Lloyds' PPI nightmare is still haunting the bank, and Associated British Foods flags margin pressures at Primark

“The pound took a step back as the markets digested comment over the weekend that Boris Johnson will go to court to challenge law blocking a no-deal Brexit. The currency fell 0.4% against the euro to €1.1100 and dipped 0.25% against the US dollar to $1.2257,” says Russ Mould, Investment Director at AJ Bell.

“This wasn’t enough to put the FTSE 100 off course, with the blue chip index rising 0.5% to 7,315, thanks to strength in utilities, oil and telecoms stocks.

“The more UK-focused FTSE 250 index also advanced, up 0.3% to 19,764 with some help from bid chatter around Intu Properties and strength in various investment vehicles."

Lloyds

“Lloyds’ management are going to be happy when the PPI saga is over. Sadly for the bank the nightmare is still very much alive as evident by an increase in charges and provisions linked to mis-selling claims.

“That has also resulted in the share buyback programme being suspended, thereby removing one of the few positive supports to its share price.

“Lloyds’ shares have been drifting downwards for months as investors worry about the scale of PPI claims, pressure on lending margins and also the general impact on Brexit on consumer finances and whether it could lead to an increase in bad debts.

“Lloyds isn’t alone with these issues. Royal Bank of Scotland and CYBG last week warned of a further hit from a deluge of late PPI claims.

“Investors in Lloyds’ shares are sadly getting used to a constant string of bad news. Once the PPI saga is wrapped up, one will wonder what the next dark cloud will be to hang over the sector.”

Associated British Foods

“Primark continues to be headline-grabbing cog inside the conglomerate structure of Associated British Foods, although credit must also be given to the grocery division’s performance in the latest update.

“Additional selling space has helped to increase Primark’s market share gains and most of its overseas operations are thriving apart from Germany which still looks like a problem child.

“However it isn’t all peaches and cream. If you look under the bonnet you’ll find a 1% decline in like-for-like sales for Primark and guidance that profit margins will be squeezed. Unfavourable foreign exchange rates will increase the cost of goods for next year, although the parent company is doing its best to mitigate some of these financial pressures.

“Primark’s success has arguably been its ability to sell a high volume of cheap goods. Its brand is associated with low-ticket items and consumers shop at the retailer because it ultimately has such a wide range of affordable clothes.

“Associated British Foods will now have to either stomach lower profit margins by keeping prices the same so as to not risk alienating its customer base, or see if its brand is strong enough to push through higher selling prices without customers going elsewhere. In the current retail environment it may have to go for the former option.”

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