With business patchy, August has always been a month for mischief on the London Stock Exchange. Victorian brokers would rig tripwires to floor pompous colleagues. Bank shares are the contemporary fall guys, with the result that the privatisation of public stakes in Lloyds and Royal Bank of Scotland looks increasingly problematic. That is a nuisance for taxpayers, whose hopes of making a predictable profit on the transactions are dwindling.
RBS shares have dropped by 44 per cent to 20p since the start of the month and Lloyds shares by 35 per cent to 28.3p. The last government bought its 84 per cent stake in RBS for around 50p per share and its 41 per cent holding in Lloyds for about 74p per share. The taxpayer is thus as deep under water as the fishy horrors photographed from bathyspheres.
There are many factors behind the falls. They include discounts for a double dip in developed economies and worries that Sir John Vickers will propose a radical re-jig of the banking system in September. The scale of the de-rating is puzzling, though. RBS, for example, is priced at around 0.4 times its book value, implying that 60 per cent of its assets are duds.
Ideally, senior investors would return from vacation to order a clear up of the mess made by hapless juniors, in scenes reminiscent of The Sorcerer’s Apprentice. But since investment warlocks were in on the action via BlackBerry, a slower recovery is likely (barring a Japanese-style lost decade, further financial shocks or plagues of locusts, boils and frogs). The more protracted the climb-back, the longer it will take UK Financial Investments, the body responsible for government banking investments, to offload a stock overhang currently valued at £18bn.
UKFI may, in time, need to think the unthinkable and contemplate share offerings at prices below the government’s average buy-in levels. This would at least counter expectations that the state is a seller only above these thresholds. Thus may necessity be made into a virtue.
Consistency of accounting treatment is important for shareholders. It reassures them that they are comparing apples with apples, rather than oranges, and facilitates just comparisons with peers. But looking at the reported operating profit margins at Taylor Wimpey and Persimmon, two of the UK’s largest housebuilders, is a bit like comparing apples with penguins. This month, Taylor Wimpey delivered a self-proclaimed sector-beating 9.3 per cent first-half operating margin. The 9 per cent figure Persimmon announced on Tuesday looked a bit measly by comparison. There is, however, a special ingredient to Taylor Wimpey’s apparent triumph over its more conservative rival. Included in its profits was a £48.9m gain from land sold for more than its estimated value. But during the recession the impairment on the very same land was deducted as an “exceptional” and was not reflected in the operating margin.
The company has done the accounting equivalent of having its cake and eating it. Discount the yo-yoing of its once “exceptional” slice of British turf and Taylor Wimpey’s margins look less healthy at 3.3 per cent. A neat piece of financial footwork. But one that has annoyed peers and will be hard to repeat a second time around.
All at sea
Lebanon should be a cushier number for oil and gas prospectors employed by Cairn Energy than Greenland, its current focus. The country, which is expected to auction sea-bed exploration blocks early next year, offers the discerning roustabout hot weather, beach furloughs and a complete absence of hungry polar bears. For Cairn, the lure is a share of wider reserves that may include 122 trillion cubic feet of gas.
By signalling a preliminary interest in the Eastern Med, Cairn can meanwhile counter impressions that its fortunes depend entirely on Greenland. It has been drilling up north for more than three years without making a discovery to rival the transformative Mangala oilfield in Rajasthan. Martijn Murphy of energy consultants Wood Mackenzie describes Lebanese blocks as “highly prospective” and “very exciting”.
Just one snagette. Even readers as immured in a business silo as Lombard will have noticed that political relations between Lebanon and Israel are a little frosty. Hydrocarbon hounds are excited about Lebanese waters because there are two big gas fields just to the south, in an Israeli patch of sea. The maritime border is hotly debated. Is it over-optimistic to imagine that Lebanon will define exploration blocks with the aim of forestalling a dispute with Israel, rather than provoking one?
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