Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Archive | November, 2016

Executive pay reveals weak link to value

Posted on 28 December 2014 by

A stack of U.K. one pound coins sits next to a twenty pound note, arranged for a photograph in London, U.K., on Monday, Aug. 17, 2009. The pound's biggest five-month rally in 24 years is ending as the Bank of England floods the shrinking U.K. economy with newly printed cash and slowing inflation precludes higher interest rates to lure investors. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

Executive managers’ pay is still determined by simplistic measures of performance that bear little relation to long-term drivers of companies’ value, according to an analysis of pay at FTSE 100 companies over the past decade.

Research from CFA UK and Lancaster Business School, which examined executive remuneration over the 10 years from 2003-2013 at 30 FTSE 100 companies, found there was scant correlation between the key performance indicators that companies highlighted to shareholders and the measures used to incentivise and reward senior staff.

    “Much of the discussion [around executive compensation] focuses on the magnitude of bonus payments,” said Natalie WinterFrost, chairwoman of CFA UK, the investment professionals’ society. “The more important question centres around the way that performance is measured and consequently incentivised.”

    The research found that chief executives’ pay showed a low level of correlation with company performance, regardless of the specific measure of performance used.

    “A large fraction of CEO pay appears unrelated to periodic value creation,” said Lars Helge Hass, Jiancheng Liu, Steven Young and Zhifang Zhang, the report’s authors.

    Relatively simplistic performance measures such as earnings per share and total shareholder return continued to dominate the measures against which executives’ performance was benchmarked over the period. Value-based metrics that related performance to the cost of capital were rarely used.

    Earnings per share can be boosted by, for example, M&A activity that does not necessarily enhance profitability. The report said the dangers of over-reliance on such measures of executives’ performance were well documented and included: “investment myopia, earnings manipulation, excessive risk-taking, and threats to organisational culture”.

    The need to improve the alignment between company bosses’ pay and long-term performance was one of the recommendations of the review by Professor John Kay into UK equity markets and long-term decision making in 2012.

    “There are evident flaws in current remuneration policies and whilst our report highlights that compensation practices have improved, the journey is far from complete,” said Ms WinterFrost.

    Vishal Khosla, executive director at EY, said some companies were developing more sophisticated ways to measure executive performance.

    “We are increasingly seeing financial services firms, particularly those within the banking industry . . . using approaches like the balance scorecard to measure performance,” he said. “This approach uses a mix of both financial and non-financial metrics that are linked to the strategic goals of the firm, and also take account of a range of risk measures.”

    There were a number of revolts against high executive pay at FTSE 100 companies in 2014, with investors in luxury group Burberry voting down a £20m pay deal for new chief executive Christopher Bailey. Barclays, AstraZeneca, Pearson (which owns the Financial Times), Reckitt Benckiser and WPP each saw a noticeable minority of investors fail to support its pay report, while HSBC and Standard Chartered experienced sizeable but unsuccessful revolts.

    UK long-serving non-execs on the wane

    Posted on 28 December 2014 by

    boardroom©Jim Winslet

    The UK’s biggest public companies are increasingly ready to say goodbye to long-serving directors.

    The number of non-execs who have been in the post for more than nine years at FTSE 100 groups has dropped by more than a quarter since February. Analysis by the Financial Times shows that the total is 73, against the 97 identified in a report by Cranfield School of Management earlier this year.

      Nine years as a non-executive is a critical period in corporate governance terms, since after that point the UK code says non-execs can no longer be assumed to be independent of the company.

      Though the “independence” provision does not apply to chairmen and non-execs representing major shareholders, the time limit has been highlighted by campaigners for greater boardroom diversity. They argue that long-staying non-execs are a factor standing in the way of change.

      Susan Vinnicombe, professor of women and leadership at Cranfield, said the boardroom seats occupied by longstanding non-execs represented a “significant opportunity to appoint more women to top boards”.

      The number of non-execs with more than nine years’ service is set to drop further early next year, as Paul Rayner and Mary Francis stand down from Centrica at the end of December.

      Other moves already in train include Roberto Quarta’s appointment as chairman of WPP, succeeding Philip Lader who has chaired the advertising group since March 2001. A couple of WPP non-execs with more than two decades each on the board retired last year and other long-standing non-execs are due to leave next year.

      Corporate governance experts say that investors typically do not mind if a board includes one or two long-serving directors who were classed as independent when they first joined the board, but that they may become concerned if there is a cluster of non-execs who have served for nine years and so have lost the presumption of independence.

      Antofagasta’s longest-serving director – Gonzalo Menendez, who was appointed to the board in 1985 – has been considered by the group to be independent throughout almost all his 30-year tenure. The Chilean miner changed his status only on December 18 when it appointed Jorge Bande as a new non-exec. Antofagasta declined to comment.

      Reckitt Benckiser has four non-executives who have all served for more than nine years. The consumer goods group said that Judy Sprieser and Ken Hydon, who both became directors in 2003, would be standing down in May but said there were no plans for Peter Harf, who is chief executive of Reckitt shareholder JAB Holdings, or Adrian Bellamy, Reckitt chairman, to leave. Both were appointed to the board in 1999.

      Standard Chartered has three long-serving non-executives who were independent on appointment – Ruth Markland, Oliver Stocken and Paul Skinner – though the banking group has also recruited a number of new non-executives in the past couple of years.

      Broadcaster Sky and brewer SABMiller each has three long-staying non-executives representing major shareholders. The longest-serving non-executive in the FTSE100 is Bruno Schroder, who has been on the board of Schroders since 1963.

      Travellers stranded as snow sweeps Europe

      Posted on 28 December 2014 by

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      Thousands of motorists spent the night stuck in their cars in France over the weekend as snow and icy weather swept western Europe.

      The greatest impact was felt in the French Alps, Europe’s most popular skiing destination.

        About 15,000 vehicles were stranded and more than 11,000 travellers spent Saturday night in emergency accommodation in the Savoy region, according to official figures.

        French media reported that a 27-year-old man was killed when his car slipped off a snowbound road into a ravine in the Belledonne mountains of the Isere region on Saturday.

        There were three weather-related fatalities in France earlier in the week, according to AFP news agency. Two were motorists and the third, a technician for electricity network operator ERDF, was killed while carrying out repair work, the agency reported.

        The state forecaster Météo-France maintained an orange weather alert, the second highest, in four departments of the Rhône-Alpes region on Sunday, but said in a statement that snowfall was expected to subside during the day. 

        About 30cm fell in lower valleys of the Alps and between 40-60cm in high valleys in about 24 hours, the forecaster said. 

        A strong north wind means that the snow is not expected to thaw on Monday, further boosting conditions in ski resorts that have struggled with a slow start to the season. France’s interior minister Bernard Cazeneuve urged drivers to exercise caution and to postpone journeys if possible. 

        In a joint statement with the transport minister issued on Sunday morning, Mr Cazeneuve said that 15,000 places had been made available in emergency shelters overnight. Some of these centres remained opened on Sunday to support traffic control operations and to receive drivers who had set out without cold weather equipment.

        In Switzerland, the national Institute for Snow and Avalanche Research warned of an increased risk of avalanches in the western Alps following heavy snowfall.

        Crystal Ski, the UK’s biggest ski tour operator by passenger numbers, apologised on Sunday to customers who were stranded in France.

        In statements on social media, the operator, part of TUI Travel, said the weather conditions and road closures at the weekend meant thousands of passengers were unable to reach resorts to start their holiday or return home after a Christmas ski break.

        Emergency flights were arranged out of Lyon airport to bring back UK tourists who were unable to fly home from Chambéry, the closest airport to some of the biggest French ski resorts.

        One Twitter user said on Sunday afternoon that around 400 tourists were staying at a sports hall at a school near Chambéry, the Lycée Marlioz, which is being used as an emergency shelter.

        “We might have to spend a second night here. Not 1 single bus has been today,” the Twitter user said in a message.

        Conditions at ski resorts across Europe have been poorer than usual this year. Unseasonably warm weather and limited snowfall have restricted skiers to higher altitudes.

        Resorts in the Trois Vallées in France, the world’s largest ski area, postponed opening this season because of a lack of snow.

        In Germany, there was snow over the weekend in the Black Forest, the Swabian Jura, a mountain range in the southwest of the country, and south of the Danube. Up to 10cm of snow fell in the German Alps, according to the national weather service Deutscher Wetterdienst. 

        Overall, snow conditions in the Bavarian Alps remain poor, according to regional officials. 

        France was Europe’s most popular skiing destination in the 2013/14 season with 55.3m skiing days sold, according to industry lobby group Domaines Skiables de France.

        Austria was the second most popular, with 50.8m, according to the lobby group’s figures.

        The US edged ahead of France in 2013/14 season to become the world’s most popular skiing destination, with 56.2m days sold. 

        US ski resorts have enjoyed favourable weather so far this year, with heavy snowfall in Utah and Colorado, according to the Ski Club of Great Britain. 

        Smart wrapping disguises policy in Europe

        Posted on 28 December 2014 by

        The European Central Bank in Frankfurt©AFP

        Maybe it is the seasonal spirit. I feel like someone who got almost everything I ever wished for. When the eurozone crisis erupted, I asked for an emergency backstop from the European Central Bank. Then I demanded a banking union, and then a large investment programme. Each time, Europe’s policy makers said yes. I wanted quantitative easing, the purchase of sovereign bonds by the ECB, which has not happened yet but probably will next month. The eurobond was the only thing I did not get.

        The score is four of five. So why am I still not happy? The answer is that I feel robbed. It was only an illusion. I did not get a single thing.

          The banking “union” will be one in which each country is responsible for its own banking system. The most important structural innovations are joint banking supervision and a tiny fund to cover losses when a banker runs away with the till. When I asked for a co-ordinated approach to dealing with failed banks, this is not what I meant.

          It looks as though the same is going to happen with QE. I am sure the financial markets will celebrate the decision. The euro will fall — until somebody reads the small print. The compromise under discussion allows creditor countries to wash their hands of any risk. The idea is that each national central bank buys the sovereign bonds of its own country — and if this results in losses, the national government in question makes the central bank whole. Think about that for a second. Italy’s government borrows money, the Bank of Italy buys the debt and the government promises to compensate the bank if its bonds fall in value (for instance because markets stop believing the government’s promises). The circularity is preposterous.

          If the ECB goes down this route, it will be the end of a single monetary policy. Yet the eurozone is supposed to be a monetary union, not a fixed exchange-rate system where everybody happens to use the same notes and coins.

          The mooted compromise would also limit the size of any QE programme. There is only so much risk that the cash-strapped governments of the eurozone’s periphery can absorb. They are unlikely to be able to do enough to anchor inflation expectations at the ECB’s target of just under 2 per cent.

          A delayed but well-aimed blast of monetary stimulus is better than a premature sputter from the cannons

          I understand that this compromise is still being discussed. No decision has been taken, and not everybody agrees. It is not clear to me why central bankers in favour of QE would accept it.

          They might, I suppose, reason that an inadequate QE programme is better than none at all. If so, they are wrong. The habit of accepting half-baked solutions is the reason why the eurozone is in its present mess. Governments accepted permanent austerity in return for emergency cash in the crisis years, but that policy only ended up enlarging the burden of government debt. A flawed QE programme would likewise be, not a small step towards a solution, but a big step away from one.

          It is important to be clear about the reasons why QE is needed. There are two possible rationales.

          One would be to monetise debt — turning it into a bond that pays zero interest and is destined never to be repaid. This would work, and it would bring economic benefits. It would also be totally illegal, under both the Maastricht treaty and German domestic law.

          The other reason for conducting QE — and the only one that is legally acceptable — is to help the ECB achieve its price stability target.

          One can have a long discussion about what that means. But a QE programme would have to be open-ended if it were to have any chance of producing this effect. You can either say: “Whatever it takes.” Or you can say: “No more than such and such billion euros.” But you cannot say both at the same time, and expect people to believe you.

          If an incoherent compromise is the only option available, it should be rejected. The eurozone cannot afford another botched policy measure with dubious benefits and considerable side-effects.

          If they decide to do nothing, central bankers will at least keep this barrel of powder dry. A delayed but well-aimed blast of monetary stimulus is far better than a premature sputter from the ECB’s cannons. I fear, however, that accommodating Germany will be the overriding priority.

          The resulting policy might be wrapped up in language that makes it look like what I asked for. But the resemblance is superficial. That is the trouble with trying to please everyone. It forces you to take decisions that are pragmatic and realistic — even if they are wrong.

          munchau@eurointelligence.com

          Young opt for life in London microhouses

          Posted on 28 December 2014 by

          ©Bloomberg

          London property developers are building hostels and microhouses for young workers who are not only priced out of buying a home but are even struggling to afford to rent more than a room in shared accommodation.

          The properties range from bedrooms and studios with shared social areas through to small flats, and are designed for professionals in their 20s and early 30s.

            An investigation by the Financial Times last year found that London was becoming increasingly unaffordable for recent graduates, with house prices and rental costs continuing to soar as population growth outpaces construction.

            Just under 20,000 homes were built in London in the 2013-14 financial year, according to the Department for Communities and Local Government, while its population is growing by 52,000 households a year.

            The average price paid by a first-time buyer in London hit 8.8 times the average wage this year, the highest level since records began in 1983, according to building society Nationwide.

            New start-up landlord The Collective houses 350 tenants in 20 refurbished buildings. It plans to build a 300-unit property in Willesden, northwest London, and a 29-storey tower in Stratford, east London.

            Its properties average 15-20 square metres, with some including kitchenettes. Prices in most buildings range from £190 to £250 a week, including all bills, WiFi and council tax. Many have communal facilities such as gyms, common rooms, gardens and private dining rooms.

            Because many new arrivals in the capital need to set up from scratch, its properties are fully furnished, down to pots, pans, knives and forks. It also offers weekly bed-linen changes and room cleaning, and a concierge service.

            There is a massive group of young professionals being forced to rent substandard rooms in often illegally converted shared houses

            Canadian landlord RealStar Living has taken its first step into the microhousing market in London by offering blocks of studios in Old Street and Clapham and in a converted students’ hall of residence in Stockwell.

            They follow apartment developer Pocket Living, which last year attracted £21.7m of investment from Boris Johnson, mayor of London. Pocket creates space-saving flats that are 20 per cent cheaper than other similar properties, though it prefers to be called “compact” rather than “micro”.

            Pocket will build 400 homes in the next 18 months. “Our build cost per unit is the same as any other developer — [the lower price] is purely about density and efficient use of space,” said Marc Vlessing, its chief executive. For example, Pocket installs underfloor heating rather than taking up floorspace with radiators.

            Just 12.5 per cent of London’s 1.5m workers aged 22-39 can afford to buy on their own with a typical 20 per cent deposit, according to recent research by property advisers JLL. By building homes at Pocket’s average size of 400 sq ft, the number of eligible buyers nearly doubles to 22.5 per cent, JLL found.

            Reza Merchant, founder of The Collective — and one of its tenants — said he was inspired to start the business when he saw how hard his fellow students at the London School of Economics found it to secure affordable, decent-quality homes. His biggest groups of tenants work in technology, consulting, finance and public services.

            “There is a massive group of young professionals being forced to rent substandard rooms in often illegally converted shared houses,” Mr Merchant said. “There is no good-quality, affordable option for them. We [at The Collective] are the target market ourselves.”

            Modern hostels “reflect the way that people want to live: transient, good quality service, and communal — a good social life”, he added.

            Microliving

            Jennifer Jones, 42, lives in The Collective’s Hyde Park scheme, a Georgian mansion converted into 24 studio flats.

            She pays £400 a week but says it is worth it because of the apartment’s location and extra services, such as cleaning and a concierge, which are included in the price.

            Ms Jones works as a user experience designer for advertising agencies, particularly on websites and mobile apps. The space doubles up as her freelance office. She moved there in February and is on a six-month contract, which she has already renewed once and intends to do again.

            “It might be a bit pricey for some people but I really believe it’s worth it,” she said. “Before I found this, I went to see so many flats, even in nice central areas, which were so awful and charging the earth. [The London rental market] is ludicrous.”

            Does the lack of space bother her? “You could get a larger apartment for the same price but you’ve got to think about location and convenience. I’m pretty cosy here.”

            Colin Stanbridge, chief executive of the London Chamber of Commerce and Industry, said microhousing was an “innovative idea” that would “help make the best possible use of available space”. However, “the very fact that there is a demand for such properties shows the desperate situation we are in”, he added.

            More than 40 per cent of London businesses were finding it hard to recruit staff because of the availability and cost of suitable housing with satisfactory transport links, an LCCI survey found this year.

            A recent survey of employees by business lobby group LondonFirst found more than half were struggling to pay their rent or mortgage, with younger people particularly affected.

            Jonathan Seager, a policy officer at LondonFirst, said an increasing number of employers were becoming concerned about the unaffordability of housing for young people. “Employers are starting to think about what they can offer their staff to mitigate a lack of homebuilding,” he said.

            “Businesses are looking at offering support on interest free loans for rental deposits, and also starting to talk to housebuilders and builders for rent, to do deals where they reserve a proportion of stock for their staff at a discounted rate.”

            Accounting firm KPMG recently signed a deal with Clydesdale and Yorkshire Banks to give preferential interest rates to its employees in the capital as a way of helping them on to the housing ladder.

            Peter Rees, professor of places and city planning at University College London, said the developers were following in the footsteps of London landlords in earlier times. When women first began to enter the capital’s professional workforce in the Victorian and Edwardian eras, they lacked respectable and affordable places to live. Working women’s hostels were created to cater for their needs.

            “It gives you a start in the big metropolis,” Mr Rees said. “You didn’t put down roots because you didn’t know if you’d be staying. You just needed somewhere as central as possible with like-minded company where you could put your head down at night.”

            Bankers wrangle over China megadeals

            Posted on 28 December 2014 by

            Asia’s dealmaking league tables have become the subject of unprecedented wrangling between rival bankers over who deserves credit for working with China’s state-owned enterprises.

            Reforms to China’s sprawling state sector offer investment bankers the opportunity to secure lucrative fees. In July, Beijing announced plans to boost efficiency and improve governance — a process in which private investment is set to play a key role.

              But bankers and data compilers report a series of fights over who has been given credit for the two megadeals involving Chinese SOEs so far: Sinopec’s $17.4bn sale of a 30 per cent stake in its retail business and Citic Group’s injection of $37bn in assets into its Hong Kong-listed unit.

              These disputes centre on how much advisory work banks really did — as it would be understood in the US or Europe — and how much of the total deal value they should therefore be given credit for.

              At stake are the banks’ positions in the M&A league tables this year. For example, if the value of the Citic deal is removed from Dealogic’s M&A rankings for Asia-Pacific excluding Japan, Morgan Stanley drops to sixth from fourth and loses almost a quarter of its credited deal value. Similarly, if the Sinopec deal is not counted, Goldman Sach’s top of the table lead shrinks from $17.7bn to $3.4bn.

              Citigroup is the only bank in this year’s top four — it ranks as number two to Goldman, and ahead of Bank of America Merrill Lynch — not to have taken a lead role on either deal.

              “Part of the challenge was determining where genuine advisory work was done,” said Finance Asia, a widely read Hong Kong based trade publication.

              Many deals in Asia can be pre-arranged between business tycoons or by different state-owned enterprises, leaving bankers with roles more akin to administration than corporate strategy.

              This affects the fees that the enterprises are willing to pay, bankers claimed.

              “You don’t need to pay for the best advice if you already know exactly what you’re going to do,” said one senior M&A banker, who noted the number of so-called “arranged marriages” between China’s state-owned units.

              However, the banker added: “If we’re talking cross-border M&A, then they do pay and they do appreciate the advice.”

              Recent cross-border deals involving Chinese groups include Lenovo’s $2.3bn purchase of IBM’s server business at the start of the year and its $2.9bn deal for Motorola, finalised in October. OCBC’s $5bn purchase of Hong Kong’s Wing Hang Bank is also cited by bankers as another example of “proper” dealmaking.

              More contentious, however, was Temasek’s purchase of a $5.7bn stake
              in Watson’s, Li Ka-shing’s fast-growing pharmacy chain. This deal switched within days from being a probable initial public offering of Watsons in Hong Kong and London to a done deal with the Singapore investment agency — prompting suspicions that the decision making was influenced by a top-level contact rather than a bank.

              Corporate Review: A year to forget

              Posted on 28 December 2014 by

              Economic Outlook: Attention turns to release of purchasing managers’ indices


              4CAST Economic Calendar

              Diary commentary from FT reporters; data and company announcements, unless otherwise stated, from Thomson Reuters. Company announcements are of information publicly available before last week.

              ● Twitter
              started the year with its shares at an all-time high of $69, 165 per cent higher than its initial public offering price just weeks earlier.

              But its first earnings statement as a listed company saw shares drop on a worry that would dog the company all year: that its user base was just not growing fast enough. The stock closed on Friday down 48 per cent on the year at $37.60.

              Investors were perturbed that the rate at which users were joining Twitter was slowing. It reaches far fewer people than rival Facebook, with 284m monthly active users by the end of the third quarter, compared with 1.35bn at the larger social network.

              Even beating expectations on revenue quarter-after-quarter could not dispel the gloom. Shareholders felt that even if they were selling advertisements now, they would remain a minnow in the digital advertising market if the user base did not grow faster.

              Dick Costolo, Twitter’s chief executive, promised changes to make the product more user friendly by, for example, prepackaging groups of people to follow to make it easier to join and ensuring users did not have to learn a new language of “@ and #” to engage on the platform. He started to talk about all the people Twitter reaches that are not signed in or even on their site.

              When progress on that was slow, he shook up his management team, parting ways with his chief operating officer, demoting the chief financial officer and pushing people in positions from engineering to design to media partnerships out of the company.

              He also brought in Anthony Noto as finance chief. Mr Noto, who led Twitter’s 2013 IPO while at Goldman Sachs, has the mission to win over Wall Street for a second time. Hannah Kuchler

              ● Barclays
              has dismissed 2014 as a year of transition. This reflects the drastic restructuring of its investment bank that it announced in May. Antony Jenkins, chief executive, hopes that by cutting the once-mighty investment bank down to a more manageable size he can win over shareholders who are tired of the bank’s faltering performance.

              But in the first nine months of the year profits at the investment bank fell 38 per cent, offsetting positive performances by other divisions, including UK retail banking and Barclaycard.

              What the bank calls “conduct and litigation” continue to drag on performance, costing it £1.7bn in the year to September. That includes a £500m provision for the expected cost of settling allegations that the bank manipulated foreign exchange markets.

              There has been some good news this year for Barclays, after it passed UK and European stress tests and found new leverage ratio targets were well within its grasp. Yet shares in the bank are still lagging many rivals and trading at a discount to book value.

              Next year John McFarlane from Aviva will take over from Sir David Walker as the bank’s chairman. He is unlikely to be patient for long if clearer signs of a turnround do not materialise. Martin Arnold



              ● It was a year to forget for Tesco
              , which issued a string of profit warnings, parted company with its top management and unveiled a £260m hole in its profits.

              Britain’s once most successful retailer saw finance director Laurie McIlwee resign just a week before its annual results in April. In July, chief executive Philip Clarke was ousted after a profit warning and replaced by Dave Lewis, a senior Unilever executive.

              The company issued a second profit warning at the end of August, but just a month later Tesco said that this had been overstated by £250m because it had been counting the money it receives from suppliers too early. It suspended five senior managers, including the managing director of its UK business.

              In October, Tesco said the overstatement was in fact £263m and chairman Sir Richard Broadbent said he would stand down.

              Just when investors were hoping for some stability, in early December, the company issued its fourth profit warning in six months.

              The shares have fallen 45 per cent this year, the lowest in more than a decade. Tesco’s investment grade credit rating is at risk, and the company is facing inquiries from the Serious Fraud Office and the Financial Reporting Council.

              New CEO Mr Lewis will set out plans on January 8 to try to revive sales in the UK, and strengthen Tesco’s balance sheet. Andrea Felsted

              ● It has been a torrid year for Standard Chartered
              in which the bank’s fall from grace has gathered speed.

              The London-listed lender issued three profit warnings in just over 12 months, with profits slumping 16 per cent to $1.53bn in the third quarter alone.

              Rising bad debts have weighed on the bank, forcing it to almost double provisions from $289m to $539m in the three months to September.

              Weakness in emerging market growth and rock-bottom US interest rates have exacerbated the Asia-facing bank’s declining returns over the past couple of years.

              Credit ratings agency Standard & Poor’s recently downgraded it for the first time in two decades because of mounting concerns over the lender’s exposure to single, heavily-indebted companies and clients.

              Questions have also surfaced over whether the bank must raise more capital to address growing bad debts.

              To add to the bank’s woes, the US has extended the timeframe within which Standard Chartered will be scrutinised to comply with sanctions laws, by another three years.

              Management has tried to allay investor concerns with plans to cut costs. The bank announced in October a $400m reduction next year by closing a number of branches and ending roles.

              But investors have been far from impressed as the share price has plummeted nearly 30 per cent in 2014, driving it below £10 for the first time in five years.

              A shareholder revolt broke out in May over a new bonus for chief executive Peter Sands, which saw 41 per cent vote against the pay policy after investors claimed the bank failed to properly communicate its plans. The board has issued two statements in the past few months backing Mr Sands, as well as the bank’s chairman Sir John Peace.

              The bank’s roadshow in November was an opportunity to allay disgruntled investors’ worries.

              However, aside from a slideshow by chief financial officer Andy Halford that outlined a number of issues in need of remedy, the presentations showed virtually no sign of veering away from a strategy focused on growth.

              For a number of years, accelerating the growth of StanChart’s wholesale bank — which is less reliant than a retail division on costly branches — has worked as emerging markets burgeoned. The bank enjoyed double-digit growth, even during the credit crunch.

              But after the bank reported its first fall in profits for more than a decade in 2013, scrutiny over its strategy has intensified. The lender dropped its long-held goal of double-digit revenue growth at the end of last year.

              Its financial markets trading business, including equities, commodities and foreign exchange, has been a drag on profitability over a number of quarters.

              One analyst said: “They need to reassess the lines of business they’re writing and decide which are viable in a new world.”

              Pressure continues to mount on management, with some large shareholders calling for Mr Sands, who has been at the helm of the bank for eight years, to resign.

              But StanChart was not the only bank on a rocky ride this year.

              Royal Bank of Scotland
              underwent a particularly tough week towards the end of the year, in which it was fined for a major IT glitch, admitted a miscalculation of its capital strength in Europe-wide bank “stress” tests, and apologised for the first time for giving “misleading” evidence to MPs over a hearing involving its restructuring unit. Emma Dunkley

              ● Three years after its $2bn listing on Hong Kong’s stock exchange, the stardust came off Italian luxury goods house Prada
              in 2014.

              Sales at the company led by designer Miuccia Prada and her husband Patrizio Bertelli were hit as China’s anti-corruption campaign took its toll on Chinese luxury spending. General global political and macroeconomic volatility and increased competition from a plethora of newer, smaller startup brands also made trading difficult.

              After several quarters of slowing growth, Prada’s worst performance to date came in the third quarter when net income almost halved to €74.5m compared with a year earlier and well below analyst consensus of €108.6m.

              Shares in the Milan-based company, home of the Prada, Miu Miu, Church’s and Car Shoe brands, have halved in value from their peak in March 2013.

              In response, Mr Bertelli is seeking to boost sales in the midterm of its smaller, younger Miu Miu brand while the group is also expanding into culture — through films and art — and even taking tentative steps into the food industry, having bought a high-end cake and coffee shop in Milan that it plans to roll out across the world.

              Still, Prada’s assessment this month of its near-term prospects is downbeat.

              “On top of the ongoing difficult economic environment, the luxury goods market is undergoing a certain readjustment, the extent and nature of which is not yet entirely clear,” it said. Rachel Sanderson

              ● Germany’s transition to renewable energy brought further pain for Eon
              and RWE this year.

              Profits at the country’s two biggest utilities have tumbled as a glut of energy from solar and wind pushed down wholesale prices.

              RWE reported a 31 per cent drop in operating profit for the first nine months, falling from €4.2bn in 2013 to €2.9bn in the same period this year.

              Eon’s underlying net income declined by a quarter to €1.4bn, with the weakness of the rouble contributing to woes.

              In November, Eon announced a radical move to turn its business around; spinning off fossil fuels and nuclear generation into a new company while focusing on renewables.

              RWE declined to follow suit. Germany’s second-biggest utility by market value has instead aggressively cut costs, slashing capex and is seeking to refocus the business with the sale of its oil and gas unit Dea.

              But RWE faces continued uncertainty over the €5.1bn sale of Dea to Russian tycoon Mikhail Fridman’s investment vehicle L1 Energy.

              The UK government blocked the deal, fearing that Dea’s North Sea assets might become inoperable in the event of further sanctions.

              Conventional generating capacity in Europe is shrinking rapidly. RWE announced in August that it planned to shut three unprofitable power stations — two of them fired by hard coal and one by lignite — with a total capacity of 1,000 megawatts. Since 2013, the utility has announced total cuts of around 9,000MW in generating capacity.

              Both companies are lobbying the German government to introduce a “capacity market” that would subsidise utilities in exchange for guaranteed security of supply.

              However, Berlin is reluctant to levy further charges on consumers who already face some of the highest household electricity bills in Europe. Jeevan Vasagar
              preview@ft.com

              Doubts persist over India bank recap plan

              Posted on 28 December 2014 by

              epa04486280 An Indian motorcyclist rides past a closed State Bank of India branch during a nationwide strike by bank workers, in Bhopal, India, 12 November 2014. Banking operations in India were hit as more than 800,000 employees went on a day's strike to seek a salary hike and other benefits, a news reports said. EPA/SAJNEEV GUPTA©EPA

              India’s prime minister Narendra Modi this month unveiled plans to sell down government holdings in public sector banks, potentially injecting Rs1.6tn ($26bn) of capital into the banking system. But many analysts remain doubtful over the viability of the recapitalisation and how much it could raise.

              Few disagree that banks in Asia’s second-largest economy
              need funds. Earlier this year, India admitted it needed to find an extra Rs2.4tn, with a particular focus on struggling state-backed lenders, which control around three-quarters of assets.

                “To meet this huge capital requirement, we need to raise additional resources,” finance minister Arun Jaitley said in his annual budget speech in July.

                In December, Mr Modi confirmed the most significant step towards that goal, giving notice that government holdings in 27 state banks would be cut to 52 per cent by 2019, down from between 56 per cent and 84 per cent currently.

                Optimism over the potential success of this move has been bolstered by a recent run-up in bank shares following Mr Modi’s election victory in May. The Bombay Stock Exchange’s Bankex index of leading shares has jumped by some 60 per cent this year, helped along by hopes of political reforms that could boost the historically lacklustre performance of state-controlled institutions.

                This investor enthusiasm has come despite any obvious signs of operational improvements, however. Bad loan rates kept rising during 2014, against a backdrop of weak economic growth. Senior bankers, including Arundhati Bhattacharya, chairman of State Bank of India, say loan quality will continue to deteriorate next year, too.

                The result has been a process of topping up bank capital by India’s government, which has injected Rs586bn over the past four years. But straining to meet a tight fiscal deficit target, and facing tough new Basel III capital targets over the next five years, Mr Modi has been forced to consider other avenues — hence the asset sell-down.

                Reducing government bank stakes will clearly help, argues Gene Fang, vice-president at rating agency Moody’s. “The question is: will this be enough? And we think it is fairly clear it won’t be, even if the sell-off works as the government hopes.”

                There are two main doubts, starting with the aim of raising $26bn. Moody’s says stake sales at current market levels in the 11 largest banks, which account for the lion’s share of the sector’s market capitalisation, would raise just $11.5bn. Morgan Stanley puts the figure for all state-backed lenders combined at $15bn, far below Mr Modi’s target.

                Impaired loans at India’s banks

                Morgan Stanley also contests the government’s figure of $38bn for the amount the recapitalisation push needs to raise. The US investment bank argues $50bn would be a better estimate, a tough goal given that it represents roughly two-thirds of the current combined market capitalisation of all India’s state-backed institutions.

                There is also a third problem: valuations. More prestigious banks, such as SBI, are likely to prove attractive to foreign investors. But despite this year’s run-up in bank stocks, 11 of the country’s 13 largest state-backed lenders still trade below book value, according to Prabodh Agrawal, head of research at India Infoline, a broker. Until that changes, the odds of successful sales are slim.

                This only sharpens the focus on the issue of banking sector reforms. “There are two reasons why bank valuations rocketed this year,” says Saurabh Mukherjea, head of institutional equities at Ambit, a broker. “One was expectations of a general economic improvement under [Mr] Modi, and the second was that he would bring in big reforms to the way the banks operated, and that second point so far hasn’t worked out at all.”

                Earlier this year, an independent review set up by the Reserve Bank of India floated a range of measures to improve governance and productivity at state-backed lenders. So far, few of its recommendations have been implemented. In recent months, RBI governor Raghuram Rajan has also introduced measures giving lenders more time and flexibility to deal with debt restructuring problems.

                “If one is charitable to [Mr] Rajan, he has judged that the government is simply not going to be able to recapitalise properly in time, and so he is thinking ahead and giving the banks more wiggle room,” Mr Mukherjea says.

                “Either way, India’s best hope of meeting its recapitalisation target is a big shake-up in the way the banks are run, to make them more attractive to investors. And so far, this isn’t happening.”

                Burst of purchasing managers’ data issued

                Posted on 28 December 2014 by

                Friday ought to be the most notable day for data releases in a week when they are thin on the ground thanks to public holidays for new year on Thursday. Purchasing managers’ indices for the eurozone and the UK, and the ISM manufacturing survey, will all be published on Friday as well as statistics describing money and credit in the UK.

                Other data released this week includes the final version of the HSBC manufacturing PMI for China, the Chicago PMI and Case-Shiller house price index in the US, as well as the growth of money in the eurozone.

                  The flash estimate of the December eurozone manufacturing PMI surprised on the upside, increasing from 50.1 to 50.8, where anything above 50 indicates expansion. Market consensus has it that the final release ought to confirm the initial positive surprise and should be consistent with only modest growth in the fourth quarter of 2014.

                  Figures describing growth in the eurozone’s money supply — published on Tuesday — should show a minimal rise. However, the figures on private sector loans which accompany the release are expected to reveal continual decline.

                  Given this weakness, it is unlikely that the eurozone can take much solace from the positive reading on the manufacturing PMI. However, falling energy prices and a more aggressive stance by the European Central Bank might make 2015 more positive.

                  Both the US and UK manufacturing PMIs are expected to come in slightly above their November reading. However, the ISM manufacturing survey for the US is expected to decline slightly, albeit from a higher initial position.

                  In China, the final edition of the December HSBC manufacturing PMI will be released. The index is expected to remain stable at 49.5.

                  During 2014 China’s economy deleveraging and growth slowed, although it did overtake the US as the world’s largest economy on some measures. Whether or not the economy does better in 2015 depends on the ability of China’s government to balance reform and growth, analysts say.

                  For the US, Tuesday will see the release of the Case-Shiller home price index. Growth on the same period in the previous year is expected to have slowed in October from 4.9 per cent in September to 4.3 per cent. The Chicago PMI will be released on Wednesday and is thought to decline slightly as well, from 60.8 to 60.0.

                  Slimmed-down Co-op faces long recovery

                  Posted on 28 December 2014 by

                  12/10/09. THE CO-OPERATIVE STORE IN ISLINGTON, NORTH LONDON. CREDIT: DANIEL LYNCH. 07941 594 556.©Daniel Lynch/FT

                  January is the traditional time for dieting but the Co-operative Group has been fasting all year. After a borrowing binge-fuelled rapid expansion in the late 2000s, it has shed businesses, cut costs by more than £100m and started repaying its debt.

                  “We’re getting back to basics,” the group says. New Year’s eve marks the next milestone, with the last payment of £163m, to recapitalise the Co-op Bank.

                    But despite returning to profit this year after a record £2.5bn loss in 2013, the UK’s largest consumer-owned business faces a long and potentially arduous recovery.

                    It is having to cut prices in its core retail business in the face of a bitter price war with larger grocery rivals.

                    The Manchester-based group is still searching for a chairman as Ursula Lidbetter intends to step down by the annual meeting in May. It is also embedding a new management structure as it pushes through reforms aimed at strengthening its governance.

                    The Co-op was plunged into turmoil in 2013 following the discovery of a £1.5bn capital hole in its banking business. Two recapitalisations by the bank’s creditors have reduced the group’s stake in the lender to just 20 per cent.

                    The group has sold its farms to the Wellcome Trust and its pharmacy chain to Bestway, collecting around £910m. It has also reduced the scope of its fledgling legal business to focus on wills and probate.

                    Now the Co-op has a more coherent set of businesses — food, which accounts for about three-quarters of turnover, funeral parlours, insurance, legal services and online electrical goods.

                    “We were a mile wide and an inch deep,” says a senior executive, who did not wish to be named.

                    The asset sales will reduce net debt to £1bn and allow £400m investment in other businesses, especially the shops, which have been starved of capital since the 2008 takeover of Somerfield.

                    After a dash for growth under Peter Marks, the former chief executive who retired in May 2013, the Co-op wants to focus on convenience retail.

                    “We now have a strategy,” says a spokesman. “Previously it was just to be the fifth-biggest retailer.”

                    However its plan to focus on small stores — which includes opening 100 annually while selling off the largest of its 2,800 outlets — could lead to a reduction in sales.

                    Clive Black, a retail analyst at Shore Capital, warns that the Co-op is vulnerable to the growing competition in convenience retail. “When an Aldi or a Tesco opens up near a Co-op it is damaged,” he says. “It is going to lose market share.”

                    The Co-op Group still has 600 unwanted stores to dispose of, some of which are rented out to other retailers. Overall, it has 4,500 outlets including funeral homes, with around 70,000 employees and an annual turnover of more than £10bn.

                    Data from Kantar, the research company, showed that UK grocers cut prices by £182m in the 12 weeks up to Christmas.

                    The Co-op’s sales for the 12 weeks to December 7 were down 1.6 per cent year on year and its market share slipped from 6.2 to 6.1 per cent. However, it was a better performance than Wm Morrison, Tesco and J Sainsbury.

                    The performance of refurbished stores has been “encouraging”, the spokesman for the Co-op says.

                    The group prioritises Fairtrade products, which guarantee prices for producers, and emphasises the £15m it gave to local communities last year.

                    But Jonathon Porritt, a green campaigner, notes in an annual sustainability report for 2013 that the group’s ethical performance has slipped.

                    “A number of targets have been missed, and it’s clear that the group’s troubles have affected its overall performance. Ambition levels have clearly been reduced,” he says.

                    A former senior executive says the ethical dimension has traditionally been driven by members, not the management. They have lost power in a new structure that reduces the 20-strong board of members to 11, with just three member-nominated directors.

                    “At a group level ethics have gone into complete reversal. The democrats are cowed,” he says. The growing dominance of the food business would put further pressure on ethics, he adds.

                    Much will depend on the new leadership and how it manages relations with the group’s 8m members. Richard Pennycook took over as chief executive when his predecessor Euan Sutherland resigned in March, calling the Co-op “ungovernable”.

                    The group has also appointed Sir Christopher Kelly, author of a critical report on the bank, as senior non-executive director.

                    Its new governance structure includes a 100 member-elected council, which should set the group’s strategic goals.

                    The ground is already set for a number of new battles between the elected members and management next year.

                    Management could come under pressure to restore the popular dividend payout to members, suspended because of the group’s troubles. There will also be a crunch vote on whether it should continue to fund the Co-operative party, which is affiliated to Labour.

                    Lesley Reznicek, a former employee of John Lewis who served on one of the Co-op’s area committees under the old structure, has been elected interim president of the council.

                    “The co-operative values and principles make us different to our competitors and they should be evident in all our decisions,” she says.

                    Mr Black agrees. “People feel let down by the Co-op,” he says. “It has always stood for more than just selling baked beans. It needs to win back those people who think it is more than a retailer.”