05 November 2015
Week in Brief: Business and the City
LESS MEANS MORE: The cost of increased regulation on the banking sector was set out very clearly in HSBC’s latest (third quarter) results. Profits of the bank were 32% up, to £3.9bn, even though turnover was down 4% to £9.8bn – mainly reflecting discontinuation of activities in marginal and loss making areas. But what was startling was that the bank announced that it had had to hire 2,231 extra staff, almost all to work in regulation and compliance, pushing costs in that one area up to £2.2bn in the first three quarters of the year out of total costs across the business of £8.6bn. Given that overall costs fell by 4%, the burden of regulation can be very clearly seen. The bank wants to cut 25,000 staff across its worldwide business, including 8,000 in the UK, but it has had difficulty achieving that and may modify the target, reflecting the recovery of its business in Britain and the Far East. However Hong Kong is relatively weak reflecting the growth of Shanghai as a financial centre and the slowing of the Chinese economy.
The bank is still pondering whether to relocate its global headquarters, currently in London’s Canary Wharf. The chairman of the banking group, Douglas Flint, said that the board was still considering this but had called for more analysis and detailed reporting before it took the final decision on the matter – that meant it would miss its self imposed deadline of the end of 2015 to announce its intentions in this matter. Part of the problem is thought to be in deciding where any new HQ should be – there are strong political arguments against all likely Far Eastern locations (Hong Kong, Shanghai, Singapore) but they are in what HSBC thinks will be its strongest growth zone; a European location, which almost certainly means carrying on in London has big regulatory costs; ditto New York. Australia is one outside possibility at least for domicile, but is probably too remote. HSBC knows that a move back east would be very well received by its business partners in the area, but might be seen in the West and by investors and rating agencies as politically risky; so this is a key decision to get right.
MORE MEANS LESS: Round at HSBC’s age-old competitor, Standard Chartered Bank, new chief executive, Bill Winters, has not impressed the stock markets with his explanation of how he intends to improve the bank’s trading. Like HSBC, Mr Winters is on an economy drive and wants to save nearly $3bn a year, achieved mainly from redundancies, losing 15,000 jobs. He also wants to invest $1bn in new IT systems – in common with most banks, StanChart economised on technology during the banking crisis and now has to catch up – not least to satisfy the regulators and their new tighter reporting requirements. None of that was controversial among shareholders or commentators, but what followed was – the announcement that the dividend for this year will be cancelled, saving $700m, and that the bank would go to shareholders shortly to raise new capital of $5bn. This was generally felt by analysts to be not enough new money to really get the business going again, though shareholders generally felt it was about right.
Mr Winters has also been having a look at the loan book and has doubled the provisions to $1.2bn, reflecting the troubles in China and elsewhere in the Far East, which with falling turnover took the bank into a loss of $139m for the third quarter. All this is fairly standard behaviour for an incoming chief executive but the market still didn’t like it and the share price dropped 11% on the back of fears that there was more bad news than had been suspected before Mr Winter’s arrival. By the close of business, sentiment had improved, but the share price was still down 7%.
GO GREAT WESTERN: The developer of the Shard, in Bermondsey, South East London, the highest building in the UK, has announced plans to build a similar building in West London, by Paddington Station. Sellar Property Group is forming an equity alliance with Great Western Developments, subsidiary of the Singapore group, Hotel Properties, to build a 65 storey tower, designed, like the Shard, by the international architect Renzo Piano. To try to swing public opinion and the planning authorities in favour of the tower, the developers also propose a public garden on top of it, public space in it and, at its base, a new ticket hall for Paddington Underground station, and 200 new houses and flats. They expect to make an initial planning application by the end of this year.
DEFLATIONARY NEWS: Michelin, the international tyre maker, announced that trading was difficult because of fierce price competition and world over supply, and that it was accordingly cutting production in Italy – 578 jobs will go at its manufacturing facility there – and at Ballymena in Northern Ireland, where it has a specialist lorry tyre factory. Some of the Ballymena plant’s lighter business will transfer to Dundee, where it has an existing business, and Ballymena will be closed in 2018, with a loss of 860 jobs. This will be a big blow to Northern Ireland, where Michelin is a major, and well regarded, employer.
A SINKING FEELING: More jobs will go across Europe as Danish domiciled Maersk Line, the world’s largest shipping line, cuts more than 4,000 posts in the next two years. Global trade is shrinking and there is no sign that that is likely to change in the near future – indeed it may well get worse for shippers as fleets fight for what business is available. For Maersk this is a special problem as its Danish ownership means that it has to grapple with higher costs than some shippers who are registered in low cost locations where regulation is less, and cheaper. Maersk has also cancelled six new ships which it intended to order. The share price of the company, which has fallen by nearly a fifth this year as trading conditions worsened, rose 4% on the announcement.
A GOOD KICKING: The lure of owning a football club continues to appeal to the super rich in spite of the oft demonstrated adage that the best way of making a small fortune is to invest a large fortune in football. This time it is Aston Villa, the Midlands based club, that is in play. It was bought by Randy Lerner, an American tycoon, in 2005, but Mr Lerner has had enough pleasure from his investment and put it on the market in 2014 at a rumoured price of £200m. So far, after eighteen months, he has failed to sell it, though he says that he has had much interest from round the world. He did have an offer from a mysterious fund in Geneva called IM1872, who ought to know what they are about – they already own a football club in Berlin. That fell apart as the financiers, allegedly Barings Bank in Hong Kong, decided that the risks were too great. But now IM1872 is back with a new offer, well below the asking price it is said, but with finance in place. Mr Lerner is not in a strong place right now – the club is loss making and at the bottom of the Premier League, and he has just fired the manager. But one fan will be hoping for an improvement in all areas – the Prime Minister, who is a big Villa fan and a frequent attender at matches.
KEY MARKET INDICES: (at 3rd November 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.39% (rising).
Euro€: 1 mth -0.13% (steady); 3 mth -0.05% (rising); 5 year 0.17% (rising)
US$: 1 mth 0.30 (steady); 3 mth 0.55% (rising); 5 year 1.50% (rising)
Currency Exchanges:
£/Euro: 1.40, £ rising
£/$: 1.54, £ steady
Euro/$: 1.10, € steady
Gold, oz: $1117, falling
Aluminium, tonne: £954 falling
Copper, tonne: £3343, falling
Oil, Brent Crude barrel: $50.54, rising
Wheat, tonne: £113, falling
London Stock Exchange: FTSE 100: 6,413 (rise). FTSE 350: 3,564 (rise)
Briefly: The markets continue their recent pattern with the FTSE indices steadily trading in their new raised patterns. Interest rates even up to five years remain low and pretty steady, though dollar rates seem to be showing signs of an upward movement. Commodities generally continue to fall. Oil has broken through the $50 a barrel marker, but it seems doubtful that this is more than fluctuation in the established band.
