22 September 2016
Week In Brief: BUSINESS AND THE CITY
CAPITAL EQUALS TROUBLE: LV=, the strangely named former Liverpool Victoria Friendly Society, is blaming low interest rates for bad news which it revealed to policy holders and others (it is a mutual society with no shareholders) earlier this week. Profits in the first six months of this year fell from £49m last year to £1m this, and capital available to the business also fell in terms of business written, so that the solvency ratio of the group – a key measure for any insurer – fell from 146% to 126%; not anywhere near a concern for LV= or its regulator, but not good news nonetheless. The company blames low returns from its investment portfolio, which is cutting into the income available to meet insurance claims, and also increasing costs applicable to claims in its key motor policy business – mainly because of the increasing complexity of modern vehicles, where electrical damage often means major (and very expensive) complete component replacement. LV= is not the first insurer to cite increasing costs in car repairs, and motorists are starting to see increases in premiums. So far that has been modest because motor insurance cover is a very competitive business and no insurer dare move to increase premiums first because of the likely loss of business which would result. It is particularly damaging as the motor cover business has high fixed costs. But the pressure is clearly on and LV= expects to see premiums start to rise in the second half and in 2017.
LV= did report some good news though. Its pension and related investment business was up 17% compared with last year as pension fund owners took their pension pots out of corporate schemes and invested in self-managed arrangements. Let’s hope they all drive their cars very carefully…
OPEN AND SHUT CASE: After a long period when bricks and mortar retail seemed to be defying the internet shopping revolution, with rents holding steady in most areas and even secondary locations seeing shops opening with new ventures, especially in the food and coffee end of the market, the first half of 2016 has seen an abrupt reversal. The net result for the half year was nearly 2,000 shops closing, this being especially pronounced on retail parks, in recent years the strongest locations for retailers. Many of the closures were due to major bankruptcies in the fashion end of retail – such as BHS – but they were also due to mergers and consolidations. This has been especially the case in the DIY market where trade has gone through a prolonged downturn and major operators have been trimming their estates. Food retail was also subject to withdrawals from the high street, with Morrisons closing its local convenience chain “M”, and other supermarkets cutting back the number of stores they operate. The trend has affected high street and prime locations in city centres and shopping malls, as much as secondary pitches. About 11% of shop units in Britain are now vacant and it seems likely that that this will soon be reflected in rental levels in all but the best locations.
NEVER KNOWINGLY UNDERPERFORMING: John Lewis, perhaps Britain’s favourite retail store and supermarket (Waitrose) operator, surprised the market with an unexpectedly poor set of results. Profits were down 15% for the first six months to end of July this year – to £82m – which Sir Charlie Mayfield, the chairman of the group, blamed on rising wage costs and tough trading in the Waitrose business. Waitrose has been expanding its operations in recent years, opening many more branches and fighting to increase market share in a difficult market; so far it has been remarkably successful whilst all four of the big supermarket operators have suffered well publicised difficulties. Although Waitrose turnover has increased, even on a like-for-like basis, margins are down as the business promotes its Waitrose Essentials brand which competes head on with Big 4 pricing to keep Waitrose customers from straying; and the minimum wage legislation has continued to push wage costs up in a business which employs a large number of low paid employees. Sir Charlie said that measures to correct the performance are already well in hand. Waitrose has reversed its intention of building seven new supermarkets, at a cost of £25m in cancellation costs, but will instead invest more in making the existing outlets more attractive, and in technology which will gradually shrink the numbers employed, though there are no current plans for redundancies. That could well mean more electronic tills and less of those friendly and chatty till operators, so popular with customers.
NO TAKERS: One of the conditions of the state rescue of RBS Group was that it should shrink to a size where it was less significant in the UK banking sector, part of the government’s efforts to ensure more diversity and competition in banking and that no bank should ever get in the position again where it was “too big to fail”. Much of that shrinkage was to be the sale of what remains of the former Williams and Glyn Bank, absorbed by the NatWest constituent of RBS many years ago, but still with about 300 branches, mainly in the north west of England. Efforts to sell that bank have been unsuccessful so far; as it was fully integrated into RBS systems it had to be provided with a new independent IT system at a cost to RBS of £1.5bn, but, even so, a sale to Santander at £1.65bn fell through in 2012, and a second attempt to sell to the Spanish bank ended this week when Santander pulled out again. There are a number of “challenger” banks who might be interested in an acquisition, but, even to such leaders of the challenger sector as Aldermore and Metrobank, taking on 300 branches and related business and infrastructure would be a major step, both in capital requirements and in management. One possible acquirer is the newly independent Clydesdale and Yorkshire Group, sold off by National Australia Group last year, but W G would be a big bite even for them. What seems certain is that RBS is going to have to take a big write down on the business on sale – a possible price of around £500m is now been suggested, well below the £1.9bn value which RBS originally placed on the business and only a fraction of what it has spent on the technology needed to separate it.
SPARKLING SEAS: It often seems that the world’s oceans are full of ships conveying cases of wine – and most of it coming to Britain. The Brits drink wine from almost every wine producer in the world – even Indian reds are starting to make their way here. But now some ships are carrying English wines back to where they departed – and the latest is from Chapel Down, the Kent wine producer who are increasingly focussing on the sparkling wine market. Following a deal to sell 10,000 bottles of wine to an American distributer this autumn, the next shipment to the USA will be Chapel Down’s Vintage Reserve Brut, a very drinkable method champenoise production. The UK’s wine exports are only about 250,000 bottles currently, but the industry hopes to be exporting over 2 million bottles by 2020.
KEY MARKET INDICES: (as at 20h September 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.38% (falling); 5 year 0.40 (falling).
Euro€: 1 mth -0.37% (rising); 3 mth -0.30% (rising); 5 year -0.25% (rising)
US$: 1 mth 0.54% (falling); 3 mth 0.86% (rising); 5 year 1.21% (steady)
Currency Exchanges:
£/Euro: 1.16, £ falling
£/$: 1.30, £ falling
Euro/$: 1.12, € steady
Gold, oz: $1,314 falling
Aluminium, tonne: $1,562, steady
Copper, tonne: $4,732, rising
Oil, Brent Crude barrel: $45.53, slight fall
Wheat, tonne: £126, rising
London Stock Exchange: FTSE 100: 6,831 (rising). FTSE Allshare: 3,726 (rising)
Briefly: The week proved a mirror to last with almost all trends reversing – interest rates falling, sterling weakening, the FTSE up, and metals showing some signs of strengthening; even wheat began to rise. Oil held steady for a further week.
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