After a policy of generally organic growth, apart from their significant £3billion Absa acquisition in South Africa, Barclays’ leap at another global brand name came as a shock. However, as the Barclays share price fell, the paper bid was always likely to fail against a higher cash offer from the RBS consortium, and whilst the Dutch will be happy with the cash, the prospect of selling some of their national silver to a Belgian bank won’t be popular with any of the Dutchmen I know.
Barclays however, apart from a hefty advisory bill, have come out of it in rather good shape. They have avoided over-paying for a bank in the midst of a banking crisis, they will receive a Euro200 million break fee to cover some of the costs, and have picked up a couple of rather useful shareholders on the way.
The China Development Bank and Temasek (the Singapore Government investment vehicle) have both bought into the Group and are likely to be longer term more reliable shareholders. They might well prove to be good friends to have when fighting off the attention of potential suitors, or even the hedge funds. The Chinese investment is especially attractive at a time when other international banks have been pouring huge sums of money into over-priced Chinese banks with unknown lending liabilities – a smart move to get them to pay for you!
As for the future I can’t imagine John Varley and his team sitting back after this refusal, and I wouldn’t be at all surprised if we see further smaller international acquisitions in the future.
These may be in more traditional banking areas and not so much in the previously glitzy world of Barclay Capital, whose reputation may not be quite as sparkly as before the credit crisis. One interesting area to consider is their Singaporean shareholder Temasek, who already has a holding in another old British imperial bank - Standard Chartered. Rumours about Barclays’ interest in its old rival in Africa have abounded for some time and certainly the pair could fit quite snugly together.
If it did happen then John would have in effect recreated that old and previously very profitable bank, Barclays DCO (Dominion, Colonial and Overseas – which by the way included Scotland as an overseas territory!) – if that happens then I shall pop on the (sola) topee and get “Bunty” to crack open the gin.
In the meantime the Fred Goodwin and RBS consortium will have their work cut out for them to justify that price to their shareholders – obviously a longer term view will be required.
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So interest rates will stay as they are for the moment, but it may be the Bank of England MPC could find itself in a more awkward spot as the rolling 12 month inflation figures change.
As the September and October figures from 2006 drop off, then the CPI figures at 1.97% might well rise to 2.5% - and even 3% by late Autumn. Thus their stance on interest rates to manage the inflation measure that the MPC is charged to maintain, will come under pressure. This will be especially sharpened if there is concern over the economy cooling and with a whiff of an election in the air. This is the crucial question for all central bankers – do you cut rates to minimise the slowdown and risk inflation – or do you stick to your anti-inflation stance and risk the economy? Watch this space.
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I have mentioned our concerns over the state of the UK housing market before but figures last week highlighting the affordability (or rather lack of it) just underlines these worries. Martin Wolf in last Friday’s FT wrote an excellent column on the topic and noted the differences between the US and UK housing markets.
He rightly highlighted that we should certainly be concerned about our domestic situation - and probably more so than that of the US. US mortgage debt at the end of last year was 104% of GDP, whereas in the UK the figure is even higher at 126%.
Additionally, total household debt was 140% in the US but outstripped by us at a whopping 164% of GDP. Quoting Mr Wolf “If US households are sinking in debt, UK households seem to be drowning in it”.
I have previously described the UK residential housing market not so much as a bubble but more like a bar of “Aero” with lots of smaller bubbles, some of which will and have already burst; the question is now - has the Aero melted to create some larger bubbles? The key point, though, is that of confidence. Prices probably only have to pull back 5-10% to cause nervousness with consumers, after all, for most of us a fall in our house price value will tap into one of our main nerves.
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And finally……..the sale of Belgium on eBay was finally stopped after bids reached £7m. I think they may have overbid.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management