BusinessDay 21 Aug 2018

More documents

Recommendations

Info

BUSINESS DAY Tuesday 21 August 2018 FT FINANCIAL TIMES C002D5556 A3 World Business Newspaper Former UBS worker calls for police investigation into alleged assault ‘I want some form of justice — he wronged me’ Laura Noonan Too close for comfort: The incestuous ties that bind auditors and watchdogs Page A4 US banks tap the brakes on consumer credit Spending is up, but concern is growing over credit quality and profitability Robert Armstrong This is a good time to offer Americans credit. Economic growth is solid, unemployment is low, and wallets are open. In July, retail sales grew at a sturdy 6 per cent from the year before, faster than analysts had expected. The prosperity extends even to dowdy brick-and-mortar stores: Macy’s, the struggling department store chain, last week posted its third straight quarter of sales growth after several years of declines. Walmart, the vast discount retailer, reported its best quarterly sales growth in 10 years. At the other end of the price spectrum, Nordstrom, the upscale department store chain, reported a big jump in sales which drove its stock up 13 per cent. Nor does the spending seem to be especially reckless. When, at the beginning of last year, household debt surpassed its last peak, in 2008, many pundits speculated about the possibility of a new financial crisis. But US household debt — all $13.3tn of it, according to the New York Fed — is much lower, relative to both GDP and disposable income, than it was in the run-up to 2008. The big card-issuing banks are pleased. In second-quarter calls with analysts, JPMorgan highlighted that consumer purchases using their cards were up 11 per cent; Bank of America’s purchase growth was almost as high. Citigroup and Capital One pointed out loan balances were growing nicely. If the card business is picnic, though, it is a late summer picnic; the watermelon has already been served, and the skies are showing the early signs of darkening. The card issuers acknowledge that, as US consumers have gotten their mojo back, the competition for their business has become very competitive indeed. Savvy Millennials shuffle between cards to maximise rewards and introductory interest rates. Big spenders with good credit ratings are the prize in a “ rewards war”. At the same time, the current economic expansion, at the grand old age of nine years, is the second longest on record. That does not A former UBS employee has asked UK police to investigate an alleged sexual assault by a more senior colleague after deciding the bank had failed in its attempts to deal fairly with her case. After leaving UBS, the woman emailed the head of its investment bank, Andrea Orcel, to complain that she had been let down by the bank’s human resources department. That provide any particular reason to think it is near an end. But trees do not grow to the sky. The competitive heat and the length of the cycle are making themselves felt in industry-wide data. Measure of credit quality, while not flashing amber, are unmistakably headed in the wrong direction. Quarterly write-offs of bad credit card debt at US banks peaked at nearly $19bn in the first quarter of 2010 and bottomed under $5bn in 2015, according the FDIC. Since then they have crept back over $8bn. The rate at which credit card holders are falling delinquent, while still at a low level, has also been creeping up since 2015. Bankers dismiss these trends as the natural “seasoning” of credit card loan portfolios that have been rebuilt since the recovery. But the numbers show that it is growing harder to sell cards to high-quality customers. Last month, the Federal Reserve’s Board of Governors released its annual report of credit card banks’ profitability. It showed return on assets falling in 2017, for the fourth year in a row. At 3.4 per cent, it is a full third lower than it was in 2013. The Fed noted that a moderate increase in provisions for losses cut into profits. More important, non-interest revenues — which are made up both of payments from merchants and the annual fees and penalty fees charged to card holders — are declining. Part of this is down to big merchants driving harder bargains with the banks and pushing down on fees. Costco, the big discount retailer, moved its branded cards from American Express to Citi last year, for example. “The banks are giving more to the merchants,” said Jason Goldberg, an analyst at Barclays. Another contributor to the squeeze in fee revenue is generous rewards offers for new customers, which are booked against revenue when the customer signs on. Finally, the compression of noninterest revenue is a long-term effect of the Credit Card Accountability Responsibility and Disclosure (CARD) act of 2009, a law that prohibited many punitive fees and limited the ability to raise customers’ rates. email became public and reported widely, including in the Financial Times. The alleged assault took place last September, just before accusations about the abusive behaviour of Hollywood producer Harvey Weinstein became public and triggered a wave of activism against sexual harassment. The bank’s internal investigation took place during months of height- Continues on page A4 Tesla hit as JPMorgan lops a third off its share price target Analyst acts after concluding funding for a buyout was not ‘secured’ MAMTA Badkar Tesla was hit on Monday after analysts at JPMorgan argued financing for a deal to go private has not been finalised, despite chief executive Elon Musk’s claim the funding had been “secured” earlier this month. Tesla shares were down about 3 per cent at $297 in early trade on Monday, extending a 9 per cent drop on Friday. In a note, JPMorgan analyst Ryan Brinkman lowered his price target by 37 per cent to $195. That had been his target before he raised it to $308 on August 8 — a day after Mr Musk tweeted he had funding secured to take Tesla private at $420 a share, which sent the stock to a near record high. Now, with more information having come out about what Mr Musk meant by his statement over funding, the bank has moved its target back. Mr Stocks rally ahead of US-China trade talks and Fed minutes Page A5 PepsiCo strikes $3.2bn deal to buy SodaStream Beverage and snacks group looks to continue health-conscious strategy for growth James Fontanella-Khan, Eric Platt and Arash Massoudi PepsiCo has agreed to buy SodaStream, the Israeli maker of home fizzy drink dispensers, for $3.2bn, just weeks after the US consumer group announced that its chief executive Indra Nooyi would step down this year. The acquisition of the healthconscious soda maker is a clear indication that Pepsi’s incoming chief executive, Ramon Laguarta, plans to continue developing the company in a similar direction as his predecessor. SodaStream fits with Pepsi’s broader strategy under Ms Nooyi’s 12-year leadership, during which she switched the company’s focus from sugary sodas to healthier snacks and beverages. Nasdaq-listed SodaStream, which fashions itself as a health and wellness alternative to cola drinks, would complement Pepsi’s healthier options, which include the flavoured sparkling water brand Bubly and the fruit and vegetable snacks maker Bare Foods. “SodaStream is highly complementary and incremental to our business, adding to our growing water portfolio, while catalysing our ability to offer personalised inhome beverage solutions around the world,” said Mr Laguarta. Pepsi has agreed to pay $144 per share in cash, an 11 per cent premium to SodaStream’s current price of $129.85 after a sharp rally in the company’s shares since the start of August. The gains had been attributed to better than expected results, given no news of deal talks had become public before Monday’s announcement. The offer, which needs to be approved by SodaStream shareholders, is also a 32 per cent premium to the company’s 30-day volume-weighted average price. The transaction is the latest blockbuster takeover of an Israeli company since March 2017 when US chipmaker Intel paid $15.3bn to purchase Mobileye, which makes sensors that detect obstacles while driving that are critical to autonomous Brinkman also retained his “underweight” rating on the stock. “We are reverting to valuing Tesla shares on the basis of fundamentals alone, which entails a $113 reduction in our price target back to the $195 level where it stood before our August 8 note,” said Mr Brinkman wrote. “Our interpretation of subsequent events leads us to believe that funding was not secured for a going private transaction, nor was there any formal proposal,” he added. The Securities and Exchange Commission, the US regulator, has launched an investigation into Mr Musk’s tweet and a number of lawsuits have been filed on behalf of investors who bought Tesla shares in the wake of the founder’s Twitter pronouncement. “Am considering taking Tesla private at $420. Funding secured,” he wrote on August 7. Mr Musk’s tweet came hours after the Financial Times disclosed Saudi driving. Subsequent to that deal’s announcement, the US Securities and Exchange Commission pursued insider trading charges against two Israeli residents and two Americans after suspicious trading in Mobileye shares before the transaction. Global food and beverage companies have been carrying out a series of deals in recent years as they try to reposition their portfolios as health conscious consumers opt for fewer sugary drinks. Pepsi’s deal comes days after its main rival Coca-Cola agreed to buy a minority stake in BodyArmor, a sports drink maker backed by US basketball star Kobe Bryant. Coca-Cola’s move comes as it has struggled over the years to loosen the hold of Pepsi’s sports drink business Gatorade. SodaStream will continue to be led by its current chief executive, Daniel Birnbaum, as Pepsi aims to expand the Israeli company by giving it access to its strong global distribution, research and development firepower and marketing expertise. Arabia’s Public Investment Fund had amassed a stake of 3-5 per cent in the electric car maker this year. His comments unleashed a firestorm, with some critics and investors arguing it was time to take some pressure off Mr Musk. “The revelation the Saudi fund is subsequently asking Tesla for details of how the company would be taken private suggests to us that any deal is potentially far from even being formally proposed, which is different from our understanding on August 8 which was based on Mr. Musk’s statement on Twitter that, “Only reason why this is not certain is that it’s contingent on a shareholder vote”. Mr Musk, who has been struggling to overcome production bottlenecks and ramp up production of the mass market Model 3 vehicle, gave an emotional interview saying he was overworked. That sent Tesla shares sharply lower on Friday.
Tuesday 21 August 2018 A4 BUSINESS DAY C002D5556 FT NATIONAL NEWS Former UBS worker calls for police investigation... Continued from page A3 ened scrutiny of workplace culture and of corporate procedures for dealing with allegations of misconduct. UBS told the FT in July that it has “strong policies and procedures in place to handle such complaints and approach them with the utmost care”. UBS, like other banks, has programmes to attract and retain women and is committed to stamping out sexual harassment. But in an interview with the FT, the woman said she has decided to take it to the police. She alleges that she woke up on the morning after a September work drinks event, in an unfamiliar house with a colleague who was her senior. She had no memory of how she got there, but believed she had non-consensual sex. She says she left as quickly as she could, without causing an altercation. A graduate trainee at UBS, she went back to work on Monday and attended a training session. She then broke down after a comment from a colleague which she would usually have brushed off. A senior colleague took her aside and she says she told him what had happened, without revealing the identity of the man. He told her she needed to see human resources. “I was like, ‘I don’t want to see HR’, it was escalating really quickly ... I didn’t know what I wanted to do,” she says. She did give HR her account that afternoon; the following day she was called back and someone “slid a rape victim brochure towards me”. “It took me a long time to put that word [rape] to it,” the woman says.“ I don’t like that word at all.” HR staff promised an investigation and offered support. They also encouraged her to go to the police, she says. The woman says that on UBS’s advice she went to a specialist centre for people who have been sexually assaulted or raped. She spoke to a police unit there. Afterwards, she says, “I told them [UBS] that ‘the advice the police themselves have given me is to let you [UBS] deal with it because if the police deal with it, it will be an 18-month long investigation’. It’s my word against his word essentially. “The police asked me what I wanted to come from this ...[I said] ‘I need him gone, I don’t want to work with him, I want some form of justice in that he wronged me and that’s not OK.’” She soon became concerned about the bank’s approach. UBS interviewed her friends, she says, saying that they wanted to make sure that the alleged assailant could not poke holes in her story. “They were asking [my friends] for messages and screenshots and asking whether I’m the type of girl who’d have a one-night stand,” she says. “UBS wouldn’t have asked all his friends, ‘is [name removed] a rapist’? But they were asking mine ‘does [the woman’s name] sleep around?’ It was an investigation into me even though I’m the complainant.” UBS declined to comment on the investigation — or give details of company policies on sexual harassment and assault. “We will not go into details due to employee confidentiality,” the bank said in a two-line response to the FT’s questions. “We remain confident in our policies and processes, but following significant cases we conduct a review and if we find any improvement opportunities we will implement them.” Too close for comfort: The incestuous ties that bind auditors and watchdogs Concerns that audit market is too beholden to the clients whose numbers it vets Madison Marriage and Jonathan Ford Stephen Haddrill has the look of a man with the weight of the world on his shoulders. At his most recent public appearances, the 62-year-old boss of Britain’s accounting watchdog appeared tired and grey. It is no surprise, given that the Financial Reporting Council has recently faced the most intense criticism of its 28-year history. There are questions over how long Mr Haddrill, who has run the regulator for the past decade, will remain in his job. Pressure has mounted following the collapse in January of one of Britain’s largest construction companies, Carillion. This triggered heavy criticism of Carillion’s auditor, KPMG, which gave the group’s accounts a clean bill of health just nine months before it unravelled. It also fuelled calls from academics, politicians and investors for a break-up of the audit market over concerns that the industry is too beholden to the clients whose numbers it vets. In the eyes of its critics, the FRC is part of the wider problem. Observers highlight the regulator’s close ties to the firms it supervises, its plodding approach to investigations and its record of levying what are seen as Mickey Mouse fines. The watchdog is now facing the possibility of its own demise after the UK government commissioned an independent review of its competence led by former civil servant Sir John Kingman. Mr Haddrill, who earned nearly £500,000 last year, making him one of Britain’s bestpaid public officials, is clinging on. The FRC is hardly the first accounting body to face a crisis of public confidence. Since the second world war, the US has had no fewer than three standard setting bodies: the Committee on Accounting Procedure (1939-59); the Accounting Principles Board (1959-73) and the present Financial Accounting Standards Board (FASB). Each of FASB’s predecessors met their demise in part over concerns about their lack of independence from private interests. Karthik Ramanna, professor of business and public policy at Oxford university’s Blavatnik School of Government, thinks accounting bodies face a special set of challenges. “These are highly technical areas that concern issues with low political salience,” he said. “They depend on deep experiential knowledge from practitioners and are prone to powerful and concentrated commercial interests. It is a model that is almost perfectly designed for regulatory capture.” This charge certainly tops the sheet for those challenging Britain’s FRC. Long criticised for its “light touch” when monitoring the Big Four audit firms, which include EY, PwC and Deloitte, the watchdog has come under fire over its investigation into the failure of HBOS, one of Britain’s largest banks. KPMG gave the institution’s accounts a clean bill of health in February 2008, eight months before HBOS collapsed and had to be rescued with a £20bn taxpayerfunded bailout. Yet the FRC then took eight years, and a great deal of political prodding, before it even launched an investigation. Its verdict last September cleared KPMG of misconduct after deciding that the HBOS audit did not fall “significantly short” of the standards to be expected. It later emerged that the regulator had raised the bar for proving misconduct in 2013. Instead of “falling short of standards”, firms had to fall “significantly short”. Paul George, a former KPMG partner, was executive director in charge of conduct at the regulator when the wording was changed. The verdict troubled observers, who fear that vested interests played a role in the outcome. These conflicts are not unique to Britain. Financial Times analysis of seven authorities involved in the audit market underlines their reliance on current and former Big Four staff. Take the European Financial Reporting Advisory Group, which advises the European Commission on accountancy rules. Nearly half of its 17 board members are current or former Big Four, as are nine of the 16 individuals on its technical working group. At the PCAOB, the US accounting regulator, two of its five board members are ex-Big Four. Four of the seven advisers to those board members are also alumni. South Africa’s accounting watchdog, which has similarly come under heavy scrutiny this year following high profile accounting scandals, has four former or current Big Four staffers on its board of seven. Few question that the world’s top accountants should have some input into the rules they apply; the question is where the balance should be struck. Erik Gordon, professor at the university of Michigan, describes the dilemma: “The overlap creates regulatory capture danger but excluding people from the Big Four would deprive regulatory bodies of many of the most expert and experienced people in the field,” he said. “There is no easy way out.” So how captured are the regulators? One perceived index of undue influence is the relatively low fines they levy on their industry. (These are important because investors have historically been loath to punish auditors for sloppy or inadequate work by removing their contract). The PCAOB is one of the toughest accounting watchdogs globally, having secured an $8m settlement from Deloitte Brazil in 2016. The FRC issued its own record penalty of £6.5m in June against PwC. The largest fines ever handed out by the Dutch, German and South African accounting watchdogs total €2.2m, €50,000 and R200,000 respectively. These pale in comparison to the penalties issued to banks and other financial services companies. In 2010, the US Securities and Exchange Commission issued a record $550m fine against Goldman Sachs, while the UK’s Financial Conduct Authority meted out a record £284m penalty in 2015. Some doubt whether such penalties really drive behaviour. As one investor points out, these are largely paid by insurers anyway, and even a tripled or quadrupled fine would be little more than a flea bite to any of the Big Four. As with banking, the suspicion is that individual sanctions may be more important. The FRC’s recent decision to effectively ban Steve Denison, the PwC auditor who signed off the accounts of BHS shortly before the retailer went into insolvency, for 15 years is regarded as much more of a nuclear sanction. “If a partner faces a lengthy or lifetime ban from the industry, that cuts into their lifetime earnings,” says Tim Bush, head of governance at the shareholder advisory group, Pirc. “It’s a much more serious sanction.” Eurozone hails Greece’s exit from bailout as end of crisis Country received €289bn of loans over eight years as economy collapsed Jim Brunsden and Mehreen Khan European leaders have heralded Greece’s exit from eight years of international bailouts as the end of the eurozone’s long financial crisis — while warning that Athens must stick to policy commitments it made in exchange for €289bn of loans. Monday was the final day of Greece’s third successive bailout programme, a period of financial aid stretching back to 2010. EU officials said the end of the bailout showed Greece’s turnround after it teetered on the brink of exiting the currency bloc in 2015. Pierre Moscovici, the EU’s commissioner for economic affairs, said it was a return to normality for the Greek people. “From today Greece will be treated like any other euro area country”, he said in Brussels. Mário Centeno, the president of the eurogroup of eurozone finance ministers, said Greece had “regained the control it fought for” during years of tough negotiations with its eurozone creditors. Greece is the final eurozone country to conclude a programme of emergency assistance. Similar help was given to Portugal, Ireland and Cyprus — but Greece’s crisis was of a different magnitude, with the size of the economy shrinking by a quarter. Youth unemployment rose to nearly 50 per cent and 40 per cent of the working age population was left at risk of poverty, according to the IMF. In Germany — which for many Greeks came to epitomise an obsession with austerity as a solution to the country’s woes — the end of the programme was welcomed by the government as proof that the years of financial aid had worked. “Greece’s salvation is also a sign of European solidarity,” Olaf Scholz, Germany’s centre-left finance minister, told Handelsblatt newspaper. “The conclusion of the Greece programme is a success. The bleak predictions of the prophets of doom have not come true.” Greece’s plans to celebrate the end of the bailout programmes were dropped as criticism mounted of the state emergency services’ bungled handling last month of a devastating forest fire near Athens, which left 96 people dead. But a government official said Alexis Tsipras, the prime minister, planned a live television address on Tuesday from Ithaca, which the official said was chosen “for symbolic reasons”. In mythology Ithaca was the home of Odysseus, the hero who made a safe return after a tempestuous 10-year journey according to Homer’s epic poem. Brussels underlined on Monday that Greece needed to persevere with reforms initiated during the crisis, such as a streamlining of civil court procedures and a new business licensing regime. The European Commission will lead a system of post-programme surveillance that will signal whether Greece is maintaining agreed deficit targets. Athens could potentially lose some of the debt relief it secured from other eurozone governments in a deal in June if the conditions are not met.
Page 1 and 2: usinessday market monitor Commoditi
Page 3 and 4: Tuesday 21 August 2018 BUSINESS DAY
Page 7 and 8: Tuesday 21 August 2018 Smallholder
Page 9 and 10: Tuesday 21 August 2018 C002D5556 BU
Page 11 and 12: Tuesday 21 August 2018 COMMENT RAFI
Page 23 and 24: Tuesday 21 August 2018 23 C002D5556
Page 33 and 34: Tuesday 21 August 2018 Nigeria’s
Page 35 and 36: Tuesday 21 August 2018 Insight: How
Page 37: Tuesday 21 August 2018 A2 BUSINESS
Page 41 and 42: Politics & Policy A6 BUSINESS DAY C
Page 43 and 44: Tuesday 21 August 2018 A8 BUSINESS

BusinessDay 21 Aug 2018

Create successful ePaper yourself

Delete template?

Save as template?