10 ★ FINANCIAL TIMES Thursday10 October 2019
Whatever the rest of Europe thinks of
the City of London, companies from
emerging economies cannot get enough
of the place. The latest isAfreximbank.
Yesterday, this unusual supranational
bank announced a float on a London
Stock Exchange thatis strugglingto
regain its lustre as a market for initial
public offerings.
Afreximbank’s balance sheet is
strong but the return on equity has so
far been low. It already has about $15bn
of loans, mostly for trade finance. It
wants to raise some equity to capture
what it claims is untapped demand for
intra-African trade finance. This is a
market worth about $450bn annually,
says the African Development Bank.
This is not a typical bank, backed by
one lender of last resort. Afreximbank
has at least seven African governments
or central banks as shareholders. It is
heavily capitalised, with a common
equity tier-one ratio of 24 per cent, far
above European banks. Non-
performing loans are only 3 per cent.
As a result, its historical return on
equity of 10 per cent looks skinny
among African banks, according to
data from EFG Hermes. But,
remember, Afreximbank lends in
dollars and thus has a lower cost of
capital than most African peers. It
recently issued a $750m 10-year bond
keenly priced at 3.99 per cent. Given its
strong balance sheet and lowish
returns, Afreximbank may seek a
valuation close to its book value of
$2.7bn. That still looks small compared
with Africa’s potential.
Other emerging economy banks
listed in London, such as Kazakhstan’s
Halyk Bankor Bank of Georgia, offer
higher returns on equity on price to
book ratios above par. But shares of
Atlas Mara, formerBarclays hairc Bob
Diamond’s abortive attempt to create a
pan-Africa banking business, have
fallen 86 per cent since listing in 2013.
Kazakh financial groupKaspi.kz
failed to get even that far this week. AAfreximbank/UK IPOs:
continental thrifttesting environment forLondon IPOs
suggests Afreximbank will need to price
its offering cheaply to attract buyers.Oligarchs launched a land grab for
assets previously owned by the state in
the early years of post-Soviet Russia.
Elbows and business practices were
sharp.Mikhail Fridman merged ae
very wealthy man. He has kept links to
Russia while overseeing investments in
Europe. Now he faces questions in a
Spanish court over alleged tactics
reminiscent of Russia’s “wild east”.
It is an unwelcome distraction for the
billionaire who has been carving out aFridman/LetterOne:
for the love of Mikenew life running investment fund
LetterOne rom London. He hopes tof
secure his place in Europe’s business
elite by floating a big energy group in
Frankfurt next year. A drawn-out court
case could damp the appetite of public
investors to back the deal.
The company has a mooted value of
€20bn, though an implied earnings
multiple in line with oil majors looks
optimistic. The company was formed
through the merger of Mr Fridman’s
upstream energy businessDEA ithw
BASF’s Wintershall nergy division.e
This put to bed a 2015 spat with
British authorities by giving Mr
Fridman a stake in Wintershall’s UK
assets. DEA was forced to sell its UK
North Sea assets over fears that Mr
Fridman would be included in US
sanctions. Even the presence ofJohnBrowne, the formerBP b oss, as
chairman of Mr Fridman’s energy unit
could not mollify the authorities.
Sanctions never materialised.
Mr Fridman’s latest controversy
concernsZed World Wide. Spanish
prosecutors are accusing Mr Fridman
of illegally using his influence to choke
off revenues to the mobile business so
he could buy it cheaply. Mr Fridman
maintains his innocence, saying that
the claims are false and lack credibility.
Such tactics are hardly unique to
Russian businessmen, anyway. Brits
and Americans have been accused of it
too. But the allegations are amplified
by Mr Fridman’s colourful back story.
London has long been a place for
wealthy foreigners to reinvent
themselves. Mr Fridman is just the
latest to make that attempt.Why doesStripe, the most valuable US
fintech start-up, want to move into
small-business lending? Market signals
suggest a growing chance of recession.
Offering loans to risky borrowers
should raise objections from investors,
even as senators warn Stripe against
involvement inFacebook’s
cryptocurrency project, Libra.
Stripe’s boldness is emphasised by
the fact itgot a $35bn valuation, in a
funding round last month, as a bet on
the expansion of online retail, not
borrowing. The company is best known
for offering start-ups such asShopifya
way to accept online payments.
Ecommerce is growing but is still just
11 per cent of US total payments.
There is plenty of room to expand.
Branching into loans seems an
unnecessary risk. Stripe’s response is to
point to data. It will offer loans only to
existing customers and can use the
information it has on payment
processing to help determine eligibility.
That will give it more to go on than
traditional credit scores. Moreover,
Stripe should also be able to make
decisions faster than traditional banks.
If that sounds familiar, it is because
Amazon oes the same thing with itsd
vendors. So do payment groupsPayPal,
Square nd listed rivala Adyen, whose
€20bn market value is a huge 83 times
expected earnings.
Stripe,created by brothers Patrick
andJohn Collison n 2011, has showni
caution in the past. Last year it stopped
accepting bitcoin, noting the high
transaction fees and long confirmation
times. Thecompany has already
expanded from its initial business by
offering credit cards and payment
terminals. Lending to small-business
customers should help them grow and
do more trade with Stripe.
But the rationale for offering extra
services is also loyalty. Margins on
online payments are likely to fall as the
marketexpands and more tech groups
and banks, such asJPMorgan,compete.
Offering a universe of services will help
Stripe keep customers on-side asthey
and the online payments market grow.Stripe:
parallel linesTroubled by human rights abuses in
China, US universities have been
unwinding partnerships with Chinese
colleges. Evidence of indirect financial
links with “re-education” camps — jails
where 1m of Xinjiang’s Muslims are
incarcerated — would cause greater
embarrassment. That jeopardy has
been created by a US blacklist of
Chinese artificial intelligence groups
implicated in state repression.
Wall Street has connections with
companies such asMegvii; Goldman
Sachs s reportedly reviewing itsi
involvement in the flotation of the
blacklisted facial-recognition group.
Megvii is one of eight businesses
allegedly providing technology to
camps where members of China’s
oppressed Uighur minority are held.
There has been little mention of US
funds whose money helped the
ventures grow. Disinvestment could
hurt these far more than a shortage of
US components.
The blacklist includes AI companies
SenseTime nda iFlytek. Surveillance
companiesHikvision nda Dahua rea
there too.Nvidia, Intel nda Qualcomm
are among many global partners they
source parts from. But components
for surveillance equipment are low
tech and can be sourced elsewhere. A
US exports ban does not hit Chinese
groups as badly as the one placed on
telecoms equipment companyHuawei.
The financial implications of
blacklisting are harder to shrug off.
Megvii may struggle to raise the $1bn it
expected from a Hong Kong flotation if
sponsors Goldman,Citigroup nda
JPMorgan hase were to pull out.C
US investors have been piling into
fast-growing Chinese AI companies
such as Megvii and SenseTime. Their
backers have includedFidelity, Silver
Lake artners,P GGV Capital, IDG
Capital, Qualcomm andQiming
Ventures, a Shanghai-based fund.
More than 17 US universities and
public pension plans have put money
into vehicles run by these institutions
in the past. They have mostly done so
indirectly, as limited partners in
private equity funds, according to
historic PitchBook data.
Shares of Hikvision and iFlytek are
down about a tenth in the past month.
The value of blacklisted businesses
Xinjiang/US funds:
schools of hard knocks
will fall further if US investors pull out
en masse. US universities and pension
plans are noisy advocates of US
corporate ethics. The blacklist forces
them to review Chinese holdings
through the same demanding lens.CROSSWORD
No. 16,294 Set by ARTEXLEN
JOTTER PAD
ACROSS
1 Insect attached to antelope
crossing river in home country
(10)
7 Very stuck in street that’s
winding (4)
9 Struggle with sight (4)
10 Son greeting Madame with
jewellery gleaming (10)
11 Vagrant one erased from set
of documents (6)
12 Lovely role: a bad criminal (8)
13 Au fait to occasionally ignore
quiet pet, perhaps (8)
15 What provoked increase in
friendliness (4)
17 Run small exercise class with
wife (4)
19 Some beef against residence’s
parties (8)
22 Mostly light eggy dish also
called layered dish (8)
23 Note distortion in bones (6)
25 Attendant to give help,
feeding males (10)
26 Secure new post, miles away
(4)
27 Ponder aloud making high-
pitched cries (4)
28 Typists make these
explanatory diagrams so trek
gets organised (10)
DOWN
2 Hunter getting a duck down,
caught over river (7)3 Birds wash nervously around
entrance of KFC (5)
4 Check on second series (8)
5 Awfully manly air about male
partner farming (6,9)
6 Fruit and nuts served up
before lad (6)
7 Justified major conflict; a
trend that’s dodgy (9)
8 Pod-bearing plant poorly
placed in front area (7)
14 Blue team’s disadvantages (9)
16 Clear day is beginning to
change in hue (8)
18 Item in production, article with
neon gas (7)
20 Carving in great rock (7)
21 US prosecutor to cover up
material (6)
24 Instrument used by urban
joiner (5)02+$,5$55$1*(
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Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter: FTLex@
Like the best things in life, bank
accounts are often free. In Europe,
that pleasure could soon be denied.
Interest rates are dropping ever
deeper into negative territory. They
will eventually have to be passed on
to retail customers.
Banks are wise to hesitate. Charges
for basic services will not revive their
abysmal profitability. They could
damage their business models too.
Better for them to tackle glaring
structural inefficiencies instead.
Europe has led the US in pushing
interest rates lower. But President
Donald Trump’s trade wars and Fed-
bashing could yet result in sub-zero
US borrowing costs, too. The ECB’s
deposit rate fell last month to minus
0.5 per cent. The Swiss policy rate ofminus 0.75 per cent may fall lower still.
Charges on corporate deposits are
already common. Wealthy private
clients are next. Switzerland’sUBSis to
impose a 0.75 per cent fee on balances
above SFr2m ($2m).Commerzbank fo
Germany is eyeing a similar move.
So far, ordinary customers have been
shielded. Mitigating action by central
banks is one reason for this. The ECB’s
tiering of its charges for banks helps
those with excess liquidity, especially
in Germany. That lessens the urgency
for billing retail clients.
Banking is a free good for economic,
not philosophical, reasons. Capital
flight is a risk. Start-up online banks
could undercut incumbents. So, too,
could safes and mattresses — although
the rise of electronic monies couldlimit such possibilities. Nor would
imposing extra charges lift profits
dramatically.
JPMorgan analysts modelled €2 in
additional retail customers’ monthly
fees and 0.1 per cent on company
deposits above €100,000. It found
German banks’ returns on equity
would rise just half a percentage
point to a still-miserable 3 per cent.
Assume account outflows, and the
gain would be even less.
Persistently low interest rates have
eroded European banks’ margins.
The sector has underperformed the
broader market by a fifth this year.
But an upwards re-ratingdepends
on steps to cut costs and overcapacity
— not charges on retail customers.
Lex offers that advice for free.European policy interest rates
Per cent-
-
Danish certificate
of deposit rate ()ECB deposit rate Swiss policy rate ()Source: RefinitivBank costs
Cost to income ratiosSource: S&P GlobalNet interest income
RebasedCommerzbankBarclaysUBS
BNP ParibasGermany
France
Italy
UK
US
Spain
Denmark
SwedenEuropean banks/rates: charge of the tight brigade
As official interest rates tumble deeper into negative territory, Europe’s banks will eventually have to pass
them on to retail customers. Persistently low borrowing costs have eroded profitability. But extra charges will
not compensate for banks’ cost inefficiencies.OCTOBER 10 2019 Section:FrontBack Time: 9/10/2019- 18:56 User:nick.miller Page Name:1BACK, Part,Page,Edition:EUR, 10, 1