Shadow chancellor John McDonnell promised fresh ideas from Labour for the UK economy and here they come, courtesy of economist Graham Turner’s “financing investment” report. The headline-grabber is the proposal to give the Bank of England a target for generating growth in productivity, which certainly counts as original. But there’s another proposal – an old one – that ought to be dropped as out-of-date, expensive and risky. It’s the idea of “using publicly owned Royal Bank of Scotland to concentrate on delivering SME lending across the country”.
Such a plan was a realistic option in 2008 when the last Labour government rescued RBS by taking a 83% stake during the banking crisis. Full 100% control might have been wiser in hindsight. But events have moved on. After the Treasury’s sale of a 7.7% chunk of shares a fortnight ago, RBS is only 62.4%-owned by the state. If chancellor Philip Hammond gets his way, RBS will be substantially in private hands before the next election, assuming the poll happens in 2022.
McDonnell may oppose Hammond’s sell-down but he can’t ignore its existence. So what’s the idea? To nationalise RBS in its entirety, however low the state’s stake has fallen? Even at the current level of ownership, the outlay at today’s share price to get full control would be £11.5bn, which is serious money.
And how is the lot of SMEs – small and medium-sized enterprises – supposed to improve? If the answer is to force RBS to adopt looser lending standards than its commercial competitors, the long-term risks to the public purse are obvious. And, given that RBS is the biggest or second biggest lender to SMEs in nine out of 11 regions of the UK, there is a danger of distorting the market. Other banks might retreat if a large state-owned rival sets its lending taps to maximum.
None of which is to deny that promoting easier access to finance for SMEs is a fine ambition. It’s just that better competition, and more new entrants, is more likely to be effective. Start by embracing the fintech, or financial technology, revolution and find policies to encourage the new breed of specialist and peer-to-peer lenders. Such an approach would be genuinely new, which you’d think would appeal to a Labour leadership keen to escape the charge of 1970s-style statism. Fully nationalising RBS, and imposing lending targets, is a dead end.
Debenhams may be fine in the long-term, but it’s got to get there first
In its new year profits warning, Debenhams reckoned it would make £55m-£65m of pretax profit this year. That became a shade over £50m-ish in April’s update. Now shareholders are told £35m-£40m is on the cards. Faith in chief executive Sergio Bucher’s turnaround plan may also be shrinking. Five years ago, Debenhams was making £139m.
The latest warning was blamed on weak markets and “increased competitor discounting,” meaning the panic at House of Fraser. No short-term relief can be expected on that front. Debenhams may enjoy a boost when HoF actually closes half its stores but the process of getting to that point is likely to involve yet more discounting.
In the meantime, Debenhams may be planning a sale of its own. The “non-core” assets are under review and the most notable loose piece is Magasin du Nord, a six-strong chain of department stores in Denmark that is worth £162m according to broker Investec. If Bucher gets an offer at that level, he should probably take it and make a dent in Debs’ borrowings of £320m.
The group keeps saying the debt burden isn’t a problem, which is correct if you look at the headroom within overall facilities of £520m. But the relevant measure now is covenants, which start to bite if profits fall to the £20m mark. Back in January, that prospect still looked distant – less so now.
One wishes Bucher luck since his attempt to invigorate Debs with virtuous brand-building was admirable in its way. But it was always a long-term strategy, and Debs’ marketplace is crumbling in the short-term.
The charmed life of KPMG and the big four
“The big four must improve the quality of their audits and do so quickly,” says Stephen Haddrill, chief executive of the Financial Reporting Council, with KPMG singled out for strongest criticism.
After such a damning verdict, you might expect investors to demand that companies find new auditors outside the big four. That won’t happen, of course, since very few FTSE 350 businesses dare to step outside the golden circle of KPMG, Deloitte, PwC and EY.
It is yet another reason why the entire auditing industry should be packed off to the Competition and Markets Authority. The consequences of failing on the job, in terms of competitive threat, seem to be roughly zero.
