Monday 22 October 2018
C002D5556
BUSINESS DAY
FINANCIAL TIMES
A12
COMPANIES & MARKETS
@ FINANCIAL TIMES LIMITED
Lloyds prepares for £2bn share buyback Plan for capital return reflects increasing confidence at Britain’s third-largest bank DAVID CROW, NICHOLAS MEGAW AND PATRICK JENKINS
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loyds Banking Group is drawing up plans to buy back almost £2bn of its own shares in 2019, double this year’s tally, in a sign of the lender’s confidence in its business despite the uncertain economic outlook. People familiar with the plan said the UK bank hoped to be able to return roughly £4.5bn of capital to shareholders next year via a higher dividend and a share buyback of almost £2bn. Lloyds declined to comment. The move comes after Lloyds completed a £1bn buyback earlier this year and reflects the improving fortunes of the lender, which had to be bailed out by the government during the financial crisis. One person familiar with the plan said it was still at an early stage and would not be finalised until a board meeting in February. They cautioned that any buyback was contingent on the regulator approving Lloyds’ capital plan and said it could be derailed by a hard Brexit that sent the UK economy into a downward spiral. The plans could also change if Lloyds were to decide to use the capital for acquisitions. However, Lloyds’ decision to prepare for a buyback at a time when the Brexit talks are entering a tense final stage suggests it is hopeful that Theresa May, UK prime minister, can secure a deal with the European Union.
Earlier this year, António Horta-Osório, the bank’s chief executive, said he was “strongly convinced that there is a strong possibility of a deal being reached by November”. It is also indicative of Lloyds’ relatively bullish stance on the outlook for the UK if a Brexit deal is reached, with one person close to the bank saying it had yet to see any signs of economic strain. The capital return plan underscores improving profitability at Britain’s third-largest bank by assets. In August, it reported a more than 20 per cent increase in first-half profits, even as it continued to be hit by compensation payouts to borrowers who were mis-sold payment protection insurance. The bank’s return on tangible equity in the first half was 12.1 per cent, putting it within touching distance of US investment banks such as Goldman Sachs and Morgan Stanley, which are in much ruder health than UK lenders. Lloyds also sold its Irish mortgage business to Barclays for about £4bn earlier this year, in a move that freed up capital that could be returned to shareholders. The bank is due to report thirdquarter earnings on Thursday. In a note ahead of the update, analysts at UBSdescribedLloydsas“undervalued”. “Lloyds is in our view . . . a strongly capital generative bank, operating with a cost advantage in a competitive market and with decent medium term growth opportunities.”
German former trader charged in Euribor rigging case Ex-Deutsche Bank trader was arrested in Italy in August BARNEY THOMPSON
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ritain’s Serious Fraud Office said it had charged a former trader with conspiracy to defraud in connection with the Euribor rate-rigging scandal after he triggered an arrest warrant and was extradited to the UK. Andreas Hauschild appeared before Westminster Magistrates’ Court this weekend, according to an SFO statement released on Sunday. No plea was entered. He was first arrested in Italy in August after leaving his home country of Germany, thus activating a European Arrest Warrant. Mr Hauschild, a former trader at Deutsche Bank, was one of 11 individuals charged in 2015 on allegations they had conspired to manipulate the Euribor benchmark interest rate, the Brussels equivalent of Libor. Euribor underpins trillions of euros of products, such as loans and mortgages, and has been described as “one of the most globally significant numbers in finance”. The SFO has alleged that a pan-European conspiracy took place between 2005 and 2009 in which traders and rate submitters conspired to artificially nudge Euribor up or down to suit the positions of certain traders. This year, Christian Bittar, a former Deutsche derivatives trader
described by a judge as “perhaps the best in the world” in his field, pleaded guilty to conspiracy to defraud shortly before he was due to face trial in London. He was jailed for five years and four months, and fined £2.5m in penalties and almost £800,000 in costs. Philippe Moryoussef, a former Barclays trader who did not appear in court to defend himself, was tried in absentia and convicted, receiving a prison term of eight years. He is thought to be still in France. At the end of the 11-week Euribor trial at Southwark Crown Court, which finished in July, one trader was found not guilty and the jury failed to reach a verdict on three former Barclays employees. They face a retrial in January. When he passed sentence on Mr Bittar and Mr Moryoussef, Judge Michael Gledhill QC was also strongly critical of senior managers working at Deutsche Bank and Barclays at the time of the conspiracy, saying they “should have known what was going on and should have stopped it”. The interbank lending rate scandal has led to some of the biggest banks and inter-dealer brokers in the world paying about $9bn in penalties. Deutsche Bank itself paid $2.5bn in fines to authorities in the US and UK in 2015 to settle allegations that it had manipulated the Libor rate.
Lloyds is is due to report third-quarter earnings this week © Bloomberg
Geopolitical risk remains in spotlight for investors Fears are growing of a contagion in Europe and worries continue over Asian stocks
DAVID KEOHANE
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hile the European Central Bank meeting will be watched, tensions over Italy look set to dominate the start of the week. Will the financial stress in Italy stay a domestic affair? One striking feature of the pressure on Italy’s borrowing costs is that it has largely remained a domestic story. But as the coalition government’s standoff with Brussels over its budget deepens, a critical question for investors is whether other parts of the eurozone’s periphery can remain insulated. While the bond yields of other eurozone periphery countries such as Spain and Portugal have remained fairly subdued since Italy’s market first came under pressure at the end of May, this month has signalled that could
change. Spain’s 10-year bond yield has risen 26 basis points this month to 1.55 per cent. Meanwhile, Portugal’s 10-year yield has risen 32bp this month to 2.26 per cent. Over the same period, the Italian 10-year yield has surged 76bp to 3.72 per cent. It has the potential to be another volatile week for Italian bonds and the country’s bank shares. Rome has to respond by Monday to the EU’s concern over the proposed budget, which authorities in Brussels described as an “unprecedented” challenge to its fiscal rules. Investors will also be digesting the decision late on Friday by rating agency Moody’s to downgrade Italy’s rating a notch to Baa3, just above junk territory. However, the agency moved outlook on Italy from negative to stable.
“ I f ma rke t st re ss pu s h e s spreads higher the government strategy to use stimulus to boost growth comes under pressure,” analysts at JPMorgan noted. “Italian banks are vulnerable and yields already are high enough to tighten credit standards.” Rival agency S&P Global is expected to publish its latest assessment of Italy at the end of the week. The spike in Italian yields has also driven the gap over yields on German government debt, the benchmark for the eurozone, to the highest since 2013. “With BTP [Italian bond] investors still lacking reassurance from the Italian government, spreads continue to widen, increasing the probability of the adverse risk case, namely that the 10-year Bund and BTP yields will more in opposite directions,” said Laurence Mutkin, global head of G10 rates strategy at BNP Paribas.
Doubts grow over US equity outlook
Fund managers’ appetite for stocks dims as Fed begins liquidity drawdown CHRIS FLOOD
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he wave of selling that hit Wall Street in mid-October has sharpened fears that the nineyear bull run, which has propelled the US stock market to an all-time high, is nearing exhaustion. The S&P 500, the main US equity benchmark, has risen 309 per cent since its low point in March 2009 following the global financial crisis. But rising US interest rates and promises by US President Donald Trump to escalate the trade war with China threaten to end the rally. After reaching a record close on September 20, the S&P 500 has retreated 5.5 per cent, trading close to important long-term technical support levels. Investors are grappling with multiple concerns, including doubts about the duration of the US economic cycle, equity valuations, the effect of higher interest rates on company business models, international trade and the evolving relationship between the US and China. The Federal Reserve has also started the process of quantitative tightening, reversing the massive bond-buying programme introduced in response
to the 2008 financial crisis. “Investors question what impact all of these issues might have on corporate earnings,” said Kate Moore, chief equity strategist at BlackRock. “But US economic data remains exceptionally strong, suggesting the expansion is still on track. Our advice to clients is to stay calm as there has not been any meaningful fundamental shift in the outlook for the US economy or corporate earnings.” The S&P 500 is trading on a current price to 12-month forward earnings ratio of about 16.6 times. High company valuations remain a worry for some strategists. Tommy Garvey, a member of the asset allocation team at GMO, the $71bn Boston investment manager, said US equities are 50 to 60 per cent overvalued but it may be a long time before a meaningful correction occurs. “It is easy to build a ‘good news’ story around US equities but all of that is already priced in. Corporate profits are strong and the valuation multiples that investors have attached to those earnings are too high. At some point, both profits and valuations are likely to revert closer to historical norms,” said
Mr Garvey. US companies are expected to deliver earnings growth of 23.4 per cent this year, dropping to 10.9 per cent in 2019, according to consensus forecasts. “A significant portion of earnings growth has come from US tax cuts but top-line (revenue) growth has been very encouraging so far this year,” said Ms Moore. She added that there is “little reason” to de-rate the US stock market further from here but if any cracks appear in revenue growth forecasts from companies during the third-quarter earnings season, investors might question the sustainability of US economic expansion. Fiona Harris, an investment specialist in JPMorgan Asset Management’s US equity group, also believes that strong US economic fundamentals will continue to support the stock market. “Employment is very strong and wage growth is starting to strengthen. Business and consumer sentiment indicators are also very robust but we will be looking out for any changes in tone in comments from companies as the current earnings season continues,” she said.