the times | Friday July 31 2020 2GM 35
Business
Unemployment rate Aged 16 and over, seasonally adjusted
House price growth12-month percentage change
2015 2016 2017 2018 2019 20
10%
8
6
4
2
0
10%
8
6
4
2
0
2020
2020
Over
three
yearsOver three
yearsScenarios
Scenarios
- 2 %
6.7%
8% 9.6%
-6%
-3.3%
-2.9%
-9.5%
2015 16 17 18 19 20
Black Horse finds
the going heavy
W
elcome to Lloyds
Banking Group,
whose “success” is
“inextricably linked
to the health of the
UK economy”. And good luck with
that after Boris Johnson closed great
chunks of it down, wrecking the
public finances in the process.
Yes, the PM was reacting to a
pandemic. But it doesn’t make the
greatest backdrop for a UK-focused
bank with a 24 per cent share of
consumer credit cards, 22 per cent
of personal current accounts and
19 per cent each of mortgages and
small business lending.
As a form guide for the British
economy, the Black Horse is hard to
beat. So what precisely triggered the
8 per cent share price fall to 26¼p
on the half-year results? Was it the
£3.8 billion bad debt provision —
about £1 billion above analysts’
forecasts? Or the gloom of its boss,
António Horta-Osório, who steps
down next year? He’s found the
“economic impact of lockdown” to
be “much larger” than thought at
April’s first-quarter update.
Unlike Barclays, Lloyds doesn’t
own an investment bank, making
hay on market volatility. So there’s
nothing to cushion it from a
lockdown nation struggling to
unlock. And Mr Horta-Osório’s
“base case” scenario for 2020 was
hardly an invite to buy the shares.
Apart from a 10 per cent crash in
GDP, he’s also shooting for a 6 per
cent drop in house prices and a one-
fifth fall in commercial property
values. Only Lloyds’s view that
unemployment will rise from 3.9 per
cent today to 7.2 per cent once the
furlough scheme unwinds could be
seen as optimistic. The best of the
Office for Budget Responsibility’s
three peak scenarios is 10 per cent.
True, Lloyds is a well-capitalised
bank with a core tier one ratio of
14.6 per cent. And excluding the
writedown that left it with a
£602 million pre-tax loss, there was
a trading surplus of £3.5 billion,
down 26 per cent. It’s also got a
mortgage book with an average
loan-to-value ratio of 44 per cent, so
looks well insulated against a house
price crash. Only £4 billion of the
book, or 1.6 per cent, has a ratio of
90 per cent or more.
Yet the traditional banking game
of paying depositors far less interest
than charged to borrowers is much
trickier when interest rates are a
poleaxed 0.1 per cent. Even if most
of the £9 billion corona loans are
bounce-backs, wholly underwritten
by the government, Lloyds will still
have the cost of trying to get the
money back. And, as Mr Horta-
Osório noted, there’s Brexit to come.
And so what if Lloyds looks
cheap, trading at half its 51.6p book
value? The regulators won’t even let
it pay a dividend. Neither will there
be any director bonuses this year. In
short, heavy going all round. No big
shock, then, that earlier this month
Mr Horta-Osório began his descent
from the saddle.Escalating quickly
N
ot everyone will want to live
in a John Lewis department
store. Some people getconfused by all the escalators, never
sure which floor they’re actually on.
Others prefer something more
bijou. Even Andy Street, the West
Midlands mayor, might not fancy
shacking up in the Birmingham
store he opened only five years ago
in his former life as John Lewis
department store chief.
But the mutual’s new boss, Dame
Sharon White, has got to do
something with the eight
“financially challenged” department
stores, including Birmingham, that
she’s decided to shut (report, page
43). So what better way to
“repurpose and potentially reduce”
the shop estate than “new mixed-
use affordable housing”? It’s one of
her ideas to push the business
“beyond retail”: overdue in this
Amazon age for a partnership that
also owns Waitrose.
Yes, it was dressed up in typical
touchy-feely “purpose” stuff: the
sort that can’t disguise 1,300 store
job losses on top of £100 million cuts
at head office. Yet Dame Sharon is
right that shopping isn’t enough any
more, while the mutual has plenty
of “catch-up” online, whatever the
efforts of her predecessor Sir
Charlie Mayfield.
Even so, it’s all a bit vague. What
precisely is “horticulture”, apart
from a bit of John Lewis garden
design? Or a “rental, resale, recycle”
business: some sort of hire shop
crossed with eBay? Dame Sharon is
promising more details in
September, plus names of third-
party partners. The wait will be
killing.Turkish blight
B
ets in illegal or unregulated
markets are the foundation of
the FTSE-100 gambling group
GVC. Its former boss Kenny
Alexander, who quit a fortnight
ago with a day’s notice after 13 years
in charge, took the profits from
them and recycled them into
buying more pukka businesses in
regulated markets. It culminated in
2017’s £3.2 billion Ladbrokes Coral
buy.
Ingenious, maybe. But GVC can’t
be surprised that questions get
asked about its past. Not least when,
only five days after Mr Alexander
quits, it discloses that it’s being
investigated by HMRC.
GVC insists that “the
investigation is into the Turkish
business”: the former subsidiary —
taking illegal bets — that it gave
away to seal the Ladbrokes deal. To
boot, it says it has “no evidence of
any link” between the HMRC probe
and PXP Financial, a payment
processing firm it once owned and
one of three it uses alongside
Worldpay and AIB Merchant
Services.
Yet, as disclosed here on
Wednesday, PXP’s new owner Senjo
is embroiled in a criminal
investigation in Singapore in
connection with the Wirecard
scandal. And GVC shares closed
yesterday 4 per cent lower at 683p.
That’s a 25 per cent drop since Mr
Alexander quit. Whatever GVC may
say, the market’s not convinced.business commentary Alistair Osborne
Co-op seeks
new grant
for business
bank growth
The Co-operative Bank is applying for
a £25 million grant to expand its
business sector after increasing its
customer numbers despite the corona-
virus pandemic.
Losses rose to £44.6 million at the
Manchester-based lender in the six
months to June 30 from £38.5 million a
year ago and the company cut its
spending on investment to help deal
with the economic storm.
However, Andrew Bester, chief exec-
utive, said that the fact that 94 per cent
of Co-op’s lending was secured against
property and had a relatively low loan-
to-value rating meant that “credit risk
remains low”. The Co-op took an
impairment charge of £11.2 million.
The Co-op Bank was formed as part
of the co-operative movement. It has
3.5 million retail customers and 85,000
small business customers, including a
sizeable number of charities.
The lender has been working to turn
around its fortunes and finances since
its near collapse and rescue by a
consortium of US hedge funds in 2017.
The Co-op Bank has separated its IT
functions from the Co-operative group,
its previous owner, and under Mr
Bester, a former Lloyds executive, it is
trying to re-energise the brand.
That has included turning on small
business lending again, an area where
the Co-op had historically a well-
established presence. The lender won a
£15 million grant last year paid for by
Royal Bank of Scotland, as part of the
latter bank’s state aid punishment.
That injection was awarded by Bank-
ing Competition Remedies, which was
convened to award £775 million from
RBS in grants and through a switching
scheme to encourage business custom-
ers to move from RBS to other lenders.
The Co-op had a 16 per cent share of
the switching scheme in the first half of
the year and increased small business
customer numbers by 5 per cent.
It will now apply for a £25 million
grant from BCR to fund more business
banking innovation to focus on
customers’ changing needs since the
pandemic, such as more digital
processes and solutions. The Co-op
Bank has issued 6,000 state-based
bounce-back and coronavirus business
interruption loans to customers.Katherine Griffiths
per cent this year while the
unemployment rate is forecast to
rise to 7.2 per cent. That compares
with its forecast of a 5 per cent
decline in GDP and a 5.9 per cent
unemployment rate at the end of
April, when the country was in its
most severe lockdown.
The outlook is bleaker for the
commercial property sector. Lloyds’s
base case scenario has forecast a 20
per cent drop in prices this year,
down from its forecast of a 15 per
cent decline three months ago.
In an upside scenario prices are
expected to fall by 8.4 per cent,
before recovering next year. In asevere downside scenario, it predicts
that prices could fall by as much as
36.2 per cent this year and 41.9 per
cent by 2022.
The forecasts come after a survey
by the Royal Institution of
Chartered Surveyors published last
Thursday found that surveyors’
outlook for retail and office rents is
as negative as it was during the 2008
financial crisis.
The quarterly survey of almost
500 chartered surveyors found that
76 per cent consider the market to
be in a downturn, while only 12 per
cent think that conditions have
reached the bottom of the cycle.and that it may not be able to generate
profits or raise capital to meet
regulatory requirements.
Monzo’s valuation fell by about
40 per cent in a fundrasing last month
in which it raised £58 million. Founded
in 2015, Monzo is seeking to disrupt the
retail banking industry. Its app allows
customers to track their spending and
to hold savings in different pots.
Its losses more than doubled from
£47 million to £113.8 million in the year
to the end of February, a period before
the pandemic took hold in the UK.
Loans that are expected to turn sour
rose to £20.3 million from £3.9 million
the year before.
Revenues rose to £67.2 million from
£19.7 million and the amount spent by
Monzo customers also rose to £10.9 bil-
lion, up from £3.6 billion the previous
year. It added 2.3 million customers
bringing the total to 3.9 million.
Tom Blomfield, Monzo’s co-founder
and president, said: “We’ve seen organ-
ic customer growth slow as word-of-
mouth drops, and we’ll see reductions
in revenues and higher credit losses.”Schroders passes rival to
be biggest asset manager
Schroders has overtaken its rival
Standard Life Aberdeen to become
Britain’s biggest asset manager.
The group said yesterday that its as-
sets under management had risen by 5
per cent to a record £525.8 billion at the
end of June, surpassing the £490 billion
that Edinburgh-based Standard Life
Aberdeen had at April 30.
The rise of Schroders is further
evidence of the problems faced by its
Scottish rival since it was created from
the merger of Aberdeen Asset Manage-
ment and Standard Life in 2017.
Standard Life Aberdeen suffered
heavy outflows of customer money in
the wake of the deal that have only re-
cently started to abate. It was also hit
after Lloyds Banking Group decided topull a multibillion-pound mandate to
manage investments after the merger.
That mandate was won by Schroders
in 2018 and the transfer of the last tran-
che of the assets brought in £29.5 billion
to the group during the first half. This
propelled net inflows at Schroders
during the six months to £38.1 billion,
compared with £1.2 billion of net with-
drawals a year earlier.
Pre-tax profits were down 12 per cent
to £280.1 million as net income slipped
3 per cent to just over £1 billion.
Schroders is one of the City’s most
recognisable names and can trace its
history back 216 years. Peter Harrison,
chief executive, said: “We have deliv-
ered a robust performance in the first
half of 2020, despite the extraordinary
period of market volatility and continu-
ing social and economic uncertainty.”Ben Martin Senior City Correspondent