Jeremy Warner's Outlook: Sir Fred's bullishness fails to convince

Succession planning at Caz and Rentokil; Inflation makes an unwelcome return
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The Independent Online

Bank results statements have never made easy reading, yet the acquisition of ABN Amro has transformed the latest offering from Royal Bank of Scotland from the merely impenetrable into deepest, darkest mud. Even Sir Fred Goodwin, the chief executive, admits to getting confused.

All the information you could possibly want is no doubt there for the taking, yet somehow or other, the statement failed to provide the clarity and reassurance the City was looking for after a year of turbulence in the bank's affairs.

In any case, a stock price which has virtually halved over the past year failed to find much encouragement in all the soothing noises Sir Fred had to make on the dividend, the capital position, profits and the ABN Amro integration. Somehow he failed to dispel the doubts. Nobody, it seems, is any more prepared to take a banker on trust.

Even so, the over-riding message was a relatively positive one, so much so – as I have observed before in writing about the bank reporting season – that it rather leads you to wonder whether there is much of a banking crisis going on at all.

Profits were at a record level, even ignoring the 76-day contribution from ABN, the revenue and cost synergies about to be realised from the acquisition are said to be even better than anticipated now that RBS has had an opportunity to look beneath the bonnet, and outside capital markets interests, business still seems to be booming.

Certainly this doesn't appear to be a bank in the midst of what the Bank of England has called the biggest-ever peacetime liquidity crisis. To the contrary, RBS seems to have been a major beneficiary of the Northern Rock collapse, with surging deposit levels.

Sir Fred says he always knew the easy credit environment of a year ago, when money appeared to be available on tap, couldn't continue, and he welcomes the return of more appropriately priced risk. One positive, according to Sir Fred, is that those prepared to take risk will now be rewarded appropriately.

Risk is something that Sir Fred knows all about, for one of the main problems with the share price has been the perception that he took on far too much of the stuff in buying ABN Amro. This collapsed the bank's capital ratios at a time when they were about to be further squeezed by the credit crunch. That these ratios yesterday emerged a bit better than expected seems to be largely down to the fact that the accounts confusingly consolidated the whole of ABN, rather than just the bits that are intended to belong to RBS.

Strip out the businesses that are going to Fortis and Santander, and the core, equity tier one ratio is still wafer thin. Sir Fred insists that he has a completely bullet-proof plan agreed with regulators for rebuilding these ratios which doesn't involve either cutting the dividend, raising new equity, or significant disposals. If he's right, then the shares are due an almighty bounce.

Succession planning at Caz and Rentokil

Succession planning has never been David Mayhew's strong point round at JP Morgan Cazenove, even though over the years he must have advised countless FTSE100 companies on it. Widely recognised as the doyen of corporate stock broking, Mr Mayhew, now 67, has proved himself quite unable – or possibly unwilling – to work with anyone who might eventually step into his shoes.

One after another, they have all been dispatched. The latest to go is Robert Pickering, the chief executive. At the ripe old age of 48 and with apparently no new job to go to, he has quit to spend more time with his fishing rod. All I can say is that it better not be on the same stretch of the river Tay as Mr Mayhew has his pitch.

Also quite hopeless at finding the right man for the right job is Brian McGowan, who rather than again spending six months of his life looking for a new chief executive at Rentokil Initial has decided to take the bullet himself for another calamitous profit warning by resigning as chairman.

Doug Flynn, the executive Mr McGowan brought in after engineering the boardroom execution of the founding father of the modern Rentokil, Sir Clive Thompson, was in truth always the wrong choice for the job. As a former newspaper and advertising man, Mr Flynn was never suited to rat catching and logistics.

A native Australian, Mr Flynn much prefers being down under and sailing. In any case, he stays and McGowan is gone. Just as well Mr Mayhew wasn't advising on this one.

Inflation makes an unwelcome return

Inflation is back, only the Bank of England won't admit it. The latest evidence comes from the BDO Inflation Index, which collates price expectations among businesses. These surged to a new record high this month, with input prices soaring and many companies saying that they would attempt to pass higher costs on to consumers.

Anecdotal evidence confirms the impression of a big surge in price increases beyond those already known about in food, energy, fuel and other transport costs. Kimberley-Clarke, Colgate Palmolive and Unilever, three of the world's biggest consumer products companies, are all planning to push through price rises of between 5 and 10 per cent over the coming months.

Interestingly, most business leaders I come across seem to believe they'll have the pricing power to make increases of this magnitude stick regardless of any consumer slowdown. The cost pressures are just too big to think that competitive factors alone will keep the lid on prices. Some of the pain might be absorbed by retailers, but there are limits. The strong likelihood is that most will be passed on.

It would be unfair to say that the Bank of England is in a state of denial about these inflationary pressures. Mervyn King, the Governor, has already said he thinks it more likely than not he'll have to write another letter to the Chancellor explaining why inflation is more than 100 basis points above target.

There has also been a series of speeches from other members of the Monetary Policy Committee warning about the coming inflationary spike. Yet the other message is that this is a temporary or somehow illusory hiccup caused by volatile energy and food prices beyond the control of monetary policy. Central bankers prefer instead to keep in mind core inflation, which excludes fuel, energy and food, and continues to look not that bad.

Personally, I don't find this massaging of perceptions and expectations at all convincing. The sort of inflation that people notice – on the forecourts and in their weekly shopping baskets – is now alarmingly high by recent standards, and if the sort of intelligence reported above is to be believed, heading higher still.

Only if you are buying a flat screen television, a new car, or some such other big-ticket manufacturered item, would you notice any price deflation, and with the weak pound, that may be fast disappearing too.

The Bank likes to present the inflation we are seeing as the result of one off, supply-side shocks. Just as plausible, however, is that it is largely demand led – not our own demand, but that of the developing world as hundreds of millions of consumers buy their own TVs and automobiles too. This sort of inflation is likely to prove sustained and must eventually result in higher wage demands.

In the US, the Federal Reserve has already as good as admitted that for the time being it doesn't care about inflation. The threat to growth is seen as the bigger enemy. That too seems to be the stance being adopted by the MPC, only the Bank, with a more rigid policy objective on inflation than the Fed, daren't say so overtly.

The underlying message is nonetheless that rising inflation should not be allowed to stand in the way of cuts in interest rates, which need to be pushed through to address the economic slowdown flowing through from the US and the related credit crunch. In theory, slower growth will result in lower inflation. Judging by the pipeline of planned price increases that can be observed in the corporate world, the theory may about to be disproved.