Amazon and Netflix to throttle services in net neutrality protest
Online shopping giant joins dozens of organisations demanding a fast internet connection for all data equally.
http://news.sky.com/story/amazon-and-netflix-to-throttle-services-in-net-neutrality-protest-10944338
Some of the world's largest internet companies are preparing to throttle their own websites in a day of protest against the United States' Federal Communications Commission (FCC).
The 170 organisations involved - including Amazon, Reddit and Netflix - are preparing to choke their own services on Wednesday 12 July as a warning against FCC proposals for deregulating how internet service providers (ISPs) treat customers.
They allege the proposed deregulation would "destroy net neutrality and give big cable companies control over what we see and do online" - but what exactly is net neutrality?
Net neutrality is a term coined in 2003 to describe the principle that ISPs should treat all of the data they're providing to customers equally, and not to use their own infrastructure to block out competitors.
In a fairly classical regulatory brouhaha, most of the big cable companies which the protest movement think would be at liberty to act maliciously have come forward in support of the FCC's proposals.
However, all of those companies state that they are supporters of net neutrality and that the protest movement is mistaken in its opposition to the FCC's plans.
What are the FCC's plans?
The FCC's chairman, Ajit Pai, expressed his desire to remove a rule called the Open Internet Order, which had been put in place under the Obama administration.
One specific part of the Open Internet Order called Title II established that broadband should be a particularly regulated service - and that ISPs were required to maintain internet connections of a certain speed to everything that their customers wished to access.
Announcing the proposal to deregulate, Mr Pai described the internet as "the greatest free-market success story in history.
"But two years ago, the federal government's approach suddenly changed. The FCC, on a party-line vote, decided to impose a set of heavy-handed regulations upon the internet.
"It decided to slap an old regulatory framework called 'Title II' - originally designed in the 1930s for the Ma Bell telephone monopoly - upon thousands of internet service providers, big and small."
This was "all about politics" said Mr Pai before arguing that the increased regulatory burden was reducing investment in broadband infrastructure.
This notion has received considerable support from cable companies such as Comcast, whose senior executive vice president, David Cohen, wrote: "While some try to conflate the two issues, Title II and net neutrality are not the same.
"Title II is a source of authority to impose enforceable net neutrality rules. Title II is not net neutrality. Getting rid of Title II does not mean that we are repealing net neutrality protections for American consumers."
Not everybody agrees, however.
What's going to happen?
The Electronic Frontier Foundation, a leading digital civil liberties organisation, claims that more than 40 ISPs across the US have written to the FCC to explain that Title II has not hurt their ability to develop and expand their networks.
The EFF has been an active participant in these protests whenever they have occurred before.
In 2012, an online protest included Google and Wikipedia replacing their websites with pages protesting the proposed Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA).
The result of this protest was considerable, with lobbying leading to two of PIPA's sponsors withdrawing their support for the bill, including a man who would later seek Presidential nomination from the Republican Party, Marco Rubio.
Another slowdown in 2014 took place to highlight net neutrality issues. The organisation behind that protest claimed that more than 2,030,000 individuals took part in it, sending over 2,300,000 emails to members of Congress to convince their legislators to protect net neutrality.
The ultimate result of that protest? It was the FCC adopting the very same Open Internet Order which Mr Pai is now proposing to replace.
U.S. Agency Moves to Allow Class-Action Lawsuits Against Financial Firms
The nation’s consumer watchdog adopted a rule on Monday that would pry open the courtroom doors for millions of Americans, by prohibiting financial firms from forcing them into arbitration in disputes over their bank and credit card accounts.
The action, by the Consumer Financial Protection Bureau, would deal a serious blow to banks and other financial firms, freeing consumers to band together in class-action lawsuits that could cost the institutions billions of dollars.
“A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law,” Richard Cordray, the director of the consumer agency, said in a statement.
The new rule, which could take effect next year, is almost certain to set off a political firestorm in Washington. Both the Trump administration and House Republicans have pushed to rein in the consumer finance agency as part of a broader effort to lighten regulation on the financial industry.
Continue reading the main story
RELATED COVERAGE
BEWARE THE FINE PRINT | PART I
Arbitration Everywhere, Stacking the Deck of Justice OCT. 31, 2015
BEWARE THE FINE PRINT | PART II
In Arbitration, a ‘Privatization of the Justice System’ NOV. 1, 2015
BEWARE THE FINE PRINT | PART III
In Religious Arbitration, Scripture Is the Rule of Law NOV. 2, 2015
video
Beware the Fine Print NOV. 1, 2015
The rule “should be thoroughly rejected by Congress under the Congressional Review Act,” said Representative Jeb Hensarling, the Texas Republican who has been leading the charge to weaken the agency. “In the last election, the American people voted to drain the D.C. swamp of capricious, unaccountable bureaucrats who wish to control their lives.”
Under the Congressional Review Act — a 1996 law that had been rarely used before the current Congress employed it to reverse 14 rules from the Obama administration — lawmakers have about 60 legislative days to overturn the rule blocking mandatory arbitrations.
But as much as Republicans deplore the consumer protection agency, they may find it difficult to kill a rule that could have wide populist appeal. Across the country, judges, prosecutors and regulators have sharply criticized arbitration clauses for allowing corporations to circumvent the courts and for taking away tools to fight abusive business practices.
The new rule would unwind a series of legal maneuvers undertaken by major American companies to block customers from going to court to fight potentially harmful business practices.
The rule is one of the signature efforts of the Consumer Financial Protection Bureau, which was created in 2010 as part of the Dodd-Frank regulatory overhaul to safeguard the rights of millions of Americans in the aftermath of the mortgage crisis.
At a time when Dodd-Frank has come under attack, the arbitration initiative from the consumer finance agency — which operates independently from the Trump administration — is a provocative stand against the prevailing political tide in Washington.
Indeed, the rule is largely unchanged from when it was issued in draft form in May 2016 and the agency began soliciting comments from industry.
It is that kind of independence that has drawn particular ire from Republicans.
Mr. Hensarling already sent a letter last week threatening contempt proceedings against Mr. Cordray, the agency’s director, faulting the agency for failing to comply with a subpoena related to its work on the arbitration issue.
The Chamber of Commerce echoed Mr. Hensarling’s critique, saying, “The C.F.P.B.’s brazen finalization of the arbitration rule is a prime example of an agency gone rogue.”
The chamber and other pro-business groups have belittled the rule as nothing more than a gift to class-action lawyers, who tend to be Democratic donors.
Last month, the Treasury Department issued a report recommending that the Consumer Financial Protection Bureau be held in check, accusing it of regulatory overreach and calling for the president to be able to remove its director.
Supporters of the agency say arbitration is exactly the kind of issue that requires independence from corporate interests.
Over decades, financial institutions, led by credit card companies, figured out a way to use the fine print of their contracts to force consumers into private arbitration, a secretive process in which borrowers have to go up on their own against powerful companies with deep pockets.
Prevented from banding together in a class and pooling their resources, most people simply abandon their claims entirely, never making it to arbitration at all.
The new rule could change all that when it comes to consumer finance. While the protections would not apply to existing accounts, consumers could pay off old loans and get new accounts that would fall under the new rule.
The rule, which would take effect 60 days after its publication in the Federal Register, does not explicitly outlaw arbitration, but industry lawyers say it will effectively kill the practice.
“If this rule goes into effect, what we are going to see is a huge avalanche of litigation and a loss to consumers of the benefits of arbitration,” said Alan S. Kaplinsky, a lawyer with the firm Ballard Spahr in Philadelphia who is widely considered the father of arbitration clauses.
To Mr. Kaplinsky, who opposes the rule, arbitration offers a faster and more efficient way to resolve legal disputes.
In the debate about arbitration, those assertions were almost entirely anecdotal. There is no federal database that tracks arbitrations, and the process is entirely secretive.
To get beyond the anecdotal, The New York Times assembled its own database of arbitrations in a series of articles in 2015 that showed that few people ever go to arbitration.
In financial disputes, the numbers are particularly startling. In its investigation, The Times found that from 2010 to 2014, only 505 consumers — a fraction of the tens of millions of Americans whose financial contracts have arbitration clauses — went to arbitration over disputes of $2,500 or less.
That reluctance is why one federal judge remarked in an opinion that “only a lunatic or a fanatic sues for $30.”
By banning class actions, companies essentially squashed challenges to practices such as predatory lending, wage theft, sexual discrimination and medical malpractice.
Among the class actions derailed over the years by arbitration was a case brought by Citigroup customers who accused the bank of tricking them into insurance that they were never eligible to use. In another, a group of merchants challenged American Express over high processing fees.
The rule from the Consumer Financial Protection Bureau would apply only to the financial companies regulated by the agency and would not touch arbitration clauses buried in the fine print of nursing home or employment contracts.
Clauses embedded in those contracts have pushed out of view disputes about elder abuse, sexual harassment and even wrongful deaths.
Recognizing that problem, the federal agency that controls more than $1 trillion in Medicare and Medicaid funding proposed a rule last September that would have barred any nursing home that gets federal funding from requiring residents to resolve disputes in arbitration. But the protection was fleeting. Soon after Mr. Trump took office, his administration moved to scrap it.
In some ways, the fate of the nursing home rule adds urgency to the efforts by the consumer bureau. The agency’s action represents the first significant blow to arbitration since two Supreme Court decisions, in 2011 and 2013, enshrined its use.
Those rulings, which initially drew scant attention outside the cloistered legal world, upended decades of jurisprudence that had been put in place to protect workers and consumers.
To stop the spread of class-action lawsuits, a coalition of credit card companies used an arcane federal law dating to 1925 that formalized arbitration as a way for companies of equal bargaining power to resolve corporate disputes. Starting in the early 2000s, the credit card companies began to use arbitration for disputes with their customers.
Today, it is virtually impossible to apply for a credit card, rent a car, get cable or internet service, or shop online without agreeing to private arbitration.
As arbitration crept into tens of millions of contracts, prosecutors, judges and lawmakers started sounding alarms. In the Dodd-Frank law, the consumer agency was specifically mandated to examine arbitration.
The analysis culminated in a 728-page report, released in March 2015, that showed how few consumers went to arbitration once they were prevented from joining a class action. For those who did go through with arbitration, the agency found, the results were dismal. During the period studied, only 78 arbitration claims resulted in judgments in favor of consumers, who got $400,000 in total relief.
The financial industry balked at the findings, arguing that on a person-by-person basis, consumers wound up with more money in arbitration than in class actions.
But law professors and judges, including some appointed by conservative presidents, say the amount of money an individual obtains in a class action is beside the point. Class actions, they argue, are intended to help big groups of people get back small amounts of money — say a $35 overdraft fee. More important, supporters say, class actions can push companies to get rid of questionable business practices.
Big banks, for example, had to pay more than $1 billion to settle class-action lawsuits that started in 2009 and accused them of monkeying with checking account policies to maximize the number of overdraft fees they could charge customers.
In the aftermath of the litigation, seven of the banks involved have adopted arbitration clauses to their contracts.
WASHINGTON — U.S. House Republicans expect to introduce bills later this week that would bar states from setting their own rules for self-driving cars and take other steps to remove obstacles to putting such vehicles on the road, a spokeswoman said.
The legislative action comes as major automakers are joining forces with auto suppliers and other groups to prod Congress into action.
Last month, a U.S. House of Representatives Energy and Commerce subcommittee held a hearing on a Republican draft package of 14 bills that would allow U.S. regulators to exempt up to 100,000 vehicles a year per manufacturer from federal motor vehicle safety rules that prevent the sale of self-driving vehicles without human controls.
Blair Ellis, a spokeswoman for the committee, said on Monday it was likely that legislation would be introduced this week and a formal hearing on the bills would occur next week.
Continue reading the main story
Republican U.S. Representative Robert Latta said last month he hoped to win committee approval of a bipartisan legislative package by the end of July.
The draft measures would bar states from setting self-driving rules and prevent the National Highway Traffic Safety Administration from pre-approving self-driving car technologies.
The Alliance of Automobile Manufacturers, a group representing General Motors Co, Volkswagen AG, Toyota Motor Corp and others, and the Association of Global Automakers, representing major foreign automakers including Honda Motor Co and Hyundai Motor Corp, are forming the Coalition for Future Mobility to press Congress to act.
The group, which includes the Motor & Equipment Manufacturers Association, National Federation of the Blind and Securing America’s Future Energy, a group of corporate officials and retired military leaders, plans to begin airing radio ads on Tuesday portraying the legislation as "liberating innovation for self-driving vehicles."
GM, Alphabet Inc, Tesla Inc and others have been lobbying Congress to pre-empt rules under consideration in California and other states that could limit self-driving vehicle deployment.
The administration of former Democratic President Barack Obama last year unveiled voluntary guidelines on self-driving cars. President Donald Trump's transportation secretary, Elaine Chao, has said she plans to quickly update those.
Warren Buffett’s Berkshire Moves Away From Stock Picking
Bid to buy Oncor is latest sign of the company’s growing reliance on running businesses
With its latest energy bid, Warren Buffett’s Berkshire Hathaway Inc. is relying less on stock picking for its future.
Last week, the billionaire investor’s firm offered to buy bankrupt power-transmission firm Energy Future Holdings Corp. for $9 billion in cash. Should the deal go through, Berkshire would be expanding its reliance on running stable and highly regulated industries to deliver growth.
Mr. Buffett rose to fame as a stock picker and continues to invest tens of billions in equities and other securities for Berkshire’s portfolio.
But today, those investments are “de-emphasized,” as Berkshire earns significantly more income from its operating businesses, Mr. Buffett said in his February letter to shareholders. Berkshire has undergone a “gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses,” he wrote.
The conglomerate’s shift toward regulated businesses began in 1999, when Berkshire announced an agreement to buy its first utility business, and accelerated with the 2009 agreement to acquire railroad Burlington Northern Santa Fe. Regulated businesses can yield steady returns, while stock investments are more volatile but can produce bigger wins. Berkshire also operates less-regulated businesses including retailers and manufacturers.
The energy and railroad businesses accounted for 24% of Berkshire’s 2016 net earnings, up from 8% a decade ago.
“The franchise has pivoted away from equity investments toward acquisitions,” said James Shanahan, senior equity-research analyst at Edward Jones. “The bigger the utility business gets, I think the more important it becomes that the leader of Berkshire Hathaway has a strong understanding of the operations of utility businesses.”
If Berkshire Hathaway Energy Co.’s deal to buy Energy Future Holdings and its Texas-based utility Oncor is approved, Oncor would increase the conglomerate’s earnings by about 2%, according to Morgan Stanley analysts.
The deal has been challenged by hedge fund Elliott Management Corp., which said it plans to put together its own deal with a higher valuation for Oncor.
One major ramification of the Oncor deal, should it go through, is that it would give more power to Berkshire Hathaway Energy’s chief executive, Greg Abel. Analysts say this purchase make them increasingly confident Mr. Abel is the leading candidate to succeed Mr. Buffett as chief executive of the parent company.
Mr. Abel, 55 years old, runs Berkshire Hathaway Energy similarly to how Mr. Buffett, 86, runs Berkshire. Both managers maintain small head offices—27 employees at Berkshire Hathaway Energy and 25 at Berkshire’s headquarters—and grant their subsidiary managers autonomy to run their businesses.
Before making its bid to buy Energy Future, Berkshire Hathaway Energy participated in talks with Texas regulators and major Oncor customers to make sure its bid would be acceptable to them, Oncor executives said in an interview. Regulators have scuttled two previous attempts to buy Energy Future’s 80% stake in Oncor.
“They went to Texas first,” said Bob Shapard, Oncor’s chief executive. “Berkshire brought [Energy Future] a deal that essentially had been settled with the major players in Austin.”
Berkshire Hathaway Energy, formerly known as MidAmerican Energy Holdings Co., has led some of Berkshire’s biggest acquisitions. This deal would significantly expand its customer base. Dallas-based Oncor serves 10 million Texans, and Berkshire Hathaway Energy serves 11.6 million customers in Midwestern and Western states, the U.K. and Canada through its utility and natural-gas businesses.
Mr. Abel joined the company in 1992 and became chief executive in 2008. Berkshire Hathaway Energy declined to make Mr. Abel available to comment.
Ajit Jain, who oversees many of Berkshire’s insurance operations, is also widely considered a potential successor to Mr. Buffett. Mr. Jain declined to comment. Berkshire has acquired insurers in recent years and launched a commercial-insurance company in 2013.
More broadly, Berkshire’s utility investments mark a different strategy than how Mr. Buffett built his firm decades ago, when he sought to buy companies like See’s Candies that required little capital investment.
As Berkshire has grown into a behemoth, Mr. Buffett has turned to acquiring regulated businesses that require consistent maintenance. The downside is these businesses require continuing capital investments, but that helps use up some of Berkshire’s massive cash pile. The utility businesses also earn tax credits for their investments in renewable energy, which Mr. Buffett can apply to the rest of the company’s balance sheet.
“It is probably a different act to maintain this company than it was to build it,” said Lawrence Cunningham, a law professor at George Washington University who has written about Berkshire. “Warren wasn’t doing this when Berkshire was much smaller, but nowadays, in the last 10 years, they’ve got so much capital.”
Mr. Buffett didn’t respond to a request for comment.
Mr. Buffett told shareholders at the company’s annual meeting in May that the next CEO’s main job would be capital allocation. Even if the Oncor deal closes, Berkshire has about $50 billion in cash available to spend, according to CFRA Research.
Louis Vuitton Launches Smartwatch With Google
The Tambour Horizon offers extensive opportunities for customization, in addition to exclusive travel-related functions.
PARIS — The smartwatch category may have yet to live up to its immense hype, but it is still attracting megabrands. The latest is Louis Vuitton, which is entering the smartwatch race with the launch of its first connected watch.
The Tambour Horizon, which hits Louis Vuitton stores today, is the fruit of a partnership with Google and offers extensive opportunities for customization, in addition to exclusive travel-related functions.
“We don’t know where the industry of connected objects is going. But we know it’s going to be massive. We have to participate,” said Michael Burke, chairman and chief executive officer of Louis Vuitton.
“We have to be audacious. We have to be risk takers. We have been risk takers for 160 years. But, in addition to that, time and travel are intimately linked. Our DNA is inscribed in travel and travel cannot exist without time and timekeeping,” he added.
The luxury brand’s move reflects the growing importance of connected devices, at a time when sales of mechanical timepieces are steadily eroding. Vuitton becomes the second brand within luxury conglomerate LVMH Moët Hennessy Louis Vuitton to collaborate with Google, after Tag Heuer in 2015.
After experiencing the breathless expansion of a new category and the buzzy 2015 introduction of the Apple Watch, smartwatch growth fizzled late last year.
Research from Strategy Analytics showed that global smartwatch shipments expanded by just 1 percent last year to 21.1 million units as consumers and manufacturers alike waited for updates from Google and Apple.
Cliff Raskind, director at Strategy Analytics, noted: “The smartwatch industry is showing tentative signs of recovery this year, but it is not fully out of the woods just yet and there remain several barriers to growth that must be addressed.”
He said vendors need to launch more exciting or cheaper models and that Apple needs to work with mobile operators to stock or subsidize its products while component makers have to develop more accurate sensors for health and fitness trading.
Still, connected devices have taken significant share from traditional watchmakers, particularly at the lower end of the price spectrum.
UBS equity analyst Helen Brand, noted recently: “The Apple Watch is now bigger than any Swiss watch brand bar Rolex. The wider wearables market is now likely 30-40 million [unit] volumes in total with Swiss watches industry volumes at 28 million. Market share may be further eroded for the Swiss industry as smart watches improve in functionality.”
All the more reason for brands such as Vuitton to get in on the game with its own take.
Vuitton is launching its smartwatch in tandem with a new mechanical watch, the Tambour Moon, signaling its intention to position the connected watch as an item every bit as luxurious as its existing models, with prices starting at 2,300 euros.
The Tambour Horizon, which functions on the Android Wear 2.0 platform, features a case made by Louis Vuitton’s manufacturer in Switzerland and a sapphire glass with a 24-hour display on the rim of the dial, preserving all the codes of Vuitton’s signature Tambour line, launched in 2002.
“They share the same case, and this is unique,” Burke said in an exclusive interview. “It’s identical lugs, identical straps. It required us talking to our Silicon Valley suppliers and telling them, this is our requirement. We’re first and foremost a Swiss-based watch manufacturer that happens to have a connected watch.”
David Singleton, vice president of engineering at Google, said the firm welcomed the challenge to fit its technology into a case just 42-mm. wide.
“I think that’s really exciting to have the same aesthetic between both because in some cases, getting a smartwatch is for some people making a compromise compared to the shape and the style that you might have in a mechanical watch, a high-end luxury watch. And with the Tambour Horizon, that’s not the case,” he said.
“Our strategy and our philosophy here has always been that when technology is going to be worn on your body, that style is really important. We really don’t think that you should have to make the compromise between the style that you present to the world and the technology that’s available to you in a wearable,” Singleton added.
Hamdi Chatti, vice president watches and jewelry at Louis Vuitton, noted it was the first time that Google had agreed to customize its operating system beyond the watch faces, which can be personalized in exactly the same way as a Vuitton bag with different backgrounds, colored stripes and initials.
“We wanted the best of this technology to be available in a product that is very beautiful, with functions that have a natural link with our universe, which is the universe of travel,” he said. “They understood that it had to be a total immersion in our universe.”
Every watch face has a marker indicating a second time zone, mimicking the GMT function on a mechanical watch. There are subtler touches too, like the LV logo that appears in the background when you call up the menu.
The Tambour Horizon has all the usual smartwatch functions, including notifications for phone calls, text messages and e-mails; alarm; countdown timer; weather forecast, and step counter. It provides access to Google Play Store, allowing users to download the apps of their choice.
In addition, it offers two exclusive functions: My Flight, which provides at-a-glance information including flight times, terminal and gate information, reports of delays and remaining flight hours, and City Guide, which has geolocalized recommendations for seven cities, taken from the guides edited by Vuitton.
Google has designed a navigation experience exclusive to Vuitton, with custom-made typefaces and notifications, including a monogram flower that pops up to say: “You’ve got mail.” The 24-hour display allows it to show information like hourly weather forecasts and store opening hours in a circular layout.
“It’s a really interesting synergy between the craftsmanship in the case and then the craftsmanship in the software,” Singleton said. “It feels like a Vuitton experience.”
The Tambour Horizon is the first Android Wear device that will be launching simultaneously in China and the rest of the world. “This is a very significant engineering effort to make that possible,” Singleton noted.
“Before today, it was the case that for our partners, when they’re selling watches in China, they run a slightly different version of the software, so actually being able to unify those versions, so for the consumer they have the choice, no matter where in the world they purchase the watch, was very important,” he added.
Both the Tambour Moon and the Tambour Horizon feature a new system of interchangeable straps that allows customers to build their own watch by selecting first a case, and then one of 60 straps. Choices include a Damier or Monogram canvas, alligator leather and styles borrowed from Vuitton’s leather goods.
The Tambour Horizon comes in a choice of three cases: graphite, which is made of stainless steel; black, which is finished in black PVD, and monogram, which features monogram flowers on the 24-hour ring. It charges by induction, with a battery autonomy of up to 22 hours during normal usage.
Burke said launching a connected watch was a natural move for the luxury firm. “You can either sit on the sidelines and observe, or you can dive in and be an actor. And Louis Vuitton, in our DNA, it’s inscribed that we have to be an actor,” he sa
Swissport is looking to switch up its bonds to avoid being bumped into a default after being bought by China’s HNA Group last year, in a sign of the growing scrutiny on aggressive Chinese acquisition techniques.
China’s HNA Group completed its acquisition of Swissport in early 2016, raising debt on its own account to finance the deal, along with high-yield bonds and leveraged loans under Swissport’s name.
Swissport says it was not until a year later that it discovered the financing also involved the Chinese group using pledges over shares in Swissport, which were used as collateral before the acquisition actually closed. Under the terms of existing debt contracts, that would trigger a technical default.
To avoid this, on Tuesday, it offered holders of bonds maturing in 2021 and 2022 the chance to exchange into new bonds, while consenting to “waive existing/past or alleged/potential defaults or claims”. If successful, the exercise will also remove “all restrictive covenants” under the old notes – a technique usually dubbed an “exit consent”, as it punishes investors that refuse to exchange into the new securities.
This year has seen increased scrutiny of the opaque financing techniques large Chinese conglomerates use to buy overseas assets, particularly after Chinese regulators asked banks to probe their exposure to Dalian Wanda, Fosun, HNA and Anbang last month.
Alongside the bond exchange, Swissport is also refinancing its some loan facilities while amending the terms of its credit agreement.
Barclays and JP Morgan are managing the exchange offer, which expires on August 7th.
Key takeaways
· 2Q17 revenues are unlikely to impress...but investment cases depend more on cost stories.
· CS remains our top pick in the EU IB space, while we remain Underperform on Deutsche Bank and Barclays.
· Potential US regulation changes could cause significant loss of competitiveness for EU IBs.
Credit Suisse is our top EU IB pick
JPM and Citi kick off the global IB reporting on Friday 14th July, while the Europeans start with DBK on the 27th July before a very busy day on the 28th when UBS, CS, BARC (and BNPP and BBVA) all report the same day. CS is our top pick in the European IB space where we still see >20% total returns. Our investment case requires the bank to continue delivering a clear route to achieve its business targets, in particular in costs where the company is adamant it will achieve <CHF17bn in costs by 2018: this would imply significant EPS upgrades. We remain Underperform on DBK and BARC.
What to watch 1: Europe versus US
Brexit volatility in June 2016 saw the Europeans lose out and US banks prosper, particularly in FICC (US FICC revenues were +23% yoy, EU -11%). This trend carried on for the rest of 2016. Comps are in theory easier for the Europeans than the US and 2Q17 should help determine how much of the market share losses are real and not just quarterly noise. BARC and DBK both have strategies to reinvigorate their IBs, but regardlessof 2Q, we believe the market should be more focused on the potentially divergent directions of regulation between the US and Europe which could cause meaningful headwinds in the medium term for the EU IBs.
What to watch 2: cost plan delivery vital
The EU IBs all have plans to cut costs even while they target better revenues. Given the regulatory cost inflation since the crisis, the market has been understandably skeptical on progress. Nevertheless, the banks see cost reductions from various legal entity programs (in particular forming the IHCs in the US) and reducing consultant/contractor headcounts (CS has the highest cost here and therefore could have the greatest capacity to make savings).
What to watch 3: NII may not match the recent excitement
Despite the excitement around central bank commentary and rising long bond yields, short term rates in Europe and Switzerland have not moved(not are they expected to move in the near term) and this means it is more likely that we see lower NII revenues, rather than higher. The erosion of NII as rates stand still is a particular headwind for DBK, in our view: 1Q17 NII fell EUR0.5bn qoq and undermine the more attractive scenario where +100bp in EUR and USD could add EUR1.4bn in extra NII.
2Q17 overview
FX is unhelpful qoq for the Swiss and balances some helpful market level moves (e.g. SPX up +3% in 2Q17…but down -2% in CHF terms). In the world of the IBs, debt issuance -11% yoy (high yield up +2%, IG -6%, MBS -26%), with ECM +12%. Trading volumes were +3% higher in fixed income, and generally stronger in equities (US cash -6%, EU cash +5%, US futures +9%, EU futures +19%). See the Capital Markets Monitor for more. Our forecasts show total EU IB revenues down -4% yoy (o/w equities -9% skewed by Asia and scope changes at CS, FICC -3% and fees -5%).
Executive summary
2Q17 reporting season starts this week
Global IB reporting kicks off on Friday with both JP Morgan and Citi. European IB reporting is bunched together the week after on Thursday 27thJuly (DBK) and 28th July (CS, UBS, BARC). Intra-quarter commentary from the US peer group suggested weaker FICC but better equities with some improvement in June versus April/May. For the readacross to Europe, it is important to note that prior year trends were very different with FICC -11% in Europe versus +23% for the US banks. We forecast IB revenues -4% with equities -9% (CS sees a bigger decline thanks to tougherAsia comps and scope changes in Global Markets), FICC -3% and IB fees -5%.
Comps about to get very tough for most banks
2Q16 saw Brexit and the start of a trend of political uncertainty, market volatility that boosted IB revenues for 2Q-4Q16. This contrasts somewhat with the more recent market activity which has in general been slower. This means that IB earnings could face several quarters of tough comps(e.g. 3Q16 FICC revenues were up +6% qoq last year, versus a normal c.-15% decline).
Wealth: no big moves in 2Q
Regularisation in WM remains a drag on inflows, but we see these effects reducing into 2018 for the larger Swiss which we believe have been more proactive. In terms of activity, we are not expecting a big bounce back in trading activity. Weaker dynamics of EUR and CHF business is partly offset by the positive effects of higher USD rates. We still see a continued or even accelerating trend towards ETFs which will remain a drag on gross margins (see charts below from The ETF-ization of the S&P 500, Part I). However, cost control has generally been positively surprising and we see huge operating leverage in these businesses. We see stable or improving net margins.
Technology spending still strong - not a driver of savings yet
Technology projects and regulatory projects are still one and the same thing. MiFID2, FRTB (Fundamental review of the trading book) and the lesser known GDPR (Global Data Protection Regulation) are all large IT projects for the IBs. Capitalised spending increased again in 2016 and implies more technology cost in the P&L again in 2017. We do not see technology as a valid route with which to cut costs just yet.
Bigger picture concerns
US competitive advantage may widen with regulation changes
We believe the sheer magnitude of the US peer group's shareholder distributions ought to send a warning signal to the European IBs that are trying to compete head-on with the US peers. The buybacks over the next 12m alone are more than the market cap of UBS. The dividends are more than the market cap of DBK.
More worryingly, the relative strength of the US peers could widen if the US Treasury's plans for reducing the regulatory burden on US banks becomes reality.
The competitive position of the European banks relative to the US therefore still looks weak in our view, despite recent capital raisings at CS and DBK and despite more aggressive language and strategy with relation to investment banking businesses, especially from DBK and Barclays.
Rates going nowhere in Europe
Market interpretations of recent speeches from the BoE and the ECB have introduced a little more volatility in European rates and FX markets. Volatility indicators have ticked up slightly in late June, but from very low bases.
In the ECB's case in particular, we still do not see a rise in the ECB deposit rate until December 2018, even as QE is tapered. Market implied rates show the ECB deposit rate around 0% by the end of 2019 or early 2020. Analyses of "100bp rate rises" for Eurozone banks are therefore just theoretical at this stage.
More worryingly, we see flat rates starting to show more NII pressure for banks in the Eurozone, and within the space this affects DBK the most (1Q17 NII fell EUR0.5bn qoq or EUR0.9bn yoy already). For a broader EU context see Stretched.
Market expectations for the overnight rate in 3 years' time have moved more, but still implies that ECB rates will barely be above 0% even by mid-2020.
"Higher rates" is therefore still very much a long-dated catalyst for bank earnings.
CS top pick in Europe
While we are cautious on EU IBs as a group given the potential for continued competitive disadvantages through differing regulatory regimes in Europe and the US, we are more constructive on CS.
CS has the "right" level of capital in our view, but no excess. Nevertheless, this is the first time we have thought that either UBS or CS has had enough capital. (UBS remains on course to reach the same levels as CS relative to leverage by 2019, partly because of higher dividend commitments).
We believe the roadmap towards better profitability at CS is more plausible than the roadmap laid out by DBK. CS needs to cut costs in the IB units (further reductions to the 23,000-strong army of outsourced or consultant headcount will be able to fix a lot of this) and see the recent hires in IWM and APAC start to deliver better inflows and move beyond breakeven. Lower litigation charges and an accelerated cut in the non-core unit shouldalso help boost reported earnings.
Better IB revenue outlook: strong 1H17
We are fairly cautious on the IB revenue outlook for 2Q17 given lower primary issuance and lower volatility at the beginning of the quarter. As a reminder, 2Q16 was a good quarter for many of the global peer group but CS and DBK in particular struggled (e.g. US bank FICC revenues were up +23% yoy in 2Q16…but were down -11% for the EU names).
2Q17: total IB revenues down -4% yoy
Our forecasts show revenues down -4% from 2Q16 levels in USD-terms, with a range of +2% at UBS (helped by equities strength) to -10% atCredit Suisse (tougher comps in equities from scope changes).
Total fee-based revenues BofAMLe -4% vs 2Q16
We see fees -5% yoy from a fairly strong prior year period. Global industry data (Dealogic) suggests a strong quarter for ECM (+20% yoy), but tougher for DCM (-9%), loans (-8%) and M&A (-5%).
Equities revenues: BofAMLe -9% vs 2Q16
We forecast Equities revenues down -9% yoy, a more negative trend than US peers. We forecast CS to be weakest, reflecting: 1) difficult comps for the Asian equities business and 2) the absence of the systematic trading business which has now moved to the asset management division (this unit generated CHF79mn revenues in 2Q16). Deutsche Bank also has tough comps given the rebuild taking place in the prime brokerage business.On the other hand, we believe UBS should be able to lead the pack after some large deals in the quarter.
Concerns around incoming MiFID 2 regulation and how this may affect the more traditional parts of the equities market continue, although Prime and derivative revenues now dominate the equities fee pool.
FICC revenues: BofAMLe -3% vs 2Q16
We forecast FICC revenues down only -3% in USD terms, with Barclays helping balance some weakness elsewhere. Credit Suisse's global numbers here also suffer from tougher comps in Asia again. However, given the less favourable trends the Europeans showed versus their US peers in 2Q16, then the EU names could outperform the US peer group.
Low volatility will have mainly affected macro products, although credit issuance was also generally weaker which tends to correlate well with secondary revenues. US debt issuance was weaker than the trends we see in Europe and Asia.
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PepsiCo beats by $0.10, reports revs in-line; slightly increases FY17 EPS guidance, continues to see organic revenue growth of at least 3%
- Reports Q2 (Jun) earnings of $1.50 per share, $0.10 better than the Capital IQ Consensus of $1.40; revenues rose 2.0% year/year to $15.71 bln vs the $15.57 bln Capital IQ Consensus.
- Reported net revenue increased 2.0 percent. Foreign exchange translation had a 1.5-percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 3.1 percent.
- Reported gross margin contracted 55 basis points and core gross margin contracted 5 basis points. Reported operating margin contracted 20 basis points and core operating margin expanded 50 basis points, both of which reflect a gain associated with the sale of our minority stake in Britvic plc (the Britvic gain). The Britvic gain positively impacted reported and core operating margin by 60 basis points.
- Co updates guidance for FY17, sees EPS of $5.13 (Prior $5.09) vs. $5.14 Capital IQ Consensus Estimate.
- Consistent with its previous guidance for 2017, the Company expects organic revenue growth of at least 3 percent. Based on current market consensus rates, foreign exchange translation is expected to negatively impact reported net revenue growth by approximately 2 percentage points and the 53rd week in 2016 is expected to negatively impact reported net revenue growth by 1 percentage point. Based on current market consensus rates, foreign exchange is now expected to negatively impact core EPS by approximately 2 percentage points (previously 3 percentage points). In addition, the Company intends to reinvest the Britvic gain in the balance of the year.