Transcript: Israel debates retaliation against Iran

This is an audio transcript of the FT News Briefing podcast episode: ‘Israel debates retaliation against Iran’

Kasia Broussalian
Good morning from the Financial Times. Today is Monday, April 15th, and this is your FT News Briefing.

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Israel is debating how to respond to Iran’s attack. And big US banks are looking at a more uncertain future. Plus, a major Chinese lithium producer made a big bet in Chile, but now it’s having buyer’s remorse. I’m Kasia Broussalian and here’s the news you need to start your day.

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Israel’s war cabinet met yesterday to discuss the unprecedented strike by Iran. The Islamic republic fired hundreds of drones and missiles at Israel over the weekend, almost all were intercepted. The barrage was in retaliation for a suspected Israeli strike on Iran’s consulate in Syria. This was the first time Iran has directly attacked Israel. Discussions were ongoing with all of Israel’s key partners, including the US, where President Joe Biden’s administration has called for restraint.

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We don’t seek a war with Iran. We are not looking for escalation here. We will continue to help Israel defend itself.

Kasia Broussalian
Pressure has now increased on US lawmakers to pass additional military aid to Israel. Republicans plan to call for a vote in Congress in the coming days. There’s growing fear that the attack could lead to a full-blown regional war.

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Large US banks have been able to rake in money thanks to higher interest rates recently. And they’re able to do that because there’s something called net interest income. But it looks like the good times are coming to an end. JPMorgan Chase, Wells Fargo and Citigroup all reported first-quarter earnings on Friday and warned that the future looks a little rocky. I’m joined now by the FT’s Josh Franklin to talk about it. Hey, Josh.

Joshua Franklin
Hi.

Kasia Broussalian
So before we get into the mixed results from Friday, tell me a little bit about this net interest income. What are we talking about exactly?

Joshua Franklin
Yeah. So that’s basically for big banks that take in lots of deposits like JPMorgan or Wells Fargo. That’s really where they make a lot of their profits from. And this is essentially the difference between what they earn from things like loans and other assets and securities and what they pay out to depositors. And really, for the last couple of years, this has been a great trade for the banks. They have been able to charge more for loans because of the interest rates being increased by the Federal Reserve, but they haven’t been passing on these higher savings rates to depositors at the same rate. So their profit margins have really improved. And it’s been pretty good for them.

Kasia Broussalian
But it also seems like that sort of revenue stream should continue. I mean, there are signs that the Federal Reserve is probably gonna have to keep interest rates higher for a little while longer. So I guess I’m wondering, what’s the problem then for these big banks?

Joshua Franklin
So I think banks have been warning for a while that this wasn’t sustainable, that in the end, they were going to come under more pressure from depositors to offer higher savings rates. The banks really struck a more bearish and less optimistic tone about net interest income for the year ahead than I think people were expecting. JPMorgan was the only bank that lifted its guidance, and even that was a very modest increase and not as much as investors were hoping for. And so for JPMorgan, it really has been arguably the biggest benefactor from higher interest rates when it comes to US banks. Their share price closed down on Friday more than 6 per cent, which was actually their biggest drop in almost four years.

Kasia Broussalian
And why is that happening? Like, explain to me the pressure that these big US banks are feeling from their depositors.

Joshua Franklin
The big thing is, there’s two sides to the equation. One is, you know, what they can charge for loans, and the other is what they have to pay depositors to keep their money at the bank and stop them from taking their money and going somewhere else. You know, people want a safe place to keep their money, and so they benefit from the kind of implicit safety that a lot of depositors see that these banks have because of their large size. You know, no one’s going to let JPMorgan go bust. But I think that that only comes to a certain point. And I think in the end, there are market pressures and dynamics forming there that in the end, a lot of customers will look at things and think, well, why am I keeping my money at JPMorgan or Wells Fargo when I could be earning a better savings rate if I take it to one of the other, you know, 4, 000 banks in the US.

Kasia Broussalian
Got it. So these depositors, they just want more bang for their buck, it sounds like. But what about the other side of the equation that you mentioned, the loans, what’s going on there?

Joshua Franklin
Yeah. The big question there is obviously you make loans and you hope that most of the loans you make they aren’t gonna go bad. And in a rising interest rate environment, you know, it puts more pressure on borrowers. The banks right now are still kind of sounding pretty optimistic when it comes to the credit worthiness of the American borrower and the American consumer. They said on Friday that some kind of lower income consumers, they have kind of spent a lot of their savings that they amassed during the pandemic. But on the whole, the banks have been pretty calm about what they’re seeing from a credit perspective.

Kasia Broussalian
OK, so more positive then on the loan front, but that still doesn’t really make up for the potential loss of net interest income. Is that what we’re really seeing in these earnings results?

Joshua Franklin
Yeah. For these big banks. I mean, net interest income is one of the most critical parts of their business. You know, they have big investment banking, trading asset and wealth management operations. But net interest income really is where they make the bulk of their profits from. So it’s a pretty critical thing. And that explains, you know, any bearish tone about JPMorgan on Friday and their share price falling as much as it did.

Kasia Broussalian
Josh Franklin is the FT’s US banking editor. Thanks, Josh.

Joshua Franklin
Thanks very much.

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Kasia Broussalian
Demand for lithium has soared in recent years thanks to the rise of electric vehicles. And foreign companies, they’re flocking to Chile to get their fix. The country is the world’s second-largest producer. But not everything has gone according to plan, especially for one major investor, China’s Tianqi Lithium. Harry Dempsey is a commodities correspondent for the FT, and he joins me now to talk about it. Hey, Harry.

Harry Dempsey
Hi there.

Kasia Broussalian
So tell me about this big bet by a Chinese company into Chile’s lithium. What are the details?

Harry Dempsey
So in 2018, Tianqi Lithium, a big Chinese lithium producer, paid $4.1bn to take a 24 per cent stake in Chile’s SQM, who is among the world’s biggest producers of lithium. But when they made this acquisition, they accepted some restrictions on their ability to act as a normal shareholder because they’re a competitor of SQM’s.

Kasia Broussalian
So it was a pretty big gamble by Tianqi then?

Harry Dempsey
Yeah, it was a huge gamble. It made this big strategic bet because it wanted to get a foothold in Chile’s lithium. And Chile has fantastic reserves of lithium, which is used in the batteries for electric cars. And it hoped one day that all the shareholders in SQM, when they sold out, they would maybe sell to Tianqi, and then it could become perhaps one day the operator. But in that time geopolitics has changed massively and that really doesn’t look on the cards anymore.

Kasia Broussalian
Yeah. What are those geopolitical factors that have changed the outlook here for Tianqi?

Harry Dempsey
So since 2018, there has been a lot of hype across the world around things like critical minerals. So there’s a lot of excitement about these resources and their economic potential and how much demand is going to grow. And then for governments, they don’t want to be exploited and just have companies coming in and taking all the revenues and leaving nothing for the country themselves. And so Chile has been one of the many countries who sort of caught up in this sort of trend towards trying to take more control of the resources. Last year, Gabriel Boric, who is the leftist president in Chile, he embarked on this drive to try and reform Chile’s lithium sector and renegotiate the degree of state involvement there. And so, Chile mandated Codelco, who is the state-owned copper producer, to negotiate with SQM about this crown jewel resource called the Salar de Atacama, which produces about 20 per cent of the world’s lithium. And so those negotiations have been going on, and they reached an outline agreement at the end of last year. And SQM and Codelco have been hammering out the final details.

Kasia Broussalian
And that then seems to leave Tianqi kind of out in the cold. Is that the problem?

Harry Dempsey
Yeah. So the big problem for Tianqi is that when they signed this agreement with SQM, they weren’t allowed to be privy to anything considered sensitive or confidential. And this deal is considered sensitive and confidential because it’s hugely transformative for the company. And what Tianqi is concerned about is that essentially, they aren’t going to be able to have a say in what happens. And in the future, their stake in the lithium business is going to be diluted massively. They had an ambition when they first made this acquisition to eventually have more of a say in this really important resource and that dream really looks like it’s over.

Kasia Broussalian
So what’s the lesson here then, you know, definitely for Tianqi, but also for Chile and countries like it that are really trying to take advantage of their natural resources?

Harry Dempsey
Well, I mean, the first point to make is sort of buyer beware. I mean, Tianqi should have known what they were getting into when they made this acquisition of the stake because it was very clear that they weren’t going to be treated like a normal shareholder. Therefore, there are risks there. But the big problem is that when Chile announced this Chilean national lithium strategy, it’s actually sort of scared away a lot of the international investors because there’s a lot of uncertainty about how things are gonna pan out. And so I think there’s a lot of countries around the world doing this who hold the resources of the future, but whether it’s actually successful in incentivising international companies to come and invest and then develop these resources and then, you know, it benefits both sides, there’s very few successful examples of that.

Kasia Broussalian
Harry Dempsey is a commodities correspondent for the FT. Thanks, Harry.

Harry Dempsey
Thanks.

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Kasia Broussalian
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.