to draw from a wider pool of talent, rather than simply moving the pieces on the corporate chess board. In the end the market will determine the salary and remuneration packages of an individual. It will probably take a new player like Metro Bank to break the mould in retail banking and that will be a lot harder amongst longer established universal banks regimes.

A split between retail and investment banks would push the issue into the open with the latter being subject to less government control and as non-retail deposit takers being of less concern to politicians, but we have seen how quickly the knock on effect of an investment bank failure can freeze markets. Basel 3 and adequate capitalisation under new rules may seem like a solution but we must have learnt that it is not the problems you anticipate that cause market disruption but the lemming like behaviour of blind bankers all running in the same direction to make an easy dollar and losing sight of the fundamentals of pricing risk.

Prudent and smarter lending is what we require from banks not the centralised allocation of lending quotas to industrial sectors like a communist state. I spent many years in the early ‘90s explaining to newly recruited Russian bankers the economic purpose of a bank to redistribute efficiently idle capital into productive projects based on a risk weighted return model. It was the failure to apply such a risk weighted return to the pricing of banking assets that had the knock on effect of undisclosed (and in some cases off -balance sheet) imprudent lending to the US housing and property development market and holdings of related bond securitisation that caused the loss of confidence and liquidity freeze that led to the Lehman Brothers collapse. The interest rate risk may have been matched but the liquidity assumptions at each roll over required an ever open inter-bank market, which proved not to be the case and drove everyone to the lenders of last resort namely the governments and the central bankers.

While two of our major banks are rebuilding and restructuring under state control, their key focus is in achieving liquidity and capital levels that would allow them to emerge as solid independent banks and for the chancellor and the state to pocket at a minimum the GBP20billion profit that is reflected in their current share price. It would cover a large part of the current deficit reduction programmes requirements far better than the tax on bonuses.

David Lewis

CEO

PMi Global