City diary: Week ahead in the markets

By This Is Money
Updated: 10:41 EDT, 28 April 2011

Taxpayer-backed banks Lloyds and RBS will share the limelight with Next and Morrisons during another busy few days for investors next week.

MONDAY

Bank holiday

TUESDAY

The CBI will issue its monthly distributive trades survey, while Markit/CIPS is scheduled to publish the latest PMI index for manufacturing.

Aberdeen Asset Management will release interim results.

WEDNESDAY

The struggles of the high street will come into focus when Next delivers a trading update for the first three months of its financial year.

According to broker UBS, the clothing chain is expected to report a 5% decline in like-for-like sales in the three months to the end of April, amid the squeeze on household incomes from the VAT hike and soaring input costs.

Retail sales volumes unexpectedly grew in March but this followed a sharp decline in February, which will be reflected in Next's figures.

The City will also be looking for an update on input costs after Next warned its ranges could be up to 10% more expensive this autumn and winter as rising commodity prices continue to hit the business.

Andrew Hughes, an analyst at UBS, said total sales, including new retail space and online, should show decent growth.

He said: 'Although disposable income and consumer confidence are under pressure, the impact has been felt most heavily on large ticket discretionary spending.'

Mr Hughes said womenswear and childrenswear gave Next and its peers a 'defensive' characteristic, while warmer April weather may have helped trading.

Next's contemporaries Marks & Spencer and Debenhams revealed surprise growth in the same period.

M&S reported 0.1% growth in like-for-like sales in the 13 weeks to April 2, when analysts expected a decline of around 2.5%, while Debenhams posted underlying profit growth of 4.5% to £129.2m in the 26 weeks to February 26.

Interim results from software group Sage will be watched for further news about a sales revival under the leadership of new boss Guy Berruyer.

Newcastle-based Sage returned to sales growth in the six months to September and maintained the improved performance in the final three months of 2010.

The FTSE 100 company has been benefiting as its target market - small and medium sized businesses - begin to get back on track following the recession and financial crisis.

Its recovery has lagged others as SMEs went into the recession late but were slower to pick up.

Revenues remained flat in the year to September 30, but cost cutting helped Sage post a 14% rise in underlying profits of £355.7m.

George O'Connor, an analyst at Panmure Gordon, believes improving conditions will have helped turnover rise by 2% to £733.8m in the half-year.

He is forecasting underlying interim earnings to edge up by 2% to £185.3m, although this includes a near-1% fall in the UK. The UK makes up about 20% of its revenues, with America accounting for about 40%.

JP Morgan is pencilling in pre-tax profits for the half-year of £178m, up from £177.5m a year earlier.

But boardroom changes have been grabbing attention at the group in recent weeks as the shake-up continues following Mr Berruyer's appointment. Paul Stobart, a company veteran previously tipped for the top job, is departing after 15 years.

He lost out to Mr Berruyer in the race to replace Paul Walker as chief executive and his departure follows that of Sue Swenson, head of Sage's large North American division.

Mr O'Connor said in a note the group needs to 'watch the gap created by Mr Stobart's departure'. But he added: 'We are relaxed about trading news in the forthcoming interim results.'

Sage employs around 13,400 people. Aside from its Newcastle headquarters, the firm also has UK offices in Manchester, Winnersh, near Reading, central London and Witney in Oxfordshire.

In other corporate news, Blacks Leisure will release full year results. And JD Wetherspoon, Legal & General, Provident Financial, Rightmove and Standard Chartered are due to publish trading updates.

Xstrata, Kazakhyms and Antofagasta will put out first quarter production reports.

The Bank of England is scheduled to release lending figures.

THURSDAY

Disappointing figures from Barclays showing a 9% drop in quarterly profits have set a gloomy tone ahead of first quarter results from Lloyds Banking Group (today) and Royal Bank of Scotland (Friday).

Aside from recent performance, the updates from the part-nationalised pair will provide the City with its first chance to quiz the banks on the impact of the recent Independent Commission on Banking (ICB) report.

Lloyds was told the disposals already agreed with European regulators did not go far enough and is now facing the possibility of more branch sales. RBS got off more lightly, with the ICB's interim report indicating it was heading towards plans to ringfence retail and investment banking operations rather than a full separation.

But RBS warned at its recent annual shareholder meeting that there would be "inevitable" costs passed down to customers and shareholders from the ICB changes.

The banks are expected to remain fairly guarded over the potential impact, given the ICB's final recommendations are not due until September, but analysts will be reading between the lines for clues - in particular on how much more Lloyds believes it will have to offload.

Lloyds - 41% owned by the taxpayer - gives little financial detail in its first quarter updates. A year ago, it revealed it returned to profit for the first time since the financial crisis and remained in the black through 2010, reporting pre-tax profits of £2.2bn against £6.3bn losses in 2009.

However, it warned in annual figures earlier this year that its margins were under pressure as it gave a sobering outlook for the economic recovery.

Analysts cut forecasts for 2011 as a result, despite sharply lower bad debts and a resilient retail banking performance in 2010 - trends that are likely to have continued into the first quarter.

Lloyds could face questions over the impact of a worsening consumer environment on debt losses, as well as the recent ruling on payment protection insurance (PPI).

The sector's High Court failure over its challenge against the regulator means banks will be forced to re-open thousands of PPI mis-selling claims. Lloyds is the most exposed UK bank and has already said the ruling could be "material" for the group.

While new boss Antonio Horta-Osorio is not set to update on his strategy until June, his plans will be in the spotlight - with reports that he is preparing to sell Scottish Widows for more than £5bn the latest speculated move.

Morrisons, the UK's fourth biggest supermarket chain, is unlikely to have avoided the consumer spending squeeze but should still reveal a resilient performance when it posts first quarter figures.

Tesco highlighted the impact of a consumer slowdown and intense competition when it reported a 0.7% drop in its fourth quarter sales, while Sainsbury's has already prepared the market for a tough 2011.

Amid the squeeze, latest figures from Kantar Worldpanel showed Morrisons outperformed the 'big four' by growing its till roll by 4% in the 12 weeks to April 18.

It was the only one of the main players to increase market share, to 11.9% from 11.8% a year earlier.

But the research made grim reading for the sector as a whole, with grocery sales rising by 3.6% - which implies a negative result when grocery inflation of 4.3% is stripped out.

Analysts expect quarterly sales at Morrisons to better the decline seen at larger competitor Tesco, albeit with marginal growth. Andrew Porteous at Evolution Securities is pencilling in like-for-like sales growth of 1% excluding VAT, which implies negative volumes after inflation.

He said Morrisons' Fuel Britannia petrol offer was a canny move, with customer pockets hit hardest by soaring fuel costs.

Clive Black at Shore Capital said the group may also be benefiting as shoppers trade down, given the chain's value credentials.

However, the supermarket's sales performance has been overshadowed so far this year by the recently appointed chief executive's plans for the firm.

Dalton Philips pledged to launch an online shopping operation within two years when he updated on strategy alongside unveiling annual results. It has earmarked £3bn in investment over the next three years to catch up with web-savvy rivals.

The group is also upping the ante in the convenience store sector - a plan that has put the group firmly in the spotlight as a potential bidder for frozen food chain Iceland, which is reportedly about to be put on the sale block.

First quarter results are due from Smith & Nephew. Trading updates are scheduled from Diageo, AMEC, Carphone Warehouse, Flybe, Galliford Try, Morgan Sindall, Rexam, St James's Place and Thorntons.

The Bank of England will announce its decision on interest rates.

FRIDAY

RBS, which is 83% owned by the state, remained in the red in 2010 with losses of £1.1bn, but returned to profitability in the fourth quarter and the market will be hoping this continued into 2011.

Sharply lower bad debts were behind the turnaround at the end of 2010, which offset slower investment banking revenues.

Barclays' figures and the performance of US counterparts have suggested investment banking is unlikely to be spectacular this year. Barclays saw investment banking revenues drop 15% in the first quarter to £3.3 bn.

But RBS has assured it is on track with its recovery plan, despite the wider investment banking slowdown and regulatory challenges ahead.

Economists will be watching Insolvency Service figures for further evidence that the number of people unable to keep up with their debts has peaked.

A total of 30,729 people in England and Wales were declared bankrupt or took out an individual voluntary arrangement or debt relief order during the fourth quarter of 2010 - the third consecutive quarter during which the number has declined.

Pat Boyden, partner in charge of personal insolvency at PricewaterhouseCoopers, expects figures for the first three months of the year to show a further fall.

He said: 'I'm expecting the figures to be down. The pressures are down at the moment because of the lower levels of debt that people have got.'

He said as a result of the credit crunch people had not been able to take on such high levels of debt as they had previously, while the tight lending criteria currently being employed by banks meant advances were generally being restricted to the most credit worthy borrowers.

Mr Boyden expects figures for the whole of 2011 to show a fall, after they hit a record high of 135,089 in 2010, with a marked drop in bankruptcies.

But others are less optimistic. Chris Nutting, director of personal insolvency at KPMG, thinks insolvency numbers will be broadly unchanged at around 30,000 during the first and second quarters, but he expects them to rise again during the third quarters of the year.

He said: 'We still haven't seen the impact of the public sector spending cuts, which will reverberate into the private sector.'

He added that the number of people unable to keep up with their debts was also like to rise once interest rates were increased from their current low level.

Vicky Redwood, senior UK economist at Capital Economics, also expects the figures to start rising again this year.

She said that while the numbers may remain flat or even fall during the first quarter, the impact of the Government's austerity measures, high unemployment and the squeeze on household incomes would lead to more people going insolvent.

Rentokil Initial, Rolls-Royce and Admiral Group are due to issue trading updates.