A surprise boost for RBS, but let's not bet the (mortgaged) ranch

It's a miracle! Royal Bank of Scotland lives again as a semi-functional bank capable of delivering pleasant profit surprises to its owners (that's mostly us). Profits are up, impairments are down massively and just look at that share price – up 11% in a day.

Actually, it's not a miracle. Chief executive Ross McEwan was claiming only "steady progress" yesterday and that sober assessment is fair. RBS is a bank of many moving parts. What happened in the first half of this year is that economic revival in the UK and Ireland greased the wheels of some of the most visible parts of the machine.

A 20% jump in house prices in Dublin in a year, for example, has a big impact if you have an oversized local loan book stuffed with troublesome residential and commercial mortgages. Very welcome, too, is the fact that fewer UK businesses are struggling to service their loans.

But let's not forget the clunking parts of the machine. The non-core assets in the internal "bad" bank have fallen rapidly to £21bn and £15bn-£18bn is in prospect for the end of year. That still leaves plenty of room for misses if, say, a new crisis were to flare in the eurozone. Meanwhile, remember the "legacy conduct issues", as the euphemism has it. If regulators prove mischief and collusion by banks in the foreign exchange market, the level of fines is anybody's guess.

McEwan and RBS still seem to be focused on 2017 as a date when the bank could be declared to be properly cleaned up. At that point, RBS might be capable of making clean profits of about £4bn, assuming targets for cost-to-income ratios are met. If 12 times earnings is a suitable yardstick, that would imply a 450p-500p share price in three years, versus 365p today.

That's if all goes well. Given the uncertainties, if the Treasury gets the chance to trim the state's holding at 400p-plus in 2015, it should probably grab it.


Roll up, roll up, for another big bet from BSkyB – the third if one ignores Rupert Murdoch's initial gamble 25 years ago on persuading Brits to pay to watch telly.

The first was in 1999, when dividends to shareholders were abruptly cancelled to fund investment in new-fangled digital technology. Then in 2004, when dividends had only just been restarted, new boy chief executive James Murdoch gave non-family shareholders a heart attack by saying profit margins would shrink to fund a march towards 10m subscribers; he knocked 20% off the share price in a day.

Both bets paid off handsomely, which perhaps explains shareholders' relative calm about the latest adventure – the birth of Sky Europe via the purchase of sister companies in Germany and Italy for up to £7.4bn.

But this is not merely a shuffle of assets within the Murdoch empire. To do these deals BSkyB is stretching its financial ratios just like the old days. Even after raising £1.36bn from shareholders, it could end up with borrowings representing four times current top-line profits if all minority shareholders in Sky Deutschland tender their shares. That's punchy. BSkyB's credit ratings will inevitably be downgraded.

In terms of actual price, the twin purchases pass the smell test. The £2.45bn for 100% of Sky Italia is a little lower than expected. For 21st Century Fox's 57% of Sky Deutschland, BSkyB is paying close to the minimum under German stockmarket rules.

All the same, Sky Italia and Sky Deutschland could not be described as BSkyB's prettier sisters. Neither has come close to matching BSkyB's UK success. The Italian operation has shed subscribers in the last two years and made top-line profits of £250m last year, versus BSkyB's £1.67bn. In Germany penetration rates for pay-TV are just 19%. Sky Deutschland, despite market leadership, made top-line profits of £28m last year.

Think of the scope for improvement, argues BSkyB. Fair enough, BSkyB is a business built on taking its chances. The interesting sub-plot, though, is how BT reacts. If it is serious about outgunning Sky for Premier League rights, this is the moment: BSkyB has just taken on a very large pile of debt.


Tesco's chief executive Philip Clarke was one profits warning away from losing his job for at least 12 months, so it was no surprise that the axe should fall this week as current trading came in "somewhat below expectations". Yet the appointment of Unilever's Dave Lewis still carries a whiff of panic among Tesco's non-executive directors. A non-retailer to lead the country's biggest retail company? Are you sure?

There is no rule that past retail experience is absolutely necessary, of course, and retailers can be sniffy about their supposedly unique talents. Lewis – who knows? – may turn out to be a miracle-worker. Yet it's hard to point to any feature of Unilever's recent corporate experience that has direct application at Tesco.

Strong marketing always helps and Unilever's record is excellent. But a brand-led business selling soap and ice cream doesn't suffer property headaches, which is where many of Tesco's problems originate, as in too many big hypermarkets. At Unilever the key to revival in the early 2000s was the concentration of "power brands". At Tesco there isn't an option of shifting towards "power supermarkets", unless Lewis has something very radical up his sleeve.

In the short term, the big question is whether Tesco should launch a price war and take the fight to Aldi and Lidl. There were whispers that Clarke was about to abandon his reluctance and ask the board to press the button.

Any such plans will now be put on hold, presumably, while Lewis takes stock. He starts at Tesco in October, suggesting that it will be New Year, at the earliest, before a new plan is unveiled. Six months, including a Christmas, is a long time in the current climate for supermarkets, especially Tesco.

After the initial excitement about the switch of boss, the shares ended the week 5% lower. That looks rational. There has been a profits warning and the next strategic move is up in the air. "It is not an easy job," remarked Paul Polman, Lewis's current boss at Unilever, in less-than-uplifting matter. He's right though.

Powered by Guardian.co.ukThis article was written by Nils Pratley, for The Guardian on Friday 25th July 2014 19.08 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010


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