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“Some of the largest companies by size are having a bad day which means markets are being dragged down. British American Tobacco, Royal Dutch Shell, Reckitt Benckiser and Barclays are among the top fallers on the FTSE, helping to pull down the blue chip index by 0.5% to 6,864. “This follows a weak session on Wall Street last night where the major indices fell by up to 1.9% amid poor home sales data and talk that the US turned down an offer from China to hold preparatory trade talks,” says Russ Mould, Investment Director at AJ Bell.
Metro Bank
“A profit miss from Metro Bank has put a large dent in its share price and left the market wondering what’s gone wrong with the once-shining star in the banking sector.
“Full year pre-tax profit guidance of £50 million is 15% below the consensus forecast among analysts of £59 million. The fourth quarter saw a big drop in profit and the market will want a full explanation of what’s happened when the next set of results are published on 27 February.
“Metro Bank seems to have no problem attracting new customers, helped by its branches having prime locations on the high street and being open seven days a week. However, banking remains a highly competitive industry and this issue is certainly going to be a key reason behind the profit warning.
“Intense competition in the mortgage market is a major issue at the moment and has been flagged by other lenders. Savings rates are also going up across the industry as the Bank of England has started to slowly lift base rates.
“This has created a perfect storm for some banks and is likely to have put pressure on Metro Bank’s net interest margin, which compares the money paid on savings to the interest customers pay on loans.
“Its trading update also reveals is a sharp jump in its risk-weighted assets, partially down to an adjustment in the weighting given to some of its commercial property and other specialist buy-to-let loans. That means its total capital ratio will have fallen, much to the market’s dismay.
“Banks have to ensure their own funds as a proportion of risk-weighted assets (money owned by other people, allowing for non-payment risk) exceed a set regulatory target.
“Analysts last year expressed concerns about Metro Bank potentially falling below its minimum capital targets unless it raised more money. It subsequently raised £300 million in the summer to boost its capital reserves.”
Burberry
“Luxury goods firm Burberry may have reported a sales drop with its third quarter trading update, but investors will still be slightly relieved that sales from China, despite all the recent negative headlines about the country’ economy, held up reasonably well.
“China has been a key driver of the company’s growth in recent years and sentiment towards the stock had been affected by the slowdown in the world’s second largest economy. In fact, it was the Americas which failed to fire for Burberry thanks to weaker footfall.
“The business maintained its full year guidance and confirmed the release of the debut collection of new chief creative officer Riccardo Tisci to stores in February after a well-received showcase at London Fashion week last autumn.
“The company’s plan is to go even more upmarket with its brand, pushing its exclusivity in order to catch up with faster growing rivals in the luxury space.
“This seems a sensible approach although it may take time to gain traction and deliver material growth – something chief executive Marco Gobbetti has been open about. For the time being, investors will have to remain patient.”
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