16 March 2017

Week In Brief: BUSINESS AND THE CITY

ALL CHANGE:  Rather more change than expected at HSBC which has been engaged in a search for a new chairman to replace seven year serving Douglas Flint – who was finance director before that.  HSBC almost always has promoted its top men (they all have been, so far) from internal candidates, a tradition which it defended as key to the tight corporate culture which drives the bank’s shared values and crisp internal communication.  But the banking group has decided that that need not be set in stone. The new Chairman will be Mark Tucker, not a HSBC man, not even a banker, (though he did two years as finance director at HBOS pre-recession), a tough taciturn South African who has had remarkable success in running insurance companies.  The bank has taken considerable trouble and time to get the right man in the chair, recognising there is a lot to do to get the bank moving again.  Tucker is said to have both the skills and the personal attributes to fit in – HSBC traditionally likes its leaders and seniors direct and brisk.  His first task is to find a new chief executive – the present one, Stuart Gulliver has confirmed that he will be leaving next year, as planned, though there were rumours that he might stay on a bit longer.  The new CEO may also be recruited from outside – there are not as many internal candidates as the bank might like, and there are a few very strong external candidates available, led by Antonio Horta-Osorio, currently doing the job with notable success at Lloyds Banking Group, but who is said to want fresh fields and a new challenge.

Whoever gets the job is going to have to work with Mr Tucker on a tottering in-tray of issues; HSBC has rather lost its way since the days when it was a world beater.  Excursions into the USA proved badly timed and very expensive and are not resolved yet with a settlement over mis-selling to sort out; expansion in Europe was probably a long term strategic error which is now being slowly reversed as the bank increasingly concentrates on the Far East where it is pre-eminent and on India and the Middle East; service issues in retail continue to cause trouble and expense – as does the investment to solve those problems; and not surprisingly return on capital remains poor.  Mr Tucker is said to enjoy a challenge and this will certainly be a big one, although his timing may also be good as Mr Gulliver has done much of the ground work to move the HSBC tanker onto its new course; even so Tucker will need a very strong chief executive to keep things moving.

BUILDING BIGGER:  The battle for Bovis is slowly warming up.  Once one of the high-fliers of the UK housing building industry, the group’s reputation was greatly damaged by a scandal in 2016 when it was revealed that customers had been pressurised into completing purchases of houses where the building works were not finished – mainly, it appeared, so that the group could meet demanding financial targets.  That led to a raft of damaging and expensive complaints, much consequential reputational damage, and a 30% drop in the share price, followed by the resignation of chief executive David Ritchie.  It also put the quoted company into play, as leading housebuilders looked to consolidate the market and get ownership of Bovis’s land-bank and land options.  Bovis is thought to have ownership of about 19,000 house plots, worth perhaps a £1billion, with a current market valuation for the whole group of around £1.1billion, so the work in-progress and market reputation – even damaged – is coming in at very little.  But there is some nervousness about the sustainable value of those plots – about three years supply to Bovis as it stands – because of the holding costs, some planning gain payments which will be triggered when work begins on some sites, and government threats to landholders who own consented plots and do not build them out fast enough. They may find their planning revoked or be forced to sell the plots.

Redrow were first to make an offer, valuing Bovis at around £1.14bn, rejected as not enough by Bovis’s management, as was a subsequent offer of £1.19bn from Galliford Try, a group which has grown fast over the last few years and is a similar size to Bovis.  Both Redrow and Galliford are especially keen to expand in  the south east of England. They are respectively focussed on the Midland and North-West and Midlands and South-West, so Bovis would be strategically a perfect fit for either of them.  Although Bovis has rejected the Galliford offer as not reflecting the full value of the Bovis business, it has said that it is not opposed to a takeover but wants to get the right price for its shareholders, and remains in discussions with Galliford.

IMPORTING JOBS:  Vodafone is the latest UK company to announce that it is returning a raft of call-centre jobs to the UK, from South Africa in this instance.  Vodafone has suffered from high volumes of complaints about its service quality and response, and in attempting to address those issues has decided that it helps to have a greater concentration of staff nearer customers.  2,100 jobs will be created in the UK by the move, mostly by expanding existing call centres across the UK, with the largest beneficiary geographically being Manchester.  Vodafone are far from the only telecoms company doing this – EE and British Telecom (now owner of EE) are also running down their overseas support networks and replacing them with UK domiciled services.  Quality is not the only issue – indeed may not be the real issue – wages and operating costs in traditional overseas call centre locations such as India and Malaysia have increased rapidly as those economies grow, and the economics of operating offshore are nowhere like so appealing as they once were.

SHOPPING PROBLEMS:  It’s not just City bonuses that are being cut; John Lewis Waitrose, the English middle class’s favourite department store and supermarket chain, is once again, for the fourth year running, cutting its staff annual bonus.  For 2016 it will be 6% – it was more than double that at 15% in 2012 – although group profits for the year were 21% up at £370m (on sales of £11.3bn). What is perhaps unusual in this is that John Lewis is a partnership in which all its staff are partners, so the bonus decision has to be “sold” to them as owners. The reasons for the continuing cuts are not hard to find – wage inflation, especially the costs of the minimum wage but also rising social costs – healthcare and pensions – are pushing earnings and rewards up for the less well paid but stressing the cost base, whilst John Lewis and Waitrose are engaged in long term upgrading of many of their stores to keep customer loyalty, protect against potential competitors, and keep the retail estate in best order in case of economic turmoil over the next few years. Waitrose in particular has been on the expansion path and the group wants to make sure finances are kept tight whilst those investments start up and begin to contribute.  However, Sir Charlie Mayfield, the chairman, did flag that whilst staff were very understanding of the need to conserve cash, the board were looking to circumstances in which they would be able to start to build the bonus back up.

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 0.35% (slight fall); 5 year 0.78% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.18% (rising)

US$: 1 mth 0.89% (rising); 3 mth 1.12% (rising); 5 year 2.19% (rising)

Currency Exchanges:

£/Euro: 1.14, £ falling

£/$: 1.21, £ falling

Euro/$: 1.06, € steady

Gold, oz: $1,206, falling

Aluminium, tonne: $1,881, slight rise

Copper, tonne: $5,793, slight fall

Oil, Brent Crude barrel: $51, falling

Wheat, tonne: £146, steady

London Stock Exchange: FTSE 100: 7,360 (slight fall). FTSE Allshare: 4,003 (slight fall)

Briefly: Interest rates seem to be on the move upwards; especially in the longer maturities; the dollar in particular continues to lead other currencies in this respect. The LSE continued to rise, with the Allshare breaking the 4,000 barrier; oil did the reverse with an unexpected decline to US$51 a barrel. Supply issues are the cause there – US output is rising and the market is doubtful on Saudi figures which it also suspects to be rising, casting doubts on the strength of the new OPEC agreement.

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