27 July 2017
Week in Brief:BUSINESS AND THE CITY
BANKING THE CASH: As had been widely predicted, Metro Bank, one of the leading and certainly most visible of the so-called challenger banks – the regiment of small banks that sprang up after the big bank failures and retrenchments following the 2008 recession – has announced a rights issue, to raise to £278m. Metro has been opening a network of high street branches in a bid to capture a dominant position among middle income middle wealth customers – not the nil cost minimal service mass market, nor the high net worth private banking market which has become intensely competitive. That strategy appears to be working – the bank has well located branches and has created high levels of service and low levels of bureaucracy (by banking standards anyway). It has also been fairly aggressive in its lending approach, building a personal loan business, a small business unit, and going into the mortgage market. But all this takes time and the costs of running a full services banking business are high, even though the bank has bought-in business – the latest and largest being a £600m mortgage portfolio which it acquired last month from Cerebus. That gives Metro a mortgage book of around £4bn, making it a fairly significant player in the mortgage market, and providing a useful base for selling other banking services. Results for the first six months of this year show a profit of £4.4m against a loss of £18m for 2015 and a loss of £13m for 2016. The chairman and founder, Vernon Hill, says things are going well; over 130,000 new accounts were opened in the first half of 2017 and he expects to achieve a return on equity of 14% by 2020. But that, although perfectly respectable for a retail bank, is below his target of 18%, which he now expects not to hit before 2022. One of Metro’s problems is that faced by all banks – customers continue to expect more service for lower or even no cost, and at the same time lending margins remain low, and currently falling rather than rising. And banking costs continue to rise, with bankers seeing more and more regulation and reporting which squeezes both income and capital, as the regulators keep capital ratios high. At least Mr Hill is happy with his business model – he says he will be putting £10m of his own money into the rights issue.
EXPERIENCE TELLS?: But if Mr Hill is confidently building his residential mortgage business, one of his competitors is not so sure. Jayne-Anne Gadhia is chief executive of one of Metro’s bigger rivals, Virgin Money who also reported their first half results this week. They were impressive, with profits up to £124m, a rise of over 30%, from (mainly) a mortgage book of £32bn which was up 7%. The bank’s other main source of profit is its credit card business which has footings of about £3bn. But it was Ms Gadhia’s comments which caused some alarm – she expressed concern about the state of the London residential market, and that of several other large cities, where house price rises have more or less ceased and prices may even be falling. This especially applies to London, and is backed by recent statistics which show that the number of people permanently relocating from London to other parts of the UK is rising rapidly; although the population of London continues to rise overall the incomers are mostly on short term contracts or here for study, so the number of houses to sell is increasing. Ms Gadhia says that Virgin will be taking an increasingly cautious approach to its residential lending, looking at affordability and leverage issues to be sure borrowers can cope even if prices come down.
FLYING LOW: Both EasyJet and RyanAir have reported on trading in the past few days; they may be great rivals and often do not agree on much, but this time they certainly agreed on one thing – air fares will fall later in the year. There is an ever increasing amount of capacity in the short haul (European) market – perhaps not surprisingly as both airlines are busy increasing their fleet sizes with orders for new jets now being delivered. Both have had a good run recently, with turnover up over 2%, most of which should go through to the bottom line, but that continuing strong performance has alerted rivals to opportunities; the available capacity at a number of regional and tourist focussed airports makes it relatively easy to set up or expand to such locations. The number of travellers is going up, but they are price conscious and they are willing to try new airline brands; on the cost side the price of jet fuel has increased sharply recently and airline chiefs think that that is a trend which is likely to continue. So both airlines’ shareholders were pleased by the past performance but nervous about future expectations – and both fell to reflect that rather depressing outlook. Better a passenger than a shareholder for now.
READY MADE INVESTMENT: In an age where many peoples’ weekly cooking is limited to putting a ready made meal in the microwave, few give a thought to where it was made. Often the answer is in Lincolnshire, especially for those more up-market feeds from Waitrose or Marks and Spencer. Bakkavor, a business founded to process fish, has been through various vicissitudes but is still owned partly by its founders, Agust and Lydur Gudmundsson, who have built it up to be one of the largest makers of ready meals in the UK. Not only does it do that, but it also makes many other things you eat when in a hurry – sandwiches, pizza, and ready prepared vegetables. The Gudmundsson’s got into a spot of difficulty in 2009 and now have Baupost, an American hedge fund, as their majority shareholder. It wants to cash in some of its investment, which suits the founders who also would like to take some money out – though they want to keep running the business. So floatation is likely to be coming soon – and it could be pretty big, turnover is around £1.7bn and the valuation of the business is likely to be around £1.4/1.5bn.
KEEP IT SHORT: But not sweet. Mike Ashley, this column’s tycoon of choice, does not waste time on platitudes. It was his principal business interest, Sports Direct, shareholder presentation last week and Mr Ashley had bad news – profits were down 59% on the previous year. The company is suffering from the impact of the weak pound on the largely imported stock which it sells; and also the cost of the new strategy to mitigate that of repositioning slightly more up-market. It intends to expand its direct property ownership, especially of key retail units. Mr Ashley used 17 words to deal with that, saying the strategy was working – and then shut-up. His shareholders are used to the style and applauded enthusiastically. To be fair to Mr A, he later spent an hour in a question and answer session with his shareholders.
KEY MARKET INDICES:
(as at25th July 2017; comments refer to changes on last 7 days; $ is US$)
UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (unchanged); 5 yr 0.77% (fall).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.14% (fall)
US$: 1 mth 1.23% (steady); 3 mth 1.31% (rising); 5 year 1.87% (steady)
£/Euro: 1.12, £ weakening
£/$: 1.30, £ steady
Euro/$: 1.16 € steady
Gold, oz: $1,252, slight rise
Aluminium, tonne: $1,890 slight fall
Copper, tonne: $5,999, rising
Iron Ore, tonne: $65.59, slight fall
Oil, Brent Crude barrel: $49.53 rise
Wheat, tonne: £1443, rise
London Stock Exchange: FTSE 100: 7,446 (rise). FTSE Allshare: 4,074 (rise)
Copper gets ever close to the 6,000 mark; in fact it could not much closer. Wheat too is moving up a little which reflects not the UK harvest which looks good, but very mixed reports from the rest of the wheat world. Other than that, a pretty steady week; even iron ore is now marking time again after its recent fast recovery.
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