12 ★ FINANCIAL TIMES Tuesday10 March 2020

COMPANIES

W

hat is a banking business worth in an era

when the solution to everyeconomic

problem is for central banks to cut interest

rates? The simple answer is: less. Banks’

fundamental activity is collecting deposits

and making loans. As interest rates approach zero, the dif-

ference between the cost of paying for customer deposits

and the yield on loans shrinks, compressing profit mar-

gins. If this keeps up for a long time, banks become hesi-

tant about lending. Japan and Europe haveshown as much.

The US Federal Reserve is aware of the risk. The impact

of negative rates elsewhere — the European Central Bank’s

key deposit rate has been below zero since 2014 — is one

reason it haspublicly rejected heir use as a policy tool. Butt

the Fed is rumbling towards the zero bound all the same.

On March 3, it announced an emergency rate cut of half a

percentage point and markets areanticipatinganother

half a point cut t the Fed’s meeting this month.a

Whether we reach zero or not, the stock market has con-

cluded that the damage isdone. Since February 21, when

fear of a coronavirus-led recession and anticipation of Fed

action drove long-bond yields below short rates — the

“inverted curve” so dreaded by bankers — bank stocks

have fallen by almost a quarter. The rout has continued

even as the yield curve inversion has abated. Even on the

days during this roller-coaster week when markets have

performed better, banks have lagged behind.

Which banks are hit hardest? Those with deposits costs

that are already near zero cannot lower them further, so

rate cuts are all downside; banks whose loan portfolios are

packed with adjustable-rate business loans will see reve-

nues decline almost immediately.Bank of America, with

its cheap deposit base, has lost $80bn in market capitalisa-

tion in just a few weeks. Former high-flyerSilicon Valley

Bank, with both low-cost deposits and adjustable-rate

lending, has lostmore than a third of its value.

Few if any banks have been spared. Analysts at Piper

Sandler published a rather optimistic report last week

highlighting those US banks

with the most exposure to

the mortgage market, which

should benefit from the

boom in refinancing that is

likely to follow the Fed’s cut.

But these banks have fared

only a little better than the

rest. In the money business,

the price of money trumps all.

There is a hardy group of investors who have long said

that the market misunderstands the earnings power that

banks — especially the biggest banks — have, even when

lending margins are tight.

“We think a lot [of bad news] is priced in. It’s starting to

get interesting,” said Patrick Kaser, a portfolio manager at

Brandywine Global Investment Management. His fund

has been underweight banks in recent months because

they had been trading near fair value. But that is no longer

true,said Mr Kaser. He thinks it is time to “get out the pen-

cils” and tot up the real earnings power of the big banks. A

few are trading near or even below book value, which

means share buybacks give a powerful boost to returns.

Chris Davis of Davis Funds, a longtime bank bull, agreed,

saying: “The banks are earning money hand over fist and

buying in a lot of shares... the price decline is actually a

significant positive for long-term shareholders.”

The bank bulls may be right; markets overreact at times

like these. But investor consensus is that there will be very

little profit growth, and possibly profit declines, in the

industry’s Fed-dominated future.

Mr Davis is right about one thing, though: up until now,

the biggest banks have been making big profits.JPMorgan,

the industry’s strongest player, made$36bn in net income

last year, enough for a return on tangible equity of 19 per

cent — respectable for any business. Bank of America,Citi-

bank nd even the woundeda Wells Fargo re doing wella.

But these huge businesses have advantages that many of

the 5,200 other US banks do not. They are diversified, with

large and relatively rate-insensitive businesses from

investment banking to credit card lending, and theirsize

means they can spread regulatory and technological costs

over a wider revenue base. The biggest banks will make

less money in a zero-rate world but, unless they start tak-

ing the kinds of gambles that have brought them low in the

past, they will continue to be viable businesses. The same

will not be true of many of their smaller peers.

If further entrenchment of the biggest banks is the unin-

tended consequence of monetary stimulus, it will be the

sequel to a movie we have already seen. The big banks also

got stronger when the authorities, rightly, raised the regu-

latory burden on the industry after the financial crisis.

Saving the economy is a tricky business.

[email protected]

INSIDE BUSINESS

FINANCE

Robert

Armstrong

Relentless rate cuts hit

smallerbanks hardest

as profit margins fall

The Fed is aware

of the risk but

is rumbling

towards the zero

bound anyway

A N D R E W E D G E C L I F F E- J O H N S O N
NEW YORK

US companies are moving to reassure
employees and customers that they
will not be left out of pocket by corona-
virus disruptions, pledging to shoulder
the cost of medical testing, cancelled
holidays,bankfeesandlostwages.

As executives grapple with the out-
break’s short-term effects on their sup-
ply chains and struggle to gauge its
longer-term effects on demand, they are
also under scrutiny for how they treat
their most vulnerable customers and
workers who they pay by the hour.
AfterMicrosoft dvised workers ina

the Seattle region to work from home,

presidentBrad Smith oted in an blog

poston Thursday that this could cause

“hardship” for café staff, shuttle drivers

and other support staff paid by the hour.

The software company has decided to

continue to pay those workers their

usual rates, he said: ensuring that 4,

hourly employees in its facilities “will

continue to receive their regular wages

even if their work hours are reduced”.

“This is an unprecedented moment.

It’s important that we approach it with a

sense of calm and responsibility —

because we have many people counting

on us,”saidSundar Pichai, chief execu-

tive of Google and its parent company,

Alphabet. The company would also

ensure that hourly workers whose

schedules have been cut are compen-

sated for the time they would have

worked, he said on Friday.

Chuck Robbins, chief executive of

Cisco, promised similar support, saying

on Twitter: “I encourage all of our peers

to consider this as well.”

Tim Ryan, chairman ofPwC S, notedU

the outbreak followed a period in which

companies have beentalking up their

“purpose” nd their responsibilities to aa

broad set of stakeholders, rather than to

shareholders alone. In that context, the

need to be seen to treat employees well

outweighs the potential costs.

Technology

US groups move to ease fears of hourly paid

K A N A I N AGA K I— TOKYO

The chief executive ofSuntory ash

warned that the oronavirus outbreakc

is hitting alcohol consumption, which

willaffect profits at the third-largest

spirits maker, adding that he expects

the turmoilin China to trigger a return

ofproductiontoJapan.

“When I look around hotels, a lot of

space is available. At restaurants, very

few tables are occupied, and at

bars, there’s almost nobody,”Takeshi

Niinami, head of the third-largest

spirits maker, said.

“This will impact our bottom line

sooner or later.”

He said: “The trend to shift produc-

tion lines will be enhanced globally.

China will still be the centre, but pro-

duction will go back to mother countries

to some extent.”

Theepidemic hasdisruptedsupply

chains nd sapped consumer demand,a

causing a$285m blow o sales att

Anheuser-Busch InBev, thebiggest

brewer, and a potential £200m hit to

operating profits at Smirnoff vodka

makerDiageo.

In Japan, beverage groups from

Kirin o Suntory are preparing for simi-t

lar fallouts as nightlife and restaurant

activity come to a near-standstill even

though it is nearly cherry blossom sea-

son, normally the busiest time of the

year for parties.

SMBC Nikko Securities estimates that

annual beer sales in Japan will fall 4 per

cent from a year earlieras a result of a

decline in demand.

The outbreak has also hit tourist

spending, with Nomura forecasting that

the number of foreign visitors will

decline 40 per cent quarter-on-quarter

in the first three months of the year.

Following government guidance for

school closures and companies to cancel

large events, economists expect the Jap-

anese economy to shrink at an annual-

ised rate of more than 2 per cent in the

first quarter.

Food & beverage

Suntory chief warns of knock to demand

A M Y K A Z M I N— NEW DELHI

Indian criminal investigatorsaccused
Yes Bank o-founderc Rana Kapoor fo
receivingkickbacksto provide funds to
a now-bankrupt housing finance group,
raising new questions about theinstitu-
tion’s lending.
Mr Kapoor, who was forced to stand
down as Yes Bank’schief executive and
managing director in early 2019 amid
growing governance concerns, was
arrested on Sunday, days after the
Reserve Bank of India seized control of
the lender he founded.
In a complaint published on its web-
site, India’s Central Bureau of Investiga-
tion accused Mr Kapoor of providing

financial support from YestoDewan

Housing Finance n 2018.i

The CBI complaint alleged that Mr

Kapoor had entered a “criminal con-

spiracy” withKapil Wadhawan, the

former chair of DHFL, in which Yeshad

invested $521m in the second quarter of

2018 in short-term debentures issued

by DHFL, which was put into bank-

ruptcy late last year.

As Yesinvested in the debentures, the

CBI alleged that “simultaneously, Mr

Wadhawan paid a kickback of $84m to

Kapoor and his family in the garb of a

builder loan” by DHFL to a group owned

by Mr Kapoor’s wife and daughters.

The CBI — which has also accused Mr

Kapoor’s wife and three daughters of

involvement in the scheme —yesterday

raidedseven sites, including homes and

offices, as part of the probe.

The CBI said it believedMr Kapoor

had similarly used his official position at

Yesin other transactions and “obtained

illegal kickbacks directly or indirectly

through entities controlled by him and

his family members”.

In acourt appearance on Sunday, Mr

Kapoor, though his lawyer, denied

wrongdoing,saying he had been made a

“scapegoat” for the bank’s problem.

The allegations of criminal wrongdo-

ing — including charges of cheating and

bribery — by Yes Bank’sfounder comes

asNarendra Modi’s government is try-

ing to engineer a revival of the lender,

which is India’s fourth-largest private

bank with $47.5bn in assets.

On Thursday, the RBI replaced Yes

Bank’s board and temporarily capped

withdrawals, saying it had no choice

but to take over the bank, which was

confronting aliquidity crisis after

failing to raise fresh capital to shore up

itsbalance sheet.

A day later, the RBI unveiled a rescue

plan that will seeState Bank of India ayp

up to $1.3bn for a 49 per cent stake in

Yes, though SBI hopes to woo other

potential investors to join a consortium

so it will not have to put in all the money.

Mr Wadhawan was arrested inJanu-

ary over allegedlaundering in an unre-

lated case, linked to DHFL’s deals with

the family of adead gangster, and

released on bail. He denied those claims

and has yet to comment on the allega-

tions involving his Yes dealings.

Mr Kapoor’s wife and daughters could

not be reached for comment.

Yeswas long known for itsrisk appe-

tite, which put it underpressure as

many of its biggest clients struggled ina

sharply deteriorating economy. But the

CBI’s charge heet —s echoed in acom-

plaint bythe Enforcement Directorate

— is likely to raise fresh concerns over

the quality of the bank’s loan book nda

thecapital required to stabilise it.

Banks

Yes founder accused of taking kickbacks

Investigators say Kapoor

plotted with ex-head of

housing finance group

JA M I E S M Y T H —SYDNEY
N E I L H U M E —LONDON

On New Year’s Eve 2018, Allan Houston
died when his bulldozer overturned at a
BHP Mitsubishi coal mine. He was the
eighth miner to die in Queensland over
the past 20 months — the worst cluster
of fatalities in two decades.
The deaths have sparked a safety cri-
sis in Australia, considered by the indus-
try as one of the best regulated, and have
prompted a public backlash and a regu-
latory crackdown that threatens a sec-
tor forecast to generate A$150bn in
exports this year.
They also coincide with cost-cutting
in the wake of the commodities down-
turn in 2013, and have led to accusations
the miners have been prioritising pro-

duction over safety after a shift towards
greater casualisation of the workforce.
“The safety situation is completely
unacceptable and is linked to the busi-
ness model of the big miners,” said
Stephen Smyth, president of Queens-
land mining in the Cfmeu union.
“The end of the mining boom acted as
a trigger for the industry to replace full-
time staff with contractors and labour
hire,” Mr Smyth added.
Analysis of annual reports by the
Financial Times shows the top five min-
ers —BHP,Rio Tinto,Anglo American,
Vale nda Glencore —reported 264
deaths between 2013 and 2018. Most
occurred at operations in Africa, South
America and Asia, whereregulations
and oversight tend to be weaker.
In the same period, their combined
global workforce fell by more than a
third, while the proportion of contract
workers increased. Some 60 per cent of
BHP’s global workforce were contrac-
tors at the end of 2018, while at Glencore
and Anglo American they were 45 per
cent and 32 per cent, respectively. In
2002, just 40 per cent of BHP’s total
workforce were contractors.
Industry expertssay senior managers
responsible for critical systems, includ-
ing health and safety, were let go during
the downturn. They add that most large
miners have written health and
safetyproceduresbut that implementa-
tion and enforcement are often lacking.
A Queensland government reviewof

accidents between 2000 and 2019 also

warned over the influx of inexperienced

workers. “As inexperienced people

enter the industry they are being

trained by people who are also reasona-

bly inexperienced... the deep learning

from someone who has spent a career in

the industry is not being passed on,” the

review aid.s

In Queensland, government data

show the number of hours worked by

permanent employees fell below that of

contractors in 2017 and last year hit

record lows.Contractors and casual

workerswere involved in 64 per cent of

serious accidents at coal mines in the

state in 2018-19. A year earlier the figure

was 67 per cent. Mining companies deny

any link between increasing use of cas-

ual workers and lower safety standards,

arguing some contractors are engaged

specifically because of their specialist

expertise in safety and other areas.

“Both contractors and embedded

employees have to work under the sin-

gle safety and health management sys-

tem for the mine,” said Ian Macfarlane,

chief executive of the Queensland

Resource Council, an industry group.

“Safety is and always has been the

number one priority.”

Mike Henry, BHP chief executive,

said company data putinjury rates for

contractors “about where they are for

employees”. But at a mining conference

last month,he outlined plans to double

the proportion of direct employees to 80

per cent, in order to have greater owner-

ship of operational targets.

Investors are also urging miners to do

more to ensure safety and to avoid

regulatory crackdowns and expensive

legal claims. “Any responsible investor

looks closely at safety and the company

record and wants to see zero fatalities,”

said Adam Matthews, director of ethics

at the Church of England Pensions

Board, which manages £2.8bn in funds.

The industry is concerned that the

safety crisis in Australia threatens their

social licence to operate at a time

when new coal mines face strong

opposition over environmental con-

cerns. Criminal prosecutionsare also a

possibility.

Last month, he Queensland statet

government opened a criminal case

against BHP Mitsubishi Alliance over

the death of Mr Houston, alleging the

company breached health and safety

obligations. The state also has begun

legal proceedings in relation to alleged

breaches of safety obligations at one of

Glencore’s coal plants that led to serious

injuries of a worker in February 2018.

BHP said Mr Houston’s death was a

tragedy. “Any fatality in mining is unac-

ceptable. BHP is playing its part along-

side the Queensland government and

others in the industry to openly share

lessons learned and achieve better

safety outcomes,” it said.

Glencore did not comment.

The Queensland government is pro-

posing laws that include 20 years in

prison for managers found guilty of neg-

ligent conduct that leads to a death and

fines for culpable companies of up to

A$13m.

Unions and families of victims insist

companies and managers must be held

accountable for negligence or safety

standards will not improve.

“There are eight families who want

answers, who want to change the safety

conditions on mine sites,” said Brian

Gerdes, whose 27-year-old son Jack was

killed at a coal mine last year.

“It’s time to get serious.”

Mining. abour conditionsL

Workers’ deaths spark Australian safety crisis

Regulatory crackdown and

backlash over business model

threaten export forecasts

A bucket wheel

reclaimer

operated by Rio

Tinto shovels

ore at Karratha

in the Pilbara

region of

Western

Australia. The

top five miners

reported 264

deaths between

2013 and 2018

Jack Atley/Bloomberg

‘Inexperienced people

... are being trained by

people who are also

reasonably inexperienced’

Number of mining fatalities

Number of fatalities

in selected countries

* Per  million hours worked ()

Source: ICMM

Fatality frequency

rate*











S Africa

Chile

Ghana

Peru

Brazil

Canada

Kazakhstan

Russia

Australia

DR Congo

US

Zambia

India’s CBI

raided

seven sites,

including

homes and

offices, as

part of the

probe

MARCH 10 2020 Section:Companies Time: 9/3/2020- 17:32 User:timothy.digby Page Name:CONEWS1, Part,Page,Edition:USA, 12, 1