Making money out of money
Nicholas Davenport
Few Labour Members of Parliament can be expected to understand the financial mechanism of the capitalist system, which they were originally brought into action to destroy, but perhaps the stupidest remark they have ever made — attributed alas! to Harold Wilson — was that making money out of money was morally and socially wrong. What else could you do if you were a bank? But perhaps this is why the Fabian Society is drawing up plans for the nationalisation of the banks and insurance companies for the next Labour Programme. We shall see how the joint stack banks have been making money out of money when their annual reports are published next month. They have not been slow to take advantage of the freedom so unwisely bestowed upon them by the Bank of England to lend as much as they like at soaring rates of interest to the private borrower.
Most brokers estimated that 1972 bank profits will be up by 20 per cent and that 1973 will follow with a further rise of around 15 per cent. Barclays Bank was apparently the most successful last year with an estimated profit jump of about 30 per cent but it must not be forgotten that about one third of its profits comes from overseas. The fact it is strong in South Africa is no mark against it; it was there long before the troubles; but it is worth noting that Barclays International reported a profit rise of only 15 per cent for t'he year to September. It was the UK business in loans to private borrowers at soaring rates which provided the banks with their profit bonanza last year. Lloyds were apparently not so quick off the mark as Barclays and National Westminster and only a very modest rise in their profits is expected. Perhaps they had more than their fair share of bad debts.
Now having regard to the fact that the joint stock banks have been told to close down on their profitable loans to private borrowers for property and Stock Exchange speculation and to increase their loans as much as possible to industrial borrowers, which will be at lower rates, the shrewd investor is turning away from the clearing banks to the merchant banks for his 1973 capital speculation. The intriguing part of investing in merchant banks is that it is like backing dark horses who may turn out winners. None of them discloses its full earnings.
I notice that the Economist is planning a series of articles on merchant banks and began last week with an analysis of Hambros Bank which caused the shares to rise by 10p or more. They purported to show that the asset value of the shares was well in excess of the market value. They took the banking profits at a modest £3 million this year and applying a priceearnings ratio of 15 they arrived at £45 million for the banking assets. Then they took £100 million for the value of the bank's investments in insurance, property, foreign interests, venture capital and the Impala platinum mine (through Union Corporation). Adding a bit for the unit trust management group they came to a figure which was almost double the then market price of 490. The jobbers promptly marked the price of Hambros up to 500. This is all very well but the bank itself only discloses a net asset value of 263. The hidden inner reserves could perhaps raise this to over 400. The investor should therefore look to the historic price earnings ratio of 24 which will be brought down to near 19 if profits increase this year by 25 per cent — a reasonable forecast. The shares are obviously not out of line with the market.
Hambros is a good example to take for it illustrates the wide range of interests in a merchant bank's business and the speculative nature of some of its operations. The solid side is banking and unit trust management linked with life assurance and "property bonds." The purely banking side was not so highly profitable for Hambros last year. It had some bad debts in New • York and two thirds of its banking was in the Eurocurrency market where margins are thin and competition intense. It is when it takes participation in companies, undertakes company-mergers and new issues and property and fund management that it can make immense profits. For example, its 44 per cent interest in Berkeley Hambro property is put in the balance sheet at £8 million and is worth more than double that figure. Rumour has it that the bank is planning to sell of its interests in the Impala platinum mine for £15 million. So it goes on. What I like about Hambros is the personal touch which it retains. It has been very well managed by 'Mr Jocelyn.'
to whom I shall always be grateful for a loan granted many years ago for a business purpose, and is now run by 'Mr Charles,' his cousin. ' Mr Jocelyn ' was not at all persona grata with the late Labour government when he raised his comparatively modest salary, which he fully deserved.
Another merchant bank with the personal touch is Kleinworts, although I do not know how active Sir Cyril Kleinwort remains in the day-to-day management, but like Hambros it is reputed to have substantial hidden profits and assets. In April last it raised additional loan capital in the Euro-bond market of US $25 million and considerably higher profits may be expected for the year 1972. The prospective price-earnings ratio is on the high side at a little over 21.
For the merchant banks selling on a low price-earnings ratio we must go to Hill Samuel and Mercury Securities. For the year to March 1972 Hill Samuel profits were up by no less than 55 per cent and those of Mercury Securities (Warburgs) by 19 per cent. For the year ending March 1973 both are expected to show an advance in profits of around 25 per cent.
This would put Hill Samuel on a prospective price earnings ratio of 16.2 and Mercury Securities of 15.0 In both cases the banking profits — after transfers to inner reserves — constitute the bulk of the whole.
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