News Archive

Facebook’s Watch goes up against YouTube for ad dollars

(Reuters) – Facebook Inc launched its Watch video service to U.S. users on Thursday with plans to allow people to submit shows, as the No. 1 social media network vies with Alphabet Inc’s YouTube for advertising revenue.

Advertisers are shifting more of their budgets from television to online as viewers have migrated to watching shows on smartphones and tablets.

On Watch, which Facebook began testing earlier this month, users can see hundreds of shows from the likes of Vox, Buzzfeed, Discovery Communications Inc, AE Networks, Walt Disney Co’s ABC, as well as live sports like Major League Baseball.

Americans spend more than 73 minutes a day watching digital video, up more than 7 percent from last year, according to eMarketer data. TV watching has dropped 2 percent from last year to 244 minutes a day, a trend that is expected to continue.

Facebook is initially paying some content creators for shows to drive interest. The company is paying $10,000-$35,000 for shorter form shows and up to $250,000 for longer shows, sources told Reuters in May.

The company declined to comment on how much it was spending on shows.

Facebook does not intend to make buying content a core piece of its strategy, Dan Rose, vice president of partnerships at Facebook, told Reuters.

“We are not focused on acquiring exclusive rights,” he said. “The idea is to seed this with good content.”

Facebook plans to eventually open the platform to everyone to submit shows for approval and share 55 percent of ad revenue, Rose said.

The company is testing how ads will work within the shows, he added.

Watch should help Facebook solidify its position alongside YouTube, the leader in the digital video space, for advertisers, said Paul Verna, a senior analyst with eMarketer.

Facebook said Watch is more personal and community-oriented than competitors. For example, it can suggest shows based on a user’s interests and friends can share their thoughts as they watch a video.

For example, fans of the exercise program “CrossFit” can watch and share commentary on live CrossFit events streamed on Facebook while chatting in groups, Rose said.

Similarly, fans of Spanish soccer can watch and chat online about “Hala Madrid,” a show about Real Madrid.

“We think our unique opportunity is around community and engaging with people on topics they love to talk about,” said Rose.

Reporting by Jessica Toonkel; Editing by Anna Driver, Richard Chang and David Gregorio

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U.S. consumer spending rises modestly; inflation retreats

WASHINGTON (Reuters) – U.S. consumer spending rose slightly less than expected in July and annual inflation advanced at its slowest pace in more than 1-1/2 years, diminishing expectations of an interest rate increase in December.

Inflation remains stubbornly low even as the labor market is near full employment, a conundrum for the Federal Reserve. Other data on Thursday showed a small increase in new applications for unemployment benefits last week amid a tightening job market.

“The consumer continues to do the heavy lifting when it comes to economic growth,” said Chris Rupkey, chief economist at MUFG in New York. “Inflation is in the slow lane for now and this is likely to make Fed officials cautious on the need to raise rates a third time this year.”

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3 percent last month after a 0.2 percent gain in June. Economists had forecast consumer spending rising 0.4 percent in July.

The personal consumption expenditures (PCE) price index excluding food and energy edged up 0.1 percent in July. The so-called core PCE price index, which is the Fed’s preferred inflation measure, has now risen by the same margin for three straight months.

The 12-month increase in the core PCE price index dipped to 1.4 percent, the smallest gain since December 2015. The index rose 1.5 percent in the 12 months through June. The annual rate has dropped by half a percentage point since February and the PCE price index has undershot the U.S. central bank’s 2 percent target for the past five years.

The combination of moderate consumer spending and tepid inflation casts doubts on whether the Fed will increase interest rates at its December policy meeting, as most economists expect.

The Fed has raised borrowing costs twice this year. It is, however, expected to announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities next month.

“We expect core inflation to get worse on a year-over-year basis before it gets better, making it an easy decision for the Fed to skip raising rates at its September meeting and focus on the balance sheet only,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York.

Financial markets are pricing in a roughly 31 percent probability of a rate increase at the Fed’s December meeting, down from about 35 percent earlier, according to CME Group’s FedWatch program.

U.S. stocks were trading higher on the diminishing rate hike prospects, as were prices of U.S. Treasuries. The dollar was flat against a basket of currencies.


The consumer spending report still suggested the economy got off to a strong start in the third quarter after gross domestic product increased at a 3.0 percent annualized rate in the April-June period, the fastest in more than two years.

Growth in the second quarter was buoyed by robust consumer spending. The continuing strength of the labor market should support consumer spending.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits rose by 1,000 to a seasonally adjusted 236,000 for the week ended Aug. 26.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell by 1,250 to 236,750 last week, the lowest reading since May.

Claims have now been below 300,000, a threshold associated with a robust labor market, for 130 consecutive weeks. That is the longest such stretch since 1970, when the labor market was smaller.

In July, consumer spending was lifted by a 0.4 percent rebound in personal income after being unchanged in June. Consumers also tapped into savings, which fell to a seven-month low of $510.2 billion from $515.7 billion in the prior month.

While consumers will continue to drive the economy, housing will probably remain a drag.

A third report from the National Association of Realtors showed contracts to purchase previously-owned homes fell in July, the fourth drop in five months. Housing is being hurt by an acute shortage of properties available for sale.

“The latest figures … come at a time when much of the housing data have turned weaker,” said Daniel Silver, an economist at JPMorgan in New York. “We will likely see the softness in at least some of the housing data persist over the next month or two.”

In a fourth report on Thursday, the Institute for Supply Management-Chicago said its MNI Chicago Business index was unchanged at a reading of 58.9 in August.

Reporting by Lucia Mutikani; Editing by Paul Simao

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Diplomatic spat casts long shadow over Hyundai factory town in China

BEIJING (Reuters) – In the industrial outskirts of Beijing, a local community in the shadow of a giant Hyundai Motor Co manufacturing complex is feeling the fallout from a fierce diplomatic standoff between China and South Korea.

Workers said shifts at the cluster of Hyundai plants had been slashed as Hyundai struggles with plunging sales in China amid the year-long dispute. Suppliers, meanwhile, have been hit by falling orders.

Local entrepreneurs and officials said housing markets and businesses in the area, a suburban district in the northeast of the city called Migezhuang, had seen sharp drops in demand.

The slump for the mini-economies that have grown around the carmaker’s operations underscores how the hammering South Korean businesses have taken in China is affecting local interests too.

“Fewer people are coming to my store,” said Li Gonghe, who has been running a convenience shop in the area since 2004.

“If there were 50 people that came to my store before, now there are only five,” Li said. Hyundai workers “are getting too many days off and the whole village is paying for it.”

Hyundai’s four plants around China – three in the suburbs northeast of Beijing – halted production last week after a supplier refused to provide parts due to non-payment. Production was restarted on Wednesday, but not before rattling investors and weighing on Hyundai’s shares.

The South Korean carmaker has seen sales in China, the world’s largest auto market, tumble over 60 percent in recent months, in large part because of a chill between China and South Korea over Seoul’s deployment of a U.S. anti-missile system.

South Korea says the Terminal High Altitude Area Defense system is needed to counter threats from North Korea. China says it poses a threat to its national security.


Workers at the local plants, operated by a joint venture between Hyundai and BAIC Motor Corp Ltd, said shifts and overtime had been significantly cut, hitting salaries.

“In May, June and July, we only worked one week per month,” one worker, Liu Haipeng, said outside the gates of one factory. “We are having too many vacation days. Who knows what’s going to happen in future.”

He said workers at a nearby South Korean factory supplying to Hyundai had recently protested against the cuts.

Hyundai and BAIC declined to comment.

Hyundai cut production at its four factories in China earlier this year due to slumping sales. A fifth China factory was scheduled to start production in August.

Xu Xianlong, 52, another worker at the Beijing plants, said employees were often being put on temporary leave because of recent slow demand. Like Liu, he said that he now only worked one week each month, while his earning power had been cut by a quarter.

“Workers are on furlough too much,” he said. “I only worked one day in May. So I didn’t get any pay that month at all.”


Hyundai is not the only South Korean company feeling the heat in China. The South Korean conglomerate Lotte Group had around 90 of its Lotte Mart retail stores around the country closed over various safety violations earlier this year.

The closures, which came after Lotte approved a land swap deal with the South Korean government in February that enabled Seoul to deploy the missile defense system, are still in effect.

“Although Lotte Mart stores have corrected safety issues, Chinese officials have not made a single visit to the stores. Hence it has been impossible for us to reopen the stores,” a Lotte Group spokesman said.

He added that the company was facing “mounting losses” in the country, though it had no plans to pull out. He asked not to be named due to the sensitivity of the issue.

“Products have been just sitting in storage, we have been paying rent while we are not making money, and been paying our Chinese employees,” the spokesman said. “Although we are not paying full wage, it’s been a financial burden to the company.”

Chinese tourists to South Korea, traditionally a popular destination, have also plummeted, after bans on Chinese tour groups traveling to the country. Cruise operators have removed South Korean ports from itineraries and some flight routes have been cut.

Chinese tourist numbers to South Korea dropped 69.3 percent in July, according to the latest figures from the Korea Tourism Organization, following similar drops each month since March.

Back in Migezhuang, near the Beijing Hyundai plant, the carmaker’s troubles have locals worried.

“There are over 800 local residents in the village, and around 1,200 to 1,300 workers from outside are living here, most of them at Hyundai factory,” Liu Yanjun, a village cadre, told Reuters in her government office. “Locals rely on the rent they get from factory workers.”

Zhai Sixing, 65, was a migrant construction worker from Shandong province until he put his life savings into opening a restaurant in the area five years ago.

“The workers aren’t doing overtime anymore, and have stopped coming to dine here,” he said. “If it continues like this, I’m going to close down this place and go back to my hometown.”

Reporting by Pei Li and Joseph Campbell in BEIJING and Heekyong Yang in SEOUL; Writing by Adam Jourdan; Editing by Philip McClellan

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BAT restructures as e-cigarettes go mainstream

(Reuters) – British American Tobacco said on Thursday it has reorganized its regional management structure following the acquisition of Reynolds American to bring its vaping and heated tobacco products into the main business.

“Now that we have built a successful NGP (next generation products) business which is poised for substantial growth, we will be fully integrating NGP to leverage the scale and expertise of the whole group to drive growth in an area that is fast becoming a key part of our mainstream business,” BAT said in a statement.

Kingsley Wheaton, the managing director of NGP will manage this integration process, the company said.

BATS has been looking to double the number of countries where it sells vaping products this year and again in 2018, as it chases rivals Philip Morris International to grab a share of a growing market.

BAT and Philip Morris were the first of the big tobacco firms to invest in cigarette alternatives a few year back, as growing health consciousness reduces traditional smoking.

Philip Morris is ahead of BAT in the market for tobacco-based vaping devices, which some analysts think will be more popular than traditional e-cigarettes with regular smokers.

Last month BAT completed the acquisition of Reynolds American in a deal valued at over $49 billion which it said would help boost its position in the small but growing market for vaping and electronic cigarettes.

BAT said earlier this year it had the biggest vaping business in the world outside of the United States and intended to take Reynold’s own NGP portfolio, led by vaping brand Vuse, into its international markets.

Also last month the U.S. Food and Drug Administration (FDA) proposed cutting nicotine in cigarettes to “non-addictive” levels in a major regulatory shift designed to move smokers toward potentially less harmful e-cigarettes.

BAT, which in January quit plans to market a nicotine inhaler called Voke, plans to double the number of markets where it offers cigarette alternatives this year, and again next year.

Under the management reorganization announced on Thursday BAT said it has appointed Jack Bowles, hitherto director for the Asia-Pacific region, to the newly created role of chief operating officer for the international business, excluding the United States.

The company said it also intended to “simplify” the regional management structure to add three regions, Americas and Sub-Saharan Africa, Europe and North Africa, Asia-Pacific and Middle East.

Ricardo Oberlander has been appointed regional director for the Americas and Sub-Saharan Africa and Tadeu Marroco has been made head of Europe and North Africa, while Johan Vandermeulen becomes the director for the new Asia-Pacific and Middle East region.

Reporting By Justin George Varghese in Bengaluru and Martinne Geller in London; Editing by Greg Mahlich

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U.S. gasoline hits $2/gallon as Harvey wreaks havoc on refiners; crude weak

SINGAPORE (Reuters) – Gasoline prices in the United States hit $2 a gallon for the first time since 2015 on Thursday as flooding from storm Harvey knocked out almost a quarter of U.S. refineries, while crude prices remained weak as demand dropped following the outages.

Harvey has battered the U.S. Gulf coast since last Friday, ripping through Texas, Louisiana and the heart of the U.S. petroleum industry. At least 4.4 million barrels per day (bpd) of refining capacity was offline, based on company reports and Reuters estimates.

Amid fears of a supply squeeze, U.S. gasoline prices on Thursday jumped to $2 per gallon for the first time since July 2015, and traders from Europe to Asia were scrambling to fix fuel cargoes to the United States.

Goldman Sachs said it could take several months before all production could be brought back online.

“While no two natural disasters are similar, the precedent of Rita-Katrina would suggests that 10 percent of the … currently offline capacity could remain unavailable for several months,” the bank said.

While gasoline spiked, crude markets remained weak after already falling sharply the previous day. The closure of so many U.S. refineries has resulted in a slump in demand for the most important feedstock for the petroleum industry.

U.S. West Texas Intermediate (WTI) crude futures were trading at $46 per barrel at 0708 GMT, slightly above last day’s settlement, when prices fell by 0.8 percent intraday.

International Brent crude was at $50.74 a barrel, down 12 cents from the previous day, when the contract fell by more than 2 percent.

“The temporary closure of refineries is a major dent to United States’ crude demand and is weighing on both Brent and WTI prices,” BMI Research said.

Analysts said that the heavy WTI discount with Brent was a result of shut in U.S. crude supplies due to pipeline and refinery closures.

Harvey could be the worst storm in U.S. history in terms of financial cost.

“The economy’s impact, by the time its total destruction is completed, will approach $160 billion,” said Joel N. Myers, president and chairman of meteorological firm AccuWeather.

Other estimates have put the economic losses from Harvey at under $100 billion.

Although Harvey keeps getting weaker, meteorologists say more floods are expected.

AccuWeather said “the worst flooding from Harvey is yet to come as rivers and bayous continue to rise in Texas with additional levees at risk for breaches and failures.”

Beyond Harvey, U.S. commercial crude oil stocks fell by 5.39 million barrels last week, to 457.77 million barrels, according to data released Wednesday by the U.S. Energy Information Administration.

That’s down 14.5 percent from record levels reached last March.

The big draw in crude came as U.S. gasoline demand hit a record 9.846 million bpd last week, and as U.S. refinery use rates rose to 96.6 percent, the highest since August 2015.

However, the data was collected before Hurricane Harvey hit the Gulf Coast.

Reporting by Henning Gloystein; Editing by Richard Pullin and Tom Hogue

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U.S. house prices to keep rising on supply constraints: Reuters poll

BENGALURU (Reuters) – U.S. house prices are forecast to rise by a cumulative 10 percent over this year and next, driven by a scarcity of new homes, low interest rates and steadily-increasing demand, a Reuters poll of property market analysts showed.

Over three-quarters of the experts surveyed Aug. 17-30 also said the U.S. home ownership rate, which a year ago was languishing at a four-decade low, will climb over the next two years.

The survey results suggest the steady recovery from a housing market crisis that first started about a decade ago – when homes lost almost a third of their value and unemployment surged – is expected to continue.

The latest poll coincides with a series of weak housing data releases. U.S. home resales and starts fell in July to their lowest levels in nearly a year on a chronic shortage of properties even as home borrowing costs are down broadly.

But the cooling in housing turnover reflects supply bottlenecks rather than falling demand.

“The recent drop in mortgage interest rates has not boosted housing market activity, which is being constrained by a severe lack of inventory,” said Matthew Pointon, property economist at Capital Economics.

“With housing starts faltering, we doubt inventory levels will improve much this year, so home sales will see little growth. Instead, prices are set to be driven up.”

The SP/Case Shiller composite index of prices in 20 metropolitan areas is forecast to rise at more than double the rate of inflation and wage growth this year, by 5.7 percent, followed by 4.3 percent next year.

Those median forecasts were slightly up from a Reuters poll three months ago. The range of forecasts also showed a shift up from a poll in May, with higher highs and higher lows.

While U.S. house prices have regained all of their losses from the financial crisis and the unemployment rate has fallen to a 16-year low, housing inventory is still at just half of where it was at its peak in 2007, at the start of the crisis.

Housing inventory has now dropped for 26 straight months on a year-over-year basis, pushing house prices up. The monthly median house price has risen for almost 5-1/2 years and the latest data show it was up 6.2 percent in July compared with a year ago.

Existing home sales are forecast to average a seasonally adjusted annual rate of 5.60 million units until the second half of next year, according to the poll, more than a 20 percent drop from the peaks of 2005, suggesting housing shortages are here to stay.


But with a couple of hundred thousand or so jobs still being added to the economy each month along with extremely low interest rates, building companies are likely to continue constructing homes to capture that solid demand.

Indeed, expectations now are for the home ownership rate to go higher over the next two years.

The home ownership rate, which measures the total number of homes owned by their occupants, hit a 40-year low of 62.9 percent last year. It has since crept up slowly to 63.7 percent, but is still a long way from reaching its recent peak.

“Gradual loosening of credit along with gradually increasing confidence in the housing market will push homeownership rates higher, although nothing close to the 69 percent seen in 2004 during the last housing market up-cycle,” said Daren Blomquist, senior vice president at ATTOM Data Solutions, an online property data website.

Rising house prices remain an obstacle for first-time buyers, however, particularly those who are saddled with huge amounts of student debt.

“Affordability is now at its lowest point of the year and it is happening with sales weakening. That seems to imply that prices are becoming a problem,” said Robert Brusca, chief economist at FAO Economics.

Asked to rate affordability of U.S. housing on a scale of 1 being the cheapest and 10 the most expensive, the median answer was 6. That has not changed in more than a year of polling.

Polling by Vivek Kumar Mishra and Sujith Pai; Editing by Ross Finley and Paul Simao

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Blow to South Korean carmakers as Kia loses landmark wage dispute

SEOUL (Reuters) – South Korea’s Kia Motors (000270.KS) said it expects to pay about 1 trillion won (686.67 million pounds) in additional wages and would post a third-quarter operating loss after a court ruled in favour of workers in a landmark labour dispute on Thursday.

Seoul Central District Court gave workers a major, if only partial, victory in their closely watched dispute with Kia, ordering the Hyundai Motor (005380.KS) affiliate to pay about 420 billion won in unpaid wages.

But Kia said the additional labour costs arising from the ruling would be more than double that amount, once all its workers’ wages were adjusted.

The payout, though significantly less than the roughly 1 trillion won demanded by workers in the six-year legal battle, is a blow to South Korean automakers just as they are battling a sales slump in China amid regional strategic tensions.

“The current operational situation is such that the ruling amount is hard to bear,” Kia said in a statement, adding it would appeal immediately

Kia Motors shares fell 3.5 percent and Hyundai Motor was 1.8 percent lower after the ruling, while the wider market .KS11 fell 0.4 percent.

A labour representative told reporters the court had vindicated workers in the face of Kia’s argument that their demands amounted to an attack on Asia’s fourth-biggest economy.

“The ruling today confirmed that … the union can aid the company’s development,” he said.

The workers in their claim said regular bonuses should be included as part of a base pay used to calculate overtime, compensation for unused annual leave, severance pay and other payments.

The case goes back to an original claim in 2011 of 659 billion won in unpaid wages. With interest it came to more than 1 trillion won.


South Korea’s car industry association warned the ruling could have far-reaching negative consequences for the sector if it sparked other wage claims.

“As a company which outputs more than one-third of local producton, Kia Motors’ wage conditions and operational crisis will spread to other automakers and suppliers, adding more pressure to the crisis in South Korea‚Äôs auto industry,” it said in a statement.

Kia’s second-quarter operating profit of 404 billion won was 48 percent down from last year and analysts were expecting the firm to beat that in the third quarter, according to forecasts made before Thursday’s court ruling.

South Korean firms like Kia, Hyundai and Lotte have been battered by Chinese boycotts and regulatory pressure over Seoul’s decision to deploy a U.S. missile defence system to counter threats from nuclear-armed North Korea.

China says the system poses a threat to its national security.

Hyundai Motor – which together with Kia is the world’s No.5 automaker – in July posted its smallest quarterly net profit in five years. Sales from its Chinese factories plummeted 64 percent in April-June alone.

Reporting by Joyce Lee and Hyunjoo Jin; Writing by Jane Chung; Editing by Stephen Coates

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Dollar, commodities cheered by China, US economic news

LONDON (Reuters) – Investors rediscovered a taste for the dollar and commodities on Thursday as upbeat Chinese and U.S. economic news whetted appetite for riskier assets globally, even as tensions over North Korea simmered in the background.

One big gainer was U.S. gasoline which surged 6 percent to two-year peaks as flooding and damage from Tropical Storm Harvey shut nearly a quarter of U.S. refinery capacity. Prices are now up more than 20 percent in the past week.

Adding to the bullish mood, a survey showed Chinese factory growth unexpectedly accelerated in August, confounding forecasts for a slight slowdown. The official PMI firmed to 51.7, from 51.4 in July.

That gave a fresh boost to industrial metals, with copper nearing its highest since late 2014 and on track for gains of 7 percent for August.

European share markets opened firmer, with the Eurostoxx 600 up 0.3 percent and London’s FTSE, Germany’s DAX and France’s CAC40 ahead by 0.25 – 0.4 percent.

Attention was on euro zone inflation data due at 1000 GMT. It is expected to show another small rise and should give the European Central Bank comfort ahead of its policy meeting next week.

U.S. core inflation figures, which will be closely scrutinized by the Federal Reserve as it looks to push on with its recent run of rate hikes, are also due later.

“It is almost like we have ended up with a default risk-on, which is in part predicated by the very benign pricing for what central banks do next,” said head of global macro strategy at State Street Global Markets, Michael Metcalfe.

“And that is why the inflation numbers now will be important,” especially with energy prices and commodity prices having risen over the last couple of months. “The period where we could have expected favorable inflation numbers (for keeping interest rates low) may have passed.”

In Asia, Japan’s Nikkei closed up 0.7 percent, its best level in two weeks, helped by a pullback in the yen.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.1 percent on the day but was a modest 0.3 percent firmer for the month.

Emerging market stocks took a breather too. But August has been their eighth straight month of gains and are now up almost 30 percent since the start of the year.

Wall Street had got a boost on Wednesday when data showed the U.S. economy grew at an upwardly revised 3 percent annualized pace in the second quarter, courtesy of robust consumer spending and strong business investment.

Other figures showed U.S. private-sector employers hired 237,000 workers in August, the biggest monthly increase in five months and an upbeat omen for payrolls on Friday.

The Dow rose 0.12 percent, while the SP 500 gained 0.46 percent and the Nasdaq 1.05 percent.


The better economic news helped distract from rumblings in the Korean peninsula and lifted the U.S. dollar.

President Donald Trump on Wednesday declared “talking is not the answer” to the tense standoff with North Korea over its nuclear missile development, but his defense chief said diplomatic solutions were still available.

Against a basket of major currencies, the U.S. dollar crept ahead to 92.929 and away from a 2-1/2-year low of 91.621 touched on Tuesday.

The dollar also bounced to 110.50 yen, off a 4-1/2-month low of 108.25.

The euro retreated to $1.1890 from its top of $1.2069, weighed in part by speculation the European Central Bank might start to protest at the currency’s strength.

“The ECB meeting is coming up next week and there are rising risks of verbal intervention from Mario Draghi,” said Deutsche Bank strategist George Saravelos.

“Despite this the euro level does not appear particularly extreme and most importantly the ECB has not been driving recent appreciation anyway,” he added. “Verbal rhetoric may cause a correction but is unlikely to be enough to derail euro strength.”

The currency has risen sharply this year against the dollar as pessimism over the euro bloc has dissipated and its economy has started to gain some traction.

The bounce in the dollar shaved 0.5 percent off the price of gold to $1,302.50 an ounce, short of Tuesday’s 9-1/2-month high of $1,325.94.

With so much U.S. refinery capacity shut in the wake of Tropical Storm Harvey, oil prices were hit by demand concerns. Brent eased 9 cents to $50.77 a barrel, while U.S. crude hovered at $46.05.

Additional reporting by Wayne Cole in Sydney; Editing by Jon Boyle

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The budget bank rattling South Africa’s financial sector

STELLENBOSCH, South Africa (Reuters) – A budget bank is booming in South Africa’s economic slump, challenging the decades-long dominance of the “big four” lenders and prompting a price war that is driving down banking costs in a country where many people can’t afford an account.

Capitec Bank has doubled its customer numbers over the past five years and quadrupled in market value, even as South Africa’s economic growth has stalled and the country has slid into recession, squeezing household incomes.

It offers a single “no-frills” bank account with low fees, as well as unsecured loans to customers including low-income borrowers, but steers clear of the more complex financial products offered by rivals.

This model has insulated it from the downturn, which has constrained mortgage lending and vehicle finance, key business areas for the four biggest banks: Standard Bank, FirstRand, Barclays Africa and Nedbank.

Those four heavyweights have reigned unchallenged over South Africa’s financial sector since the 1990s.

But Capitec, whose shares have risen more than 300 percent since 2012 and over 30 percent this year, now has a market value of 103 billion rand ($7.9 billion) – closing in on the number four lender Nedbank, which is worth 110 billion rand.

The Stellenbosch-based bank, which launched in 2001, has 9 million customers, of which 4 million are so-called primary clients who have their salaries deposited into these accounts.

“Most of them we’ve taken from other banks,” Capitec Chief Executive Gerrie Fourie told Reuters in an interview, saying that his bank attracts 100,000 to 150,000 new customers a month.

“The economy is helping us,” he added. “People have started questioning why they have to pay banking costs.”

There are clear risks to the bank’s business model of offering unsecured loans to lower-income borrowers without any other forms of lending to counter any losses, according to industry experts.

Capitec’s rise is nonetheless forcing its rivals to respond. They are all fighting back with their own no frills accounts aimed at hard-pressed consumers.

This is pushing down the cost of banking in South Africa – a significant development in a country where only around half of the 55 million population have bank accounts, according to Nielsen research, partly because of the charges involved.


Bank fees for deposits, withdrawals, transfers and administration have for years largely ranged between 100 and 250 rand a month, but can rise as high as 450 – a stiff ask in a country where the minimum wage is 20 rand an hour.

Nedbank has reduced the administration fees for its most basic account to Capitec’s level of 5.50 rand a month and also lowered transaction costs. It now offers bank accounts that are about half the price of five years ago.

Chief Executive Mike Brown told Reuters it was focusing strongly on entry-level banking and was looking to that segment for customer growth.

The other big banks have gone even further, more than halving their fees for their most basic accounts over the past five years to undercut Capitec.

FirstRand’s FNB arm now offers an account with a monthly fee of 5.25, Standard Bank runs one for 4.99 rand per month, while Barclays Africa’s Absa division offers 4.95 rand.

Standard Bank’s co-Chief Executive Ben Kruger told Reuters it needed to be able to respond nimbly to counter lean new entrants like Capitec who have been able to enter the market without the stifling processes established banks have inherited from their paper-based legacy systems.

“Capitec is gaining market share in the bottom end and the middle of the market and they are increasingly becoming more aggressive in business banking,” said the bank’s other Co-CEO, Sim Tshabalala.

FirstRand, the largest banking group with a market value of 318 billion rand, has 7.7 million customers through its FNB arm; Standard Bank, valued at 276 billion rand, has 12 million; Barclays Africa, which is worth 128 billion rand, has 9.4 million through Absa; and Nedbank has 5.7 million.


Nestled in the vineyards of the Western Cape, far from South Africa’s financial hub of Johannesburg, Capitec has enjoyed a rapid rise since it launched 16 years ago. The biggest growth came during the economic downturn of the past five years, both in terms of customers and market value.

“Capitec came from zero, to being a big player,” said Feroz Basa, head of Old Mutual’s Global Emerging Markets Fund. “It’s centered around this low-cost model, that’s how they are gaining market share.”

The retail bank has also been swiftly expanding its branch network, adding 76 last year to reach more than 800, compared with Absa’s 719, Standard’s 630, FNB’s 645 and Nedbank’s 513.

The bank’s growing deposit base has narrowed its own cost of funding significantly, Arqaam Capital analysts Jaap Meijer and Leen Antonios said in a note, adding that they expect it to generate higher-than-expected revenues in the next few years.

However, in terms of risks, the amount of Capitec’s loans in arrears at the end of December were up 24 percent to compared with a year earlier, at 2.86 billion rand, outstripping the 11 percent growth rate of its interest income.

Unlike its rivals, the bank offers only unsecured loans and cannot count on other lending areas such as mortgages to counter any losses. The company is due to report half-year results at the end of September.

“The other banks might have a bit of a moat by having vehicle finance, housing loans and bonds and higher value loans,” said Momentum SP Reid banking analyst Brian Mugabe. “Their (Capitec’s) biggest challenge comes as they move up the value chain.”

Nonetheless, as the price war for low-income customers gears up, Capitec warned its bigger competitors that it plans to climb the income ladder – but not all the way up.

“We designed this bank to service 90 to 95 percent of South Africa’s banking public,” said Fourie. “The wealthiest 5 to 10 percent of the population we leave for the guys offering private banking services.”

($1 = 13.2158 rand)

Additional reporting by Tiisetso Motsoeneng; Editing by Pravin Char

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