Facebook Tries to Monetize By Annoying; LinkedIn Adds to Value of its Site

In the span of 24 hours this week, the two most important (for now) publicly traded social networking companies in the world, Facebook (FB) and LinkedIn (LNKD), each made fairly minor strategic moves that did a magnificent job of highlighting the major differences not only in their corporate identities but why investors have thus far embraced one and abjectly shunned the other.

First, LinkedIn on Tuesday unveiled a new feature that will let its 175 million-plus users easily follow a panel of 150 or so “influencers” including the likes of President Obama, Richard Branson, a slew of other business leaders, entrepreneurs, bloggers and even LinkedIn CEO Jeff Weiner himself.

The idea is that because LinkedIn users generally skew older and more “professional” than the 950 million-plus Facebook devotees, giving them convenient access to these prominent thought leaders’ will encourage longer and more frequent visits to the site which, in turn, will generate more advertising revenue and that elusive “stickiness” that all online operations crave.

LinkedIn is still working out the “Who” and “How” and “Why” of this evolving reservoir of deep thinkers but the overall idea would seem a logical fit for its audience of professionals who mainly use the site for job-seeking purposes or to inundate their networks with links to their various professional endeavors. Users can pick and choose which influencers they do and don’t want to hear from. Bottom line: it’s free and potentially adds to the value of the site for users.

And while LinkedIn has been trading for almost exactly one year longer than Facebook, it’s still very, very early. That said, the stock’s performance (on the stodgy, old NYSE) has been nothing less than spectacular as you can see here:

LNKD data by YCharts

Meanwhile, Facebook on Wednesday countered (indirectly) with news of its own, announcing a new feature that will let U.S. members pay to promote their posts to friends in the same way that advertisers do now. Having a blowout Halloween party or garage sale or conniption fit that you want everyone in your network to know about? Pay the piper.

The company didn’t detail the exact price it would charge users to bump up their posts in all their friends’ news feeds but this potential new revenue stream has been in dress rehearsal in 20-some other countries and, apparently, is something that Facebook thinks its younger, more socially obsessed users would be willing to punch in their credit card numbers to leverage. It costs users money and, quite certainly, will be an annoyance to users who receive the “favored” posts. The move further cements the view here that Facebook is a great service, if sharing is your thing, but not such a great business. If you have to pay to get your ramblings noticed on Facebook, isn’t that a little sad? Perhaps Aunt Sally has already hidden your posts.

As you can see from this chart, Facebook’s post-IPO run has actually been worse than advertised when juxtaposed against the sharp performance of the “younger, hipper” NASDAQ as a whole:

^IXIC data by YCharts

Time will tell if either of these new initiatives will make much, if any, impact on the short- and long-term financial performances of both of these social networking giants. But at least they’re trying.

LNKD Revenue Growth data by YCharts

On the surface, LinkedIn’s new feature smacks of a snoozefest waiting to happen and probably not particularly engrossing to the majority of its users who are either too busy working or looking for work to nestle in for Richard Branson’s musings on whatever.

Likewise, Facebook’s pay-to-display scheme probably will find some takers — depending on the price — among the child-photo-sharing and Spring-Break-updating crowd. But then again, chances are most of the people who would actually consider paying to barnstorm their “friends’” news feeds probably are long on time but short on the expendable cash required to sustain an extended self-promotion campaign.

YCharts, Forbes Contributor

Larry Barrett is an editor for the YCharts Pro
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Yuan Trade Settlement Seen Reaching $1 Trillion

Cross-border trade settled in Chinese renminbi will triple to 6.5 trillion ($1.03 trillion) yuan within three years as relations with the world’s second largest economy grow, Royal Bank of Scotland Group Plc. said.

Settlement will grow from 12 to 20 percent this year, reaching $1.03 trillion in two years, up from $330.8 billion in 2011, Janet Ming, head of the China desk for RBS in Europe, Middle East and Africa, said in a Oct. 9 interview in Dubai.

“We’re seeing a lot more customers starting to practice in renminbi,” Ming said. “For most companies and banks, China and India is where the growth is. If you’re dealing with China, ignoring renminbi is not the right thing to do.”

The Euro and U.S. dollar are the top two settlement currencies with market share of 41 percent and 33 percent, according to the bank.

RBS also expects a growing number of foreign companies and governments to issue bonds in the Chinese currency as they become “more confident” with the renminbi as an international currency, Ming said.

“Different Asian governments are investing into the renminbi to use it as a reserve currency,” she said.

Hong Kong is currently the global hub for renminbi trade settlement. RBS, along with Industrial & Commercial Bank of China (601398) Ltd., HSBC Holdings Plc (HSBA), Standard Chartered Plc (STAN), JP Morgan Chase & Co., Barclays Plc and Deutsche Bank AG (DBK), is lobbying to make London another offshore hub for the currency. Singapore, Taipei and Paris are also being considered.

“London has many competitive advantages such as timezone, robust legal frameworks and efficient markets,” Ming said.

Global issuers accounted for a record share of yuan- denominated bond sales in Hong Kong last quarter as it became more attractive to raise Chinese currency and swap the proceeds into dollars.

Export-Import Bank of Korea led 10.7 billion yuan ($1.69 billion) of so-called dim sum offerings by non-Chinese companies, whose share of the market rose to 49 percent, excluding certificates of deposit, according to data compiled by Bloomberg.   

By Stefania Bianchi

World banking is gloomy, McKinsey consulting report

Banks worldwide remain scarred by the 2007-2009 financial crisis and are years away from developing new business models that will produce sustainable profits, according to a new study.

Despite progress in meeting regulators’ requirements to build capital, revenue growth is slow, costs are rising and new competitors exploiting digital technologies are emerging, McKinsey & Co said in a report.

The consulting firm prescribes a rigorous mix of cost cutting, business simplification models adapted from the auto industry and image repair that requires fundamental changes in employee culture and respect for societal values.

“It’s the banks’ game to lose,” Toos Daruvala, a McKinsey director who helped write the report, told Reuters.

The challenges are so great, though, that the consultant expects a host of large and small US banks over the next five years to throw in the towel and merge.

In the United States, where almost two-thirds of U.S. banks are earning less than their cost of capital. Reuters

“You will see significant consolidation, particularly among banks with less diversified income streams that are highly dependent on net interest margins,” Daruvala said. “They will be troubled and forced to sell.”

The report also sends an ominous message about banks’ central role in the global economy.

A 30-year trend in which national average bank revenue has grown faster than countries’ gross domestic products “is likely now being broken,” the study says. “In both emerging and developed markets, banking revenues are expected to flatline at around 5 percent of GDP for the foreseeable future.”

In the United States, where almost two-thirds of U.S. banks are earning less than their cost of capital, investors will have to wait three to five years for returns on equity (ROE) to return to historical averages of 10 to 12 percent, Daruvala said.

Banks cannot control central bank interest rate cuts that are squeezing their net interest margins but have only themselves to blame for outdated business models and internal cultures that fall short of customer needs and perceived societal values, the report says.

“MASSIVE” COST CUTS

Banks that rely heavily on trading and other capital markets activities are particularly challenged because of regulatory changes eradicating their proprietary trading models, according to the report. It prescribes “massive cost cutting” to supplement what has already occurred at the capital markets giants.

Retail banks, however, face decreasing customer loyalty and business banks “no longer enjoy structurally lower funding costs than many of their large corporate clients,” the study says.

Compounding banks’ problems are technologies that make it much easier for new competitors to steal customers. Wal-Mart Stores Inc  and American Express Co  on Monday announced a joint venture to provide financial services through a prepaid debit card aimed primarily at low-income customers.

US banks had an average ROE of 7 percent last year, up from 6.2 percent in 2010 as credit quality gradually improved, but “are still far from earning their cost of equity,” McKinsey said. Even if interest rates rise and banks reprice their services upward, they are “unlikely to return ROE to acceptable levels” any time soon, the report said.

Expenses for US  banks last year exploded to 68 percent of total income from 60 percent in 2010 while revenue grew just one percent, according to the study.

Bank revenue globally rose 3 percent to $3.4 trillion in 2011 from the previous year, slowing from a 9 percent rise from 2009 to 2010. Returns on equity last year fell to an average of 7.6 percent from the low double-digits and profit fell by 2 percent.

INVESTORS CHOKE

Investors’ doubts remain strong.

More than two-thirds of publicly traded banks in developed markets now trade “significantly” below book value, according to McKinsey, and the average price of insurance against bond defaults for 124 banks sampled by McKinsey rose to the highest level on record last year.

Bank stock prices globally last year traded at 11 times earnings, down from 15 in 2007.

Some analysts challenged the dire report. Focusing on conventional double-digit returns to shareholders when interest rates and funding costs are at historic lows is irrational, said Richard Bove, an analyst at Rochdale Securities.

“Anyone who says that banks should be making traditional returns on equity today when the ten-year Treasury is around 1.6 percent has got to explain themselves,” he said.

Bove said he was excluding the outlook for banks that are heavily involved in capital markets such as Goldman Sachs Group and Morgan Stanley.

Sanford Bernstein analyst Brad Hintz, in a note to clients last week, said few trading units anywhere are generating returns and echoed McKinsey’s pessimism about the outlook for their profitability. “Simply cutting compensation ratios and implementing technological improvements may not be enough to reach a target ROE,” he wrote.

The good news is that banks that adapt can prosper by financing infrastructure projects that are expected to grow 60 percent by 2020, the report says, and by selling advice and retirement products to aging populations in developed nations and core banking services to new customers in emerging markets.

The study was based on a review of financial data at the world’s 30 largest banks, with some data extending to over 2,400 banks in the 69 countries followed by McKinsey. - Reuters