8 ★ FINANCIAL TIMES Thursday 26 March 2020
COMPANIES
ST E P H E N M O R R I S— LO N D O N
Credit Suisse has slashed the bonus of
its former chief executive Tidjane
Thiam for his role in a corporate spying
scandal that damaged the Swiss
lender’s reputation.
Mr Thiam’s “short-term incentive”
bonus for 2019 was cut by a third from
SFr4.9m to SFr3.3m ($3.4m), according
to the bank’s annual report filed yester-
day. Overall, he was awarded SFr10.2m
last year, down 17 per cent from
SFr12.3m in 2018, and lost all of his 2020
long-term incentive awards.
Kai Nargolwala, chair of the board’s
remuneration committee, said that Mr
Thiam “led by example in terms of per-
sonal commitment to the group’s con-
duct and ethics standards” but
his “non-financial assessment score had
been reduced” because “the observa-
tion matter had a significant impact”.
Still, after being awarded “good
leaver” status on his departure last
month, Mr Thiam was allowed to keep
his 1.4m shares valued at about SFr19m
at the end of 2019. This year Credit
Suisse’s stock has fallen 41 per cent,
leaving them worth substantially less.
Mr Thiam was ousted after he lost a
bruising boardroom battle with Urs
Rohner, the bank’s chairman. His
departure followed months of revela-
tions linked to two cases of intrusive
surveillance conducted against depart-
ing senior employees, including wealth
management boss, Iqbal Khan, who left
for rival UBS.
Credit Suisse reiterated that it hadfound no evidence that Mr Thiam was
directly involved in ordering the sur-
veillance. Swiss regulator Finma is
investigating the affair and is interview-
ing the people involved, and reviewing
their phone records and emails, accord-
ing to people familiar with the matter.
Mr Thiam is to join the board of
French luxury group Kering, which is
owned by the billionaire Pinault family
and includes brands such as Gucci, Yves
Saint Laurent and Alexander McQueen.
The executive board collectively
earned SFr77m last year, a 17 per cent
drop, the report said. Overall, the bank
group bonus pool was cut 1 per cent to
SFr3.2bn, confirming a Financial
Times report from the start of February.
Thomas Gottstein, the new chief exec-
utive will be paid a salary of SFr2.7m.Banks
Credit Suisse cuts Thiam’s bonus after scandal
K A N A I N AG A K I , A R A S H M A S S O U D I
A N D R O B E RT S M I T HSoftBank has demanded that Moody’s
remove all its bond and currency rat-
ings on the Japanese conglomerate,
after the agency issued a two-notch
downgrade that cut its debt deeper into
junk status.The group led by Masayoshi Son imme-
diately accused Moody’s of making
its decision based on “biased and
mistaken views”.
The unusual demand came just two
days after SoftBank said it planned
to sell $41bn in assets to pay down
its heavy debt load and fund a share
buyback.
Those actions have triggered a 55 per
cent rise in SoftBank shares, whichtouched a four-year low last week as
investors panicked over its hefty debt
exposure.
“[SoftBank Group] believes that
Moody’s ratings action is based on
excessively pessimistic assumptions
regarding the market environment and
misunderstanding that SBG will quickly
liquidate assets without any thorough
consideration,” the company said.
The downgrades may increase bor-
rowing costs for the group, which is
saddled with $55bn in net debt,
with yields on SoftBank’s perpetual
bonds, which have no maturity date,
climbing above 11 per cent amid a sell
off yesterday.
Moody’s cited SoftBank’s “aggressive
financial policy” for its decision to cut
its rating from Ba1 to Ba3, saying thatthe value of the group’s portfolio would
be reduced if it sold off its lucrative
stakes in Chinese ecommerce group
Alibaba and Sprint during the market
volatility caused by the coronavirus
pandemic.
“Asset sales will be challenging in the
current financial market downturn,
with valuations falling and a flight to
safety,” said Motoki Yanase, Moody’s
senior credit officer.
This month, S&P cut its outlook on
SoftBank to negative after it also raised
concerns about the group’s earlier plan
to carry out a $4.8bn share buyback.
While this hefty debt load relative to
the group’s cash flows mean that west-
ern rating agencies class it as junk, Soft-
Bank has an investment-grade rating
from the local Japanese agency, JCR.Technology
SoftBank attacks Moody’s over downgrade
D E R E K B R OW E R— LO N D O N
US oil output, at a record 13m barrels a
day, will begin falling steeply in the sec-
ond half and could drop 2.5m b/d by the
end of 2021, ending the shale boom,
analysts have warned.
The sector that made the US the big-
gest oil and gas producer, and offered
the prospect of energy self-sufficiency,
has slashed spending and production in
response to a price war and the collapse
of demand.
Even a modest further oil price
decline could cut US output back by
almost 4m b/d, reversing three years of
increases.
“Shale growth helped lead the US out
of the Great Recession but may fall vic-
tim to the Covid-19-fuelled recession,”
said Jamie Webster of BCG’s Center for
Energy Impact.
The capex cuts have come thick and
fast since the collapse of a Saudi-Russian
oil pact on March 6 sparked a rout that
has more than halved the price of West
Texas Intermediate to $ 23 a barrel.
Occidental, Apache, Diamondback
Energy, Continental Resources, Cono-
coPhillips, Concho Resources, Pioneer
Natural Resources, Parsley Energy andCimarex are among the shale patch’s big
producers to have collectively wiped bil-
lions from planned spending.
Chevron joined them this week, say-
ing it would reduce its capex in the Per-
mian shale this year by $2bn. The
number of its operating rigs in the
region would soon drop by more than
half and output by year-end would be a
fifth lower than planned.
In total, capex across the shale sector
would fall from $107bn last year to
$64bn this year, said Rystad Energy, a
consultancy, and the drop could be
much steeper unless oil prices rose.
The collapse will cause pain in oil-pro-
ducing regions of the US, where services
sectors — from hospitality to frackingcrews — have sprouted in three years of
brisk business. It will end the produc-
tion boom that reduced US dependence
on foreign supplies — to the delight of
the country’s leadership — and allowed
for a steady rise in crude exports.
Rystad said it expected a decline of 1m
b/d this year and another 1.6m to be lost
in 2021, if WTI traded at $30 a barrel.
At $20 a barrel — unthinkable a few
weeks ago but forecast by GoldmanSachs for the second quarter — produc-
tion would fall by 3.6m b/d.
Those declines are only slightly larger
than those forecast by others.
Output would drop 1.4m b/d by the
third quarter of next year, Goldman pro-
jected this week. RS Energy Group, a
consultancy, said 700,000 b/d would be
lost this year and 1.1m in 2021.
“With WTI at $30 or Henry at $2,
nothing works at scale in North Amer-
ica,” said Dane Gregoris, a director at
RSEG, referring to the record low prices
being paid for Henry Hub, the natural
gas benchmark.
RSEG estimates the break-even WTI
price for production in the Permian,
shale’s choicest area, to be $43 a barrel.Oil & gas
Hopes dashed for US energy independence
Drillers cut spending
and production as
shale boom collapses
DAV I D C R OW— LO N D O N
Italy’s emergence as the centre of the
outbreak in Europe has prompted a
familiar question: is its banking sector
strong enough to withstand the shock?
Banks across the world have seen
their shares crater as investors fret that
aspike in loan losses because of the
shutdown — and accounting rules that
force earlier recognition of them — will
hammer profitability and blow a hole in
balance sheets.
Those fears are acute for investors in
the Italian banking sector, which has
unique challenges linked to the coun-
try’s high debt levels.
Before the outbreak, Italy’s debt to
gross domestic product ratio was about
135 per cent, the second-highest in
Europe behind Greece.
A compounding factor is that a large
chunk of Italy’s sovereign bonds are
held by domestic lenders, creating a
doom loop where the fortunes of the
country’s economy and its banks are
more closely linked than tends to be the
case elsewhere.
Whenever Italian borrowing costs
spike, such as during the 2011 sovereign
debt crisis or when populists took power
in 2018, the doom loop, and the risk of
contagion throughout the eurozone,
come back into focus.
The FTSE Italia All-Share banks index
has fallen 43 per cent compared with a
month ago, when the Italian govern-
ment quarantined 50,000 people from
11 municipalities in the north. Those
measures have since been implemented
nationwide, placing the country into
what amounts to a lockdown.
“The situation is desperate,” said
Lorenzo Codogno, a former chief econo-
mist at the Italian Treasury department
who runs an advisory firm.
Were it not for the policies of the
European Central Bank, which has kept
interest rates in negative territory since
2014, Italy “would already be in
default”.
Christine Lagarde, president of the
ECB, fuelled fears this month when
she warned that the central bank was
“not here to close spreads”.
Her comments resulted in an imme-
diate widening of the spread between
Italy’s 10-year government bonds
(BTPs) and Bunds, which ballooned to
almost 320 basis points.
Ms Lagarde subsequently apologised
for the comments and the ECB
announced plans to buy an extra
€750bn of bonds. The spread has since
narrowed to 191 basis points.
Even after Ms Lagarde’s botched mes-
saging, the spread was much narrower
than during the 2011 sovereign debt cri-
sis, when it widened to 560 basis points.
In late 2018, fears over the spending pol-
icies of Italy’s then populist govern-
ment resulted in spreads of more than
3 00 basis points.
However, the brief tantrum this
month reminded investors that the
doom loop is still a problem for Italian
lenders. Domestic banks have reduced
their holdings of Italian government
debt to €380bn compared with peak of
€413bn at the start of 2015, but they still
hold about a fifth of the overall stock.“The doom loop is still pretty much
there,” said Mr Codogno. “If there is a
widening of spreads, immediately the
banks are going to fall into difficulty.”
Filippo Alloatti, a senior credit ana-
lyst at Federated Hermes, said Italian
banks’ exposure to government debt
was “still very much in place”.
Although large banks, such as Intesa
Sanpaolo, “have been diversifying a lit-
tle bit”, Italian BTPs still accounted for
“the majority of their bond book”.
Some economists and investors fear
that Rome’s introduction of an open-ended moratorium on loan payments
for companies and consumers hit by the
virus could aggravate an existing prob-
lem: bad loans.
Italian banks have made progress in
reducing their exposure to non-per-
forming loans, which are categorised as
such when payments are more than
90 days late.
At the end of last year, the ratio of
non-performing loans to the total, net of
provisions, had fallen to 3.3 per cent ver-
sus 9.8 per cent at the end of 2015.
But the economic damage wrought by
coronavirus could cause the ratio to
start rising.
“There is clearly a lot of pressure
because the government has decided to
suspend mortgage payments, so NPLs
will start moving higher,” said Mr
Codogno.
Whether banks could withstand the
pain was “very much a call on how long
the problem is going to last”.
Investors and executives have long
argued that consolidation of the frag-
mented Italian banking market could
help solve some of its structural prob-
lems.
Days before the government put the
north of the country into quarantine,
Intesa launched a hostile takeover bid —
of €4.86bn at the time — for its smallerrival UBI Banca. However, as the virus
has worsened, some fear that a deal
could be delayed or derailed.
One shareholder in both banks said
they were worried about a side-deal fall-
ing through between Intesa and BPER
Banca, which has agreed to buy up to
500 branches following the main trans-
action to satisfy concerns that it will
reduce competition.
BPER is planning to issue new shares
to fund the purchase of the branches,
which would be a tall order if market
conditions do not improve.
Intesa and BPER amended their deal
last week to reflect the coronavirus
impact, but the smaller bank still has to
raise about €440m through a share
sale — about a third of its market
value — according to analysts at BNP
Paribas.
Intesa and BPER planned to press
ahead with the deal, according to two
people briefed on their plans.
Even if coronavirus does derail the
Intesa-UBI merger, investors said that
the economic aftershock would
make Italian bank mergers more, not
less, likely.
“The fact is that the pain on profitabil-
ity for the banks will be so pronounced
that it will make the case for consolida-
tion even greater,” Mr Alloatti said.Financials.Doom loop
Fears mount over fragility of Italian lenders
‘Desperate’ situation puts risk
of eurozone contagion back
at forefront of bankers’ minds
Frankfurt’s skyline from inside the offices of the European Central Bank. Italy might already be in default were it not for the ECB’s policies— Frank Rumpenhorst/AFP/GettyAsset quality at Italian banks was under pressure before crisis
Non-performing loans and market capSources: Factset; FT researchMarket cap ( bn)Non-performing loans as of loansItalian banksMonte PaschiUniCredit Intesa SanpaoloBanco BPMHSBC
SEB
ST E P H A N I E F I N D L AY— N E W D E L H I
N E I L H U M E— LO N D O NIndian tycoon Anil Agarwal is pushing
ahead with an aggressive oil and gas
expansion programme, undeterred by
a crash in prices and concern about
debt levels at his company Vedanta
Resources.Mr Agarwal said he would not rein in a
$4.5bn investment plan for Vedanta’s oil
exploration arm, Cairn Energy, aimed at
more than doubling production to
450,000 barrels per day in two years.
“There is no hold or any cut in cost,”
said Mr Agarwal in an interview. “We
are the only oil producer in India in the
private sector; we’re very excited.”
The spread of coronavirus and a price
war between Saudi Arabia and Russia
have sent oil prices tumbling. Brent
crude, the international benchmark,
traded below $25 a barrel last week at its
lowest level since 2003.
With the world awash with so much
crude oil, analysts fear the price could
fall to the teens or even into single digits,
presenting the industry with its gravest
crisis in 1 00 years.
However, Mr Agarwal argued that
India — the world’s third-largest oil
importer — was on a path to energy self-
sufficiency. Cairn was working with US
oilfield service companies, including
Halliburton and Baker Hughes, to scale
up capacity, he said.
Moody’s on Tuesday placed Vedanta
Resources on review for another down-grade, a move that the credit rating
agency said “reflects our expectation
that low oil and base [industrial] metal
prices will significantly strain Vedanta’s
financial metrics, at least through the
fiscal year ending March 2021”.
The credit rating agency cut Vedanta
to junk earlier in the month, saying low
and volatile commodity prices meant
the company’s earnings were unlikely to
improve. Vedanta’s dollar bonds due in
2024 are trading at less than 40 cents.
A self-made billionaire, Mr Agarwal
has built the company he founded into a
large natural resources group using bor-
rowed money to buy distressed assets
from the Indian government and min-
ing companies around the world.
It has two main assets: a 50.1 per cent
stake in India-listed Vedanta and a 79
per cent holding in KCM, a copper mine
and smelter in Zambia, which has been
seized by the government. Vedanta in
turn controls Hindustan Zinc and Cairn
India as well as aluminium, zinc and
copper assets.
Through this complex structure, Mr
Agarwal controls a natural resources
empire focused mainly on India and
which produces iron ore, bauxite, alu-
minium, copper, zinc, power and oil.
At the end of September, Vedanta’s
net debt stood at $9.5bn, or 2.8 times
adjusted earnings before interest, tax,
depreciation and amortisation in 2019.
The company needs to refinance $1.9bn
of debt between now and September
2021 while Volcan, Mr Agarwal’s family
trust, has to repay $625m of loans.
Asked about the Moody’s downgrade
to junk, Mr Agarwal, said Vedanta was
in a “very, very healthy situation” when
it comes to servicing its debt, and no
lenders had asked for more collateral.
“We are very comfortable to honour
all our commitments,” he said, acknowl-
edging “it is the time to be ready to
tighten our belts”outside oil and gas.Oil & gas
Vedanta aims
to ramp up
production
despite slide
in prices
‘We’re the only oil producer
in India in the private
sector; we’re very excited’Anil Agarwal$ 64 bn
Projected sector
capex this year,
down from
$107bn in 20191mb/d
Decline forecast
by Rystad for
2020 if WTI
trades at $MARCH 26 2020 Section:Companies Time: 25/3/2020 - 17: 53 User: cathy.pryor Page Name: CONEWS1, Part,Page,Edition: USA, 8, 1