In the City
On to a ton?
Jock Bruce-Gardyne
Acouple of months ago I mentioned with a nuance of scepticism the predic- tions of the Sunday Telegraph that the FT Index — the old-fashioned, 30-share job, not the smart new real-time affair — would break the 1,000 barrier before the year was out. That was before Nigel Lawson laid his spell upon the markets: I suppose Ivan Fallon, the outgoing City Editor of the Sunday Telegraph, would be hard put to get takers at evens on his prophecy today.
Nor is it just the Budget. Look at the figures emerging from company after com- pany in the heartland of British manufac- turing industry. Businesses like GKN and TI which not so long ago were reckoned to be on life support in the Bank of England's casualty clearing station have been coming up with profits which handsomely exceed the most optimistic forecasts of the analysts. Old lags like Woolworth, whose long-suffering shareholders had begun to wonder what a dividend looked like, have come surging back into the lists. Talbot unveils a profit for the first time in a decade. Turner & Newall, where a com- bination of clamour against asbestos, jaded management and unhappy investments overseas seemed just two short years ago to have carried things beyond recall, now has the City talking of a profit on the right side of £20 million in 1984. And incidentally it is surely a welcome sign of the times that the revelation of Sir Francis Tombs's prospec- tive £1 million (less tax) reward for rescuing T & N has been greeted with something like approval. In the past his achievement in saving the jobs of T & N's employees and the investments of their shareholders would have been forgotten in clouds of envious in- dignation. Maybe we are still some way from sharing the American respect for pro- fit and performance. But we do seem to be moving in the right direction.
Not everyone can expect to share in the springlike mood of cheerfulness. Not the hapless minority shareholders of Stylo Shoes, for example, who have had to watch the controlling family interests see off an attractive-looking bid from Harris Queensway without a backward glance. And not the equally unfortunate erstwhile depositors and borrowers of the New Cross Building Society.
Early in the New Year, it may be recalled, the Chief Registrar of Building Societies called in the licence of the New Cross and bundled it into the arms of the Woolwich, to a chorus of relief from any who reckoned the New Cross had been skating on thinnish ice. Last week we learnt that the relief was not universally shared. The New Cross had specialised in premium packages to tempt in the depositors. Unlike some of the competi-
tion, however, it had balanced these with well-above-average interest rates on a substantial portion of its mortgage book. No sooner had the Woolwich moved in than the former New Cross depositors were offered something of a Hobson's choice: they could either accept a cut in interest to bring them into line with Woolwich rates, or they could take their cash elsewhere.
Not so the mortgagees. They had covenanted to borrow at well above the BSA recommended rates, and the Woolwich was not minded to rewrite their contracts. To add insult to injury the Woolwich justified this somewhat less than even-handed approach by explaining that the New Cross's published ratio of reserves to total assets was on the low side. For while it is true that the New Cross exit reserve ratio, at around 3 per cent, was lower than that of the Woolwich at the time of absorp- tion, that balance would obviously change if a significant number of the New Cross depositors took the hint and packed their bags. If, for example, a third of them depart in search of better rates elsewhere (as they might, being presumably premium- conscious investors) then the reserve/asset ratio of what Woolwich would be left with would be higher than that of the Woolwich before the merger. When on top of this they read of a society like the North-West Kent, one-third the size of their own former socie- ty, but still no tiddler, unveiling a surplus of just £1,800, the participants in New Cross might be forgiven if they took to sticking pins in the effigy of Chief Registrar Michael Bridgman.
Another bunch of citizens unlikely to be sharing in the general post-Budget euphoria are the shareholders in the High Street banks. They hardly needed the Governor of the Bank of England to tell them, in a remarkably — some might say alarmingly — free-ranging encounter with the Corn- 'We ended up picketing a coal mine in Derbyshire.' mons Treasury Committee, that the Budget had 'serious' implications for the banks' finances: a glance at Standard & Chartered's provisions for future tax liabili- ty was quite enough. And hot on the heels of Mr Nigel Lawson comes the news that Argentina has no intention of servicing its debts this month. Fear not, says Mr Volcker, this is no 'default'. To the American banks which have to mark their loans as 'non-performing' this weekend, it just feels that way. Fortunately our own banks are more relaxed, and one still has the feeling that her creditors will come to Argentina's terms before the London clearers feel obliged to adjust their balance sheets.
There could also conceivably be some relief for the High Street banks at home. The CBI, I hear, is girding up its loins for a barney with the Chancellor over the move to annual allowances for plant and machinery on a 25 per cent reducing balance basis. They will argue forcibly that this would grossly overstate the life- expectancy of modern machines and com- pare most. unfavourably with the tax treat- ment of industrial investment overseas. The Chancellor is also likely to be pressed (and here I should declare an interest as a direc- tor of the Central Trustee Savings Bank) to extend the existing unique privilege of pay- ing the first £100 of interest gross enjoyed by the Post Office Savings Bank when the composite rate comes in. I don't imagine Nigel Lawson is likely to prove a pushover on either count; and even if he were there would only be a modest cushion for the banks. Still, every little helps. As for the bank managements, they Of not their shareholders) could take comfort from the revelation that, notwithstanding the laid-back attitude of the Bank °f England towards the pace of change in the stock and money markets, the new Gover- nor takes no more kindly to the possibility of acquisition of our clearers by the wily foreigners than did his predecessor. Let us hope that the banking committee of Con- gress does not study the evidence given to the Commons Treasury Committee. FOC otherwise they might start making rude noises about the freedom enjoyed by British banks to go shrimping stateside. For the most part, though, it was another aspect of the US scene which preoccupied the City this week: the meeting of the Fed's. Open Market Committee on Monday an° Tuesday, and what it presaged for interest rates all round. Not for the first time dark warnings of dearer money from the dreaded Dr Henry Kaufman looked both overdone and premature. Still, if the Fed eventuallY overcomes its scruples about displeasing the White House in election year and rocking the fragile craft in which the sovereign bor- rowers of South America travel, most opi- nion in London would go along with the views of the National Westminster's Islr Philip Wilkinson that the next change in UK interest rates would more likely be UP than down. And in that case 1,000 ori the FT index could still prove elusive.
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