19 October 2017
Week In Brief: BUSINESS AND THE CITY
GODDBYE MR FLINT, HELLO MR FLINT: No sooner has one Flint left the boardroom of HSBC than another one arrives. On 30th September the banking group’s chairman left after 22 years on the board, and 12 days later new chairman Mark Tucker announced John Flint would take over as chief executive. Mr Flint – the new one and no relation – is not new to HSBC but has worked at the bank his whole career, latterly as Group Treasurer and now as Head of Retail Banking. He will take over the top job but one in February next year when current CEO James Gulliver leaves. He is 49, and his 28 years at HSBC have made him widely known, long tipped as a high flyer, and very popular within the bank. He won many plaudits for shepherding HSBC through the financial crisis of world banking which began in 2008. Mr Tucker, the new chairman, is the first outsider ever to sit in the top chair, his mandate to modernise the banks’ processes and develop a growth strategy which builds on the remodelling and intensive pruning of the bank post crisis by Messrs Gulliver and Flint (and Flint). The bank had become enormous over twenty years of world-wide expansion and the previous management team, though getting in good order through the recession, saw that parts of the business were insufficiently managed and incapable of making the returns the shareholders expected. They cleared the shelves; the new team will be able to restock them.
But in one thing at least, Mr Tucker has found HSBC’s traditions good. The bank has long placed strong emphasis on recruiting and retaining a pool of talent suitable for forming a continuous succession of senior management. The appointment of an outside chairman caused some internal debate though there was no obvious internal candidate; but there were several strong candidates for CEO, so it would have caused consternation if that appointment had not been made internally. The move has been widely welcomed by shareholders as well as by management, and is a sign that the HSBC model still works – and that it is still possible to work up from the bottom to the top (albeit by the accelerated management scheme, the “international officer” programme).
The new team will not find things that easy. Mr Tucker needs to learn the bank’s ways. Mr Flint and his colleagues will need to accept the change of style and emphasis that an outsider will bring and Mr Tucker is robust in his demands and beliefs. The bank is reasonably profitable, but not to the extent that it could be and should be in relatively benign times such as these, so they have to look at how to reduce costs and enhance income, as well as considering the structural changes in corporate and investment banking that are changing banking world wide – to say nothing of the threats and opportunities – and expense – of introducing state of the art technology to their operations.
CURSE OF THE NEW: It is one of the most embarrassing thing that can happen to an investment banker or stockbroker – months have been spent on due-diligence, millions have been invested in documents and the best advisors, and dozens of late night and weekends lost for ever by anxious professionals edging the prospect along; and then the newly listed company has to admit that trading seems to have taken a dive. It happens, alas, and this week it happened to ConvaTec, which just a year ago was the darling of the London Stock Exchange as it became the largest Initial Public Offering for 2016 on the London exchange. The company raised £1.5bn at a price which gave it a net worth of £4.4bn in a sector which the market currently loves, medical products manufacturing. At the time it was forecasting a growth rate for its business of over 4% in 2017. Not any more. Now the company says 1%, or maybe a bit more, with a similar position in 2018. It ascribed the reason for this to cost cutting, or more specifically, to moving key elements of its manufacturing to the Dominican Republic from the USA. This was more difficult than expected – not least because of the impact of the recent hurricane – and so orders were lost and production slower than hoped. It thinks the net results will be a significant lowering of profits – and the share price reacted the same way – dropping 26% on the day.
NEX IT PLEASE: Or may there is something more embarrassing. Such as a highly regarded senior figure setting up a much heralded new electronic trading business to harry the traditional exchanges – and finding that the tech bits don’t work very well. That has happened to Nex, the business set up by Michael Spencer, long time City trader, grandee and general industry heavyweight who last year broke up ICAP, the business which he founded to trade between market brokers and participants, selling one half for £1.3bn to Tullet Prebon, and setting up Nex from the remaining business to facilitate trading in over-the-counter markets. Nex makes its money by charging tiny fees on large volumes – it processes on a typical day around five million deals, (a quarter of the whole market, it estimates) – so it has to be efficient. So far it has not got the technology to work as well as it should, so incurring millions of pounds of costs on staff and extra technology support. Profit margins were forecast to be around 40%, but are currently sub 30% and dropping as more is invested. Nex reckons they will dip to 20% next year, then recover strongly as transaction volumes go up and operating costs go down. The cost figures are big – £84m spent on IT last year alone. But so far Mr Spencer’s shareholders are keeping faith – the share price dropped briefly but then recovered. A relief no doubt for Mr Spencer, who owns 17%.
ALL THE NEWS THAT ‘S FIT: Once owning a regional newspaper was the recipe for making a small fortune; owning a chain offered the way to a big fortune. The secret was partly the great loyalties of readers to their local daily or weekly paper, but more especially adverting revenues – to reach a targeted local market was every retailers’ dream and one they were willing to pay for. But local press advertising has long been going the way of national adverting; the only real strength has been in local residential advertising – but in recent years even this has taken a steep dive. Plus most locals now get their news from local radio, much of it free from the BBC. Most newspapers have shrunk and some have turned into freesheets; even such regional giants as the Yorkshire Post are but shadows of their former selves. Most local papers have gradually been bought up by bigger groups – the Johnston Press is thought to be the largest owner (including the Scotsman, and the Yorkshire Post indeed). Now the final end game may be about to begin – Christen Ager-Hanssen, who owns the Swedish Metro group, a largely digital group of publications, says that digital is the only way forward, one that Johnston has failed to take, and that Johnston will not last much longer without some sort of revolutionary approach to what it does. It has £220m of debt due in 2019. So Mr Ager-Hanssen has amassed a stake in 13% in Johnston and says he has support from other shareholders to take on the group and change the board. He has demanded an EGM to discuss it; the company must respond by this Thursday
KEY MARKET INDICES: (as at 17th October 2017; comments refer to net changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.37% (rise); 5 yr 1.00% (steady).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.09% (fall)
US$: 1 mth 1.24% (steady); 3 mth 1.35% (steady); 5 year 2.01% (steady)
Currency Exchanges:
£/Euro: 1.13, £ rising
£/$: 1.33, £ rising
Euro/$: 1.17 € steady.
Commodities:
Gold, oz: $1,285, fall
Aluminium, tonne: $2,144, rise
Copper, tonne: $7,062, rise
Iron Ore, tonne: $60.89, rise
Oil, Brent Crude barrel: $57.34, rise
Wheat, tonne: £140, steady
London Stock Exchange: FTSE 100: 7,516 (slight fall). FTSE Allshare: 4,124 (slight fall)
Briefly:
The star performer this week is undoubtedly copper continuing its surge; increasing demand and the number of mines closed in the slump a year ago means a good time is being had by anybody who has copper to sell. Has iron finally reached a trading pattern? Maybe, but iron is so volatile that it is a difficult one to call.
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