U.K. Considers Letting Banks Pay Bigger Bonuses
The British government, led by new Prime Minister Liz Truss, is looking at ways to attract financial stars from New York and elsewhere
LONDON—The U.K. is considering a plan to allow banks to pay bigger bonuses to their star traders and bankers, the latest salvo in an intensifying competition between London and other financial hubs about where to trade and invest money.
Since 2014, U.K. banks have been subject to European Union rules that restrict banks from paying bonuses of more than twice an employee’s salary. For bankers earning $500,000, that means they can get no more than a $1 million bonus.
U.K. Prime Minister Liz Truss, who took office this month, is an acolyte of Margaret Thatcher and has pledged to follow the late prime minister’s lead in deregulating the financial sector. Ms. Truss has said easing rules on business would stimulate the U.K.’s moribund economy and maintain London’s perch as one of the world’s leading trading centers.
The U.K. can lift the cap because it is no longer part of the EU, the trading bloc that it fully departed last year as a result of the 2016 Brexit referendum.
In potentially the big first step toward further deregulation, the new chancellor of the exchequer, Kwasi Kwarteng, is considering lifting the bonus cap, a Treasury official said Thursday. The Financial Times newspaper first reported the plan.
The Bank of England, which regulates banks in the U.K., said it opposed the cap and that it believed in other ways to limit financial risk taking, such as rules that allow banks to recoup bonuses if trades go bad.
The bonus cap was part of Europe’s response to the 2008 global financial crisis. The EU argued that the prospect of big end-of-year bonuses had encouraged bankers to engage in risky trading and investments that contributed to the collapse of financial markets. They put the cap in place to reduce the incentives for risk taking.
Banks opposed the rules. They have said the cap hasn’t reduced bankers’ incentives but has simply shifted how they are paid, toward higher fixed salaries. That shift, they say, has meant that bankers get paid high salaries even in years when they perform poorly.
London’s financial sector is facing some competition from European cities like Paris and Amsterdam in the wake of Brexit. France and Italy have offered tax incentives to woo Londoners and other rich expats after Brexit. The EU has moved to requiring certain financial functions to take place on the continent.
William Wright, managing director of New Financial LLP, a finance industry-backed research group, said there was anecdotal evidence that top finance executives in New York have resisted moving to London because of the salary cap.
He said evidence supports the banks’ claims that the cap has, inadvertently, boosted many bankers’ fixed salaries, but that scrapping the bonus cap now—when inflation is soaring and the public is mourning the death of Queen Elizabeth II—could lead to a political backlash.
“Scrapping the bonus tax would be seen by many voters—at a time when they’re facing a cost-of-living crisis and the highest inflation in 40 years—as the government prioritizing allowing already highly paid wealthy individuals to be paid more,” Mr. Wright said.
Ethereum’s merge: a Netscape moment for Web3?
Five issues that will determine the significance of the crypto world’s switch
Has Web3 just had its Netscape moment? The launch of the first web browser in 1994 was a turning point for the internet. Now, if crypto enthusiasts are to be believed, the switch by the Ethereum blockchain to a new system for validating transactions — a move known as “the merge” — is an equally historic moment for what has become known as Web3.
Moving away from its previous, energy-intensive validation mechanism puts Ethereum on a more sustainable long-term path. For the network that has become the main platform for blockchain-based applications like non-fungible tokens and decentralised finance, that is certainly significant.
But nine years after Ethereum was launched, there is still a long way to go. Here are five issues that will help to determine whether or not the merge will one day be seen as a significant moment in the history of the internet.
First, the new validation mechanism, known as proof of stake, doesn’t on its own do anything to solve one of Ethereum’s biggest problems: that it can handle only 15 transactions per second (tps), a bottleneck that has led to very high transaction fees.
The merge at least clears the way for the network’s next big step, scheduled for the second half of next year. Called “sharding”, this would involve splitting the Ethereum database into 64 fragments. Since every computer on the network would no longer need to keep a record of every transaction, it would greatly increase overall capacity and speed.
There are still big, unresolved technical questions about how this will work. Also, sharding will not be a complete solution. A 64-fold increase would lift the network’s capacity to nearly 1,000 tps — not far off the 1,700 tps capacity of the Visa network. But the promise of Web3 is to use blockchain technology to mediate every online interaction, meaning far greater capacity will be needed.
Second, the merge brings with it a whole set of unknown risks. Essentially, a market currently worth $200bn is being shifted on to entirely new foundations, with new mechanisms and new roles for market intermediaries that haven’t been tested in real-world conditions.
Rather than the risks, many market participants are likely to be more focused on the potential for higher returns. Under the new proof of stake system, holders lodge their ether as collateral to validate transactions in return for “staking rewards”. That has turned a previously unproductive asset into one that now offers a yield — something that many investors are likely to find attractive. But at this stage, it’s anyone’s guess whether the yield will compensate for the new risks — not to mention the huge volatility in the cryptocurrency itself.
Third, the build-out of a broader layer of market infrastructure on top of Ethereum is still in its infancy. So-called layer-two networks, like Polygon and Optimism, act as “roll ups”, batching up many individual transactions themselves and lodging only a single entry back on the Ethereum blockchain. Along with sharding, Ethereum’s backers claim this might lift overall capacity to 100,000 tps.
The companies that operate on top of Ethereum in this way could themselves become powerful new intermediaries in the blockchain world — something that runs counter to the ideal of decentralisation on which crypto is founded.
This leads to the fourth point: as the broader Ethereum system evolves, its backers will have to ditch some of the crypto world’s ideological baggage in favour of a greater pragmatism. The challenge will be to work out which ideals can be compromised in the interests of a more workable system.
The emergence of influential new intermediaries could also give governments a new point of leverage over the system. For instance, if large numbers of holders turn to crypto exchanges for help with staking, then those exchanges would play an important role in validating transactions. That could expose them to political pressure to block certain transactions in pursuit of financial sanctions.
Fifth, and finally, improving the underlying blockchain infrastructure will do nothing to solve Web3’s biggest challenge: demonstrating why this technology is needed in the first place.
The optimists claim that, with the merge completed and work well under way on solving Ethereum’s scaling challenges, effort will shift increasingly to building the consumer-friendly experiences needed to draw large numbers of users. That means devising things like crypto wallets and marketplaces for digital assets that are easier for ordinary mortals to use. It also means coming up with entirely new applications that could not have worked as well on the existing web.
The Ethereum merge doesn’t provide any clues about what those uses might be. But, to paraphrase Winston Churchill, it at least shows that Web3 has got to the end of the beginning.
Fosun: sell the trophy assets first
Data suggest the highly indebted Chinese conglomerate is in a bad place
Fosun is showing signs of stress. The highly indebted Chinese conglomerate has alarmed investors with one of its entities planning to cut its holding in a core healthcare unit. It has followed up by saying it will file a lawsuit against Bloomberg. The bone of contention was a news report alleging that regulators asked some lenders and state-owned companies to examine their exposure to Fosun.
Shares plunged then rallied after Fosun denied the report, which it said had “seriously misled investors”. But the spat between the business and the media group changes nothing financially. Data suggest Fosun is in a bad place.
Hong Kong-listed shares have nearly halved in the past year to a decade low. Some of its offshore bonds have fallen below 45 cents on the dollar.
The group owns a sprawl of businesses from French resort group Club Med to English football club Wolverhampton Wanderers. Net liabilities make up 83 per cent of Fosun’s enterprise value, according to S&P Global. Bond repayments through next year are expected to be as much as $8bn. Debt has grown amid a drop in earnings, which fell by a third in the first half.
It is equally pertinent to ask how strong the political credit of Fosun is with the Chinese Communist party.
The government has been reining in conglomerates that expanded overseas via takeovers. Deleveraging is a key policy goal. Beijing restricted large overseas investment sprees five years ago, especially in areas such as hotels, entertainment, real estate and sports clubs. These were areas where Fosun had been an active acquirer.
The parallel is with local peers HNA and Anbang. Debt-fuelled foreign acquisition sprees triggered official disapproval. The authorities jailed or detained top executives from Anbang and HNA. The Chinese government seized Anbang in 2018, HNA went into bankruptcy administration last year.
A key differentiating factor between these groups and Fosun is
subsidiary Fosun Pharma. The healthcare unit, which is the Chinese partner of German biotech company BioNTech, posted surging earnings and sales last year on the back of Covid-19 vaccines sales.
The Fosun entity’s plan to cut holdings in this core asset looks like a financial and political mistake. The 3 percentage point reduction in a reported indirect stake of 38 per cent would not be large. But it points to a dangerous direction of travel. Fosun should sell overseas trophy assets first.
Research Calls
- Upgrades:
- Activision Blizzard (ATVI) upgraded to Overweight from Neutral at Atlantic Equities; tgt lowered to $84
- Chart Industries (GTLS) upgraded to Buy from Neutral at Goldman; tgt raised to $259
- Deckers Outdoor (DECK) upgraded to Outperform from Neutral at Wedbush; tgt raised to $410
- Delek US Holdings (DK) upgraded to Outperform from Peer Perform at Wolfe Research; tgt $49
- Enviva (EVA) upgraded to Outperform from Mkt Perform at Raymond James; tgt $80
- GlaxoSmithKline (GSK) upgraded to Neutral from Underperform at Credit Suisse
- Hilton (HLT) upgraded to Buy from Hold at Berenberg; tgt raised to $152
- Hyatt Hotels (H) upgraded to Buy from Hold at Berenberg; tgt raised to $105
- Marriott (MAR) upgraded to Buy from Hold at Berenberg; tgt raised to $185
- Masimo (MASI) upgraded to Outperform from Peer Perform at Wolfe Research; tgt $165
- Netflix (NFLX) upgraded to Outperform from In-line at Evercore ISI; tgt raised to $300
- Nokia (NOK) upgraded to Outperform from Neutral at Credit Suisse
- Nordstrom (JWN) upgraded to Buy from Hold at Jefferies; tgt raised to $24
- Novartis AG (NVS) downgraded to Underperform from Neutral at Credit Suisse
- EOG Resources (EOG) upgraded to Overweight from Neutral at JP Morgan; tgt raised to $156
- PBF Energy (PBF) upgraded to Outperform from Underperform at Wolfe Research; tgt raised to $49
- Roche Hldg (RHHBY) upgraded to Outperform from Neutral at Credit Suisse
- Snam SPA (SNMRY) upgraded to Buy from Hold at Societe Generale
- Swisscom (SCMWY) upgraded to Neutral from Sell at UBS
- Terna Rete Elettrica (TERRF) upgraded to Buy from Hold at Societe Generale
- Vermilion Energy (VET) upgraded to Neutral from Underweight at JP Morgan
- Wynn Resorts (WYNN) upgraded to Outperform from Neutral at Credit Suisse; tgt $117
- Downgrades:
- AstraZeneca (AZN) downgraded to Neutral from Outperform at Credit Suisse
- CVR Energy (CVI) downgraded to Peer Perform from Outperform at Wolfe Research
- Devon Energy (DVN) downgraded to Neutral from Overweight at JP Morgan; tgt $83
- Ericsson (ERIC) downgraded to Underperform from Outperform at Credit Suisse
- Electronic Arts (EA) downgraded to Neutral from Overweight at Atlantic Equities; tgt lowered to $130
- IronNet (IRNT) downgraded to Sell from Neutral at BTIG Research; tgt $0.15
- Kohl's (KSS) downgraded to Hold from Buy at Jefferies; tgt lowered to $29
- Munich Re (MURGY) downgraded to Neutral from Buy at UBS
- Phillips 66 (PSX) downgraded to Peer Perform from Outperform at Wolfe Research
- The Duckhorn Portfolio (NAPA) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $19
- Others:
- Alkami Technology (ALKT) initiated with an Overweight at Stephens; tgt $18
- AppFolio (APPF) initiated with a Buy at Berenberg; tgt $130
- Axon (AXON) initiated with an Overweight at Barclays; tgt $147
- Ball Corp (BALL) initiated with a Neutral at UBS; tgt $64
- BioAtla (BCAB) initiated with a Mkt Outperform at JMP Securities; tgt $17
- Bill.com (BILL) initiated with a Positive at Susquehanna; tgt $190
- Bumble Inc. (BMBL) resumed with a Buy at Stifel; tgt $35
- Capital Bancorp (CBNK) initiated with a Buy at Janney
- Crown (CCK) initiated with a Neutral at UBS; tgt $105
- Euronet (EEFT) initiated with an Equal-Weight at Stephens; tgt $95
- Fortinet (FTNT) initiated with a Buy at Jefferies; tgt $65
- KemPharm (KMPH) initiated with a Buy at Canaccord Genuity; tgt $20
- KnowBe4 (KNBE)initiated with a Buy at DA Davidson; tgt $25
- Landsea Homes (LSEA) initiated with a Neutral at BTIG Research
- Lucid Group (LCID) resumed with a Buy at Citigroup; tgt $28
- Match Group (MTCH) initiated with a Hold at Stifel; tgt $62
- Mirati Therapeutics (MRTX) initiated with an Overweight at Piper Sandler; tgt $110
- Okta (OKTA) initiated with a Buy at Jefferies; tgt $90
- Palo Alto Networks (PANW) assumed with a Buy at Jefferies; tgt $220
- Permian Resources (PR) upgraded to Overweight from Neutral at JP Morgan; tgt $12
- Quanta Services (PWR) downgraded to Neutral from Buy at Goldman; tgt $150
- Zscaler (ZS) initiated with a Hold at Jefferies; tgt $200
Gapping down
In reaction to earnings/guidance:
- ARNC -9.8%
Other news:
- IDYA -14.5% (prices offering of 7619048 shares of its common stock at $10.50 per share)
- RYTM -11.7% (prices offering of 4.8 mln shares of common stock at $26.00 per share)
- RBBN -3.5% (files common stock offering by selling shareholders)
- DDI -3.5% (files common stock offering by selling shareholder)
- NEE -3.4% (to sell $2.0 bln of equity units)
- SJM -3% (announces creation of a Transformation Office)
- AKRO -2.5% (prices offering of 7692308 shares of its common stock at $26.00 per share)
- AMPS -2.4% (redeems public and private placement warrants)
- PYPL -1.1% (CFO is taking a leave of absence)
Analyst comments:
- EA -1.1% (downgraded to Neutral from Overweight at Atlantic Equities)
Gapping up
In reaction to earnings/guidance:
- HUM +4.8%.
Other news:
- NETI +8.2% (authorizes up to $50 mln for share repurchases)
- VLD +6.1% (Kevton Industries subsidiary acquires seven of its Sapphire printers)
- FTCI +5.3% (introduced a new and differentiated one module in portrait (1P) Solar Tracker Solution)
- TGLS +5% (provides update on high-return strategic capex propelled by incremental demand)
- CSX +4.1% (trading higher following tentative railway labor agreement)
- UNP +3.8% (trading higher following tentative railway labor agreement)
- BCLI +3.8% (announces peer reviewed publication of results from the NurOwn Phase 2 Progressive MS Trial)
- DHR +3.6% (spinning off its Environmental & Applied Solutions segment)
- VMEO +3.1% (reports August statistics)
- NSC +3.1% (trading higher following tentative railway labor agreement)
- APA +3% (increases quarterly dividend and share buyback authorization)
- FTI +2.9% (awarded contract by TotalEnergies)
- WSM +2.6% (appoints new CFO upon former CFO's departure)
- MNSO +1.3% (announces substantial completion of independent investigation)
Analyst comments:
- HLT +0.9% (upgraded to Buy from Hold at Berenberg)
- MAR +0.9% (upgraded to Buy from Hold at Berenberg)
Early premarket gappers
- Gapping up:
- NETI +8.2%, VLD +7.8%, FTI +6.2%, CMP +5.1%, DHR +4.2%, UNP +3.5%, OCSL +3.4%, APA +3.3%, VMEO +3.1%, WSM +2.6%, CSX +1.9%, NSC +1.7%, BCLI +1.4%, HL +1.3%, FSM +1.2%, EL +1.1%, LICY +1%, SPIR +0.7%
- Gapping down:
- RYTM -12.5%, IDYA -12.1%, ARNC -9.7%, RBBN -3.5%, DDI -3.5%, NEE -3%, SJM -3%, PYPL -0.8%, AKRO -0.7%
EDF warns hit to profit from nuclear outages will reach €29bn
French power group under pressure to restart reactors as Europe faces energy crisis
EDF warned that core profits would take a €29bn hit this year from outages at France’s nuclear reactors, a sharp rise on its previous forecast just weeks ahead of full renationalisation by the French government.
More than half of the 56 reactors run by EDF are offline as corrosion problems discovered at some sites add to maintenance stoppages.
That has pushed output to three-decade lows, sapping electricity supply in a country that is normally an exporter of power and forcing the company to buy power on wholesale markets that have become hugely costly as Russia chokes gas supplies to Europe.
EDF had previously estimated the hit to its earnings before interest, taxes, depreciation and amortisation at €24bn for 2022.
The group, which is 84 per cent controlled by the state and has come under government pressure to get its reactors running again for the winter, has said restarts are on track and capacity should return to last winter’s levels.
Even so, France’s grid operator has warned that targeted power cuts may be needed at moments of strain on the system in the coming months unless households moderate their energy use.
The French government is poised in the coming weeks to launch a tender offer for the 16 per cent of EDF it does not already own. It has said it wants to take full control as EDF gears up to build new reactors and addresses operational problems.
People close to the operation have said the company’s financial woes have added to incentives to remove it from the glare of markets.
EDF’s finances were also hit this year by government measures to cap electricity bills for households. The caps on price rises will be extended into 2023, with power bill rises limited to 15 per cent, although it is unclear whether EDF will be made to shoulder some of the cost of the measure.