Week in Review, March 12

Week in Review

A round up of some of the week’s most significant corporate events and news stories.

US investment banks widen lead over European rivals

The decline of Europe’s investment banks was laid bare this week, as analysis by the Financial Times showed how dramatically they lagged behind their US peers last year, writes Laura Noonan.

Revenues for the top five European investment banks were less than half of the $138.5bn made by their top five US rivals, their financial statements show. Pre-tax profits at the European groups’ investment banking and securities divisions were $4.2bn in 2015, a figure dwarfed by the $33.5bn the Americans earned.

Experts agree that conditions favoured the US banks last year, as a rebounding American economy triggered a wave of M&A activity and fundraising that delivered a bounty of fees for Citigroup, JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America.

But the Americans had more than good fortune on their side — they are also reaping the rewards of reshaping their businesses earlier in the financial crisis, a process Barclays, Credit Suisse and Deutsche Bank are only now getting stuck into.

Leading executives at the European banks argue that their restructurings will make them “more focused” than US banks, helping them to claw back market share in areas such as advisory and capital markets.

Credit Suisse is hiring more bankers for this — even as group chief executive
Tidjane Thiam pursues annual cost savings of SFr2bn ($2bn) across the entire Credit Suisse businesses.

UBS, which embarked on its major restructuring in 2012, is taking on more bankers in the US, and Deutsche Bank is targeting growth in its advisory and capital markets businesses.

Still, the Americans are quietly confident of retaining their global crown.

They now dominate the fees league tables even in Europe, the Middle East and Africa, so they are well-positioned to benefit from the long-awaited uptick in the European economy.

Their sheer size and breadth allows them to serve clients right across the globe in a way that is increasingly impossible for the shrinking Europeans, giving them a powerful marketing unique selling point.


Related Banking Weekly podcast: An ethical review, European investment banks shrink and the oil threat to US banks

RWE and Eon feel the heat as groups report losses

This week was another difficult one for European utilities, with the German companies Eon and RWE both reporting a slump in results, writes Kiran Stacey.

RWE said on Tuesday that Npower, its UK business, had lost €137m last year and would shed 2,400 jobs — a fifth of its workforce.

RWE blamed the loss on “serious process and system-related problems” in billing, which affected more than 500,000 customers between September 2013 and December 2014. Npower was fined a record £26m by Ofgem, the energy regulator, last year over its failure to treat customers fairly.

RWE has been struggling with the same difficulties faced by other German power groups, whose profit margins at gas- and coal-fired plants have been squeezed as the government moves towards renewables.

Peter Terium, RWE chief executive, said that with the German wholesale electricity price of about €20 per megawatt hour, coal and gas-fired power stations could not survive.

“We cannot expect any lasting improvement in this dramatic situation in the foreseeable future,” he added. “There is no rapid recovery of wholesale electricity prices in sight.”

Eon gave another indication of these problems on Wednesday, when it said it would write down the value of its coal and gas stations by €8.8bn. That led to the company’s biggest ever net loss of €7bn, more than double the €3.2bn loss recorded in 2014.

Johannes Teyssen, the chief executive, said the downturn it faced would be “tougher and longer than anticipated”.

Sharapova drug admission plays poorly with sponsors

Maria Sharapova, the world’s highest earning female sports star, lost three key corporate sponsors this week but had one reconfirm its support, after the Russian tennis player admitted failing a drug test, writes John Murray Brown.

Maria Sharapova of Russia prepares to hit against Tatiana Golovin of France during her semi-final match at the Nasdaq-100 Open tennis tournament in Key Biscayne, Florida March 30, 2006. REUTERS/Marc Serota©Reuters

Nike, the US sportswear group, said it was “saddened and surprised” and had decided to suspend its relationship after the former Wimbledon champion revealed she had tested positive for a banned substance following the Australian Open in January.

TAG Heuer, the Swiss watch brand owned by luxury company LVMH, followed suit while Porsche, the German carmaker, said it would “postpone planned activities” with the player until further details were released.

Head, the racket maker, said it planned to extend its contract, however, and commended as admirable “the honesty and courage she displayed in announcing and acknowledging her mistake”.

Ms Sharapova receives more than $20m a year in endorsements, a figure that is six times larger than her 2015 winnings on court.

The sponsorship deals give companies image rights and access to the star’s social media audience. The tennis player has more than 15m followers on Facebook and 2m on Twitter.

But scandals have left sponsors nervous about the value of relationships with sports and athletes.

Some commentators were surprised by the speed of the sponsors’ reaction, however, suggesting the scandal was being used to ditch a client, who earns huge fees but is a fading star on court.

Ms Sharapova, who could face a four-year ban under the sport’s rules, said she had been taking the drug meldonium — under its alternative name, mildronate — for the past 10 years for health reasons and had not known it was banned.

Meldonium was added to the World Anti-Doping Agency’s list of banned substances on January 1.

Related Short View column: Signs of life behind the rouble

G4S exits Israel as profits plunge and blunders build

G4S is the biggest security company in the world but it still sets alarm bells ringing with surprising frequency — a record it added to this week as it announced a fall in profits, writes Gill Plimmer.

G4S USA 2016. G4S security officer on perimeter patrol at a power station. Credit: Tom Parker/OneRedEye

The company mismanaged the guarding of the 2012 London Olympic Games and was later forced to admit it had charged the UK government for electronically tagging criminals who were already dead. More recently, staff were caught on camera allegedly abusing teenagers at a youth offenders institute in Kent, south-east England.

The noise has finally got to Ashley Almanza, the publicity-shy head brought in to restore the company’s fortunes in 2013.

G4S has already exited a contract to clean the US detention centre at Guantánamo Bay and on Wednesday said it would quit Israel, where it employs 8,000 staff, some of whom install security equipment at prisons in the West Bank.

Pro-Palestinian campaign groups, which have pursued their cause in human rights tribunals, declared the announcement their victory.

Mr Almanza may be hoping the change in strategy will buy a quieter life. But a lossmaking contract housing asylum seekers in Britain has cost it £31m and may leave it with a further £57m bill by the end of the decade.

With pre-tax profits falling 40 per cent to £78m in 2015, and cash flow down 13 per cent to £460m, it is the debt that is increasing — up £143m to nearly £1.8bn last year. As the share price hovers around 183p, its lowest since autumn 2008, it is investors who are now clamouring for attention.

Related Lex note: Safety in numbers

Bethune put forward amid United shareholders’ revolt

Gordon Bethune, the man credited with the rescue of Continental Airlines, became involved in a shareholder battle at its successor company this week, write FT reporters.

Gordon Bethune, CEO of Continental Airlines, listens during a press conference in New York on September 13, 2004 announcing the addition of three airlines to the SkyTeam Alliance. Continental, KLM Royal Dutch, and Northwest airlines are now full members of the alliance. Photographer: Daniel Acker/Bloomberg News.©Bloomberg

Former Continental CEO Gordon Bethune

He was one of six candidates nominated to join the board of United Airlines, which was formed in 2010 from the merger of United and Continental.

All of the candidates were put forward by two United shareholders who have accused the company of “substantial and inexcusable . . . underperformance” in the US aviation market.

The campaign also highlights the tough start Oscar Munoz is having as chief executive of United Airlines.

Next week, he is due to return to work after nearly five months away following a heart attack. When he suffered health problems last October, he had been United’s top manager for less than six weeks.

He replaced Jeff Smisek, who was forced to stand down amid a federal investigation into allegations that United bestowed favours on the former chairman of the New York and New Jersey port authority, owner of the area’s three airports.

Altimeter Capital and PAR Capital — the two United shareholders behind the proxy battle, with 7.1 per cent of the stock of the airline’s parent company — say “meaningful change” is needed. In a letter to the chairman, Henry Meyer, they criticised “longstanding poor board governance” and “years of substantial and inexcusable underperformance relative to United’s competitors”. United is less profitable than American Airlines and Delta Air Lines, its two main peers.

Mr Meyer said United had attempted a dialogue with the two shareholders, and was “deeply disappointed” that they had taken “this hostile action” — warning it could distract the company from its strategic plan.

Related video: Airlines face pilot shortage crisis

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