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In this week’s Commercial Awareness update, we discuss the outlook for the British banking sector, what ratings agencies do, strikes on the railways, the value of Manchester City, Zopa’s troubles and a record Black Friday for retailers.
The outlook for the UK banking system
The outlook for the UK banking system has been downgraded by credit ratings agency Moody’s, with a tough year forecasted by many commentators. The agency point to low interest rates and a highly competitive mortgage market making conditions tough for banks to turn a strong profit in the coming year. There are also doubts on how Brexit and the ongoing trade war between China and America will impact on the sector. Due to the worsened operating environment, Moody’s has cut its predictions for banks from stable to negative. However, it’s not all bad news for some of Britain’s biggest lenders with many predicted to be more profitable in 2020 than this year - largely caused by the deadline to claim back mis-sold payment protection insurance (PPI). A bigger number than expected made claims as the deadline approached, making a significant dent in profits.
Despite the news the pound has been strengthening in the last week, hitting highs of $1.30 against the dollar. With the polls currently suggesting there will be a majority government and therefore more political certainty, the markets are reacting well to the current situation.
What’s a ratings agency?
A ratings agency is a company that assesses an organisation or government on their financial stability and more specifically their ability to pay their debt back (including the interest payments). Financial institutions will use this rating to calculate the risk of lending money and therefore the interest rates to charge - the higher the rating, the more stable the organisation and therefore the lender will likely offer low interest rates.
Questions to ask yourself... How can banks maintain core profitability while there tough market conditions? What impact will downgrading the outlook have on banks?
Companies to watch
South Western Railway
Workers on the South Western Railway (SWR) have started their 27-day strike, after talks between the Rail, Maritime and Transport (RMT) union and SWR broke down. SWR has been planning to introduce new trains which don’t require guards in their current form. This would lead to job changes or even losses, hence the union’s strike action. They argue that passenger safety is at risk due to this change, which would see the driver closing the doors. The strike action means that many services will be canceled across the next month, causing travel problems for thousands of people until 2nd January. This isn’t the first time that SWR workers have gone on strike over this proposed change.
At the same time the government has announced it will increase rail ticket prices by an average 2.7% in the new year, but has made many question whether private railway contracts are providing the best service and value for British customers.
Manchester City Football Club's parent company City Football Group (CFG) has made a splash recently after receiving £389m of investment from US private equity firm Silver Lake. The deal values CFG at £3.73bn, who along with Manchester City own majority stakes in New York City FC, and Melbourne City football club as well as part owning clubs in, China, Uruguay, Spain, Japan, and India.
Owned by the Abu Dhabi Royal family, the group aims to increase participation in football around the world, bringing world class facilities with cutting edge technology to boost performance. However the group isn’t without controversy, with ownership of multiple clubs not considered sporting, along with questions around the political motivations of the Abu Dhabi royal family’s ownership.
The UK’s oldest peer-to-peer lender Zopa, has had its valuation almost halved from £354m to £188m ahead of a new round fundraising later this week. The new valuation comes at a time when interest in peer-to-peer lenders is significantly dropping, following the poor performance of the publicly listed lender, Funding Circle, as well as increasing regulation of the industry from the Financial Conduct Authority (FCA), which is affecting the business models of firms in this sector.
Zopa focus their business model towards consumers as opposed to businesses, and Augmentum Fintech, the investment trust responsible for the new valuation, feel that this point of difference will enable Zopa to differentiate itself in the market. With £140m of new investment being injected later this week, Zopa is aiming to expand its product lines from personal and car loans, to more traditional banking services, and the hope is this will bolster the company’s performance.
Questions to ask yourself... Should their be more legislation to stop such lengthy strikes on the railways? What are the advantages of peer-to-peer lending?
Record online sales on Black Friday
Black Friday has been and gone, with many stores doing big promotional offerings across last weekend. The total sales from online purchases in America reached a new high of $7.4 billion, with $2.9 billion worth of goods being purchased on a mobile phone. This is the most ever in a single day, highlighting changing consumer trends in the retail industry. Purchases in-store didn’t have the same spike in activity, with purchases actually declining 6.2% compared to last year.
Black Friday gave a welcome boost for retail in the UK too, with sales up 16.5% compared to 2018. After a tough year for them, the hope is that with Black Friday and Christmas they will have a strong end to the year. However, consumer group Which? suggest that Black Friday deals don’t offer customers better value for money. Out of 83 products they analysed over a year, only four were at their cheapest during the Black Friday sales.
Question to ask yourself... Can physical stores halt their decline?