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The Market
Blue chips in London closed the Friday session sharply higher but during the week little changed, as the FTSE 100 shrugged aside further losses for the Dow Jones Industrial Average (DJIA) and decided instead to take its cue from the performance of the Nasdaq composite. With Vodafone AirTouch and a last burst of short covering providing powerful props, the FTSE 100 closed 111.3 points higher at 6,198.0 - its session high.
Shortly after the closing of trading in London, the DJIA was down nearly 90 points while the Nasdaq was up 17, extending Thursday's record breaking run further. Over the week, which was notable for extreme volatility, the FTSE gained 33 points as the churn from "old economy" sectors into "new economy" sectors continued. The broader indices were all higher, with the TechMark 100 closing above the 5,000 level for the first time in its brief existence and the FTSE Small Cap, up 27.2 points at 3,324.9, ending at an all-time high.
The FTSE 250 was more restrained, managing to make a gain of just 29.8 points to 6,442.7. Market turnover was similarly restrained, touching just 1.8 billion by 4.44pm, with Vodafone AirTouch accounting for 338.70 million of that total. Vodafone shares closed the session 8-3/4 higher at 361-3/4, delivering 21.3 points of the FTSE 100's upside, as it benefited from the switch to "new economy". It was joined by BT, up 53 pence at 1,152 pence, and Colt Telecom, 293 pence better at 3,740 pence, with the latter given an additional shot in the arm from Morgan Stanley, which resumed coverage with an "market outperform" rating and a £38 price target.
Cable & Wireless was also in demand but for different reasons. The stock closed up 103-1/2 pence at 1,398 pence after news that Pacific Century CyberWorks will make a major announcement on Monday relating to its interest in C&W HKT.
Away from the telecoms sector, a powerful showing from the oil sector provided additional support for the FTSE. BP Amoco, up 17-1/2 pence at 462 pence, and Shell, 15 pence higher at 426-3/4 pence, both closed sharply higher, tracking the robust crude price. AstraZeneca clawed back virtually all of the 10 per cent loss, as brokers came out in support of the Anglo-Swedish pharmaceutical giant. The shares finished 190 pence, or 9.87 per cent higher at 2,116 pence after heavyweight brokers DLJ, Salomon Smith Barney, and Merrill Lynch moved to upgrade their recommendations in the wake of the weakness.
DLJ upgraded the stock to a "top pick" from "buy", Salomon Smith Barney went to "buy" from "outperform", and Merrill Lynch upped its long term stance to "buy" from "accumulate", citing the outstanding potential of AstraZeneca's research and development pipeline, and its current lowly valuation. On Thursday, AstraZeneca shares dropped 10 per cent after the market assessed the group's full-year results and focused on worries over underlying sales growth once patents expire on its drug Losec.
Hilton eventually emerged triumphant in battle for the FTSE 100's top spot. Its shares closed 35 pence, or 16.75 per cent stronger at 244 pence, on continued positive reaction to its e-betting plans. Dresdner Kleinwort Benson was among its fans, repeating "buy" advice. Salmon Smith Barney was also positive repeating its "outperform" rating.
Centrica was the other prominent riser, gaining 30-1/4 pence or 16.62 per cent to 212-1/4 pence, after Warburg Dillon Read repeated its "strong buy" rating and raised its price target to 240 pence per share from 200. Warburg cited the group's telecommunications offering, unveiled with full year results, as the rationale for the upgrade.
Smaller company shares finished at record highs on Friday, extending their recent firm performances thanks to a heavy mixture of corporate deals, Internet excitement and a dash of speculative interest. At the close, the FTSE Small Cap index was 27.2 points higher at 3,324.9, its best ever levels, having stayed in positive territory all session once again. High street retail group Storehouse shot to the top of the small cap leaders board in late trading, encountering strong, if frenetic demand, up 17-3/4 pence - or 55 per cent - to 49-1/2 pence, after the group revealed bid approach news. The firm confirmed that it has received a number of preliminary approaches either for its Bhs and Mothercare stores businesses, or for the group as a whole.
Lloyds TSB
Lloyds TSB, the banking group, reported profit before tax on a statutory basis rose by £606 million, or 20 per cent, to £3,621 million for the year to 31 December. This profit figure included £400 million pension provision and disposal gains totalling £84 million. The 1999 figures included a further pension provision of £102 million, a £28 million provision for the closure of Lloyds TSB Securities Services, and a provision of £98 million for the sale of the new business capability of Abbey Life.
Meanwhile, the banking group announced the launch of a major new efficiency programme and the cost reductions from this programme, together with the expected revenue growth, are such that by 2002 Lloyds expects that the group's efficiency ratio will be below 35 per cent, and forecasts further progress thereafter. However, the start of this efficiency programme will require a restructuring charge of up to £200 million in 2000.
The transfer of Scottish Widows' business to Lloyds is subject to the sanction of the Court of Session in Edinburgh. The transfer is expected to be completed tomorrow on schedule. The results of the Scottish Widows business will be consolidated in full with effect from tomorrow.
The impact of e-commerce is considerably greater than just Internet banking and the group's e-commerce strategy is being further developed based on four important themes. First, during 2000 Lloyds shall be further enhancing its current Internet Banking Service to UK personal customers by expanding its on-line capabilities.
Second, Lloyds plans to launch a stand alone pan-European Internet bank focused initially on Spain, with the objective of obtaining 1 million customers within three to four years. Lloyds intends to introduce a similar stand-alone Internet bank in the UK towards the end of the year.
Third, Lloyds intends to launch a range of trade facilitation (business to business) services to assist corporate, commercial and small business customers. Finally, the banking group plans to make greater use of Internet technology to redesign its internal operating processes, to improve customer service and efficiency, and to realise significant cost savings over time.
The total capital ratio further strengthened to 15.1 per cent and the tier 1 capital ratio increased to 10 per cent. This reflects both the strong internal generation of capital and the raising of some £2.4 billion of loan capital in anticipation of the completion of the Scottish Widows acquisition. Balance sheet assets increased by £8 billion, or five per cent, to £176 billion, largely because of further growth in mortgages and other customer lending. Risk-weighted assets increased to £84.2 billion from £83.3 billion at the end of 1998.
The core fundamentals of Lloyds' business remain strong and when Scottish Widows will join the group in March 2000 it is expected to further enhance the group's revenue growth prospects.
Barclays
Barclays announced that its Value-Based Management (VBM) framework is up and running across all its lines of business across the group. Barclays success will be judged by the standard of its potential to double economic profit every four years, calculated on a rolling basis across the business cycle. Performance management and incentives will also be aligned to economic profit. Barclays believes this framework will allow it to unlock the hidden value of its capital, skills and reputation and meet its overarching goal of maximising shareholder value.
For Barclays Capital there are growth opportunities in the European markets as the sophistication of European corporates and investors increases. The bond market in Europe is underdeveloped relative to North America, giving Barclays Capital plenty of room to grow. The bank's debt-focused model has already yielded strong results. Meanwhile, Barclays Global Investors (BGI) continued to invest, recognising the need to maintain its strong global position. BGI has developed a new generation of higher-margin products and is now making progress in high growth markets such as defined contribution pensions and exchange traded funds.
Barclays has plans for accelerating the technological transformation of the group as these offer the greatest opportunities, both to grow traditional revenues and especially to win a large share of the business currently passing under the heading e-commerce. The Barclays CEO claimed that five years from now, there will be no distinct
e-businesses or dotcom companies; only companies that have learned how to change their business model and survived, and those that have fallen by the wayside. He added that Barclays is particularly well placed to take advantage of this new economy.
Overall banking business margins fell slightly to 3.40 per cent from 3.42 per cent. The group margin fell in the second half of 1999 compared to the first half of 1999 mainly reflecting increased volumes in the lower margin wholesale business, which is conducted in Barclays Capital. Overall UK margins in Retail Financial Services and Corporate Banking reduced slightly in the second half of 1999 compared to the first half of the year. Barclays' spread improved in the year to 2.88 per cent from 2.69 per cent reflecting growth in lending to customers and a change in the funding mix.
The restructuring charge of £344m for 1999 primarily relates to Retail Financial Services and Corporate Banking. Gross reduction in job numbers of 7,500 has been achieved from the 1999 restructuring programme and the Barclaycard change programme. Total provisions for bad and doubtful debts rose by £129m to £621m, mainly because of higher levels of new and increased provisions reflecting strong volume growth within Retail Financial Services. This was offset partly by the absence of new and increased provisions of £153m charged in 1998 in respect of Russian counterparties.
Barclays claims to have many of the elements and initiatives to realise its potential already in place, but there seems little detail to support these promises.
Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.
James Dimech DeBono is a qualified accountant with a strong academic background in quantitative financial economics and a keen interest in investment management. He can be contacted by e-mail: JamesDebono@CompuServe.com
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