17 September 2015
Week in Brief: BUSINESS AND THE CITY
SAWING OFF THE BRANCHES: The dismemberment of the Royal Bank of Scotland empire continues. A lot of this is the implementation of the promises made in 2008 when the government rescued the bank (once the biggest in Europe and with even greater aspirations under its former chief executive Fred Goodwin) to thin the inflated financial conglomerate down and to introduce more competition into the banking sector. The long term strategy in the Treasury is that there should be no banks in the UK economy which are “too big to fail”, so that if (and when) the next crash occurs, the government is not effectively forced to prop up failed banks.
The latest branches to be cut off are indeed branches – 308 of RBS’s retail outlets. They are to become a separate retail banking operation (although 200,000 small business customers will also find themselves with new bank managers) under the name of Williams and Glyn’s Bank, one of the components of what became National Westminster Bank and which was then taken over by RBS. It comprises the former RBS branches in England and the former NatWest branches in Scotland. RBS has already had one go at floating them off in 2013, but this failed on grounds of systems preparedness and in particular on the need to have robust and well-tested operating systems independent from those of RBS itself. The cost of the spin-off is said to be over £1.5m, which is probably about the worth of the new business, so RBS is unlikely to see a profit on the disposal (which it expects to happen in 2017). Current thinking is that there will be a full stock market flotation, and indeed RBS is hoping that the current investor enthusiasm for independent banks such as Aldermore and Virgin Money may mean a premium on the share price which might give them at least a small profit – which would come in handy, given that the whole project has taken up the time of around 4,000 staff and will have taken eight years to come to fruition by the time it does.
FELLING THE GIANTS: Williams and Glyn may soon re-emerge to join the ranks of what are now known as the UK’s challenger banks; but those banks – of which there are now nine – continue to be concerned about the competition strategies of their big rivals, especially Lloyds and Royal Bank of Scotland. The challengers say that the big old banks are still too dominant in the market and enjoy particular advantages related to their size. They argue that as they, the challengers, are not a threat to the stability of the economy and have a natural prudence coming from their smaller scale and closer involvement of senior management and shareholder investors in risk assessment, they should be more lightly regulated, bear less stringent capital requirements and be exempt from the new 8% bank tax (at least until they achieve certain size thresholds). Although the Treasury is believed to be reluctant to concede these points, it is thought that there is considerable sympathy in the higher ranks of government for the smaller bank’s arguments.
JETTING OFF EAST: In a surprise move Kuwait has agreed to buy 28 new supersonic fighter jets from BAE Systems, the British-based aircraft and defence manufacturer which produces the planes through the Eurofighter consortium (which encompasses makers in Germany, Spain, and Italy). It is an important order for BAE, which makes components but also handles the high value assembly work in Lancashire, and where the pipeline for work was looking pretty bleak after 2018. The order is thought to be worth around £2bn, and also adds hope that other orders will be forthcoming from Gulf states. The United Arab Emirates came close to ordering 60 of the fighter jets but then decided not to proceed, apparently on cost grounds, but this may mean that they will re-examine their strategy – the Gulf states like to be able to work together on defence procurement and management.
SOUR TASTE: J D Wetherspoon, one of the largest pub operators in the UK, has joined the attack on the Chancellor’s decision last month to increase the minimum wage. Tim Martin, chairman of the group, said that the group had increased the minimum wage it pays twice in the last year, by 13% in total, reflecting its abilities to share good performance with staff and continue to recruit staff of the quality it needed, especially in a market growing more competitive for skilled labour. But he condemned politicians for dealing with wage issues “on a whim, for political reasons” without thoroughly thinking through the consequences for youth and low wage employment.
Wetherspoon’s results for the year to July 2015, which he disclosed at the same time, showed that cost control is an essential element of high volume low margin businesses such as pubs; although revenue was up about 7% on the previous year (to £1.5bn), profits were down by £20m to £58.7m. Part of this was due to writing down the value of some underperforming pubs, but the continuing stiff competition in food and drink offers accounted for most of the rest.
SLOW OIL: Sources in OPEC have suggested that what many oil analysts have been suspecting during the steady fall in the oil price over the past couple of years is indeed correct – that is, a deliberate strategy led by the Saudi oil producers to force out of business the many new sources of competition, especially shale oil. The Saudis have been increasing supply to the market even as the price fell, suggesting that they were either short of income, or were trying a term strategy to regain control over the oil price. If the latter is indeed true, it has been a long struggle – the high-cost producers have of course heavy investment in their extraction media and once that has been made, need the oil revenue to pay for it. And the incremental costs of continuing to pump are usually low until fresh capital investment is needed. That seems to be what is happening now. Forecasts from outside OPEC are that production in the high-cost environments of Russia, North American shale and the North Sea are going to fall sharply in 2016 as equipment renewal costs start to bite. Those same forecasters also think that world demand for oil will increase in 2016 on the back of economic recovery, which could have some dramatic impact on oil prices over the next year – the current price, trading in the low US$40’s per barrel, could be an historic low. There are two problems though for OPEC, if this indeed their thinking: first, many of its own members are suffering economically because of low revenues – Nigeria and Venezuela are both deep in financial trouble; and, second, if the price does pick up, those mothballed fields can be got quickly back into production and volumes will start to grow again. It could be a helter-skelter run for the next few years. And against a background of continuing efforts by western economies in particular to use less carbon energy sources for both environmental and dependency reasons.
IT’S THE BLUES BLUES: After a long bull run, sales of jeans are finally slowing, down 5% last year in the USA. Levi Strauss, the world’s most famous jeans makers if not the largest, say that they fear this may be a continuing trend as the world puts on yoga pants. Their approach is to move the jeans brand further upmarket into vintage styles and high quality, and to continue their long term diversification into accessories such as shirts, buckles, and belts. Don’t remember John Wayne hitching up his yoga pants….
KEY MARKET INDICES: (at 14 September 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.5% (falling); 5 year 1.41% (falling).
Europe€: 1 mth -0.9% (falling); 3 mth -0.3% (steady); 5 year 0.25% (steady)
US$: 1 mth 0.36% (rising); 3 mth 0.45% (rising); 5 year 1.54% (steady)
Currency Exchanges:
£/Euro: 1.36, £ slight fall
£/$: 1.54, £ steady
Euro/$: 1.13, € steady
Gold, oz: $1104, steady in new band
Oil, Brent Crude barrel: $46.37, continues weak in new range.
Wheat, tonne: £113.60, rising
London Stock Exchange: FTSE 100: 6,183. FTSE 350: 3,451
Briefly: Not a spectacular week: the London Stock Market continues a slow recovery after the heavy falls of August. Interest rates continue to be stable but spreads are widening, especially in dollar rates. And wheat continues to move slowly up as the results of the northern hemisphere harvest can be more accurately calculated. For oil, see the commentary piece above.
