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Spanish construction rebuilds after market collapse

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Euro suffers worst month against the pound since financial crisis

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RBS falls 2% after failing BoE stress test

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China capital curbs reflect buyer’s remorse over market reforms

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Categorized | Banks

Week in Review, November 26

Posted on November 25, 2016

A round up of some of the week’s most significant corporate events and news stories.

Rio Tinto chief vows to focus on cash generation

Jean-Sébastien Jacques, the chief executive of Rio Tinto, laid out his vision for the Anglo-Australian miner this week, setting himself a five-year target of boosting cash flow by $5bn by grappling with seemingly mundane issues such as running its fleet of giant haul trucks for longer periods, writes Neil Hume in London.

At his first strategy presentation since taking control of the company in July, Mr Jacques said he would focus on sweating the company’s assets rather than pursing ambitious deals.

“Increasing the productivity of our $50bn asset base is the highest return available to us,” said Mr Jacques. “Our focus is on generating cash.”

His comments were received positively by analysts. At prevailing commodity prices, Rio expects to generate $10bn of operating cash flow next year.

“We expect a lift in the dividend payout to 60 per cent and a $2bn share buyback in 2017,” said Paul Young, Deutsche Bank analyst.

Mr Jacques also used the presentation to address an unfolding payments crisis that is threatening Rio’s reputation.

Earlier this month Rio notified law enforcement authorities in three countries about how in 2011 it paid $10.5m to a consultant who helped secure the company’s rights to a giant iron ore deposit in Guinea.

The Financial Times has established that the consultant, François de Combret, was also working as an informal adviser to Guinea’s president at the same time, raising questions about whether Rio broke anti-corruption laws by making the $10.5m payment.

Mr Jacques told analysts: “What you need to know from me is the following. I take integrity and our code of conduct seriously. For me, it is absolutely non-negotiable”.

Sherwood quits Goldman as co-head of Europe

© FT Graphic

Michael Sherwood said he spent several years discussing when to step down as co-head of Goldman Sachs in Europe but he “didn’t want to have anything out there before I left” after three decades at the US investment bank, writes Martin Arnold in London.

So the 51-year-old was “very happy to see us win hands down” a recent High Court verdict in a $1bn lawsuit by the Libya sovereign wealth fund that had accused Goldman of mis-selling complex financial products.

Mr Sherwood has faced questions internally since being called to appear before a UK parliamentary committee on the bank’s role in advising Sir Philip Green over the retail magnate’s ill-fated sale of BHS, say people familiar with the matter.

“On Philip Green, I wish we hadn’t been involved and I certainly don’t think we did much wrong,” he said. “It is one blip in a 30-year career and it really played no part in my decision.”

Known as “Woody”, he will remain at the bank as a senior director during a handover period of about six months. Richard Gnodde, his co-head of Goldman Sachs International, will take control of the European operation.

The departure removes one of Goldman’s longest-serving European executives at a time when the bank is grappling with the uncertainty arising from the UK’s exit from the EU, triggering rumours that it may move activities out of London.

“I’d rather leave when everyone is screaming for you to stay than overstay my welcome,” said Mr Sherwood, who plans to focus on his philanthropic and investment activities.

● Analysis: Sherwood, the man who led Goldman’s growth in Europe
● Lombard: Goldman puts its faith in Gnodde
● City Insider: Goldman banker makes time for the kids

Estate agent investors flee after ban on tenants fees


Estate agents received a shock in this week’s Autumn Statement when chancellor Philip Hammond announced a ban on fees charged to tenants, which had been developing into a highly profitable business line, writes Judith Evans in London.

Tenant groups cheered the move, but investors in listed estate agencies fled, sending shares in Foxtons, the London group, down 13 per cent in an hour. The blow was especially hard because estate agency chains such as Foxtons, Countrywide and LSL had been expanding their lettings businesses in an era of low sales transactions.

“Pretty much all of them have increased their exposure to lettings for that reason,” said Anthony Codling, an analyst at Jefferies.

Fees charged to landlords make up most of agents’ revenues from lettings, especially if they are hired to manage the properties. But fees to tenants, charged for administrative services such as contracts and referencing, are a high-margin business. They have risen 60 per cent on average in five years, according to research by Citizens Advice.

Analysts at Peel Hunt said tenancy agreements, in particular, carry margins of about 80 per cent, with fees averaging £300 to £350.

Ministers are set to consult on details of the ban, which Mr Hammond said would be brought in “as soon as possible”. If it were introduced immediately and banned all fees to tenants, Peel Hunt said it would reduce Foxtons’ 2017 pre-tax profits by an estimated 11.4 per cent.

Foxtons said: “This was an unexpected announcement and the details and timing of the new policy are not yet known. As we get more clarity, we will review the impact to our customers and on our business.”

Potential winners from the ban are the digital-first estate agencies such as Purplebricks, which already compete on the basis of fees lower than their traditional competitors.

● Lex: UK estate agents — rent seeking

VW to revamp core brand in bid to crack US market

Volkswagen this week unveiled a radical overhaul of its underperforming core brand, in an attempt to substantially improve its profit margin and finally crack the elusive US market, writes Peter Campbell in London.

© Reuters

It is aiming to launch 17 new SUV models worldwide before 2020, build electric vehicles in the US as well as Germany, and delegate decision making to local management teams as it seeks growth in emerging markets.

VW’s performance as a car brand has lagged behind that of other marques within the group, notably Audi and Porsche. Before last year’s emissions testing scandal — when it emerged that VW had installed software in 11m cars to mask pollution levels in test conditions — the company was aiming for a 6 per cent return on sales by 2018.

But this target has been pushed back to 2025 under a new plan unveiled on Monday by Herbert Diess, VW brand chief executive.

Instead, the company will aim to raise margin for the brand to 4 per cent by 2020, compared to 2 per cent this year.

Its VW brand will also aim to earn €1bn from digital services by 2025, and will phase out underperforming car models to cut spending. Mr Diess called it the “biggest process of change in the history of our brand”.

VW plans to free up money to invest in electric vehicles, and wants to sell 1m battery-driven cars by 2025.

Earlier this month, VW reached a deal to lay off 30,000 workers in order to slim costs.

Shares in VW group closed on Friday at €124.6, up from €118 at the start of the week.

● Lex: Volkswagen — volt face

Eli Lilly shares drop after Alzheimer’s drug trial fails

Shares in Eli Lilly dropped to a two-year low this week after the group warned that a drug tipped as a breakthrough treatment for people with mild dementia due to Alzheimer’s disease had failed to pass a late-stage clinical trial, write FT reporters.

© PA

This test failure was described by analysts as a significant setback for Eli Lilly, as well as other drug companies making similar medicines such as Biogen, Roche, Johnson & Johnson and Merck.

Eli Lilly’s drug, which the company believed could be the first to delay the fatal disease, is called Solanezumab, or Sola. Hopes for its development had been raised after earlier studies seemed to show it slowed the rate of cognitive decline in patients with mild forms of Alzheimer’s.

News of its trial failure led to a 14 per cent fall in Eli Lilly’s share price, wiping more than $10bn off its market value. In addition to dealing a significant setback to the hunt for a drug to delay Alzheimer’s, the failure will result in a fourth-quarter charge for Eli Lilly of 9 cents per share after tax.

Eli Lilly is testing several other drugs based around the same sort of effect on the brain, which means the failure of the phase III clinical trial has raised questions about the rest of its Alzheimer’s pipeline portfolio.

More broadly, the failure of the drug to pass its late stage trial cast doubts on whether such medicines would be available at all in the near term.

Eli Lilly said it now had no plans to seek regulatory approval for the medicine.

“This result will no doubt cast a shadow over Lilly’s Alzheimer’s pipeline portfolio, which is heavily based on the amyloid hypothesis,” said Seamus Fernandez, an analyst at Leerink. “Other competitors’ programmes based on this hypothesis will probably continue, but this will probably have negative read-through on these results in the short term.”

Eli Lilly said the results from the trial of 2,000 participants “directionally favoured the drug, [but] the magnitudes of difference were small”.