Wednesday 29/04/20

1. In LOCKDOWN & OIL NEWS, Putin extends, Trump forces meat processors to stay open and BP has a ‘mare
2. In BANKS NEWS, it’s a mixed bag for UBS, HSBC and Santander
3. In RETAIL NEWS, M&S is “never the same again” while Tesco sees a rise of the silver surfers and Travis Perkins, Nando’s, Burger King and Starbucks fire up for a new normal
4. In INDIVIDUAL COMPANY NEWS, Google’s revenues climb, Ford delays new product launches and BA announces major job losses
5. AND FINALLY, I bring you the world’s most coronavirus-friendly restaurant and a practical home craft project…

So Putin extends Russia’s lockdown, Trump orders meat processors to stay open and BP continues to suffer…

Putin extends Russia coronavirus lockdown and warns worst to come (Financial Times, Henry Foy) shows that Putin has decided to extend Russia’s lockdown until May 11th, adding that “a hard and difficult path lies ahead”. The government is concerned about the virus spreading outside Moscow to provinces that may be less well-equipped to deal with it – to the extent that Putin said yesterday that some regions may be on lockdown longer than others.

Following on from what I’ve been saying about meat processing in the US, the fact that Donald Trump orders meat processing plants to stay open (Financial Times, Demetri Sevastopulo, Aime Williams and Gregory Meyer) shows just how serious the problem is getting as concerns increase over the viability of America’s food chain following a number of major closures. He invoked the Defense Production Act (also known as the DPA) – something that dates back to the Korean war era (!) – that allows the government to force companies to take action for security reasons. * SO WHAT? * Trump has used this act a few times over the past month – he made General Motors

manufacture medical ventilators – and continues to use it to threaten other industries and companies with. Its invocation will effectively shield affected companies from any legal liability that could come from remaining open during the outbreak. Unions are concerned that this will effectively remove the incentive for companies to provide a safe workplace and that people will not be keen to work under such conditions.

The dark cloud hanging over oil continues in First-quarter loss with worse to come puts job cuts in pipeline at BP (The Times, Emily Gosden) which highlights a “tough” first quarter for the oil major and expectations for an even tougher second quarter as BP faces a “perfect storm” of weak oil prices and ongoing coronavirus repercussions. When the chief exec of one of the biggest oil and gas companies in the world, Bernard Looney, says “Nobody knows what the price of oil is going to be in the future. Nobody has seen anything like this before”, you know things aren’t good. Stripping out one-off charges, underlying profits fell by two-thirds – which was actually better than analysts were expecting. On the other hand, it has cut capex on fracking in the US. * SO WHAT? * Things are bound to get worse for the company as the average price of a barrel of oil in the first quarter was $50, whereas it actually needed it to be above an average of $56 a barrel over the course of 2019 to cover capex and its dividend payout. The company is hoping to bring this break-even price down to $35 a barrel by next year, but in the meantime, Brent Crude is hovering around $20 a barrel and WTI is around $13. 

European banks report mixed results this week…

It’s European banks’ reporting season at the moment and UBS profits jump 40% as wealth unit performs robustly (Financial Times, Sam Jones and Stephen Morris) shows that the Swiss bank’s first quarter loan loss-related expenses jumped more than 13-fold versus the same period last year. On the plus side, it reported a 40% rise in net profits to $1.6bn as its wealth management business and investment bank put in strong performances. Interestingly, its main wealth management division had its best quarterly revenues since the 2008 financial crisis, its investment management division saw profits soar by 242% and even its asset management division reported a 52% hike in profits! On the other hand, its core equity tier one capital ratio (this is a measure of balance sheet strength for banks) suffered, but it isn’t yet at disastrous proportions.

HSBC quarterly profit halves as pandemic hits loans (Financial Times, Stephen Morris and Primrose Riordan) shows that Europe’s largest bank saw its first quarter profits halve due to loan reserves rising by 417% as it

readies itself for all the bankruptcies and defaults caused by the global lockdown. Execs warned that the situation would get worse and be a major hit on profitability in 2020. As a result, it suspended its dividend, cut expenses and reduced the bonus pool by a third. In terms of current market conditions, the bank says it is seeing some signs of recovery in Asia but remains cautious on the overall outlook for the rest of the year.

Santander profit plunges on loan loss provisions (Financial Times, Nicholas Megaw) shows that Spain’s Banco Santander saw a massive 82% drop in profits in the first quarter due to an 80% increase in loan loss provisions. It said that the impact in the first quarter was actually relatively limited and the CEO, José Antonio Alvarez, said he was optimistic that the global economy would rebound quickly but added that a slower recovery could be painful for his bank. * SO WHAT? * OK, so maybe I’m over-simplifying this a bit, but it seems to me that everyone and their dog are hiking up their loan loss provisions as they expect the worst. Business overall for banks doesn’t seem to have been that bad in the first quarter. HOWEVER, the second quarter is going to be a real test and they are all bracing themselves for a massive storm. The magnitude of that storm will depend on how quickly economies can open up again and so the pressure will continue on politicians and businesses to weigh up economic needs and deaths.

M&S reviews while other high street players start making a return…

In Fresh slogan for M&S vows radical break from the past (Daily Telegraph, Laura Onita) we see that M&S has adopted the new slogan “never the same again” for its turnaround plan as it announced dividend cuts for this year and next in a bid to save £210m. Given the collapse of non-food sales over the current period, many fear that more store closures and job losses are to come. Plans to sell groceries online via Ocado still appear to be on track for September and its banks have agreed to relax rules around its borrowing until September 2021. * SO WHAT? * M&S has been in trouble for quite some time now and although its food offering has done OK during the outbreak (others have done better), there are still serious issues for it to deal with. I guess that the coronavirus is going to become the go-to excuse for drastic store and staff pruning not only for M&S, but for pretty much everyone.

Elsewhere, Tesco breaks online record as silver surfers fuel demand (Daily Telegraph, Chris Johnston and Laura Onita) cites an interesting trend identified by Kantar as it turns out that the over-65s spent almost double previous levels on home deliveries over the latest quarter versus the same period last year. I suspect that now this demographic

has got the hang of it, many of them will continue! Other than that, Travis Perkins to build up trade again (The Times, Robert Lea) signals a return to some kind of normality for the DIY retailer that owns Toolstation and Wickes as it says that 70% of its outlets are now open for business under new trading rules. Like many other businesses, it will be applying strict social distancing and moving to contactless transactions. Nando’s and Burger King fire up grills to trial reopening (Daily Telegraph, Hannah Uttley) heralds a limited return for the two popular chains – with the obligatory social distancing measures in place – as they make a tentative return in a handful of sites and Starbucks logs first quarterly same-store sales drop in 11 years (Wall Street Journal, Heather Haddon) shows that the coffee giant has suffered under the lockdown although it continues to eek out some business via drive-throughs, delivery and pick-ups. * SO WHAT? * It’s good that these businesses are starting to open up once more in a responsible manner, but just how much consumers are willing to spend on non-essential items is a big unknown. As I have said before, I expect that people will WANT to spend initially as they get more freedom back in their lives, but many will be restricted by dented household budgets. Maybe “affordable luxuries” will be able to sustain a reasonable level of business as customers want something to lift the spirits, but we will just have to see. Everyone is fearing the worst, so the danger is actually that we are overestimating the downside and not taking into account any upside.

Google reports higher revenues, Ford delays new launches and BA announced big job losses…

Google revenue climbs, but company warns of ‘Tale of two quarters’ (Wall Street Journal, Rob Copeland) shows that Google’s parent, Alphabet, posted solid results as strength in advertising revenues early on in the quarter offset the impact of the coronavirus lockdown. Although many expect tech companies to weather the Covid-19 storm relatively well, Alphabet execs cautioned that company performance fell sharply as the crisis gathered momentum and that they could not predict how the next few months will look. * SO WHAT? * Any companies surfing the wave of advertising revenues is likely to look vulnerable

as companies do the traditional thing and cut ad budgets in a downturn. Having said that, I do wonder whether DIGITAL advertising will not fall as badly as, say TV and print advertising, because there is an argument to be made that digital advertising is more easily targeted and therefore more important. 

In other news, Ford to delay new product launches (Financial Times, Claire Bushey) highlights Ford’s decision to delay launches for this year and next due to disruption caused by plant closures (and probably the fact that sales are likely to be dented badly by the global lockdown anyway) and BA to axe 12,000 jobs as air travel collapses (Daily Telegraph, Oliver Gill and Chris Johnson) shows the inevitable consequences of a widely expected major slowdown in the aviation industry. BA’s chief exec Alex Cruz said in a letter to staff that there is going to be no taxpayer-funded bailout and that the furloughing of staff is not a long-term solution. This is going to get painful.

And finally, in other news…

I thought I’d leave you today with the interesting restaurant concept in A one-person restaurant is opening in the middle of a field in Sweden, delivering food from a rope out of the kitchen window (Insider, Sophie-Claire Hoeller https://tinyurl.com/y9s7hh3c) and the latest what-the-hell-is-that invention from Japan in Japan’s latest work-from-home innovation: The wearable video conference background (SoraNews24, Casey Baseel https://tinyurl.com/ycqzpr2f). What?!?