Banking on a soft landing

Will 2004 prove to be the high-water mark for Britain's banking giants? They are on course to report bumper profits after the biggest borrowing binge in history. But this week, we may get a feel for how confident the bankers are about 2005.

HSBC, Royal Bank of Scotland and Standard Chartered are due to publish trading statements and face questions from investors about prospects for the next year.

Most analysts expect slower growth is on the menu. Several factors are at work. The weak dollar is hardly a boon for those banks with big US operations. Most vulnerable to the dollar slump is HSBC, which derives two-thirds of its profits from North America.

Standard Chartered, although largely in Asia, reports its numbers in dollars because the currencies of places where it operates, such as Hong Kong, are pegged to the greenback.

All banks have benefited from the personal lending boom, but now there are clear signs of a slowdown as interest rate rises bite.

The banks have had a good run in the last two years because they have been able to unwind provisions they made in 2001-2002, when many feared a slump in the wake of 9/11 and the bursting of the dotcom bubble. Instead, rock-bottom interest rates fuelled consumer lending as never before.

From 2005, the effects of higher interest rates, the weak dollar and a drop in personal lending will almost certainly slow the heady rates of growth we have seen this year. But the banks will suffer in varying degrees because their business mixes are different.

Barclays and RBS have a smaller proportion of their business exposed to personal lending and mortgages than Lloyds or HSBC, not to mention Abbey National and Northern Rock. Also, the weak dollar is a double-edged sword for British companies as it means US acquisitions become less expensive - so there are opportunities as well as dangers.

Moreover, the slowdown for the banks may be relatively short-lived if the experts are right in predicting interest rates have already peaked in Britain, and that the next move is down. In this uncertain world, that's a big 'if'. In fact, the whole notion of a soft economic landing requires something of a leap of faith.

Why Emap needs to turn the page


The world of magazine publishing can be nasty, brutish and short. New titles are launched to catch the latest trends in fashion, health or showbusiness, but the casualty rate is high. Emap, one of Britain's largest groups, is no stranger to setbacks. In America, poor judgment has cost shareholders hundreds of millions. Boardroom infighting has claimed several senior executives.

It was against a backdrop of City disappointment that Tom Moloney became boss 12 months ago. Despite his short tenure, many investors have decided Emap's glass is half-empty. They complain Emap failed to act swiftly to meet competition in thecompetitive French television listings market. They argue, too, that advertising has been static since 1997, so expanding Emap's business is akin to pushing water uphill.

But there is another Emap: the one that almost invented the men's market; look no further than FHM, one of the industry's biggest success stories.

Elsewhere, Emap's radio business, which includes Kiss FM, offers a springboard into a fast-growing sector. The company owns 27 per cent of Scottish Radio Holdings, and a full takeover may be only weeks away. Chrysalis, owner of Heart FM, is also on Moloney's radar.

In the City, there is a growing realisation that behind Moloney's sales patter lies steely determination. And he is surely right to talk about changing the mix of Emap's business so that less profit is derived from consumer magazines, and more from business-to-business publishing and exhibitions, where margins are higher.

What this means is that Emap needs to make purchases to underpin growth in a potentially difficult market. But the company's acquisitions record, especially in the US and France, has been patchy. If Moloney can change the impression that Emapgets things wrong when it buys other firms, the shares will fly.

McGowan bowls Rentokil googly


When is a profits warning not a profits warning? That question is being asked by investors in Rentokil Initial, the business services group, whose board conspired to oust former boss Sir Clive Thompson earlier this year.

Brian McGowan, the cricket-loving chairman who headed the Thompson coup, is reluctant to admit that what he said on Tuesday was tantamount to a warning for 2005. One can sympathise with McGowan because he never formally indicated how the numbers would look. So in theory, there were no estimates to revise.

But we know it doesn't work like that. And when UBS, the house broker, slashes its 2005 forecast by £25m, one can only suspect someone has been sending out erroneous smoke signals.

The time-honoured City practice whereby companies provide guidance via nods and winks didn't work on this occasion. A pity, because it's not a bad system.