09 March 2017
Week In Brief: BUSINESS AND THE CITY
URGE TO BE LARGE: After the recovery from the 2008 recession and banking crash got underway, a positive meadow of small banks and quasi banks began to flower, filling the spaces left by the struggling big banks, especially the big four clearing banks (Barclays, RBS, Lloyds and HSBC). The opportunities were mainly in the small business sector and in personal banking, where lending growth for the new entrants was greatly helped by the low rate interest rate environment – meaning that debt providers could charge highish margins that allowed for some comparatively risky strategies, and also for the high operating costs of being in that sector (small loans are expensive to run). Some have prospered and a few have fallen by the wayside, the most visible success being perhaps MetroBank, whose branches are an increasingly common sight in south-eastern prime high streets. But now the challenger banks are starting to feel the cold winter of competition – from each other, as they grow, from the partially resurgent clearing banks as they recover, from some serious majors such as Handelsbanken and Santander, and also the side winds of slowing demand in a lending market where longer term interest rates have risen and borrowers are being more cautious about business risk over the next two to three years.
Not surprisingly, the challengers are starting to look at how best to strengthen their balance sheets – Wellesley, the peer to peer operator which we looked at a few weeks ago, is busy capital raising to cover rising default risk in its property development focussed book, ICG Longbow is doing the same to grow and diversify its book – again mainly in property – where it wants to move into larger and more robust clients, and Shawbrook, which is a more generalist bank along the MetroBank model, though with a significant property angled loan book, has been approached by its main shareholder Pollen Street Capital, together with a partner, BC Partners. Both are private equity funds which specialise in the financial sector, and they would like to acquire Shawbrook with a view to taking it private – Shawbrook was floated in early 2015 and is in the FTSE250. Pollen own about 38% of Shawbrook already, but they have yet to convince their fellow Shawbrook shareholders that their offer, equating to around 328p is of interest. However, the market view is that this is not an argument about principle – there is little advantage but a lot of cost to the public quote – but to what is a fair price for the business. As little as 350p, an extra 22p, might swing it, say the analysts.
THE NEW AGE OF MOTORING: Diesel is dead, petrol is passing, electricity is the eco-future. That finally seems to be confirmed with the surprise announcement by Bentley, the prime luxury car maker, that they are to introduce an electric sports car; a proper Bentley with a soft top and just two doors. Perhaps it is not such a surprise in the industry. Bentley has been known to be working on radical changes for its next generation of cars, and battery technology is moving on so fast that even a heavy, many accessoried, car such as a Bentley can get enough mileage out of battery packs to make an electrical version a viable proposition. And Bentley is part of the Volkswagen Group, which, after recent bad happenings, is anxious to prove its green credentials both to the car buying public and to the regulators. The new car is said to be capable of 310 miles on a single battery charge – not so far off what the Continental model will do on a tankful of petrol – although one problem common to all car makers is the time taken to charge batteries – up to four hours on a home charging point and maybe two hours on the new generation of commercial charging points. There is another problem too – not to the car makers but to governments. As electric propulsion is now growing fast, the impact of it will soon be felt on revenues from fuel based tax, so we are soon likely to see changes to the taxation regime for motorists – maybe to something more value based. That will not be good for Bentley and other British (and Italian) luxury and fast car makers, though maybe if you can afford to buy the car, the tax bill won’t worry you. Or perhaps it will – Bentley has not yet quoted a price for their new electric super-sports model.
SAILING ROUND WINDMILLS: You’ve heard of wind power, you’ve heard of wave power, you’ve heard of tidal energy; but now here comes the ultimate: underwater windmills. They are not windmills of course; they are watermills, turbines attached to the seabed which are driven by the flows of sea water and tides. This may sound like fantasy, but they are real enough. Four have been installed experimentally off the north coast of Scotland and they seem to be proving both technically reliable and good sources of constant energy. The developer of them is Atlantis Resources, maybe not the wisest choice of name, but they say that they have now proven the concept. They just need the money to make their sunken power city viable. Atlantis would like to install another 260 mills underwater in the same area, which will bring great economies of scale in instalment, management, and power generation – and have been working on improved turbines that will be bigger and thus more economical to build and operate. The site is not the most convenient – about as far from electricity users as could be – but the water is deep (so good for safety), the seabed suitable for holding the turbines in place, and the water flow strong and reliable. The proposed full installation would produce up to 400 megawatts of electricity, enough to power about 175,000 houses, so the underwater farm would be a meaningful contributor to Britain’s power deficit. Atlantis though needs government help to pay for the installation, and is bidding for a subsidy this year to build another 50 mills. The government is cutting back on subsidies for sustainable energy because of growing consumer resistance to the extra premium on bills, and also recognising that shallow water wind turbines seem to be reliable and cheaper to fund – and less controversial than their on-land cousins. Nevertheless, Atlantis hopes that the reliability of their model and their acceptability to landscape campaigners may win them some extra government support.
NOT QUITE OVER: The London Stock Exchange says that its proposed merger with the Frankfurt Bourse is still possible and is continuing to work on the technical details (see our story last week). It rather contradicted itself though with an increase in its dividend by 20%. It is true that turnover was up by a similar percentage but profits were nearly halved for 2016. Commentators have said that the only reason to increase the dividend was to keep investors on side as the merger receded into history.
KEY MARKET INDICES: (as at 7th March 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight rise); 5 year 0.71% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.07% (rising)
US$: 1 mth 0.83% (rising); 3 mth 1.1% (rising); 5 year 2.09% (rising)
Currency Exchanges:
£/Euro: 1.158, £ falling
£/$: 1.22, £ falling
Euro/$: 1.06, € steady
Gold, oz: $1,217, falling
Aluminium, tonne: $1,867, falling
Copper, tonne: $5,855, slight fall
Oil, Brent Crude barrel: $56, slight rise
Wheat, tonne: £146, rising
London Stock Exchange: FTSE 100: 7,263 (slight fall). FTSE Allshare: 3,953 (slight fall)
Briefly: Stock market up, commodities down (honourable mention for wheat which has shown increasing volatility over the last month) and sterling down, interest rates rising again, especially in the longer dated maturities, and with the Fed pushing for rates to rise. There is some economic nervousness around and it is showing this week; government spending in the USA and UK may start to drive inflation a little and the market is pondering on that.
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