16 ★ FINANCIAL TIMES Tuesday28 January 2020

B

rian Moynihan, who runsBank of America,

recentlytold he FT that his bank’s retail opera-t

tion could in time double its market share.

Given BofA is already the largest retail bank in

the country, that would make it very large

indeed, with about a quarter of the US market and some-

thing in the order of $1.5tn in retail deposits.

Should that prospect worry us? Mr Moynihan pointed

out that other consumer industries, such as beer and cars,

have much higher levels of concentration, with single com-

panies holding up to half the market. One could go further,

too. In consumer technology (a business that banking

increasingly resembles), concentration often extends as

far as virtual monopolies such asGoogle nda Facebook.

Mr Moynihan’s ambitions are not an expression of idle

fantasy. America’s very largest banks areincreasing mar-

ket share.

Mike Mayo, theWells Fargo ank analyst known for hisb

scepticism about the big banks before the crisis, now

thinks economies of scale have given them an enduring

advantage over their smaller peers. He noted that in the

five years to the end of 2018, BofA,JPMorgan Chase nda

Wells itself together enjoyed a rise in consumer deposits of

44 per cent, compared with 17 per cent at a group of lead-

ing regional banks.

BofA and JPMorgan alone increased their combined loan

portfolios by $310bn between 2015 and 2019. That is more

than the total loan portfolio ofUS Bancorp —the fifth-

largest lender in the country.

No bank is allowed to gain more than a 10 per cent share

of the country’s deposits by acquisition. But there is no

hard limit on organic expansion, and BofA, JPMorgan and

Wells are all above the 10 per cent threshold.

Politicians worry the big banks are pushing community

banks out of business — with “community” here being a

fuzzy word for “smaller”. US Representative Maxine

Waters, who chairs the House financial services commit-

tee, has suggested bank con-

solidation makes it “difficult

for community banks to

compete on a level playing

field”.

People like to drink local

beer but they do not bemoan

the lack of a local smart-

p h o n e m a ke r. T h i s i s

because the local gadgets

would be inferior toApple’s. And it is hard not to wonder

whether, in a largely fixed-cost businesssuch as banking,

bigger banks are not winning because their large revenue

base lets them offer better pricing and build better tech-

nology than smaller banks. Is this the tilted playing field

Ms Waters refers to? If so, consumers should hope it tilts

further still.

Yes, banks are implicitly and explicitly backed by the

taxpayer, and the failure of a bigger bank has bigger impli-

cations for the stability of the financial system, as we learnt

in 2008-09. But that is why regulators have imposed pro-

gressively higher capital requirements on banks as they

grow larger.

Yet if the higher capital burden is not enough to offset

economies of scale — and so far it does not seem to be, judg-

ing by the performance of BofA and JPMorgan — then the

biggest banks will keep getting bigger.

This may be nothing to worry about. There is a differ-

ence between size and interconnectedness, and retail

operationssuch as those of BofA are not necessarily heav-

ily interconnected. There may be reasons to split up retail

and investment banks, as the Glass-Steagall Act of 1933 did

until its repeal in 1999, to limit contagion. But that is a sep-

arate question.

It is also worth remembering that a nasty bank crisis can

start in and spread among lots of small financial institu-

tions. That is precisely what happened in the savings and

loan crisis in the 1980s, which spread from “thrifts” to

small banks and cost US taxpayers billions.

Not everyone is so sanguine. Sheila Bair, who ran the US

Federal Deposit Insurance Corporation during the finan-

cial crisis, thinks community banks are having a hard time

competing because the big banks’ implicit government

guarantee allows them to deploy more leverage. In her

view big banks, far from winning on price or technology,

are lumbering oligopolists. “If you jack up their capital

requirements, you would force them to break themselves

up,” she told the Financial Times this week.

She could be right but it will be hard to assess the relative

stability of big and small banks while monetary policy is

loose and the economy benign. They will not be so forever.

In the meantime, the debate about “too big to fail” is

framed mostly in terms of banks buying one another. This

is myopic. The biggest banks are getting bigger fast, with-

out buying a thing.

[email protected]

INSIDE BUSINESS

FINANCE

Robert

Armstrong

It is time that the

debate on ‘too big to

fail’ was reframed

Politicians worry

the big banks are

pushing the

community ones

out of business

ST E P H A N I E F I N D L AY— N E W D E L H I

New Delhi has invited bids forAir India,
reviving plans to privatisethe debt-
laden carrier two years after a botched
attempt failed to attract any interest.
Prime ministerNarendra Modi’s
governmentyesterdayrelaunched the
sale process for Air India and its stake in
two subsidiaries, offering sweetened
terms compared with the attempted
disposal in 2018.
The government said it would sell
100 per cent of the national carrier,
which operates domestic and interna-

tional flights, along with its stake in low-

cost business Air India Express and

airport services companyAisats. It set

March 17 as a deadline for submissions.

Together, Air India and Air India

Express control more than 12 per cent of

the Indian domestic market, according

to the government.

During the last sale attempt, New

Delhi sought to retain 24 per cent of the

carrier. The fresh process stipulates that

any buyer must take on$3.3bn in debt,

down from$5.1bn in 2018. Air India’s

total debts stand at roughly $8bn,

according to Hardeep Singh Puri, India’s

civil aviation minister.

The decision to reduce the debt and

offerthe whole business for sale should

help pique interest, said analysts.

“On the face of it, both of these are

quite positive developments,” said Kin-

jal Shah, aviation analyst at credit rating

agency ICRA, a local affiliate of Moody’s.

But she warned that there may be

other conditions that could hinder

investor interest, such as the retention

of its staff. Other analysts raised the air-

line’s ageing Boeing fleet as a potential

deterrent, and bidding rulesstate that

control of Air India must stay within the

country. A foreign airline may buy only

49 per cent of a local carrier, a rule ana-

lysts cite as asignificant arrier tob

investment.

“It’s going to be a big price tag,” said

Ashish Nainan, an aviation expert.

“And, for international investors, own-

ership is going to be a sticky point.”

Successive Indian governments have

tried to privatise Air India, which has

been lossmaking for a decade as it strug-

gles against no-frills competitors.

Jet, India’s oldest private carrier, col-

lapsed last year after failing to find a

white knight investor to bail it out.

The call for Air India bids comes after

Mr Modi’s government unveiled plans

in November toramp up its privatisa-

tion programme. It wants to sell stakes

infive state-owned companies o raiset

funds and attract foreign investment to

counter an economic slowdown.

New Delhi hopes to raise Rs1.05tn

($14.7bn) through asset sales by March.

That could help its efforts to shore up

public finances and meet a fiscal deficit

target of 3.3 per cent.

India Ratings and Research, a Fitch

Group company, expects the govern-

ment to miss this goal.

Airlines

New Delhi seeks to sell off Air India

Modi government offers

buyer 100 per cent stake

in national carrier

N A STA S S I A A ST R A S H E U S K AYA
M O S C O W

Days before launching Russia’s biggest
constitutional overhaul in more than a
decade, President Vladimir Putin trav-
elled to Istanbul to unveil aGazprom
pipeline running almost 1,000km via
the Black Sea to Turkey.
If January has been a month of tur-
moil in the Kremlin, the pipeline open-
ing underlined the opportunities for
Gazprom, Russia’s highest-profile com-
pany and one responsible for more than
a third of Europe’s gas supply.
The Turkish project comes on the
heels of Gazprom’s decision in late 2019
to settle a protracted legal dispute with
Ukraine’s state-backed gas supplier,
Naftogaz. Gazprom has also made
progress in beginning to prise open the
potentially lucrative Chinese market
with a historic pipeline known as the
Power of Siberia.
Yet shares in state-owned Gazprom
are down in January, lagging behind the
Russian stock market. For analysts and
investors, the underwhelming reaction
is a reminder that Gazprom’s fortunes
this year ultimately hinge on two far
more powerful forces: the natural gas
price and geopolitics.
The natural gas market has already
proved a painful drag, as a global supply
glut and unseasonably warm weather
have sent the price tumbling in January.
Natural gas prices in Europe have fallen
11 per cent.
“The fundamentals so far do not look
supportive for Gazprom,” said Ekater-
ina Rodina, an analyst at VTB Capital in
Moscow. “Gas prices were down 30 per
cent year on year [in late 2019] and the
price in 2020 might not reach the $
Gazprom expects.”
With the natural gas market under
pressure, Gazprom’s longstanding chief
executiveAlexei Miller ast year madel
more strenuous efforts to appeal to
shareholders. The group overhauled
parts of its management teamand has
started to pursue domestic debtors,
including in the politically sensitive
Chechnya region, for the first time.
In May, the company announced
plans to pay record dividends and then
double them to 50 per cent of its
adjusted net profit in three years. It was
enough to see Gazprom briefly reclaim
its crown last June as Russia’s most valu-
able company fromSberbank, the coun-
try’s biggest lender.
The more than 50 per cent advance
in Gazprom shares last year was
not enough to stop Mr Putin complain-
ing in November that “Gazprom’s
capitalisation — it is obvious to all

experts — is at a minimal level”.

Analysts caution that the Russian

government’s fraught relations with the

west is one factor that will keep a lid on

further gains for the state-owned energy

company this year. Mr Miller declined

to be interviewed.

Although Gazprom was not hit by US

and EU sanctions imposed after Russia’s

2014 incursion into Ukraine, the recent

threat of American measures against

the Nord Stream 2 pipeline to Germany

— a project that would allow Russia to

bypass Ukraine when sending gas to

Europe — is a potential problem.

“The company’s dividend policy is

positive for the shares’ growth but the

extent of the growth will be also deter-

mined by the gas prices in Europe and

external political challenges such as

sanctions,” said Danila Bochkarev, sen-

ior fellow at the Brussels-based East-

West Institute think-tank. “Obviously,

Gazprom is not fully immune to exter-

nal shocks such as any kind of regula-

tory flexibility or rules a la carte.”

It is a view echoed in the bond market.

Artem Frolov, vice-president at credit

rating agency Moody’s, argued that

“Gazprom has strong financial met-

rics... It is one of a handful of Russian

companies rated a notch above the sov-

ereign rating level”. However, “country

risks including sanctions risk continue

to weigh on its credit profile”.

But it is the weakness in natural gas

prices that arguably poses the more

urgent challenge to a company that

has over the past decade become a

champion in pipeline construction

and now operates the world’s most

extensive gas transportation system.

The US is emerging as a competitor in

its key European market, which

accounts for more than 40 per cent of

net income. Gazprom made Rbs1.1tn

($17bn) of net income in the first nine

months of 2019.

In a bid to defend its market share in

Europe, Gazprom unleashed a price war

last year by increasing the share of spot

sales via its electronic platform, allow-

ing it to sell more and therefore push

down the price.

Its pipeline exports to Europe and Tur-

key were down 1.3 per cent in 2019 from

2018, and Gazprom expects its exports to

Europe and Turkey to be flat this year.

However well that prediction ages,

experts are sceptical that the company’s

price guidance of $200-$205 per 1,

cubic metres for this year can hold.

“The world is flooded with gas. Chi-

nese demand alone cannot pull it all,”

said Ms Rodina of VTB. “Gazprom

might have to cut its price guidance.”

But amid its challenges, China does

offer Gazprom hope. Following the

launch in December of the Power of

Siberia pipeline across east Siberia to

north-eastern China, the company is

now exploring further gas networks to

China, including one via Mongolia.

“Development of the Gazprom-China

relationship is definitely positive for

Russia and for the company,” Ms Rodina

said. “Although institutional investors

may have some concerns, mostly due to

the short-term nature of their invest-

ment horizons, in the longer term this

would be value-creative and positive for

Gazprom’s fundamentals.”

Gazprom’s challenge is to keep inves-

tors’ patience even as the outlook for

2020 becomes more demanding.

Oil & gas. Headwinds

Gazprom investors need long-term focus

Russia’s most valuable

group grapples with global

gas glut and geopolitics

Wheels in

motion: After

the launch in

December of the

Power of Siberia

pipeline across

east Siberia to

north-eastern

China, Gazprom

is now exploring

further gas

pipelines to the

country,

including one

via Mongolia

Andrey Rudakov/Bloomberg

‘Development of the

Gazprom-China

relationship is positive for

Russia and the company’

COMPANIES

‘It’s going

to be a big

price

tag... for

[foreign]

investors,

ownership

is going to

be a sticky

point’

M A M TA BA D K A R— N E W YO R K

Mattress companyCasper as pitchedh
a significantly lower valuation in its ini-
tial public offering than its last funding
round in one of the first major tests of
Wall Street’s appetite for lossmaking
groups since the collapse of the
WeWork PO.I

The New York-based group is offering
8.35m shares of common stock at
between $17 and $19 each, according to
a filingyesterday with US securities reg-
ulators. At the top end of that range,
Casper would be valued at $744m —
markedly lower than the 1.1bn valua-$

tion t secured in the private market lasti

year.

The group, whose investors include

actor Kevin Spacey and rapper 50 Cent,

plans to raise as much as $159m in the

flotation, or $182m if underwriters uti-

lise a “greenshoe” option that allows

them to sell additional shares.

Casper, which ships mattresses

directly to customers, forecasts 2019

revenue of $437m to $441m, or a 23 per

cent increase from the previous year at

the midpoint of the range. The company

reported sales growth of 43 per cent in

2018.

It also projects its net loss will widen

to as much as $96.4m this year, from

$92.1m in the previous year, driven by

investment in sales and marketing and

administrative expenses to support

growth in retail stores and product

development.

The flotation will be one of the first

tests of market appetite for companies

that have struggled to show a clear path

to profitability following the collapse of

WeWork’s IPO last year and stumbles

for other start-ups such asPeloton nda

Smile Direct Club.

Casper hopes to capitalise on the

rapid growth in what it refers to as the

“sleep economy”.

Personal & household goods

Mattress group’s valuation softer before IPO

T I M B R A D S H AW

Gadget makers will be forced to

provide a series of new protections for

connected speakers, cameras and

other devices, as part of a UK govern-

ment crackdown on the security of the

“internet of things”.

The UK’s Department of Digital, Cul-

ture, Media and Sport said yesterday

that a new law will force companies

to “explicitly state” how long they will

provide security updates for, when cus-

tomers purchase the product.

DCMS will require manufacturers to

ship individual devices with unique

passwords so hackers cannot take

advantage of customers who fail to

change default login details. Vendors

must also make it easier for researchers

to report vulnerabilities to them.

Connected devices — from security

cameras and smart speakers to baby

monitors and toys — have become a

booming part of the consumer electron-

ics industry. But security scares that left

consumers vulnerable to eavesdroppers

and hackers has prompted concern that

tech companies were failing to do

enough to protect customers.

“Our new law will hold firms manu-

facturing and selling internet-con-

nected devices to account and stop

hackers threatening people’s privacy

and safety,” Matt Warman, the UK’s dig-

ital minister, said in astatement. “It will

mean robust security standards are

built in from the design stage and not

bolted on as an afterthought.”

While companies such asApple,

Amazon nda Google ften provide yearso

of software updates for their smart-

phones, speakers and other “smart

home” devices, few manufactures com-

mit at the point of purchase how long

they will provide such support.

The UK is among the first countries to

mandate such a requirement.

Technology

UK targets ‘internet of things’ security

JANUARY 28 2020 Section:Companies Time: 1/202027/ - 19:37 User:andrea.goddard Page Name:CONEWS1, Part,Page,Edition:LON , 16, 1