Friday 26/04/19

1. In FINANCIALS NEWS, Deutsche Bank and Commerzbank merger talks collapse, UBS has a shocker and Nomura announces its first full-year loss in ten years
2. In RETAIL NEWS, Sainsbury’s/Asda gets blocked, new fraud rules threaten online retailers, Amazon’s growth slows and Laura Ashley has a profit warning
3. In TECH NEWS, we look at Huawei fuss while Microsoft becomes the third listed US firm to hit the $1tn mark
4. In INDIVIDUAL COMPANY NEWS, Baoshan triggers steel oversupply concerns, Ford profits trump estimates and Starbucks puts in a decent performance
5. In OTHER NEWS, I bring you a useful parenting hack. For more details, read on…

So Deutsche Bank, Commerzbank, UBS and Nomura all have shockers…

Merger collapse plunges Germany’s biggest banks into uncertainty (Financial Times, Olaf Sorbeck, Guy Chazan and Stephen Morris) signals the end of six weeks of talks between the two entities to create a German “superbank” in what has been unkindly dubbed in some circles as the potential “merger of weakquals”. Germany’s #1 and #2 lenders said that there were too many unresolvable issues to move forward to create what would have been the eurozone’s second biggest lender. * SO WHAT? * So it’s back to the drawing board for Deutsche Bank chief exec Christian Sewing as he’ll now be expected to come up with a plan B. Olaf Scholz, finance minister and cheerleader-in-chief of the merger, got it in the neck from his fellow politicians for backing the wrong horse and both banks will now have to take a serious look at cutting costs and arresting revenue declines. This will all have to happen against the backdrop of interest rates at zero, tough domestic competition and high funding costs. German labour unions (and employees of both banks) will probably be breaking out the Bolly and patting themselves on the back for putting the mockers on this, but I suspect that there will be a ton of job cuts to come – this merger setback will just delay things slightly as I would think that European banking consolidation is highly likely given the backdrop I just mentioned – it’s not just German banks that are suffering after all. Other banks, such as Italy’s UniCredit (which owns HypoVereinsbank) and Dutch lender ING (which owns a 15% chunk of Commerzbank) look like they could be interested in merging with Commerzbank, but I guess it’s early days.

Meanwhile, UBS investment bank suffers 64% fall in profits (Financial Times, Stephen Morris) highlights a big drop in first quarter profit at UBS’s investment banking division, with a 48% fall in advisory and capital markets being the main culprits. Fixed income and currency trading did OK but its flagship wealth management unit did not, as earnings from the latter fell by 21% despite attracting record new inflows from Asia. This disappointing start to 2019 follows a cr*ppy end of 2018 as wealth and asset management clients made hefty withdrawals against a stormy market backdrop. * SO WHAT? * Revenues really need to turn up in the second half of this year and investors will be relieved that the company’s share buyback programme is still intact. However, others are calling for deeper cost-cutting measures to get back on track given the current economic backdrop. As I said in the previous story, things like this just show the ongoing weaknesses in European banking and how M&A activity among them is getting more likely to increase as the prospect of huddling together for survival becomes ever more compelling. 

Then Nomura reports first full-year loss in a decade (Financial Times, Leo Lewis) heralds ongoing bad news for Japan’s biggest broker as it tries to evolve its business amid tricky global economic circumstances and a declining domestic population. This announcement of a $897m loss for the year ending March 31st came only one week after chief exec, Koji Nagai, announced big job losses in London as part of a global $1bn cost-cutting drive. * SO WHAT? * Basically, management will be streamlined and it will close at least 30 of its 156 domestic retail branches – the latter of which has always been seen as a sacred cow. It remains to be seen whether Nomura will rein in its global ambitions and be an Asian regional player. TBH, given the trends in global regulation and weakened global growth, more focus in what it does best looks like the smart course of action at the moment.

“Sasda” falls flat, new fraud rules threaten e-tailers, Amazon’s growth momentum slows and Laura Ashley has a profit warning…

I mentioned this in a red “newsflash” in yesterday’s Watson’s Daily, but Sainsbury’s merger deal with Asda is blocked by Watchdog (Daily Telegraph, Ashley Armstrong) just puts a bit more flesh on the bones of the story as the Competition and Markets Authority stopped the proposed merger from going ahead following an investigation that lasted almost a year. Sainsbury’s share price still fell by 4.6% despite many already believing that the deal was dead. * SO WHAT? * This means that Sainsbury’s is going to have to soldier on, creating value the old-fashioned way, while Asda owner Walmart was keen to limit speculation that it would sell Asda quickly, saying that it would “ensure Asda has the resources it needs” to continue to battle on. I still think that Walmart will try to offload Asda pretty sharpish because its international strategy has been shifting over the last year or so as it tries to concentrate on more profitable markets.

I thought that I would include Fraud checks on online shopping could wipe out £60bn of sales (Daily Telegraph, Tim Wallace) because it sounds to me like it’s the sort of thing people don’t really think about until it’s just about to come into force (like GDPR!). Basically, from September 14th, purchases over £30 will require “two-factor authentication” to cut fraudulent transactions. * SO WHAT? * The British Retail Consortium believes that businesses aren’t sufficiently prepared and could lose out on as much as £60bn of sales via cards online and will be calling for action by the financial regulator, the FCA. The chairman of

the Federation of Small Businesses, Mike Cherry, warned that “rolling out the system before businesses and shoppers are prepared for it will be bad for all concerned. We’re a few months away from enforcement and hardly anyone has even heard of it”. Clearly a proper campaign and snappy name is needed here otherwise there could be carnage.

Talking of online retailing, Amazon makes $1bn a month as growth slows (The Guardian, Dominic Rushe) highlights Amazon’s reputation as a massive profit-making machine as it made $1bn in profit per month for the first quarter of this year, which was more than double the level this time last year and represents the fourth quarter in a row of making record profits. Its growth seems to be slowing, however, as North American revenues were up by 17% versus 46% the same time last year with international growth falling from +34% last year to +9% this year. Even the company’s fast-growing cloud service division AWS, which hosts data for the likes of Netflix, Unilever and Airbnb (amongst many others), showed a slowdown in the pace of its sales growth from 49% last year to 41% this.

At the other end of the feelgood scale, Laura Ashley issues warning amid ‘challenging trading’ (Daily Telegraph, LaToya Harding) shows the embattled soft-furnishing-and-fashion retailer announcing its second profit warning in two months after “very demanding” trading conditions in the third quarter and said that it expected results to be “significantly below expectations”. The share price fell by over 20% initially on the news but recovered to close “only” 3.6% lower at the close of trading yesterday. * SO WHAT? * The company’s suffering from consumers shying away from big ticket purchases like furniture plus it’s had a problematic shift to a new digital platform. Chairman Andrew Khoo is continuing to implement his turnaround plan which involves closing 25% of its stores.

We take a quick look at what’s behind all the Huawei-bashing and see that Microsoft reached the $1tn mark…

Given all the hoo-ha surrounding Chinese telecom equipment making giant Huawei, What are the main security risks of using Huawei for 5G (Financial Times, Yuan Yang) does a good job of summarising the risks that involving Huawei in our 5G network build-out could pose. The US government says that Huawei is a threat to global cyber security and has threatened not to share intelligence with countries who go ahead anyway and use its equipment. You should definitely read this article if you want to know more detail, but it is possible for data to be hacked (although it’s possible to limit this by only giving Huawei access to the periphery of the network), individuals can be hacked (although this can be minimised by involving Huawei equipment in certain parts of the network) and, if attacked, one country’s compromised network could quickly spread to other countries’ networks. So, is using Huawei’s equipment going to increase security risks? Vodafone’s chief exec Nick Read said that painting

Huawei’s equipment as being “bad” and everyone else’s being “good” it too simplistic because the telecoms networks themselves have high levels of security in place and Michael Howard, senior research director at IHS Markit for carrier networks said that “any and all equipment from any vendor can be compromised by any knowledgeable rogue person”. My conclusion? There may be slightly more risk using Huawei’s equipment, but it doesn’t sound any way near as clearcut as the US is making out.

I thought that I’d include Microsoft becomes third listed US firm to be valued at $1tn (The Guardian, Angela Moneghan and Graeme Wearden) because, you know, it is the sort of fact that might come in useful at a pub quiz at some point in the future – but also because it signifies a milestone (reached by Amazon and Apple previously) that its strong quarterly results had a helping hand in. Microsoft beat its sales and profit expectations in the latest quarter thanks in some part to the strength of its cloud computing business (it signed up Kroger and Walgreens Boots Alliance during the quarter, amongst others). Revenues were up by 14% and net income increased by 19%. * SO WHAT? * Great performance – and it shows that cloud computing continues to be a really strong earner across the board (as Amazon is also finding).

Fears increase of steel flooding the market again while Ford and Starbucks put in good performances…

In a very quick scoot around other big stories today, Chinese group sparks oversupply fears in steel market (Financial Times, Christian Shepherd, Anna Gross and Neil Hume) shows that plummeting profits at China’s biggest steel producer, Baoshan Iron and Steel Co, were caused by

a dramatic slowdown in domestic demand for steel. * SO WHAT? * The resulting overage has stoked fears that Baoshan will once more flood overseas markets with cheap steel but the fall in China demand will also affect other steel producers like ArcelorMittal.

Elsewhere, there’s some good news for a change for the blue oval in Ford’s profit beats estimates on stout truck, SUV sales (Wall Street Journal, Mike Colias) as the company managed to limit overseas losses and consolidate domestic success and Starbucks boosts US China sales (Wall Street Journal, Heather Haddon) shows that there’s still plenty of fight left in the coffee purveyor as it beat profit expectations in the quarter.

And finally, in other news…

I thought I’d leave you today with a very useful parenting hack in Mum shares genius tip for removing splinters from kids’ fingers painlessly (The Mirror, Nicola Oakley, Zoe Forsey and Emma Gill https://tinyurl.com/y5wh94ug). Keepin’ it real here at Watson’s Daily ????