In this week’s Commercial Awareness update, we discuss Spain declaring direct rule on Catalonia, the banking bailout in India, Netflix investing in new content, Google’s advertising revenue, what to expect in November’s budget and much more.
Catalan declare independence
It was another eventful week in Spain, as Catalan’s leader Carlos Puigdemont declared independence from Spain, only for the Spanish government to sack Catalonia’s leaders - including Puigdemont - and enact direct rule on the region hours later. The government claims it has taken this temporary action to establish order in the region and that there will be new elections in December. It has said the former leader Puigdemont can run again during the new elections. However, he is also under investigation by the authorities for holding what the national government believes was an illegal independence referendum.
Over the weekend, both pro-independence and pro-unity supporters have been attending rallies in the region. Since the contested vote in Catalonia on 1st October, where over 90% voted for independence and the Spanish authorities used violence to stop some Catalan citizens voting, many had speculated this declaration of Catalan independence would happen. However, the Spanish government is desperate to keep Spanish unity, especially as Catalonia makes up 25% of the nation's GDP.
As the crisis in Spain escalated last week, the Euro lost value against other major currencies. Across the week, it lost 1.6% against the dollar - its worst performance for 11 months. The Spanish stock market did slide throughout last week, but stocks rose in early trading this morning after a poll suggested support for the nationalist movement was declining. In early October, there was a huge sell off of Spanish stocks after the contested independence vote, but the markets have rallied since.
Questions to ask yourself… How does national unity contribute to the perceived strength of a nation? Should the Spanish government allow the Catalan people vote on independence?
Banking in India
On Tuesday, the Indian government announced a recapitalisation plan to address the country’s bad loans problem. Ity will inject $32 billion into state-owned banks, who have administered a significant number of loans that won’t be paid back (bad debt). This was stopping banks lending, as they were using finances coming in to cover these losses, rather than lending more money - the government saw this as a blocker to economic growth. The cash injection should free up capital in the country and also encourage investment from abroad. Experts predict India’s bad loans account for around 10% of outstanding loans, which isn’t as high as some European countries, including Italy and Ireland.
The announcement of the recapitalisation had a real impact on the share price of Indian banks, with some of the larger state-owned banks gaining over 25% on Wednesday alone. However, it wasn’t all good news for banks - some key banking institutions in the private sector saw their share price drop as much as 4%. While state-owned banks have struggled with their bad loans, the private sector has taken market share from its competitors. Private sector banks enjoyed a 15% year-on-year increase in loans during the second quarter of this year, but now state-owned banks have more capital, it’s unlikely they will continue to see this growth.
Questions to ask yourself… Will the EU have to follow similar steps in countries like Italy and Ireland? Should governments have this involvement in a financial system?
Companies to watch
Lloyds Banking Group
Lloyds Banking Group has reported a 141% increase in year-on-year profits for Q3, as the costs associated with Payment Protection Insurance (PPI) decline significantly. After being returned fully to private ownership earlier this year, the bank recorded pre-tax profits of £1.95 billion - this beats the £1.6 billion predicted by analysts. During the nine months to September, income rose 6% year-on-year, while costs fell by 1%. This time last year, Britain’s largest retail bank was handed a large fine for its involvement in the PPI scandal. They still have money put aside to pay back remaining claimants, but this is likely to continue declining and will come to an end on 29th August 2019.
It wasn’t a good week for all banks, as Barclays’ shares closed 7.4% down on Thursday, after it announced worse-than-expected results for Q3. Overall profits were up year-on-year, but it was the investment banking profits which caught analysts’ eyes. These were down to £652 million, compared to £1 billion in the same period last year. There has been a market-wide slowdown in investment banking in recent months, but the bank did improve profitability in other areas - partially helped by declining PPI payments.
Netflix is set to announce plans to raise a further $1.6 billion to fund new content, as competition in the online streaming market intensifies. The market leader has said it will spend more (up to $8 billion) than previously planned on new shows in 2018, therefore will offer $1.6 billion in new debt to fund its expansion. While Netflix’s subscriber rates have grown more quickly than the market expected - in Q3 it recorded 5.3 million net new subscribers - its strategy is to spend more to ensure market dominance and open new markets up to them.
Netflix already has $4.89 billion in debt, but is selling a further $1.6 billion worth of notes to “qualified institutional buyers”, with the interest rates offered and the maturity date subject to negotiation - experts suggest the yield to be between in the region of 4.75% and 5%.
Google’s parent company Alphabet saw its shares rise up to 4% on Thursday, as the tech giant recorded better-than-expected revenues for its advertising business during Q3. The company generated $27.77 billion in revenues - up 24% compared to the same period last year. Within Google’s cost per click (CPC) model, the cost their clients pay for each click has dropped lower than expected, but the volume of clicks surged, especially in Asia, leading to increased revenues. This is largely due to an increasing number of their clicks coming from mobile, for which they charge less, but get in greater volumes.
Thursday was a big day for the tech industry, with all of Amazon, Intel and Microsoft beating expectations in their Q3 earnings reports. Amazon recorded a 34% year-on-year rise in earnings, leading to a 7% rise in the share price during early trading and making founder Jeff Bezos the wealthiest person in the world.
Questions to ask yourself… Why is it a relative quiet period in investment banking? Why are the big tech firms doing so well at the moment?
The new Budget
Chancellor Philip Hammond is set to unveil the new Budget on 22nd November, in which he claims to be adopting a “balanced approach” to spending. But what does this mean? In the past week, Hammond has been put under pressure by the Labour Party and some of his own MPs to soften his approach to austerity - for instance, his fellow cabinet minister Sajid Javid called for more borrowing to build houses. However, Hammond has pledged to remove the deficit by mid-2020, which he is unlikely to do if the UK borrows more, putting him in a dilemma. If Hammond was to increase spending - which he is likely to do for some public services in November - he would have to find ways to increase money raised by the government. This could be easier said than done, due to promises the Conservatives have made to keep taxation low.
Commentators are speculating that he might clamp down on companies having employees on freelance contracts, who should be taken on as employed staff included in their payroll - increasing their tax bills. This could bring in a further £1 billion as both the employer and employee will have to pay more tax, if they are a full time employee, not a contractor. More will be revealed in the coming weeks, but look out for what Hammond says about the deficit - many expect him to abandon his promise to remove it by 2020.
Questions to ask yourself… Why do some companies prefer to employ freelance contractors to fulfil projects, rather than hiring permanent staff? What is ‘self-employment’? How does applying the IR35 tax legislation help the government raise additional tax?