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“A third interest rate cut this year from the Federal Reserve served to give the US markets a boost last night but that’s failed to extend to the UK and the rest of Europe. Only Asia shares were in jubilant mood on Thursday,” says Russ Mould, Investment Director at AJ Bell.
“A year ago, the Fed was shrinking its balance sheet to unwind quantitative easing and raising interest rates, with a clear plan to do - keep doing more of the same. Now it is cutting borrowing costs and expanding its balance sheet.
“Disappointing updates from Royal Dutch Shell and Lloyds were the key reasons why the FTSE 100 didn’t join in the interest rate cut party.
“Shell’s weakness dragged down BP and together their shares have a major influence over the direction of the blue chip index. Banking shares are also key drivers of the FTSE and so Lloyds’ setback also took Barclays and HSBC’s shares along for the ride downwards."
Lloyds
“The banks must be cursing our habit in the UK of leaving things to the last minute as Lloyds becomes the latest name in the sector to be hit by a wave of late payment protection insurance (PPI) claims ahead of an August deadline. The monster provision for PPI spooked investors on Halloween as it virtually wiped out third quarter profit.
“At least this trend is consistent with its peers and the company’s net interest margin – a key measure of profitability and an area of concern for the market – held up better than had been feared. The company also beat forecasts on costs.
“That’s where the good news stops; revenue, unaffected by the PPI charge, was below expectations – and the company also took a ‘single large corporate charge’ which some have speculated could be related to Thomas Cook’s collapse.
“Unsurprisingly the company blamed the challenging UK backdrop for the pressure on its income and having rallied on hopes of Brexit resolution, the shares may now drift as we head towards a December election.
“The destiny of Brexit has two big impacts on domestic banks like Lloyds, most obviously on how it affects business and consumer confidence as well the level of bad debts.
“But also in how it influences the future direction of interest rates which are a key determining factor in banks’ profitability.”
Royal Dutch Shell
“Expectations were not set that high for Royal Dutch Shell’s third quarter results but they still had investors running scared as profit came in well below expectations and fell sharply year-on-year.
“While its rivals have also been struggling recently, the company’s performance has been patchy for a while, notwithstanding the usual volatility in the oil market, and its second quarter numbers were also poor.
“The upstream oil and gas production side of the business was particularly disappointing but unlike BP earlier this week, the refining part of the business didn’t come to the rescue in the same way. The company did at least benefit from a strong contribution on the oil products trading side and from its liquefied natural gas business.
“Investors like Shell because of its dividend, which was held flat as the company continues its share buyback programme.
“There may be increasing fears over the sustainability of the dividend as debt creeps up and when you consider the increasing regulatory and political pressure on the industry over its contribution to climate change.”
Crest Nicholson
“The fact that Peter Truscott, the new boss of Crest Nicholson, has laid out numerous strategic changes in less than two months of joining the business would suggest the housebuilder wasn’t firing on all cylinders.
“Profit warnings often come in the early stages of a new chief executive’s tenure if they have done a review of the business and found unsatisfactory practices. You often have to wait up to six months for a review to be completed, so to have a profit warning from Crest Nicholson only seven weeks after Mr Truscott joined would imply that the strategic challenges were glaringly obvious and needed addressing immediately.
“Admittedly part of the profit warning also relates to weak market conditions and a large charge linked to checking and replacing combustible cladding on its developments. The former is perhaps unsurprising given the gloomy property market data this year.
“Analysts were forecasting £153 million pre-tax profit for the current financial year so the new guidance of £120 million to £130 million is a big step back for the business.
“Crest Nicholson says there will now be a greater focus on generating profits principally from developing houses rather than also making money by flipping land. Like the rest of the sector, it needs to trim costs and be a leaner, meaner business.
“It had already begun to alter its strategy before Mr Truscott joined by moving away from a higher-end focus to offer a broader range of houses including ones classified as ‘affordable’ and selling to private and social landlords. This diversification could help the business longer-term but it will take time to change the dynamics of the group.
“For now, investors may be relieved that the dividend guidance for the 2020 financial year hasn’t changed but the company has not ruled out a future cut by saying the current dividend expectation only stands if the business doesn’t see a significant deterioration in trading conditions.”
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