Lloyds Banking Group is by necessity forced to be up close and personal with its customers. Their uncertainty is the lender’s uncertainty. On Thursday Lloyds made provisions for £1.43bn against future loan defaults, five times provisions in the first quarter of 2019. About £1bn of these expected losses are related to coronavirus and that was before the UK settled into lockdown.
It is of a piece with rival banks. Barclays this week logged a £2.1bn provision to cover possible defaults. Totting up the cost of bad debts is wizardry rather than science. It involves crystal balls and pacing between regulators and regulations. IFRS 9 accounting rules insist on early recognition of loans that might go sour. The Bank of England, though, has warned British banks against throwing every default into the kitchen sink too soon, in case it restricts lending to the needy during the crisis.
Lloyds has made 3,750 government-backed coronavirus business interruption loans worth close to £500m to business customers. That’s pretty paltry compared with the total of £4bn lent across the UK. But Lloyds has agreed 37,000 capital repayment holidays and overdraft extensions to businesses and eased terms for nearly 900,000 retail customers. An unknown proportion of these customers will default.
Lloyds’ base case is that the UK economy could shrink 5 per cent in 2020 but then grow in 2021 by 3 per cent. Critically, this assumes an unemployment rate of 5.9 per cent and that house prices will fall 5 per cent this year.
Analysts will fight over the numbers like baldies over a comb. This week, Barclays set a scene of steeper falls followed by a steeper recovery. But, say Citi analysts, if Lloyds’ very worst-case scenario proves accurate and the economy falls 5 per cent next year and house prices tumble 30 per cent, its expected credit losses will rise by another £1.8bn. Of that, nearly £1bn would relate to mortgages. Lloyds’ net interest margins are already squeezed by low activity, heavy competition and low interest rates.
Lloyds has probably banked enough capital to shoulder the knocks. Its core equity tier one ratio, a measure of balance sheet strength, hit 14.2 per cent in the first quarter, higher than many UK peers. But the uncertainty that saps its customers’ energy will continue to sap Lloyds’ shares.
The bank lives the same dilemma as its customers. It might wish it could keep customers at a safe distance, but it must keenly look forward to the end of lockdown and a resumption of economic activity.
Sales growth of 13 per cent looks like job done for a chief executive hired to reverse the fortunes of an ailing company. Not so for Laxman Narasimhan, newish boss of health and hygiene group Reckitt Benckiser. It is hard to credit Mr Narasimhan, eight months in post, with the Covid-19 first-quarter sales surge at the maker of Dettol, Durex and Nurofen. His will be a turnround tale with a twist: a cracking quarter means his first year may be his best. While the windfall is doubtless welcome, the short-term gains could create longer-term headaches.
Mr Narasimhan’s strategic overhaul unveiled two months ago is crucial to clean up Reckitt’s reputation, tarnished by supply chain slip-ups and a fatal sanitiser scandal in South Korea, and to restore faltering growth. But deciding where to invest when demand patterns have shifted so quickly is difficult. The implications of the current crisis could be “wide-ranging and long-lasting”, Mr Narasimhan cautioned. Many consumers will undoubtedly tire of extreme hygiene and incessant handwashing, but not all. Stockpiling has to be separated from enduring behaviour change and strategic adjustments made accordingly. Mr Narasimhan’s laundry list was already long; coronavirus has made it longer.
Still, Reckitt’s supply chain management is an encouraging sign of things to come, even if it is at a cost to margins (airlifting raw materials to navigate lockdowns is expensive). In the past Reckitt struggled to meet demand with enough supply. This quarter it managed to shift 11 per cent more of its stuff. That suggests the boss has grasped the nettle.
The crisis has also helped vindicate Mr Narasimhan’s biggest strategic choice, to hold fast to both Reckitt’s health and hygiene units. Health — which incorporates Nurofen and incomprehensibly Dettol — was the sick man of the group. It has shed that tag, with sales of over-the-counter medicines up 33 per cent. The separation plans of Mr Narasimhan’s predecessor Rakesh Kapoor are now a relic of another era.
Mr Narasimhan has his work cut out, not least because expectations are high. RB’s shares are already trading on 22 times forward earnings, ahead of household staples groups Kimberly-Clark and Unilever if not Procter & Gamble or Clorox. It’s a good start but not job done.
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