Is there anything left to say about gold? Maybe we could say that the dollar value of a troy ounce is up just 15 per cent from when Warren Buffett wrote his 2011 investor letter dumping on the logic of buying lumps of metal, though it’s gained around 10,426 per cent since Karl Marx wrote something quite similar.
We could say also that it’s been a weird looking fear trade. Primary market flow data from SocGen shows that of the $54.8bn of net new assets recorded globally in July, $8.8bn went into gold ETPs, a new record high. But equities and fixed income net new assets were still $11.5bn and $32.9bn respectively:
Where next, then, for gold? Let’s ask Macquarie’s Gold Commodity Desk Strategy Team, which is an actual thing apparently:
Gold has finally pushed through the $2k psychological target, at a high of $2,030/oz at time of writing. The move continues to benefit from USD weakness and the ongoing slide in US real rates through -1%. In addition to the lift in 10-yr break-evens above 1.5%, 10-yr Treasury yields have slipped to new lows of 0.5%. Even with these supportive factors, however, gold continues to look rich on a cross-asset basis, trading $150-$200 above our ‘fair value’ estimates. We believe this is the overshoot move that we have been looking for and, while momentum could carry prices further, it raises the risk of a sharp correction. Following the services ISM and US Treasury’s quarterly funding statement, eyes should turn to Thursday’s jobless claims and Friday’s NFP release for evidence of whether or not the labour recovery is stalling out.
Alternatively, for the currency debasement and Central-Banks-Can’t-Print-Gold stuff, here’s Bank of America:
Gold has rallied over falling real rates. Continued fiscal spending as governments are mending the damage from Covid-19, backstopped by central banks means that interest rates will remain low, at the same time as the economy reflates. Financial repression may be with us for a while, so we reinforce our $3,000/oz forecast. . . .
[T]here is strong evidence that specially US authorities are looking to over-stimulate the economy – the output gap is around 10% at present, but the stimulus announced even so far is running well ahead of that. This may ultimately help a pick-up of inflation from current depressed levels. If policy rates remain pegged close to zero and if central banks introduced yield curve control, there is scope for real rates to decline further from here. . . .
[R]elative to global equity market capitalisations, investors have allocated just 3% of their assets to gold. To put this number into perspective, allocations were as high as 6.2% in 1980; meanwhile to optimise risk-return profiles of a mixed equity/ fixed income portfolio, market participants should hold around 4.5% of their assets in the yellow metal. Raising gold holdings to those numbers would imply gold purchases of 68Kt and 49Kt respectively, compared to an annual gold market size of around 3.5Kt. As such, we still see ample scope for traders to consider increasing their gold holdings.
Over in corporate, Legal & General’s lower after holding its dividend flat, breaking management’s promise of a progressive policy and missing consensus by about 6 per cent. H1 headline profit and Solvency II ratio are well above expectations but include big one-off bonus on assumption changes on late retirement for deferred annuities. Strip that out and the result’s slightly weak, with both asset management and protection a bit disappointing. Below the line there’s a load of retail property write downs at Legal & General Capital, which had been the root of share price underperformance last week. Morgan Stanley can summarise the detail:
LGR operating profits 20% (£119m) ahead of consensus at £721m – helped by positives from a review of modelling assumptions and Covid-19 related mortality experience (+£32m benefit). Adjusting for the mortality experience, the beat is 14%. LGI missed expectations by 29% (£37m) driven by a £80m provision for current and future Covid claims. LGC operating profits ahead of expectations by 20% – however, negative investment variances below the line were £307m on write downs. In addition to negative movements on the traded asset portfolio they are mark downs on two retail assets – The Lexicon Bracknell and Thorpe Park.
LGIM missed expectations – most likely driven by the higher cost income ratio of 58%. External net flows at £6.2 billion were materially lower than we expected. Solvency II ratio is in-line with expectations at 171%. The release comments that less than £300m of traded credit assets have been downgraded to sub-investment grade and there have been no defaults. Dividend has been held flat at interim, which we believe is sensible. Consensus had expected a 6% increase, but given uncertainty we think it makes sense to defer the decision on any increase until final.
RBC reckons the flat divi is probably in caution rather than by necessity:
Headlines well ahead … Operating profit was 9% ahead of consensus (and in line with us).
…driven by the annuities business (64% of the group now) which saw 10% growth year on year. L&G manages an £81bn annuities book. While annuities come with new business strain which eliminates year 1 cash, cash flows freely off the back book in year 2 and beyond (for 20-30 years). L&G has written £4.2bn of annuities in the first half of 2020 highlighting that COVID has had very little impact on transactions in that market. The opportunity ahead is massive given there are £2trillion of UK defined benefit pension liabilities. L&G is well placed to take it as the market leader.
Balance sheet robust. The solvency ratio was 173% at end June 2020. L&G had guided to 163-167% but issued £500m of debt in June and corporate bond spreads have come in since guidance was given. L&G said there were no defaults and just 0.6% downgraded to high yield (vs market which saw 1.5%). We note L&G has a very high quality corporate bond portfolio with an average rating of single-As. UK single A spreads narrowed from 221bps at end March to 132bps at end June and 119bps at end July.
The interim dividend has been held in line with last year. The group is saying this is to maintain flexibility as the economic effect of COVID-19 becomes clearer. We note this caution is in contrast to L&G being the first to say it would pay the 2019 final dividend post the EIOPA statement in April. This may relight concerns from bears saying that L&G cannot grow into bulk annuities and grow its dividend. We built a cashflow model to check this and can confirm that, in our view, L&G can write £10bn of annuities each year and grow its dividend by 8%pa. We see this dividend caution as merely temporary and not an indication that dividend growth will slow. We wonder if the group is finally responding the regulatory pressure as so many other insurers have done.
Outperform. L&G has lost one-third of its market cap during this crisis, however the balance sheet is merely dented, the cash generative annuity book continues to grow. As such we regard the shares as very attractive.
Metro Bank’s down after interims showing a £183m loss, or nearly £241m including exceptionals, which is a lot of money to spend in order to remain Metro Bank. Deposits are up but revenues are down, one-offs are numerous, guidance doesn’t happen and impairments are breathtakingly deep. The macro assumptions aren’t notably worse than consensus (table below) so the big question here concerns the quality of Metro’s loan book:
Investec can summarise the detail:
New management had, back in February, “prepared the market” for a bloodbath even before the debilitating impact of the UK lockdown, but the scale of today’s loss is eye-watering. A statutory loss of £240.6m reflects extreme NIM compression, lower fees, higher operating costs, planned investment spend, a very material (primarily lockdown-related) impairment charge and other one-off items. In H1 2019, Metro recorded a profit of £3.4m.
The one obvious positive is a 7% QoQ increase in customer deposits to £15.6bn. Indeed, this has primarily been driven by strong current account growth, enabling Metro to price away relatively expensive fixed term deposits. Customer loans grew by 2% QoQ to £14.9bn, hence an improvement in the loan:deposit ratio to 95% (from 100% at Q1 2020). Despite lockdown, customer accounts increased by a further 84,000 to 2.1 million.
The CET1 capital ratio declined from 15.6% at 31 Dec 2019 to 14.5% at 30 June 2020. The RateSetter acquisition, which has been well-received by the market over the past 48 hours, will “cost” c.0.3%.
The Income Statement makes for grim reading. Revenues fell 29% YoY to £153.3m reflecting sharp NIM compression, from 1.40% in H2 2019 to 1.15% in H1 2020. Fee income was also weaker. By contrast, operating costs rose by 13% YoY to £224.7m; a cost:income ratio of 147%.
The impairment charge jumped from just £7.3m in H1 2019 to £112.0m (115bps) in H1 2020, primarily reflecting a forward-looking IFRS 9 charge triggered by the expected impact of the UK lockdown. Metro estimates that without the lockdown crisis, its expected credit loss expense would have been only £15.2m.
The statutory loss of £240.6m also reflects £57.2m of negative “one-offs” including the write-off of intangible assets (£26.6m), transformation costs (£12.4m) and remediation costs (£17.8m). Metro states that it is “too early to establish if there is any impact on the 2024 financial targets”.
On 0.2x 2020e tNAV, Sell reaffirmed, TP/forecasts under review
And Goodbody, which we’ll quote at length because it’s good:
Following a skinny 1Q20 update in May, this is the first time we have been given any colourful detail in relation to YTD performance. In short, the numbers don’t inspire confidence – particularly in an impairments context with an out-of-the-park 155bps annualised CoR in 1H20 set to grab the headlines today. However, we need to understand how management has arrived its CoR estimate before we form firm conclusions.
Quickly focusing on the key metrics, net loans were -1% y/y to £14.9bn (6% ‘better’ than our forecast – but some will question should MTRO be writing new business at all given questions on marginal returns on new lending) while deposits were up strongly as we expected (despite guidance) to £15.6bn (+14% y/y and 4% ahead of our forecast), which is impressive (particularly given current accounts have increased to 34% of outstanding deposit balances versus 30% at end-FY19). On the Income Statement, NII was 1% ahead of our forecast (but -30% y/y) – with NIM of 115bps broadly in line with our forecast for 114bps (though -47bps y/y) while other income of £37.1m was 8% behind our £40.3m forecast (- 32% y/y), which is disappointing given the bank’s plans to expand other income. MTRO also notes it may issue £200-300m of MREL in 1H21 depending on the outcome of the BoE review. Opex of £227m compared unfavourably to our £209m forecast – though the frontloading of investment spend may be constructive in the longer-term.
The big delta was on impairments, which came in at £112m versus our £22m forecast, representing an annualised CoR of 155bps for 1H20 which is >5x our 30bps forecast (our FY20F forecast was for 58bps as we saw much greater uplift coming in 2H). While we have raised questions in the past around the danger of assuming that all is fine with MTRO’s asset quality (jumbo mortgages, the high relative proportion of interest only in its owner occupier mortgage book, anecdotal soundings concerning commercial lending practices, etc.) we did give the bank some benefit of the doubt in our assessment. Digging into some detail on this, annualised CoR came in at 66bps in the mortgage book (<20bps on average for the large cap UK domestics), a staggering 735bps in the consumer book (<500bps on average for the large cap UK domestics though there is a lot of variance here, with NWG reporting an annualised 777bps in 1H20), and 349bps in the commercial book – rates that are way out of kilter with peers. However, just £15m of the £112m charge relates to experience so £97m is overlay related (and the company notes that it does not expect the annualised CoR in 1H20 to be replicated in 2H20) – what will be key to ascertain this morning is whether MTRO’s asset quality is significantly worse than in the case of similar peer bank books or is management just (excessively?) frontloading. Indeed, the economic scenarios modelled by MTRO look more conservative than peers (especially on unemployment and HPI) at first glance.
The CET1 capital ratio came in at 14.5% versus our 16.1% expectation – with higher impairments explaining some of the difference but the following items are also noteworthy: i) the 16.1% CET1 ratio incorporates 100bps of IFRS transitional relief benefit related to lower RWAs (versus our 69bps estimate, owing to higher impairments) as well as a 60bps benefit associated with the SME Supporting Factor; and ii) the post-tax exceptionals of £52m represented 60bps of CET1 ratio drainage. Elsewhere, no update on timing of the outcome of the RWA misstatements investigation and no update on IRB as expected. The lower capital ratio brings into sharper focus the need for MTRO to migrate to IRB credit risk modelling within a reasonable timeframe for the business model to have longevity in independent form.
Land Securities seems to be causing the most excitement among the speculators, the idea being that the property developer is a potential target for private equity.
There’s been a rash of similar speculation of late, with the Spanish press linking Brookfield with Merlin Properties just yesterday. We’ve also had a £152m cash offer from Apollo for Atlantic Leaf, Starwood Capital buying nearly 30 per cent of RDI REIT, Tristan Capital taking a stake in McKay Securities and Brookfield disclosing a 7.3 per cent stake in British Land. LandSecs’ share price in the region of 600p compares with a March 2020 NAV of £11.81 so it’d be no surprise to see some PE interest in the name.
Regency Mines, the microcap owner of some Papua New Guinea nickel-cobalt mines and a power storage plant in Southport, is changing its name to Corcel. “The purpose of the name change is to more closely reflect the Company’s strategy to develop its businesses across the battery metals exploration and flexible grid solutions space,” it says. Corcel is a Portuguese word to describe a horse, not dissimilar to steed or charger. So . . . battery charger?
In sellside, ITV gets an upgrade to “buy” from Deutsche Bank as part of a big sector review, though they’ve only sent the summary so far:
Don’t change the channel just yet; Rating and Target Price changes: ITV PLC – Hold to Buy, tgt 120p to 80p, M6 – Sell to Hold, tgt E13 to E11, ProSiebenSat.1 – Hold to Buy, tgt E14.5 to E12, Mediaset Espana – Sell to Hold, tgt E4 to E3.6, Mediaset – Hold, tgt E2.5 to E1.5, RTL Group – Hold, tgt E48 to E35.
Traditional media formats including TV and Print have come under significant structural pressure over the past few years as consumers have moved online and advertisers have followed suit. However, TV has fared better than its Print peers and, with enough content and digital avenues of their own to keep their viewers engaged, should be able to maintain their not-insignificant share of the advertising pie going forward (~25% in the five largest European markets). We think the structural pressures caused by the influx of SVOD services such as Netflix and Amazon Prime have been priced in, particularly following the de-rating of the sector in 2020, and see some attractive entry points in the European Broadcasters we cover, notably ProSieben and ITV.
And BP’s onto SocGen’s “buy” list:
We upgrade BP from Hold to Buy based on valuation and the new strategy announced at the 2Q conf call. Our unchanged TP of 330p offers a 23.1% TSR, including the halved fixed annual dividend (to 21 cents). In our view, the company wisely brought forward disclosures planned for September’s CMD, revealing a comprehensive, transparent path through the energy transition: to harvest legacy oil and gas cash flows and reduce their carbon footprint while investing in low carbon. BP also unveiled their financial strategy for capex, debt, returns and distribution policy: 60% of free cash flow to be returned as buybacks once net debt drops to $35bn. This is the first time any IOC (moving to become an IEC) has spelled out in detail how it sees its future operationally and financially. We raise our £/$ 1.22 to the spot 1.31 but halve our previous 10% TP discount to DCF to the normal 5% we use in the sector. This reflects much improved visibility on ESG and in particular, on energy transition risks, with BP disclosing its intermediate emissions reduction targets and explicitly targeting: 50GW of 2030 renewables (up 20x), 100kbd of bioenergy (up 5x), hydrogen (10% market share in core markets), EV charging points (up 10x), and CCS. They expect a 12-14% group ROACE (from 8.9% in 2019). The September CMD needs to show how it’s all done and whether returns can improve.
Harvest and shrink oil and gas, decarbonise and transition Oil & gas production is to decline 42% by 2030, via disposals and depletion: from 2.6mboed to 2mboed by 2025 and to 1.5mboed by 2030. Refining capacity is to shrink c.30% by 2030, from c.1.7mbd to 1.5mbd by 2025 then to 1.2mbd by 2030. This is where the planned $25bn of disposals in 2H20-2025 come from, incl. $10bn in known deals (Alaska, petrochemicals).
Financials $14-16bn pa group capex (once net debt drops to $35bn from $40bn) over 2021-25 includes inorganic spend and $5-7bnpa (both organic+inorganic) of capex on low carbon electricity, energy mobility et al, with just $9bn on legacy oil and gas. From surplus cash flow above capex and the new 21 cent/sh fixed, not progressive, annual dividend, 60% is to be returned as buybacks (improving per share EBIDA); we think the other 40% might be invested in M&A. The halved dividend was more than priced in, and the stock was rightly depressed by lack of clarity post the February announcement of “net zero by 2050”. That has now been fully addressed in our view. Many questions remain to be addressed at the September CMD; some can only be answered over time, as a transition track record is set. But BP is the first IOC to show the way forward. This is no longer just talk about 2050 net zero, it’s a firm action plan.
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