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Bank of England's Changing of the Guard

THE WEEK: Morningstar columnist Rodney Hobson reviews the leadership change at the BoE, ongoing troubles for BP and Thomas Cook, and profit flows at United Utilities

Rodney Hobson 30 November, 2012 | 4:09PM

On the Credit Side at the Bank

The appointment of the first foreigner to be Governor of the Bank of England has not brought quite the outbreak of xenophobia one might have expected. Beyond the typically British moans about the indignity of failing to produce a sufficiently worthy candidate ourselves, Mark Carney has been received better than he might have expected. 

I was greatly reminded, while reading the press reaction, of the wonderful satirical song in HMS Pinafore, where one of the protagonists is lauded with the words: ‘It’s greatly to his credit, that he is an Englishman’ a decision taken ‘in spite of all temptations to belong to other nations’. 

So it’s greatly to Carney’s credit that he is Canadian, which one gathers is the next best thing to being British, he has lived in this country, he married an Englishwoman and his children have dual nationality. Not bad for a foreigner. 

Oh, and by the way, he happens to be the best candidate for the post. The salient feature of the ‘beauty parade’ of home grown candidates was that each had a fatal flaw. It says something that Paul Tucker, the bank’s deputy governor, was clear front runner despite being tainted by the Libor scandal. 

He could never have had the authority to impose discipline on the banking sector given the laxity of his dealings with Barclays (BARC) at a time when Barclays was actually trying to bring the Libor fixing out into the open. 

Carney comes from the equivalent post at the Canadian central bank and has the very great merit of having presided over one of the best recovery stories in the developed world. A strong governor at the Bank of England, leading the way with enhanced powers, will do far more for the banking sector than any amount of formal regulation. 

Let us hope that we can get back to the pre-Gordon Brown days. I have been a frequent critic of Chancellor George Osborne but he went to some lengths to get this one right. 

Already the snipers are out, though. It has been suggested that the role will be too large for one man after the much needed repatriation of powers from the Financial Services Authority. Of course it will be! That’s why he has deputies and a large staff. He isn’t expected to do it all. He is expected to be able to delegate while keeping a firm grip on the overall operation. 

Bank shares fell on Carney’s appointment. It will take time, but I believe that the banks will ultimately be the major beneficiaries from a no nonsense regime under which they will be less at liberty to inflict damage on themselves as well as on the economy and the general public. 

More In Sorrow Than Gloating

Two companies that I have warned investors away from produced more bad news this week: BP's (BP.) and Thomas Cook (TCG). 

BP keeps switching between troubles in Russia and troubles in the United States and this week it is the turn of the US, where it has been banned from bidding for federal contracts indefinitely. 

The US Environmental Protection Agency has accused BP of a ‘lack of business integrity’ regarding not only the blowout at the Deepwater Horizon oil well in the Gulf of Mexico but also, more seriously, in its response to the disaster. 

Investors would be foolish to assume that this suspension will be short-lived, although the agency describes it as temporary. Even when BP is allowed to bid again it will have a question mark over it. 

BP shares hardly reacted to the news, yet it is still heavily reliant on the US. The alternative is the utterly unpredictable Russian market. Not an attractive choice. 

Even so, I would rather be in BP than in Thomas Cook, where losses for the 12 months to the end of September amounted to a worst ever £485.3 million. New chief executive Harriet Green reckons Cook has turned the corner and she has put her money where her mouth is, spending £115,000 buying shares. 

It is true that the losses are accounted for by write-downs and Green is talking about £100 million a year cost savings but there is no dividend and investors have to take a lot on trust. The shares have doubled from a 12-month low of 12.5p to around 25p so even if you really believe in a recovery story you have already missed the plane. 

The Tap Stays On 

United Utilities (UU.), in which I hold shares, has produced a rise in first half profits from £124.4 million to £135.6 million despite the impact of recession on demand from commercial customers. Mind you, regulator Ofwat played a part by allowing a 5.8% price increase. With enemies like that, who needs friends? 

The interim dividend is increased by 7.2%. UU shares immediately rose 17.5p to 686.5p on the news. They are still way below the 12-month high of 816p and while that last figure was wildly optimistic I cannot feel that the current share price is an overvaluation. The prospective yield is around 5%, which is pretty good for a solid company.

Market Performance: November 26-30

  • FTSE 100 Index: +0.8%
  • FTSE 250 Index: +1.2%
  • FTSE All Share: +0.9%
  • FTSE Small Cap: +0.9%
  • FTSE AIM 100: -0.4%
  • FTSE Fledgling: +1.0%

 

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Barclays PLC218.35 GBX2.46
BP PLC421.90 GBX-1.54
Thomas Cook Group PLC110.10 GBX-0.09-
United Utilities Group PLC824.50 GBX0.49
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.