Legal & General looks set to weather Brexit storm

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Sir John Kingman has never chaired a public company, let alone been an important member of the FTSE 100 index, but suddenly his arrival at Legal & General looks inspired, or at least less of a gamble.

Kingman was second permanent secretary at the Treasury and thus one of the country’s most senior civil servants. He should be a useful big brain for L&G’s board to call upon to explain the finer points of the commercial carve-up that will be UK’s renegotiation of its trading relationship with the European Union.

L&G didn’t have Brexit in mind, one assumes, when approaching Kingman. But the group says it had assumed a 50% probability of a vote to leave, which is why Tuesday’s post-referendum update on the capital position carried the tone of an extended boast.

L&G took a few “de-risking” actions in advance. Thus the whack from the upsets in financial markets was £200m or so, which is not much in the context of an insurer with a regulatory capital surplus of £4.9bn. As for rating agencies’ downgrade of UK sovereign debt, L&G was on the job: it had shifted already for the purposes of internal modelling. Very reassuring.

It was enough to add 8% to L&G’s share price in yesterday’s wider stock market rally. Even so, the 178p share price compares to 236p on the eve of the referendum because investors’ (understandable) response to Brexit has been to worry about everything financial.

Caution will dominate for ages, one suspects, but L&G looks more robust, better provisioned and more diversified than most in its sector. And, on the lower share price, the historic dividend yield is now an eye-catching 7.6%. “This has to be close to a screaming buy unless you are in the financial Armageddon camp,” says Berenberg’s analyst. You’ll get no share tips here, but that’s a popular view if you believe the Brexit crisis will pass eventually.

Kingman has timed his move well. Chairing L&G looks more fun than being on the telephone to Brussels and Berlin for the next two years, which is the fate of his former colleagues.

Myners close to the mark on Green’s pension responsibilities

Lord Myners is perhaps not a wholly impartial observer – he has history with Sir Philip Green from Marks & Spencer days – but his assessment that the Topshop tycoon will need to find £400m-plus to resolve the pension mess at BHS sounds close to the mark.

The sum has not been plucked out of thin air. The important principle here is that the Pension Protection Fund, which is funded by a levy on defined benefit schemes, should not be left out of pocket when Green fulfils his promise to “sort” the deficit in the BHS fund. It would be “unconscionable for any shortfall to be dumped on solvent schemes through the levy,” Myners told Sky News.

Quite right, and one can see the outline of a three-part deal. Members of the BHS scheme with small sums invested could be offered a lump sum. The body of the scheme would be transferred to the PPF, with Green making up the shortfall. And the BHS executives, whose pensions would suffer a haircut under PPF rules, would be topped up via a new scheme, again with funding from Green.

It sounds a workable structure, with the latter two elements costing about £200m apiece. The MPs, when they cross-examined Green, should have pressed him harder on his definition of “sorting” the deficit. But Myners’ version is on the right lines: no dumping on the PPF, and fully-funded transfers from the off.

Shawbrooks shoots itself in the foot

The UK’s challenger banks will find life more challenging in the new world, runs the reasonable thesis. Bad debts could rise if the economy slows; lower-for-longer interest rates will hurt margins; and regulators’ capital demands could become tougher.

Against that backdrop, it’s best not to shoot yourself in the foot. Shawbrook’s warning of a £9m charge stemming from “irregularities” in its asset finance division was horribly timed. The lender to small and medium-sized businesses said “a number of loans” did not meet the group’s “strict” lending criteria. The cock-up was discovered when a new risk-management system was installed.

At a push, it’s encouraging that the new control system is better tuned than the old one. Even so, a £9m charge on a £14.7m collection of loans is hefty – it’s equivalent to about 13% of Shawbrook’s pre-tax profits last year. The difference with challenger banks is that they have specialist knowledge about their customers and take a personalised approach to underwriting. That, at least, is what it says on Shawbrook’s website. Bruised investors, contemplating a share price at half its pre-referendum level, may want to be persuaded anew.

Osório leads by example with personal share purchase

That’s the spirit: António Horta Osório, chief executive of Lloyds Banking Group, followed his memo to staff (“the fundamentals of the group are strong”) by buying 100,000 shares at 54.2p, the lowest they’ve been since 2013.

The outlay was not large for a man with an £8.5m pay package last year, but it was something. Let’s see if it is mirrored elsewhere by bosses working in sectors where share prices have suffered a shake-out. A personal share purchase sends a stronger message of confidence than an anodyne email.

Powered by article was written by Nils Pratley, for The Guardian on Tuesday 28th June 2016 20.17 Europe/London © Guardian News and Media Limited 2010


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