12 ★ FINANCIAL TIMES Friday2 August 2019Big was once beautiful at Siemens. No
longer. BossJoe Kaeserhas scrapped
ambitious sales targets in favour of
slimming down theconglomerate.
Yesterday, the German group
reported the first set of earnings under
its new structure. Net profitsfell 6 per
cent in the third quarter.Shares fell by
nearly as much on the worse than
expected results. A svelte Siemens
might not prove as resilient as hoped.
As one of Europe’s largest
manufacturing companies, it is
inevitably buffeted by geopolitical
woes. The problem is that its
glamorous digital business — destined
to account for the majority of the
group’s value after next year’s
separation of the gas and power
division — was the main cause of the
earnings miss. The impressive
profitability of the business, a leader in
the automation of industrial
operations, is under pressure. Adjusted
ebita marginsdeclined to 14.8 per cent
from 19.5 per cent a year earlier.
They should recover, the company
says. It reckons margins will be on
target (17-23 per cent) for the full year,
partly as a result of cost-cutting. Some
protection comes from diversification.
Pharma, chemical, food and drinks
customers account for a fifth of the
division’s sales between them. Yet they
are overshadowed by the car and
machine tools industry, which
currently represent 20 and 15 per cent
of the division’s sales. Those sources of
demand will not pick up any time soon.
Mr Kaeser is inspired by the fate of
the dinosaurs. Their inability to adapt
to changing conditions is a guide to the
fate of unreformed conglomerates, he
reckons. That explains the vigour with
which he is restructuring and spinning
off businesses. Investors have not yet
given full credit. The shares are trading
at over a quarter less than its sum-of-
the-parts value, which Morgan Stanley
calculates to be €128. Erosion of that
discount will depend on how wellSiemens:
robot woesSiemens copes with economic pressure.
In most past downturns, the shares
underperformed their industrial peers.Even when earnings and shares are
soaring, it is a brave chief executive
who criticises the owners.Bill Winters’
recent outburst against “immature”
shareholders was put in context by a
modest 3 per cent rise in first-half
profitsand in Standard Chartered’s
stock price. This smart, touchy banker
should build some bridges before full-
year numbers. These may be poor.
A slight improvement in half-year
pre-tax profit to $2.4bn reflectedStanChart/Bill Winters:
shirtybuoyant Southeast Asian markets and
cost cutting. The bank, whose pay
policies have attracted shareholder
hostility, faces big structural
challenges. US rates are falling and
Hong Kong is politically volatile. There
are early signs of weakness in retail
banking and capital markets.
Hong Kong’s central bank has cut its
benchmark rate for the first time in a
decade, following the Fed’s lead. We
should assume low rates are now a
permanent feature of banking.
Revenues from Hong Kong were flat.
Income slid in greater China and North
Asia. Pre-tax profits from Europe and
the Americas plunged 85 per cent.
Standard Chartered’s common tier
one equity ratio dropped more than
expected to 13.5 per cent, reflecting
higher risk-weighted assets and $1bn inbuybacks. New allegations of
transactions involving Iran-connected
entities mean $204m in regulatory
charges may not be the last.
Currency fluctuations in key markets
reduced the impact cost-cutting had on
earnings. Expenses are expected to rise
in the second half.
All of this points to a bleak full year
for Standard Chartered, unless it can
offset weak core markets through rapid
growth in India and the Gulf.
The bank should rejig Mr Winters’
pay before then. Reducing a £474,
pension allowance is one option. But it
would be wrong to humble Mr Winters
publicly and hasten his departure. He
already lost his shirt — albeit in a
charity performance. Standard
Chartered’s woes are not of his making.
His strategy is a credible one.The cloud is more physical than it
sounds. Data stored with third-party
providers such as AmazonWeb
Services requires powerful servers. The
security of data centres is the
responsibility of these businesses. The
security of the data itself is shared
between providers and corporate
customers. These include US credit
card issuer Capital One, where a huge
data breach has affected more than
100m people.
This distinction means there is no
reason to regard the cloud as more
risky than on-site servers. Broadly,
AWS takes responsibility for the cloud
and customers take responsibility for
what is in it. The Capital One hacker
seems to have used the group’s web app
to access data stored with AWS.
On Wednesday, companies including
Italy’s UniCreditannounced they were
trying to work out whether the hacker
had accessed their dataas well. The
suspect arrested in connection with the
data theft — once an AWS employee —
does not seem to have done anything
with the information apart from brag
about it online. This is unlikely to stop
a regulatory investigation. Yet no
company has suggested that there is a
problem with the cloud.
Cloud fans say the breach could have
happened just as easily if the data were
held in an on-site server. Guggenheim
says the movement of large quantities
of data might then have been more
noticeable. But this cannot be proved.
Still, customers wrestling with a shift
to the cloud may find a hybrid service
blending on-site equipment with public
cloud services more alluring. Amazon,
the biggest cloud provider with a
business accounting for more than half
its operating income, announced its
own hybrid service late last year.
Customers gain computing power
and reduce costs by moving to the
cloud. By 2020 the market is expected
to be worth $191bn, says analyst
company Forrester — doubling in size
in just five years. Hacks will trigger
calls for improved cyber security. They
will not slow the pace of adoption.Capital One/Amazon:
hack soreMaybe European investment banking
is not a disaster zone, after all.
Barclays’ unitpulled off a respectable
second quarter. Profits edged higher,
burnishing the UK bank’s otherwise
lacklustre results. Revenues from
markets activities fell less than at US
rivals. Chief executiveJes Staley’s
commitment to full-scale investment
banking looks less dangerous. He still
has not proved his point.
Mr Staley has fought hard on behalf
ofBarclays’traders and corporate
rainmakers. Activist investorEdward
Bramsonwanted deep cuts in a volatile
business. He was seen off. Since then,
weaker rivalDeutsche Bankhas
announcedcuts — clearing the field for
Mr Staley, perhaps. OtherEuropean
rivals see investment bankersas mere
supportfor more profitable businesses.
Global market turbulence ripped
through European banks’ trading
roomslast year. A rebound was
inevitable. Sustaining therecovery
matters more for Barclays. Investment
banking accounts for about half of risk-
weighted assets, compared with a third
atBNP Paribasand Credit Suisse.
But investment banking still fails to
excite. Returns on tangible equity in
the corporate and investment bank
were 9.3 per cent. Even in a weak
quarter, Barclays’ UK banking arm
generated 13.9 per cent returns. The
cards and payments unit managed
18 per cent. In comparison,Société
Générale’s investment bankreported
underlying 10 per cent second-quarter
returns.
Overall, Barclays targets returns
above 10 per cent by 2020. Cost-cutting
has been stepped up. Scepticism
remains. The analysts’ consensus sees
returns sticking below 9 per cent in
2020 and 2021.
Barclays’ shares edged higher
yesterday, but remain a fifth lower
than a year ago, no better than
European stocks. But low double-digit
returns are probably as good as it gets,
at least until interest rates rise again.
Big Wall Street banks generate
returns into the high teens. The gap is
largely explained by lower European
borrowing costs, which have eroded
margins. European bankers complain,
too, about unfair regulatory burdens.
Likerivals,Barclays’ shares trade belowBarclays/Jes Staley:
the holdoutbook value — in its case, just 0.6 times.
This looks cheap, relative even to
Barclays’ profitability. UK banks bear
an extra discount because of Brexit
worries. Not even Barclays’ investment
bankers can do much about that.CROSSWORD
No. 16,235 Set by BRADMAN
JOTTER PAD
ACROSS
1 Maiden is full of anger, things
being not what they seem to be
(7)
5 Plant donkey found by East
Anglian river (6)
8 Biscuit with rotten egg in – nasty
turn ensues (6,3)
9 Old soldier in sixties show
suitable for kids making
comeback (5)
11 Work of poet being performed in
cinema? (5)
12 Scottish island, say – one with a
learner in an academic setting
(9)
13 Enticers manoeuvring without
anybody seeing (2,6)
15, 3 Unruly gang re-enter border
village (6,5)
17 Servant of broadcaster
appearing around 4 to 5 (6)
19 Fellow going to room cut bread
(8)
22 What a lecturer wants to be
paid? (9)
23 Strips, having returned for rest
(5)
24 Boredom with EU in Britain
finally resolved? (5)
25 Cartoon character on the web?
(9)
26 He may get involved with IT etc
with no end of excitement (6)
27 High wind besetting one lake
gone finally – this one? (7)
DOWN
1 Friend full of nostalgia
surprisingly for Mississippi (8,5)2 Ref initially enrages football
team (7)
3 See 15
4 Nice lass arranged plants (8)
5 Cross put above cathedral city in
an attractive way (6)
6 A super tom around? Maybe this
isn’t needed then! (9)
7 Endless expertise shown with
two newspapers presenting
winter sports feature (3,4)
10 3D show of yesteryear? (4,1,8)
14 Scientist in den with container
for absorbing nitrogen (9)
16 Conservative wanting capital
punishment is coming to
di erent view (8)
18 Trendy present maybe making
one passionate (7)
20 Hot air from the group believing
everything – almost everything
(7)
21 Load of lies in paper (6)
23 Groovy dude (5)+($ '+817(5 3$*(
/ 8 3 + 2 ( $
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9(*$ 6$/$'&5($Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLexArt prices are almost as volatile as
shares in AlticeEurope, whose
billionaire bossPatrick Drahiis
buying art auction house Sotheby’s.
Altice stock soared more than 20 per
cent yesterday after the telecoms
group reported better than expected
results. That suggests the leveraged
roll-up need not auction so many
assets to hit debt repayment targets.
The entrepreneur and collector
should have more free time to take
Sotheby’s private.
Revenues at Altice France, the
group’s main division, bounced back
in the second quarter. The results
also lifted shares in rival French
telecoms groups Orange,Iliadand
Bouygues. Mr Drahi’s comments
stoked hopes a long-running mobilesprice war in France is ending. If so,
Altice offers outsized returns — and
risks — compared with peers.
The timing for a ceasefire looks right.
France now has some of the lowest
mobile and broadband prices in
Europe. Consolidation has long been
mooted. But plutocrat-controlled
companies have been unwilling to
combine. Without mergers, price
increases now look like the only option.
Operators need cash for broadband
investments. Forthcoming 5G
spectrum outlays add to that pressure.
Altice also needs cash for paying
down a huge debt pile accumulated
during its creation. Almost €400m of
this quarter’s €1.4bn ebitda went on
interest. Group net debt stood at
5.7 times ebitda in the second quarter.Mr Drahi’s priority is to get that
closer to 4 times in the next two
years, so he can buy back shares
These had doubled in price this
year even before yesterday’s bump.
French rivals have barely moved over
the same period. Altice’s historical
beta — a measure of volatility — is
two , against the Stoxx 600 index.
That compares with 0.5 and 0.4 for
rivals Orange and Iliad.
Altice is volatile because debts are
high and the free float is limited by
Mr Drahi’s controlling stake. In a
sharp downturn, the shares will lack
support, like levitating figures in a
painting by Marc Chagall, an artist
Mr Drahi admires. For the moment,
expect market auctioneers to mark
them higher.FT graphic Sources: Refinitiv; company; Berenberg * Weighted average of Iliad, Bouygues, SFR and OrangeFrench telecoms share prices
Rebased Altice Europe
Orange
Iliad
BouyguesAltice France revenue growth
Annual changeFrench broadband revenues
Average revenue per user (annual change)*- - Q Q Q Q Q Tota l
Residential only
-
-
-
-Altice Europe/Patrick Drahi: last auction hero
The thin sliver of equity that sits on top of the telecoms company’s large debt pile offers investors potential
for outsized returns. Better than expected quarterly results sent shares soaring yesterday. Hopes of a truce
in the long-running price war in French mobile and broadband lifted stocks across the sector.
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