09 February 2017
Week in Brief: BUSINESS AND THE CITY
LOOKING ON THE BRIGHT SIDE: Regional newspapers used to be the thing to be in. National titles had high production and distribution costs, with uncertain advertising revenue, but regional newspapers derived a much higher proportion of revenue from advertising, especially from estate agents, and had lower distribution costs – they were also were less strike prone. But the digital age has changed all that; although production costs have fallen, with huge cuts to editorial teams, and modern printing is much cheaper, reader loyalty has plummeted; so much so, that many local papers have had to become free handouts. Advertisers have become suspicious that what people get for nothing they do not read very thoroughly and so advertising rates have fallen; and the advent of residential property sites such as Rightmove have further reduced estate agents buying of sales space. The largest owner of local papers is Johnston Press, a Dundee company, which owns 200 local titles (and also i, a national which it bought in spring last year). Its results for 2016 showed what a troubled business this has become – revenue was down 14% for the year with classified advertising revenue – cars, houses, jobs – especially hit. Johnston still has a number of titles which are sold (rather than freesheets) and revenue from those too declined, but by less, around 9%. The company though tried to find some good news in all this gloom, reporting that the third quarter showed a slower rate of decline, and the last quarter, to December, actually showed an increase of 1%, helped by fierce advertising for Christmas by local and national retailers. Although the outlook is for further slow declines in both sales and advertising income, Johnson hope the worst is over and that some stabilisation will now occur.
MORE LOOKING ON THE BRIGHT SIDE: Calculating a bank’s profits is a very deep science; all that working out of present values of strange instruments, that ensuring that write offs are adequate but not overstated, that inspection of the loan book for unforeseen problems, and, most of all, getting sorted that most important weapon in each banker’s armoury – his annual bonus. The results for 2016 are now been worked out for most banks which means the bonuses have to be agreed – and with two banks still having some public ownership as the long tail of the 2008 bank crisis, bonuses are not just a profit and staff incentive matter, they have a political angle as well. That means bad news for those employees of RBS Group, still loss-making after nine years, whose bonus pool is likely to be further reduced, but cheerfulness round at Lloyds Group, now returned to profits under the leadership of Antonio Horta-Osorio and with the government’s shareholding reduced below 5%. For the first time ever, it looks as if Lloyds bonus pool will be bigger than that of RBS – both somewhere between £350m and £400m are the guesses, with Lloyds at the top end of that and RBS at the low end. The contrast in forecast profit performance is much more dramatic – a loss of circa £5bn at RBS: a profit of perhaps £2.9bn at Lloyds. But the bankers are not spending those projected bonuses yet – they have to be approved by UKFI, the Treasury arm that manages the government’s shareholdings.
CLEAROUT AT BARCLAYS: Barclays Bank continues to tidy up its balance sheet and corporate shape under chief executive Jes Staley. Mr Staley is taking the bank back to what he hopes will be a much leaner, focussed, and profitable operation, and is selling assets which he thinks will not contribute to that, raising some useful capital – but also taking some hefty losses on the way. The Staley axe has swung especially hard in Europe – with much of Barclays widespread network gone or going. Latest is the Italian loan book, mostly real estate related, sold to specialist loan recovery business Anacap Financial Partners. No price quoted, but it is a fair guess that there was substantial discount to face value involved – Barclays had already sold its retail banking business in Italy to an associate of Mediobanca, so this pretty much concludes the withdrawal from Italy. No more spaghetti to untangle at Barclays board lunches.
AND NEW OWNERSHIP AT RELIANCE: The shrinkage of Britain’s once powerful mutually owned finance sector continues. Once they dominated savings, house loans, and all sorts of insurance, but with the demutualisation of many building societies in the 1980’s and 1990’s, those dealing in finance mostly moved over to conventional banking structures and corporate ownerships – indeed many ended up as subsidiaries of banks and gradually vanished, leaving Nationwide as the only significant high street presence. That trend has also occurred in the insurance sector, albeit more slowly. Latest to incorporate there is Reliance Mutual which celebrated its centenary in 2011, but has decided not to go for a second century but instead sell itself to Oaktree Capital, an asset manager which likes to acquire non-standard and financial investments. Reliance has about £1.9bn of assets which, in current times, make it quite a small participant in the market; it says that it is just too small to bear the ever increasing cost of compliance and regulation. Oaktree is building a stable of similar investments and should be able to spread the costs which weary Reliance across a broader back. Not that Reliance policy holders will be getting rich – there are 170,000 of them and they are likely to end up with an average of around £100 each, depending on the size and number of their policies.
GETTING FITTER: Enough finance sector news; over to a sector for whom January generally brings a boom – healthclubs and keep fit. The news in February is from operator Virgin Active, formerly one of the UK’s bigger players (it also has major operations overseas with a particular emphasis on South Africa) but one which in the UK has struggled to achieve desired returns on activity – financial returns that is. It had around 100 UK gyms but decided last year to move the whole operation up-market, to locations and facilities where it was possible to bolt on more opportunities for added value, such as health consultants, cafes, and sports wear sales, in city centre or affluent areas. Last year it sold a third of its portfolio to Nuffield – the hospital to healthcare to gym operator group, and now it is selling another 16 outlets to David Lloyd Leisure, a long term owner and operator in the gym sector. Virgin says that will complete its restructuring and the proceeds will complete the upgrading of the facilities which will form its remaining portfolio.
KEY MARKET INDICES:
(as at 7th February 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.35% (slight fall); 5 year 0.80% (fall).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (slight rise); 5 year 0.02% (rising)
US$: 1 mth 0.77% (steady); 3 mth 1.03% (slight fall); 5 year 1.92% (falling)
Currency Exchanges:
£/Euro: 1.16 £ slight fall
£/$: 1.24, £ slight fall
Euro/$: 1.07, € steady
Gold, oz: $1,231, rising
Aluminium, tonne: $1,811, slight rise
Copper, tonne: $5,785, slight fall
Oil, Brent Crude barrel: $55.01, slight fall
Wheat, tonne: £147, steady
London Stock Exchange: FTSE 100: 7,221 (rising). FTSE Allshare: 3,928 (rise)
Briefly: Not one of the most exciting weeks on the market – the main action was in sterling which weakened a little, with longer term rates also easing off, a reversal of recent trends; and in gold which after some weeks of dullness moved up; supposedly a reaction to nervousness about the Trump presidency. The UK stock market threw off last week and returned to trading more strongly in recent bands.
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