Financial Times UK - 18.09.2019

1 6 A FINANCIAL TIMES W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9

CO M PA N I E S

ST E P H E N M O R R I S— LONDON
O L A F STO R B E C K A N D M A RT I N A R N O L D
FRANKFURT
European lenders are braced for deeper
cost cuts and consolidation after the
European Central Bank extended a pun-
ishing five-year stretch of negative
interest rates.
The region’s banks were left disap-
pointed by Mario Draghi’s last major act
as ECB president, in which he last week
cut its key deposit rate to -0.5 per cent,
while also unveiling a new tiering sys-
tem designed to shield a portion of the
deposits lenders keep at the ECB from
negative rates.
However, the relief provided by tier-
ing will barely offset lost earnings from
lower base rates, according to analysts
and executives, piling pressure on a sec-
tor struggling to generate acceptable
returns. The ECB is expected to cut its
deposit rate again by next year, which
could lower even further the Euribor
rate on which many loans are priced.
“Deposit tiers... [are] a drop in the
ocean,” said Morgan Stanley analyst
Magdalena Stoklosa. “Profitability
uplifts could be minimal for most
banks... as sensitivity to Euribor is
multiple times greater versus savings on
cash reserves parked at the ECB.”
Negative rates were introduced in the
region in June 2014 to boost a flagging
economy by nudging banks into lending
more, rather than leaving excess liquid-
ity languishing at the central bank. But
the knock-on effect has been to further
dent the already-strained earnings of
Europe’s banks, which are holding a
combined €1.9tn of reserves to satisfy
post-crisis regulations.
The benchmark index for the sector is
languishing near a 20-year low and the
average return on equity stands at just
around 6 per cent, far below their esti-
mated 11 per cent cost of equity and
barely half the level of US rivals.
“Deposit tiering doesn’t help us even
nearly enough,” said a top executive at a
German lender. “The ECB’s decisions
make it impossible to generate a return
of 10 per cent or more. In this environ-
ment we’ll do well to get to 7 [per cent].”
It is a view echoed by Kian Abouhos-
sein, an analyst at JPMorgan Chase, who
expects lenders to start a price war over
cheap credit to win market share as

deposits grow faster than loans. “The

ECB is effectively reducing the struc-

tural profitability of European banks in

the long run, while tiering is only help-

ing in the short term,” said Mr Abouhos-

sein. “Banks can only deal with this [by

becoming] more competitive on the

cost side, or by engaging in M&A.”

In 2018, European banks paid €7.2bn

in interest for deposits at the ECB,

according to the Association of German

Banks. The group estimates tiering will

lower the annual bill to €5bn as the ECB

will not charge negative rates on about

€800bn of liquidity parked with it.

Analysts at Morgan Stanley and Citi

estimate European banks’ net profits

will rise an average 2 per cent, but cau-

tioned this would be offset by a negative

1.5 per cent hit from the 10 bps rate cut.

“We believe the impact is net neutral

for the sector,” Citi’s Andrew Coombs

said. “Ultimately banks are still hurt

from the effective zero-bound on depos-

its... [and] passing on negative rates

to retail clients is still politically unpal-

atable.”

The deposit-tiering system, modelled

on that of the Swiss central bank, gives

lenders an exemption for their excess

deposits up to six times the value of

their minimum reserve requirements at

the ECB. This compares with 20 times at

the Swiss National Bank and even

higher in Japan.

Mr Draghi, who steps down at the end

of October, said the new system was not

intended as a subsidy for banks. He said

executives should focus on cutting costs

and digitising rather than “being angry

about negative rates”.

As central banks around the world cut

rates they are stirring debate about the

impact on the banking system. The US

Federal Reserve is today expected to cut

its interest rates by a quarter point for

the second time in two months.

In Europe, many banks are already

passing at least some of the cost of nega-

tive rates on to companies and other

financial institutions. In Switzerland

UBS and Credit Suisse recently started

charging their wealthiest clients to

deposit francs and euros.

However, no bank thus far has dared

to impose charges on regular retail cus-

tomers, a politically contentious move

that many fear could push consumers to

move their money to cheaper rivals

or withdraw it as cash.

Amid general disquiet that tier-

ing fails to offer sufficient protec-

tion, Italian and other southern-

European banks could prove rela-

tive winners from the policy. One

tactic could be for them to sell short-

term, negative-yielding sovereign

bonds and put the money on deposit

at the ECB for free instead.

“The ECB effectively creates the

opportunity for a carry trade,” said Mr

Abouhossein, adding that banks in the

eurozone’s periphery will be able to

park €55bn in the ECB’s negative-rate-

exempt facility.

German banks are hit the hardest in

Europe by negative rates as they hold

about a third of the total excess ECB

deposits. Deutsche has been the most

vocal, considering its woes and its sys-

temic importance to the eurozone.

Executives had counted on interest

rates rising out of negative territory by

2022, the last year of their three-year

turnround plan. Instead, the ECB has

signalled negative rates will remain for

at least the medium term.

As a result, less than two months after

announcing radical cuts to its invest-

ment bank and new targets, Deutsche

has softened the goals. Finance chief

James von Moltkehas said it will earn as

much as €1bn less than the €25bn ini-

tially sought by 2022. Privately, execu-

tives admit that making a return on tan-

gible equity of 8 per cent may no longer

be achievable in that timeframe.

“Every single European bank is look-

ing at their business plan afresh in light

of the new environment,” said one sen-

ior banker at a Swiss lender. “Some

very tough decisions are going to

have to be made in the next few

months.”

See Editorial Comment

R I C H A R D M I L N E

NORDIC AND BALTIC CORRESPONDENT

Swedbankhas told Swedish and Esto-

nian regulators that it still has “short-

comings”initsanti-money-laundering

work as Sweden’s oldest lender

attempts to overcome a $135bn dirty

moneyscandal.

The largest bank in the Baltics released

part of its response to a joint Swedish-

Estonian investigation yesterday, say-

ing it still had problems with know-

your-customer and risk-assessment

practices in both countries.

Swedbank admitted that it had “not

allocated sufficient resources and com-

petence” to combat money-laundering,

that the division of responsibilities in

the bank was not clear enough, and that

it had “not always complied with inter-

nal policies”.

The comments are the bank’s clearest

yet on what went wrong in a scandal

that has cost Swedbank more than a

third of its market capitalisation since

February as well as the jobs of its chief

executive and chairman.

It is facing inquiries by US regulators,

first revealed by the FT, that investors

fear could lead to large fines.

About €135bn of “high-risk, non-

resident” money flowed through

Swedbank’s Estonian operations over

a decade, according to an internal

report seen by Swedish public broad-

caster SVT.

Swedbank has only released a heavily

redacted report that merely looked at

its links to a €200bn money-laundering

scandal atDanske Bank.

Swedbank’s board, which since June

has been headed by former Swedish

prime minister Goran Persson,

reversed a previous decision on Mon-

day night and agreed to hand over an

internal report to local prosecutors.

The bank raised eyebrows in March

by engaging in a war of words with Swe-

den’s prosecutor for financial matters,

saying his comments that no company

had ever refused to hand over docu-

ments were “incomprehensible”.

Swedbank and its advisers had

argued that the report, by a Norwegian

lawyer, was covered by attorney-client

privilege but it had agreed to waive that

and hand it over.

Swedbank said it was “hard at work

to ensure regulatory compliance going

forward” and it would give more infor-

mation when it reported third-quarter

results in late October.

Financials

Swedbank

admits to

‘shortcomings’

in work against

laundering

Financials. Strategy test

Europeanbanksbuckleupfor

cutsandmergersafterECBblow

Move to shield portion of

deposits provides little relief

as negative rates run deepens

The European

Central Bank

has cut its key

deposit rate to

-0.5 per cent, in

a last move for

Mario Draghi,

below, who bows

out as president

in October— Kai

Pfaffenbach/Reuters

‘The ECB’s

decisions

make it

impossible

to generate

a return of

10 per cent

or more’

C H R I ST I A N S H E P H E R D

Shanghai has become the first Chinese

city to issue permits allowing self-

driving cars to carry passengers and

freight on the city’s streets, a positive

sign for companies hoping to monetise

thetechnologyinChina.

Chinese carmakerSAIC Motorgroup,

Germany’sBMWand ride-hailing com-

panyDidi Chuxinghave been granted a

primary batch of “operational” licences

to test a fleet of 50 cars in the Jiading dis-

trict of Shanghai, according to the offi-

cial Xinhua news agency.

The move, which for the first time

does away with rules limiting compa-

nies to passengerless road tests, was a

step towards allowing widespread adop-

tion and commercialisation of autono-

mous driving in the city, Xinhua said.

Regulations governing the licences

released this week said that applicants

must have more than 24,000km and

1,200 hours of passengerless testing in

the Jiading district without accidents to

get approval.

Vehicles can then carry a cargo or vol-

unteer passengers, but the trips cannot

make a profit. If a company’s fleet of 50

vehicles operates for six months with-

out incident, then they can apply to

increase the number of vehicles.

The ability to deploy self-driving cars

with passengers in Shanghai is a “big

deal” because of the city’s size and com-

plex driving environment, said Tu Le, of

consultancy Sino Auto Insights.

“Part of getting [self-driving cars] on

the road to commercialisation is accept-

ance by other drivers and this moves

that forward,” Mr Le said.

Didi in August announced plans to

launch a robotaxi fleet in Jiading dis-

trict, which would give users of its ride-

hailing service the option of taking a free

self-driving car on certain routes.

BMW, the first international auto-

maker to be granted the permits in

China, said the licences will allow them

to demonstrate the real-world applica-

tions of their autonomous driving tech-

nologies.

“China has the most complicated traf-

fic scenarios in the world”, making

research in China an important part of

the company’s autonomous driving

development worldwide, the company

said.

Automakers have in recent years

poured billions into developing autono-

mous driving, attempting to catch up

with leaders such asGoogle’s Waymo, in

expectation that the technology will

upend global transportation.

Many have seized upon robotaxis to

recoup investments, but the companies

still face regulatory hurdles to get to

widespread adoption — let alone com-

mercialisation — of the technology.

The United States has so far issued

more testing licences than China for

self-driving cars that can carry passen-

gers, with cities including Phoenix, San

Francisco, Detroit, Pittsburgh and Palo

Alto already granting permits.

Automobiles

Shanghai to license self-driving cars for people and freight

R I C H A R D WAT E R S— SAN FRANCISCO

Pitting two artificial intelligences

against each other in games such as

DeepMind’s Go has led to some of the

biggest breakthroughs in AI, as the

machines learn skills through trial and

errorthateventuallyleadtothembeat-

inghumans.

But can the same technique produce a

more useful AI capable of operating in

the real world?

OpenAI, a San Francisco-based AI

research group, published research yes-

terday showing what it claimed was a

method for training increasingly power-

ful smart systems that could prepare

them for tackling more ordinary human

problems.

Set in increasingly realistic environ-

ments, the technique pointed to

a way for the AI to “evolve” in a simu-

lated world until it was ready to be

used, it said.

The researchers used several intelli-

gent “agents” in a game of hide-and-

seek played in a simulated physical

environment.

The “hiders” learned by themselves

how to co-operate and adapt their envi-

ronment, moving walls and blocking

doorways with large blocks to create

hiding places. The “seekers” responded,

for instance by using ramps to jump

over the walls. After 43m games, the

agents had been through six adapta-

tions as they developed strategies and

counter-strategies to outwit each other.

“As the agents learn, they’re implicitly

creating new tasks for other agents to

solve,” said Bowen Baker, the lead

researcher behind the paper.

He pointed to “plenty of multi-agent

problems in the world” the technology

might eventually learn to tackle, from

designing robots that can operate

around people to building “smart cities”

where millions of people interact.

Research into so-called multi-agent

problems is not new, and the work

relied on well-tried reinforcement

learning methods — giving the AI a

“reward” each time it manages to solve a

problem.

But OpenAI claimed that setting the

task in a simulated physical world

opened a way to “scale up” to real-world

challenges, allowing it to add progres-

sively more complexity to the simula-

tion. The biggest challenge, in fact, may

not lie in designing intelligent algo-

rithms, which evolve largely by them-

selves, but in creating a foolproof simu-

lation at a large enough scale.

Even in the limited hide-and-seek

game, the agents learned to trick the

physics of the simulation, for instance

byworking out how to push the ramps

through the outer wall to remove them

from the game.

Unexpected actions like these high-

light the problem of controlling AI when

it is finally ready to be released into the

real world, Mr Baker said.

Technology

AIs use hide-and-seek for tips on tackling real-world problems

‘Getting [self-driving cars]

to commercialisation is

partly about acceptance

by other drivers’

The researchers employ intelligent

‘agents’ in a simulated environment

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