Month: August 2013

Co-op Group reports big banking loss

The Co-operative Group has reported heavy losses as a result of a huge write-down of assets at its troubled banking arm.

The group lost £559m in the first half of the year, having written off £496m of bad loans at Co-op Bank. The bad loans relate mostly to Britannia Building Society, which merged with Co-op Bank in 2009. The bank also faces a £1.5bn capital hole in its balance sheet, which regulators say it must fill. Including the write-downs, Co-op Bank alone reported a total loss of £709m. The Co-op Group’s food and other businesses reported profits.

The bad results were widely expected, but highlight the problems being faced by Co-op Group chief executive Euan Sutherland, who took over the role in May this year.

He said the results showed the “well-documented challenges” faced by the bank. “My first few months in the role have been focused on putting in place the recovery plan for the bank,” he said, but warned there were “no quick fixes”.

In June, the Co-op announced it had reached an agreement with the bank regulator, the Prudential Regulation Authority, to plug a £1.5bn capital hole in its balance sheet. It includes a stock market listing, measures to raise money from bondholders and the sale of its insurance business, planned for 2014.

“The underlying issues in the results today are not new,” said Co-op Bank’s chief executive, Niall Booker


“We are now clearly focused on improving the capital position of the Bank… [and] at the same time, we have continued to lend, maintaining our focus on supporting our loyal customers, both in retail and through our continued focus on lending to small and medium-sized businesses.”

The capital shortfall came to light during Co-op Bank’s attempts to buy more than 600 bank branches from the partially state-owned Lloyds Banking Group.A deal was initially agreed in 2012, but fell through earlier this year. MPs are currently holding an inquiry into the circumstances of the collapsed deal. Lloyds executives have already claimed they knew about the hole in Co-op’s balance sheet months earlier. Weeks later, rating agency Moody’s downgraded Co-op’s debt to junk status, citing concerns about its capital position.

Facebook could be used to decide if borrowers should get a loan

The Facebook and Twitter accounts of borrowers could be analysed by banks to decide whether they should give people in Britain a loan or mortgage.

Movenbank, an American online bank, already uses social networking sites to decide whether people are a good risk and said they plan to use a similar system when they come to Britain.

Some overseas lenders already use social media to check applicants’ credit worthiness – looking at their Facebook ‘friends’ to see if any are customers or in debt, as well as conversations held online. This information, based on the assumption that people with a good credit history tend to socialise together, is used to decide if someone is a good or bad risk, how much money banks should lend to them, or if they should refuse them entirely.

Movenbank will launch in Britain at the end of this year, subject to approval from the Financial Services Authority (FSA). It uses data from social networking sites such as Facebook, Twitter and Linkedin to determine how influential potential borrowers are, with those who are more influential having a greater chance of getting better loans.

Brett King, the American banking expert and author who founded Movenbank, told the Sunday Times: “The better the score, the better the rates and fees will be. Someone’s reach and influence is taken into account. If someone has 5,000 friends and posts something good or bad about the service they got at a bank, 5,000 people will see that, which is inevitably good for business.”

Other banks also analyse people’s social networks to determine how good a risk they will be – based on the assumption that those who repay their debts are likely to have friends who have a similar attitude to banking.

Manufacturers pin growth hopes on new products and exports

Britain’s manufacturers are substantially increasing their strategy for innovation to grow their presence in emerging markets, according to a new survey sponsored by NatWest.

More than two thirds of companies plan increasingly ambitious innovation of new products, technology and research to aid exports to new countries during the next three years, according to a survey conducted by the manufacturers’ organisation EEF.

The move follows a difficult recovery where most businesses focused on improving processes to cut costs and meet the needs of existing customers. More than 70% of the 147 companies questioned for the survey plan to move into new markets on the strength of innovation in products and services, a rise from 54% during the past three years.

Resources and expertise

However, innovation is a difficult process, which requires significant resources and expertise, and selling into new markets has heightened some of the challenges faced by manufacturers, including low cost competitors and ever shorter product life cycles.

Steve Radley, EEF Director of Policy, said: “After a long and slow recovery manufacturers are looking to drive growth through innovation, developing new products and services for new markets. However, the demands of selling into new markets have increased the ‘need for speed’ when it comes to innovation, something that remains a key challenge for manufacturers.”

To help overcome these barriers companies are increasingly collaborating with customers, suppliers and research institutions on innovation activity. The percentage of companies working with research institutions has risen significantly, up from 44% in 2010 to 62% in 2013.

Such collaboration is not limited to within the UK as 51% of companies, including smaller businesses, were working with organisations overseas.

Companies also use government support to help with their innovation. This is well targeted, with schemes such as the Knowledge Transfer Partnership and the new network of Catapult centres helping companies to access expertise and facilities. European funding has also proved an important source of support.

The EEF has urged the government to build on existing work by raising awareness, ensuring stability and keeping access simple. In particular, government should:

  • Ensure stability by announcing a long term commitment to the Technology Strategy Board; maintain the breadth of support mechanisms such as the R&D tax credit
  • Simplify and streamline application processes and consider an ‘innovation active’ qualification to fast-track access to support.
  • Improve access to the new network of Catapult centres by streamlining membership models and, longer term, develop metrics to ensure SME engagement.

Growing confidence

Mark Eastwood, Head of Manufacturing for Business and Commercial Banking at NatWest, said: “Manufacturing plays a vital role in the UK economy and is the backbone of real growth, so it is fantastic to see that confidence is growing across the sector. Investment in innovation and research is key to keeping on top of this global market and manufacturers need stability and certainty as they look to invest in new products and markets.”

Despite the increasing attention being given towards innovation however, the survey also highlights that at 1.1% of GDP Business Expenditure on R&D (BERD) in the UK remains low by international standards. Even after adjustments for structural differences between countries, the UK is 0.4% below the OECD average and further behind the leading countries such as the US, Sweden and Korea.

Why Are Businesses Losing Over £7 billion a Year?

UK businesses are losing more than £7 billion a year due to a combination of low bank interest rates and above target inflation, says UHY Hacker Young, the national accountancy group.

Interest rates on business deposits are now at a record low, at just 0.59%. This combined with relatively high inflation (RPI 3.1% in July — compared to a target rate of 2%) mean that business savings are rapidly declining in value.

UHY Hacker Young points out the amount of cash held in business accounts that offer no interest at all has more than doubled since 2009 (see graph below). According to the Bank of England a record £52.9 billion is currently deposited in accounts yielding 0% interest.

Since the credit crunch lending to small businesses has become a priority for the Bank of England. Initiatives such as the Quantitative Easing programme and the Funding for Lending scheme — which are both designed to boost lending — have contributed to the slashing of interest rates.

Many businesses are now having to hold large cash balances because they feel when they need them, they can’t rely on banks to provide overdraft facilities at reasonable rates.

“As the Bank of England continues to focus its attention on reviving lending to small businesses, those with no current need to borrow are being punished for being prudent and keeping cash reserves,” Mark Giddens, Head of Private Client Services at UHY Hacker Young, explained.

“Before the Funding for Lending scheme was introduced, interest rates were competitive in order to attract savers. However, under the Funding for Lending scheme banks are now getting cheap funding from the Bank of England, which means they no longer need to offer generous interest rates to businesses.

“With the recent announcement that interest rates will remain low until unemployment falls below 7% – which economists are predicting won’t be until 2016 and the confirmation that Funding for Lending scheme will be extended until 2015 — businesses will continue to see the value of their savings eroded for some time to come.”

UK Construction Industry at three-year high, PMI survey indicates

The UK’s construction industry has reached its highest level of activity since June 2010, a survey has indicated, boosted by a continuing surge in house building.

The Markit/CIPS Construction Purchasing Managers’ Index (PMI) rose to 57.0 in July from 51.0 the month before.

A figure above 50 indicates expansion.

“July’s survey highlights a new wave of optimism across the UK construction sector,” said Markit senior economist Tim Moore.

He added that construction firms were reporting “a pace of expansion in excess of anything seen over the past three years”. The government announced measures in March 2013, such as Help to Buy, to support people looking to buy their first home and to spur construction of new properties.

The construction sector has been an area of weakness in the UK economy.

First estimates for second-quarter GDP show the construction sector grew by 0.9%, but it still remains more than 16.5% lower than it was before the start of the financial crisis in 2008.

Overall GDP growth for the April-to-June period was 0.6%.

Howard Archer, chief European and UK economist for IHS Global Insight, hailed the survey as “more good news for the UK economy, with the construction sector seemingly increasingly shrugging off its long-term problems and now contributing to growth”.

On Thursday, the PMI survey for manufacturing indicated that the sector grew in July at its fastest pace for more than two years.

The reading of 54.6 for last month, from an upwardly revised June figure of 52.9, was the strongest since March 2011 and marked the fourth month in a row of expansion.

PMI surveys are based on data from various private-sector firms, which supply information on factors such as output, new orders, stock levels, employment and prices.

UK businesses urged to capitalise on export advice

Britain’s businesses are being urged to take advantage of specialist export advice in light of the fact that 62 per cent of companies in the UK are being held back from exporting by language barriers.

Recent figures released by the British Chamber of Commerce have revealed that a mere five per cent of UK companies speak enough French to do business in the country, while 58 per cent doubt that their product or service is even good enough to market overseas.

As a result, language experts Comtec Translations has urged SMEs to make the most of the sizable network of support available to successfully launch your business internationally.

Sophie Howe, MD, Comtec Translations has stated: “There is an abundance of support available for businesses that need to take the first few steps to exporting. Organisations such as UK Trade & Investment (UKTI) offers introductory services to overseas markets and specialist translation providers can provide support around handling communications material for overseas trade.

“Your local Chamber of Commerce can also provide useful advice and support,” advises Howe, who was recently featured on national radio talking about the challenges the UK faces as an economy to develop the vital language skills businesses need to enter international markets.

Brian Mountford, International Trade Advisor at the UKTI explains the advantages exporting will bring to a business: “On average, companies who export see a 34 per cent increase in productivity in their first year of exporting; they are 11 per cent more likely to survive, and they benefit from operating in a more competitive environment; attracting and providing more opportunities for higher skilled workers.”

Agricultural industries to receive £160m Technology Boost

The new government strategy is set to make the UK become a world leader in agricultural science and technology, and will also help the sector meet the challenges of global demand for food, as well as land, water and energy shortages.

Breakthroughs in nutrition, informatics, satellite imaging, remote sensing, meteorology and precision farming mean the agriculture sector is one the world’s fastest growing sectors.

Developed in partnership with industry, the Agricultural Technologies Strategy will ensure that farmers, retailers, cooks and shoppers will be able to share the benefits to be had through these breakthroughs.

Centres for agricultural innovation will receive £90m, while £70m will go to projects that “bridge the gap between the lab and the market”.

The food supply chain, from farming through to catering and retailing, contributes £96bn to the economy and employs 3.8 million people, according to the Department for Business, Innovation and Skills.

It says that currently not enough of Britain’s research is being commercialised, so farmers and food manufacturers are unable to take advantage of gains that new technology might offer. Defra minister for science Lord De Mauley said: “We face a global challenge to feed the rapidly increasing population in a way which is affordable and sustainable.

“We are investing in technologies that will enable British farmers to meet these challenges and take advantage of the growing demand in export markets for British food.”