Comment: What will Halifax do with all that money?

`Could any management with such a stash burning a hole in its pocket really be expected to adopt such a sensible approach? Bitter experience suggests not'
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The Independent Online
What an extraordinarily wealthy beast Halifax Building Society is turning out to be. The first surprise was that this stodgy old institution should be worth anything at all; when floated on the stock market this June, it will be valued at upwards of pounds 12bn, a sum that past generations of members would not have believed possible. The second, revealed in glorious technicolour by yesterday's full-year results, is that Halifax contains within it an embarrassment of riches that have the potential to wreak havoc in the saving and mortgage lending markets.

The profits first. An increase of "just" 6.6 per cent to pounds 1.43bn may not seem much set against some banks, but it actually rather understates the position. Halifax has chosen the conservative approach in accounting for the cost of mortgage incentives, writing them off against profits in the year they are incurred - pounds 626m of it last year. Others, Lloyds- TSB, Woolwich and Abbey National included, have been less guarded in their approach, choosing to amortise these costs over several years.

But the real talking point about these results is that seemingly arcane thing - tier one capital. Halifax's ratio of free capital to liabilities at 14 per cent is about double the norm for UK high street banks and even more comfortably in excess of recommended international levels. A swift back-of-the- envelope calculation reveals that this leaves Halifax with roughly pounds 3.5bn of surplus capital to spend.

So what to do with all that money? There are three options - spend it on acquisitions, spend it on organic growth by launching a fierce price war in existing markets, or give it to shareholders. Of the three the latter would seem to have most to commend it. There will be millions of members trying to dump their free shares in the early months after flotation. Designing a scheme to mop up all that excess with the company's own money would surely be a comparatively easy thing.

This, however, may be to expect too much from a management which has already begun to talk, all misty-eyed, about its long- term "mission". Could any management newly unleashed on the publicly quoted sector, and with such a stash of money burning a hole in its pocket, really be expected to adopt such an eminently sensible approach? Bitter experience ought to suggest that it could not. The Halifax "mission" is to become "the leading provider of personal financial services in the UK". Halifax certainly has the money and the size to buy that position, but has it also got the nous? The risk of profligate use of capital seems high.

Picture at ICI is not what it seems

Times are hard round at ICI. Sir Ronnie Hampel, who divides his time between chairing the company and trying to decide whether the corporate governance fascists have gone far enough, took a pounds 654,000 pay cut last year after ICI's profits fell off a cliff.

Quite right too, you might think from the man who has been handed the baton by Sir Adrian Cadbury. What better example of boardroom probity, responsibility and accountability could there be than this sacrifice from the chairman of the Hampel Committee?

The magnanimity did not stop there. Charles Miller Smith, drafted in as chief executive from Unilever two years ago, also saw his remuneration dwindle, although by the less spectacular amount of pounds 84,000. Ditto the rest of the boardroom team, who took their share of the pain as profits plummeted by pounds 348m and earnings per share shrank by a half.

This collective donning of the hairshirt is not quite what it seems at first glance. Nearly all of the reduction in Sir Ronnie's pay was due to two factors: moving from the chief executive's job to the role of chairman and the payment in 1995 of a thumping pounds 425,000 bonus for pulling off the Zeneca demerger.

The picture with the other board members is also less black and white. Even though each one took a headline cut in pay, their basic salary during the annus horribilis in question actually rose. In Mr Miller Smith's case this was partly due to him only having served as chief executive for part of the year in 1995. None of the other directors, who all enjoyed double- digit increases in their basic, had this excuse.

For all ICI's woes, Mr Miller Smith still pocketed pounds 500,000 just for turning up to work in 1996. Rob Margetts, who has been put in charge of ICI's problem child, industrial chemicals, got an increase in his basic from pounds 285,000 to pounds 325,000 while the finance director, Alan Spall, went from pounds 267,000 to pounds 310,000.

But hey, guys, just remember that no one got an annual bonus in 1996. Given the company's parlous financial performance that is scarcely surprising. What may puzzle shareholders is why anyone took home a bigger basic when profits and earnings were going in the other direction.

The game is up for Littlewoods' stores

James Ross is absolutely right to sell Littlewoods' retail arm - it is a duff business which has shown no response to the intensive care lavished on it in recent years. Whether he is likely to achieve the price he wants is less clear cut. His claim that Littlewoods will only sell the business as a going concern is so much hooey. No one would want to run the stores as they stand, so this is only ever going to be a property deal and the pounds 450m Iceland was prepared to pay for the sites a year ago may not be so very different from the price tag Asda or Tesco might attach to the sites.

The extent of the operation's problems was underscored by yesterday's announcement of flat operating profits in the year to December. Despite pouring pounds 140m of capital investment into the business over the past three years, profits still languish well below the level they achieved in 1993. With like-for-like sales growing at only 3 per cent in the run-up to Christmas, barely half the rate achieved by sharper peers, Mr Ross has realised the game is up for this tired old brand.

For Littlewoods the company, the decision to sell marks an extraordinary U-turn in strategy. Three years ago, when Littlewoods last assessed its mix of businesses, the future was said to lie in retail. It was mail order that was earmarked for sale. Still, one of the merits of wholesale management clear-outs is the opportunity they give new brooms to reverse their predecessors' mistakes. Littlewoods has a tiny share of the high street and has proved itself inadequate to the task of keeping up with the increasingly competitive pace. In mail order, if it gets the MMC's nod on the planned Freemans deal, it will at least be neck and neck with GUS with a quarter of the market.

There is a lot to do at Littlewoods, especially if the rumoured flotation is less off-the-agenda than Mr Ross claims. The group finds itself in the unenviable position of earning a poor return of 8 per cent on its employed capital, a full 3 percentage points lower than the cost of those funds. If the Moores family is unhappy with that, the City is unlikely to be any more impressed.