COMMENT Investors will have their revenge on Littlechild
"Professor Littlechild is not just shifting the goal posts; he seems to have dug up the entire pitch."
Wednesday 08 March 1995
This may well be the right approach from a consumer point of view - this newspaper and others have been saying it for long enough - but from an investment perspective it looks disingenuous and arbitrary in the extreme. Prof Littlechild is not just shifting the goal posts; he seems to have dug up the entire pitch. Moreover, the timing, coming in the middle of the Government's Gencos offers and the Trafalgar House bid for Northern Electric, could hardly be more disruptive, damaging and unfortunate.
The Treasury must be fuming. Proceeds from the sale of the two generators seem to be secure but those left holding the baby - 1.1 million private shareholders have already paid £1,000 apiece - have every right to feel aggrieved. So, too, do the legion of investors who bought into the regional electricity companies in the belief that when Professor Littlechild set a new five-year pricing regime in August he meant it.
Only kidding, he appeared to be saying yesterday as he announced that the bid by Trafalgar House for Northern Electric, the subsequent Northern defence and widespread public concern about whether the new pricing regime was sufficiently demanding on the RECs had led him to reconsider the position. Though he seems to be entirely within his rights, the City had assumed that what it was told last August was the way it would be.
That he could so easily change his mind is something investors neither knew about still less appreciated. Small wonder that the stock market price of both electricity generating companies fell through the offer price yesterday. In the circumstances, the insistence of advisers that Prof Littlechild's volte face has little if anything to do with electricity generation, though technically true, looks either naive or disingenuous. If the regulator can act like this with one set of utilities, why not another? At a stroke Prof (by the book) Littlechild seems to have sunk all prospect of either the National Grid or Railtrack flotations. The timing of his intervention may look to consumer groups like an admirable show of regulatory independence, but from a City perspective it is crass stupidity, as if one side of Government doesn't know what the other is doing, and a damning indictment of privatisation strategy.
It would be absurd to suggest that utility regulators stick to the letter of the privatisation prospectus. Circumstances change. The scope for efficiencies among privatised businesses and for the introduction of new competition into their markets often prove more dramatic than had been supposed. The regulator must have the right to chop, change and adapt accordingly. By the same token, however, to move the goal posts so unexpectedly just six months after putting them in place is really not on, not if ministers want to continue to sell these businesses to investors anyway. Independent regulators are not just consumer watchdogs; they are also there to ensure that the interests of investors are protected from political whim and prejudice.
Investors are now being obliged to pay a heavy price for Prof Littlechild's misjudgment. They will have their revenge the next time the Government tries to privatise anything.
New mind set that shrinks loans
Barclays had the shrinks in last year, and a very good idea it was, too. Martin Taylor, chief executive, has got the bank's loans down by £9bn, or about a tenth.
Mr Taylor is the industrialist who came into a troubled bank and made no secret of his surprise at its management deficiencies. Much of the past year has been spent talking his colleagues into a new state of mind about what they do. Some of it is so simple it is amazing it was not done before.
Top of his list is shareholder value - "the lodestar we are following" - as the key to all decisions about taking on business. This new refrain at Barclays has been familiar for years at Lloyds under Sir Brian Pitman.
It means examining every business decision in terms of the return it produces and avoiding or getting rid of activities that do not satisfy minimum criteria. There is no point in growth for its own sake unless there are profits.
Such a change of direction can clearly cause great personal distress to traditional bankers. Some of them apparently have difficulty understanding why they should withdraw from any of their core lending businesses, no matter how poor the return on equity.
Loans are now priced by analysing the risk of different types of business and the volatility of returns. Using these calculations, the bank can estimate some of the potential losses when the economic cycle turns down and set aside bad debt provisions well ahead to reduce the shock.
Far from slashing the general provision for bad debt as banks used to do at the peak of a cycle, Mr Taylor has topped it up £74m to £850m. And his managers are forced by the new methods of analysis to think harder about the risk factor on every loan they make, which discourages lending just for volume.
The bank has to get these decisions right or its talk of managing its own capital to match its lending - and handing back money to shareholders when there is a surplus - will be just hot air. Nobody wants a return to the days of high dividends clawed back by rights issues every few years.
But while Barclays is more shipshape under its new skipper, it is still not steaming very fast. Lower lending and a more cautious attitude to speculation at BZW pulled operating profit down. The whole of last year's pre-tax improvement was due to lower bad debts. The gross level of bad debt provisions last year of more than £1bn - in contrast to the net level after recoveries - is still alarmingly high.
Barclays' average post-tax return on shareholders' funds over 10 years is 9 per cent, less than half the level targeted by any respectable industrial company. The 21 per cent return reached last year was not enough because it was on the sharpest part of the cyclical upswing (so talk of profiteering is nonsense).
The real measure of whether Mr Taylor has got it right will only be available in three or four years' time when we see if he can reach his target average return on equity of 15 per cent. So while his first year report shows good progress on the easy part - disciplining an errant bank - Mr Taylor now has to show he can grow Barclays in a tough new regime in which profitability comes before size.
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