This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.
You can find the current article at its original source at https://www.theguardian.com/business/nils-pratley-on-finance/2017/oct/25/uk-economy-is-resilient-says-lloyds-boss-should-we-relax
The article has changed 5 times. There is an RSS feed of changes available.
| Version 3 | Version 4 |
|---|---|
| UK economy is resilient, says Lloyds boss. Should we relax? | UK economy is resilient, says Lloyds boss. Should we relax? |
| (5 days later) | |
| Let’s hope António Horta-Osório is right. The chief executive of Lloyds Banking Group makes the immediate outlook for the UK seem, if not rosy, then at least steady. The economy is “resilient”. Borrowers can cope with a quarter-point rise in interest rates to 0.5%. And we shouldn’t get too excited about the increase in consumer debt because levels are still 25% below those of a decade ago. | Let’s hope António Horta-Osório is right. The chief executive of Lloyds Banking Group makes the immediate outlook for the UK seem, if not rosy, then at least steady. The economy is “resilient”. Borrowers can cope with a quarter-point rise in interest rates to 0.5%. And we shouldn’t get too excited about the increase in consumer debt because levels are still 25% below those of a decade ago. |
| These are all fair points, and Lloyds’ third-quarter results illustrated the theme of resilience. The bank’s percentage of impaired loans continues to run at historically low levels, despite a hit from an unnamed and mysterious “single large corporate”. Impairment charges over the nine months rose 20% to £538m but the loan book itself is larger after the purchase of the MBNA credit card business. | These are all fair points, and Lloyds’ third-quarter results illustrated the theme of resilience. The bank’s percentage of impaired loans continues to run at historically low levels, despite a hit from an unnamed and mysterious “single large corporate”. Impairment charges over the nine months rose 20% to £538m but the loan book itself is larger after the purchase of the MBNA credit card business. |
| Can we relax, then? Should we stop obsessing over every twist in the Brexit negotiations and spend more time looking at the underlying picture? Before anybody runs away with that idea, three points are worth making. | Can we relax, then? Should we stop obsessing over every twist in the Brexit negotiations and spend more time looking at the underlying picture? Before anybody runs away with that idea, three points are worth making. |
| First, Horta-Osório’s economic punditry always comes with the caveat that he’s looking only six to 12 months into the future. If he’s still talking up resilience in a year’s time, that would be more significant. By then, we will know if the fall-off in business investment is affecting employment and thus banks’ bad debt charges. | First, Horta-Osório’s economic punditry always comes with the caveat that he’s looking only six to 12 months into the future. If he’s still talking up resilience in a year’s time, that would be more significant. By then, we will know if the fall-off in business investment is affecting employment and thus banks’ bad debt charges. |
| Second, Lloyds enjoys the luxury of commanding positions across the UK banking landscape. It has a 25% share of UK current accounts, 22% of retail deposits and 21% of mortgages. Market leadership gives Lloyds a competitive cost-to-income ratio rivals can only envy. Others’ view of life may not be so confident. | Second, Lloyds enjoys the luxury of commanding positions across the UK banking landscape. It has a 25% share of UK current accounts, 22% of retail deposits and 21% of mortgages. Market leadership gives Lloyds a competitive cost-to-income ratio rivals can only envy. Others’ view of life may not be so confident. |
| Third, resilience should not be confused with decent growth. The UK economy grew marginally faster than expected in the third quarter but nobody would describe 0.4% as exciting in a year in which the eurozone has emerged from hibernation. | Third, resilience should not be confused with decent growth. The UK economy grew marginally faster than expected in the third quarter but nobody would describe 0.4% as exciting in a year in which the eurozone has emerged from hibernation. |
| Lloyds’ share price tells a similar story. It bounced quickly from its post-referendum low when an economic shock did not arrive, but the advance since January has merely been from 64p to 68p. That’s progress of a sort – but the Brexit discount, for a bank with 97% of its business in the UK, is obvious. | Lloyds’ share price tells a similar story. It bounced quickly from its post-referendum low when an economic shock did not arrive, but the advance since January has merely been from 64p to 68p. That’s progress of a sort – but the Brexit discount, for a bank with 97% of its business in the UK, is obvious. |
| Mind the dividend | Mind the dividend |
| Here’s how to knock £4bn off your market capitalisation in one swoop: say you’re having a look at buying a rival’s unwanted subsidiary but give no details as to how you would meet the likely $14bn-$15bn (£10.5bn-£11.3bn) bill. | Here’s how to knock £4bn off your market capitalisation in one swoop: say you’re having a look at buying a rival’s unwanted subsidiary but give no details as to how you would meet the likely $14bn-$15bn (£10.5bn-£11.3bn) bill. |
| The GlaxoSmithKline chief executive, Emma Walmsley, cannot be surprised by the severe 5.5% response to her ambition to make the UK pharmaceuticals group “a consolidator” in consumer healthcare, specifically by contemplating an offer for Pfizer’s unit. | The GlaxoSmithKline chief executive, Emma Walmsley, cannot be surprised by the severe 5.5% response to her ambition to make the UK pharmaceuticals group “a consolidator” in consumer healthcare, specifically by contemplating an offer for Pfizer’s unit. |
| GSK shareholders love their dividends – 80p-a-share was sustained by her predecessor during some lean years for profits – and they will react violently to any whiff of danger on the income front. If a $15bn purchase required GSK to issue new shares to raise cash, the obvious worry is that dividends would be diluted. | GSK shareholders love their dividends – 80p-a-share was sustained by her predecessor during some lean years for profits – and they will react violently to any whiff of danger on the income front. If a $15bn purchase required GSK to issue new shares to raise cash, the obvious worry is that dividends would be diluted. |
| Yet the appeal of getting bigger in consumer healthcare is also clear. GSK’s unit, which Walmsley used to run, hasn’t skipped a beat since it absorbed Novartis’s brands a couple of years ago; the desired 20% profit margin has arrived as advertised. Ripping out costs from an enlarged consumer operation also promises more certain (if lower) returns than those on offer in the riskier game of discovering and developing original medicines and vaccines. | Yet the appeal of getting bigger in consumer healthcare is also clear. GSK’s unit, which Walmsley used to run, hasn’t skipped a beat since it absorbed Novartis’s brands a couple of years ago; the desired 20% profit margin has arrived as advertised. Ripping out costs from an enlarged consumer operation also promises more certain (if lower) returns than those on offer in the riskier game of discovering and developing original medicines and vaccines. |
| At the right price, then, a deal with Pfizer would make sense. The fit also looks good – Pfizer’s operation is big in the US, GSK’s isn’t. | At the right price, then, a deal with Pfizer would make sense. The fit also looks good – Pfizer’s operation is big in the US, GSK’s isn’t. |
| But Walmsley needs to explain how the pieces of the financial jigsaw are meant to fit together. As it is, GSK could have to pay £7bn next year to buy out Novartis’s 35% stake in the existing consumer business. Can it really do that deal plus a purchase from Pfizer? And can GSK credibly say its focus remains on pharma, its largest business, if consumer healthcare is seeing so much action? | But Walmsley needs to explain how the pieces of the financial jigsaw are meant to fit together. As it is, GSK could have to pay £7bn next year to buy out Novartis’s 35% stake in the existing consumer business. Can it really do that deal plus a purchase from Pfizer? And can GSK credibly say its focus remains on pharma, its largest business, if consumer healthcare is seeing so much action? |
| Walmsley needs to tread carefully. The very worst outcome here would be to reopen the tired and tedious debate about whether GSK itself should be broken up. Keep the dividend sacrosanct and all should be fine. | Walmsley needs to tread carefully. The very worst outcome here would be to reopen the tired and tedious debate about whether GSK itself should be broken up. Keep the dividend sacrosanct and all should be fine. |
| Another Brexit casualty | Another Brexit casualty |
| Still on GSK, it is depressing to hear that “contingency planning” for Brexit is required, including the construction of drug-testing facilities in mainland Europe. | Still on GSK, it is depressing to hear that “contingency planning” for Brexit is required, including the construction of drug-testing facilities in mainland Europe. |
| Healthcare should not be contentious territory in the Brexit negotiations. The mutual interest in securing uninterrupted and safe supplies of medicines is basic stuff. Finding a way for the UK and the EU to recognise each other’s drug-testing regimes cannot be too hard. | Healthcare should not be contentious territory in the Brexit negotiations. The mutual interest in securing uninterrupted and safe supplies of medicines is basic stuff. Finding a way for the UK and the EU to recognise each other’s drug-testing regimes cannot be too hard. |
| Business | Business |
| Nils Pratley on finance | Nils Pratley on finance |
| Banking | Banking |
| Interest rates | Interest rates |
| Economics | Economics |
| António Horta-Osório | António Horta-Osório |
| Brexit | Brexit |
| comment | comment |
| Share on Facebook | Share on Facebook |
| Share on Twitter | Share on Twitter |
| Share via Email | Share via Email |
| Share on LinkedIn | Share on LinkedIn |
| Share on Pinterest | Share on Pinterest |
| Share on Google+ | Share on Google+ |
| Share on WhatsApp | Share on WhatsApp |
| Share on Messenger | Share on Messenger |
| Reuse this content | Reuse this content |