14 ★ FINANCIAL TIMES Thursday 27 February 2020

COMPANIES

W

hen Alibaba raised almost $13bn in a Hong

Kong share listing late last year, nowhere

were the sighs of relief more audible than

in Tokyo, from the sleek head offices of

Japan’s major banks in Marunouchi to

those of SoftBank, close to Tokyo bay.

Alibaba doesn’t really need the money: the Chinese

ecommerce group is performing strongly. But the listing

boosted its share price and so lifted the value of SoftBank’s

2 5 per cent stake in Alibaba, which provides the collateral

for much of its nearly $140bn in net debt. Alibaba’s stock

performance is critical not only to the health of SoftBank

and that of many of its portfolio firms, but also to the

health of the Japanese group’s lenders, especially Mizuho.

SoftBank’s debt position is improving in other ways. Ear-

lier this month, the telecoms merger between SoftBank-

owned Sprint and T -Mobile US cleared the final regulatory

hurdles in the US. It will allow SoftBank to shift some

$38bn from its balance sheet. But leverage remains an

issue both for it and for its lenders.

Years ago, SoftBank founderMasayoshi Sonwas widely

regarded as an outsider in the eyes of Japan Inc, in part

because of his Korean roots. Yet today he is embraced,

whether out of love or necessity. At a time when there is

virtually no demand for corporate loans in Japan, it seems

SoftBank is about the only company with a desire to bor-

row. Moreover, the fees it paid to its financiers totalled

more than $2bn in the past five years, according to data

from Refinitiv.

Mr Son’s transformation from pariah to paragon of the

business community is due to the paradoxical fact that he

has become too big to fail. Banks that are already so heav-

ily exposed are signing off on the financing for more trans-

actions, some of them questionable. Does the general lack

of concern make sense?

Mizuho Financial Group, for example, officially has

something like $5.5bn in loans outstanding to the SoftBank

group. But analysts at Hong Kong credit and macro funds

claim that in fact the number is far closer to $30bn if expo-

sures to all units in the group

from various pockets at the

bank are included. Mizuho

declined to comment.

Regulators are showing no

sign of intervening, profess-

ing little concern for the

exposures of their bank

charges to SoftBank. “There

are lots of assets,” says one

recently retired senior official. “And there are the Ali

shares. We are very comfortable.”

SoftBank itself says that it is “in a solid financial posi-

tion” with “enormous unrealised value” from its Alibaba

position. It also prefers investors to focus not on its consoli-

dated debt but on a narrower definition that excludes

some non-recourse loans to its portfolio companies.

Credit rating agencies are not as sanguine. “The portfo-

lio’s concentration in large assets makes its value and qual-

ity susceptible to its largest asset, Alibaba. Alibaba shares

account for more than 40 per cent of the portfolio’s value.

The three largest assets, including Alibaba, account for a

high proportion of over 70 per cent of the portfolio. This

high concentration is the largest risk in the portfolio,” note

analysts at Standard & Poor’s, adding that if Mr Son sells

shares in Alibaba, the credit quality of his portfolio would

probably drop.

Among the most iffy transactions is the loan Mizuho

provided toRitesh Agarwal, founder of Oyo, to enable him

to buy out virtually all of the shareholdings in his young

hotel chain from Lightspeed Capital and S equoia Capital.

That led the two venture capital firms, in turn, to make

11 and 10 times their money respectively. The loan was col-

lateralised by the Oyo shares while the whole transaction

was guaranteed by Mr Son. That means the transaction is

far more risky for the lenders than for the borrower.

The valuation of Mr Son’s companies has always

depended on a belief that he has endless capital to support

dizzying valuations. Until recently all the private markets

cared about was growth at all costs. But Wall Street cares

about profitability and it usually has the last laugh. If Mr

Son is to cash in on his investments, listing will be the main

route, and that requires profits, not just revenues.

In the past few months, some people at the three big Jap-

anese banks that have financed SoftBank’s adventures

have begun to be concerned about their exposure to the

group and all its units. It is late for such reservations, how-

ever. If the debt-laden edifice topples, it won’t be the first

time that the Japanese banks are left holding the bag.

[email protected]

INSIDE BUSINESS

ASIA

Henny

Sender

SoftBank’s debt load

is a dangerous burden

for Japanese banks

Too-big-to-fail

Son has been

transformed

from pariah

to paragon

C H R I S F LO O D— LO N D O N

Barbara Novick, a co-founder ofBlack-
Rock, is stepping down as vice-chair of
the world’s largest asset manager after
more than three decades at the $7.4tn
group.

Ms Novick, 59, will remain in her role to
help conduct the search for a successor
and will then become a senior adviser at
BlackRock, according to a memo sent to
employees yesterday.
“After 32 years of extraordinary
accomplishment at BlackRock, vice-
chairman and co-founder Barbara
Novick has informed us that she would
like to step back from day-to-day man-
agement roles,” chief executiveLarry
Finkand presidentRob Kapitosaid.
Ms Novick, who was one of a group of

eight who founded BlackRock in 1988, is

one of Mr Fink’s most trusted lieuten-

ants. “BlackRock would not be what it is

today without her,” he said.

Mr Fink persuaded her to return to

the group to create and lead a new pub-

lic policy group after she took a break to

look after her parents in 2009.

Ms Novick later played a key role in

persuading US regulators that Black-

Rock should not be classified as a “sys-

temically important financial institu-

tion” after the 2008 financial crisis, a

designation which would have required

changes to its highly profitable business

model.

“Barbara is regarded as an iconic per-

son inside the firm,” said a former senior

BlackRock executive who declined to be

named.

Ms Novick also expanded Black-

Rock’s engagement with investee com-

panies and oversaw a significant

increase in the size of the group’s global

stewardship team, which has more than

doubled to 47 people over the past dec-

ade.

“Our public policy and stewardship

efforts are at an inflection point,” Mr

Fink added in the memo. “Much of the

post-financial crisis policy work that

Barbara led is largely implemented, and

she has greatly enhanced our steward-

ship practices.”

Last month Mr Fink signalled in his

annual letter to chief executives that

BlackRock would step up its efforts in

sustainable investing following criti-

cism that it had failed to use its clout to

combat climate change.

Financials

BlackRock co-founder Novick to step down

N E I L H U M E

N AT U R A L R E S O U R C E S E D I TO R

Rio Tinto’s chief executive yesterday

defended the miner’s decision not to

set targets for reducing the carbon

emissions of its customers, saying that

it was focused on putting its own house

in order.

While the Anglo-Australian group

would work with its clients, which

include some of the world’s biggest

steelmakers, to reduce greenhouse gas

emissions,Jean-Sébastien Jacques, chief

executive, said his priority was on out-

comes he could control.

“We are focusing on reducing emis-

sions at our operations... and we will

continue to improve our environmental

performance,” Mr Jacques said.

Yesterday, Rio set an “ambition” to

reduce its operating emissions to net

zero by 2050 and invest $1bn in climate-

related projects over the next five years.

“We will not set targets for our cus-

tomers. It does not make sense for us.

But we are happy to work with them,”

Mr Jacques said.

Last year, Rio signed a pact with

Baowu, China’s biggest steelmaker, and

Tsinghua University, to develop new

methods to reduce carbon emissions.

Mining companies are under pressure

to reduce their carbon footprints. How-

ever, the debate has shifted from the

emissions created directly by mining

operations to scope 3 emissions, which

include the greenhouse gases generated

by their customers. BHP and Vale have

both promised to introduce scope 3

targets, while Glencore expects its indi-

rect emissions to fall 30 per cent by 2035

as it allows thermal coal mines in

Colombia and South Africa to deplete.

Rio argues that its rivals are able to

make those commitments because they

produce fossil fuels and can therefore

control their scope 3 emissions.

“Remember we are the only large,

diversified mining and metal company

that is not selling either coal... or drill-

ing oil and gas,” Mr Jacques said. Rio sold

its last coal mine in 2018.

Mr Jacques was speaking after Rio

announced its biggest profit since 2011,

on the back of booming iron ore prices.

In the year to December, underlying

earnings rose 18 per cent to $10.3bn as

the average price it received for iron ore

surged to more than $85 a tonne.

Mining

Rio Tinto rejects ‘green’ targets for customers

M U R A D A H M E D A N D O L I V E R R A L P H
LO N D O N
L E O L E W I S— TO K YO

Organisers of big sporting events are
counting the cost of the coronavirus out-
break, which threatens to lead to the
cancellation of this summer’s Olympics
in Tokyo as it disrupts competitions.
The spread has led to the postpone-
ment of soccer and rugby fixtures, golf
tournaments, and motor racing events
in Asia and Europe that were due to be
held in the coming weeks.
“We are still absolutely heading for
the Games on July 24,” a spokesperson
for the International Olympic Commit-
tee said yesterday, but added that
organisers were monitoring the
situation alongside the World Health
Organization and authorities in Japan

and China before making any firm

decisions.

Dick Pound, a member of the IOC,

said this week that the biggest sporting

event was more likely to be cancelled

than postponed, if health authorities

deemed it too dangerous to proceed by

late May.

“If it gets to be something like the

Spanish flu,” said Mr Pound, referring to

the pandemic early in the 20th century,

“at that level of lethality, then every-

body’s got to take their medicine”.

Economists and analysts in Tokyo

said they had been inundated with

requests from investors over the past

24 hours to calculate the financial

impact on Japan of a postponement or

outright cancellation of the Olympics.

The project has cost Japan $25bn,

according to some estimates, and has

broken records for corporate support

with each of the games’ 15 “Gold” spon-

sors, includingCanon,Mizuhoand

Nomura, paying $100m for that status.

Kiichi Murashima, chief economist at

Citi in Tokyo, said cancelling the games

would reduce Japan’s quarter-on-

quarter GDP growth for the three

months to September by 0.2 percentage

points, or 0.8 percentage points on an

annualised basis. He based his estimate

on the 2m expected inbound tourists for

the games not coming to Japan. That

theoretical blow would hit a Japanese

economy that is deemed at risk of enter-

ing technical recession this year.

According to a person familiar with

early conversations, officials have

begun discussing contingency plans,

such as shifting Olympic competitions

elsewhere. The IOC declined to com-

ment. Such a move could protect broad-

casting contracts, particularly in the US,

where even a short delay would clash

with schedules for domestic sports

leagues during the autumn.

Some of the money spent organising

sporting events could be recouped

through cancellation insurance. Accor-

ding to data from insurer Beazley, the

2014 soccer World Cup was covered by

$1.25bn of event cancellation insurance,

while the 2018 World Cup was insured

for $1.5bn. Analysts at Jefferies believe

the Tokyo Olympics could be covered

for about $2bn, with an extra $600m to

cover hospitality and hotel bookings.

“Coronavirus is going to be pretty

large for the property and casualty

insurance industry,” said Philip Kett, an

analyst at Jefferies.

Making claims on the insurance poli-

cies is unlikely to be straightforward.

Terms and conditions differ from policy

to policy, as do triggers that lead to pay-

outs. In some cases, cancellation

because of infectious disease could be

excluded.

The IOC has an insurance policy

designed to protect its revenues against

force majeureevents, although it has not

been tested previously. Other Olympic

Games events have only previously

been cancelled during world wars.

Travel & leisure

Virus raises fears for Tokyo Olympics

Project that has cost Japan

an estimated $25bn risks

being put off or scrapped

N I C H O L A S M E G AW
R E TA I L B A N K I N G C O R R E S P O N D E N T

AsMetro Bank’s new chief executive
revealed an annual loss and outlined a
fresh recovery plan yesterday, he asked
journalists to be gentle.
“I’d ask that you try to be as balanced
as you can,”Dan Frumkin said,
acknowledging the bank had had a
bruising year.
Despite the unappealing state of UK
banking — which has also forcedRoyal
Bank of ScotlandandLloyds Banking
Groupto cut their return on equity tar-
gets — two of Wall Street’s biggest names
are planning to attack the market.
JPMorganis working on a digital
banking offering under its Chase brand,
followingGoldman Sachs, which is plan-
ning to expand the Marcus retail busi-
ness it opened in the UK in 2018.
After years of false dawns with efforts
to boost banking competition in UK,

analysts and investors said the latest
trend could be one that finally has a seri-
ous impact.
“We do think the incumbents are
quite handicapped by their branch
networks in terms of costs. We think
this probably accelerates the need for
them to restructure and be more cost-
competitive in servicing the retail mar-
ket,” saidColin McLean, chief executive
ofSVM Asset Management, which owns
shares in several UK lenders.
By many measures, the UK appears to
be an unattractive place to do business
compared with JPMorgan’s home turf.
The bank’s consumer division gener-
ated a return on equity of 31 per cent in
the fourth quarter of 2019, almost dou-
ble Britain’s best-performing high street
lenderBarclays.
For that reason, chief executiveJamie
Dimonhas repeatedly said “it doesn’t
make sense to do normal retail banking
overseas”. While he declined to give any
details on JPMorgan’s UK plans at an
investor day on Tuesday, Mr Dimon said
that “digital may make it different”.

Goldman’s online-only business has

gathered more than £13bn in deposits

since it opened in September 2018.

Metro Bank’s branch-heavy model

took more than seven years to hit the

same level.

Marcus’s aggressive approach — offer-

ing the highest rates in the market for

easy access savings accounts — has

driven up costs for small- and midsized

banks that rely on such savers.Tesco

Bank,Virgin Money andYorkshire

Building Societywere among a string of

lenders that increased their interest

rates or introduced new products in the

month following Marcus’s launch,

according to analysis by Moneyfacts.

JPMorgan, meanwhile, is expected to

go further than Marcus with a faster

push into lending, and has lined up an

experienced chairman — former City

regulator Clive Adamson — to lead the

business. In addition to its US retail

expertise, the bank has a UK-based pay-

ments business, which people close to

the group pointed to as evidence it

would not have to “start from zero”.

With an annual technology budget of

more than $11bn, it is hoping that more

advanced systems will keep costs low

enough to turn a profit even in the com-

petitive UK market.

John Cronin, analyst at Goodbody,

said: “If you look at margins on UK retail

banking products and forget about leg-

acy cost structures and conduct issues,

margins on some new business are very

attractive.”

Alongside Metro’s decision to rein in

its branch opening plans on Wednesday,

Lloyds Bank and Virgin Money

announced a cumulative 1,300 job cuts

as part of efforts to reduce the cost of

their legacy high street networks.

However, despite the cuts, most exec-

utives believe their old-fashioned net-

works will provide some protection

against the likes of Chase and Marcus.

“The only people making money in

UK banking are incumbents. And they

don’t make it by offering mortgages and

personal loans funded by top-of-best-

buy-table deposits,” said an executive at

one high street lender. “The incumbents

make money out of inertia, infrastruc-

ture and their back books.”

Start-ups such asMonzo andRevolut

have attracted millions of customers to

their digital-only current account offer-

ings in the past few years, but they have

struggled to persuade users to make the

leap to using them as a main bank

account.

In contrast, Metro Bank andHan-

delsbanken— the Swedish business

bank that puts emphasis on its branch

portfolio — consistently appear around

the top of satisfaction surveys.

Mr Frumkin, who took over at Metro

Bank at the start of the year, said many

of its branches had “very long leases

with no break clauses. Moving would be

quite expensive”. But while some of its

future “stores” would be smaller, he

insisted that the underlying “bricks and

clicks” model worked.

“There’ll be noise today,” Mr Frumkin

said, but “our core strength is that we’re

people people, we’re store-based —

we’re not going to be automating things

away that are truly valuable.”

Financials.Retail services

Wall Street prepares to pounce on UK banking

JPMorgan eyes an offering

under its Chase brand while

Goldman plans Marcus push

Start-ups have

attracted

millions of

customers to

digital-only

accounts but

have struggled

to persuade

users to make

the leap to using

them as a main

bank account

Tolga Akmen

‘The incumbents

make money out of

inertia, infrastructure

and their back books’

‘If it gets to

be like the

Spanish flu,

at that level

of lethality,

then

everybody’s

got to

take their

medicine’

Dick Pound,

IOC member

FEBRUARY 27 2020 Section:Companies Time: 26/2/2020 - 18: 55 User: andrea.crisp Page Name: CONEWS1, Part,Page,Edition: USA, 14, 1