Standard Chartered: Bigger cushion

Patrick Hosking

Peter Sands, the man whose ideas helped shape the Government's bail-out of domestic banks six weeks ago, is discovering no bank is immune from the icy winds blowing across financial markets. Standard Chartered, where he is chief executive, serves customers almost entirely in Asia, the Middle East and Africa, but is still tapping existing investors for £1.8 billion. It's also cutting the dividend.

Mr Sands says he didn't have to raise fresh capital, but he looks wise to do so. The perception of capital strength is essential for all banks. If things worsen in emerging markets, Standard will have anticipated it. In markets where bank runs are still commonplace, a strong balance sheet is invaluable. If things stabilize, the extra capital will give it the firepower to exploit any recovery to the full.

The fund-raising looks, if anything, a bit timid, raising its capital ratios by just 1.3 percentage points. If the global economy seriously slows, with the inevitable blow-out in bad debts, then the extra cushion will be neither here nor there set against a $330 billion balance sheet.

Meanwhile, the bank's pretence that the 25 per cent reduction planned for the final dividend is somehow not a real dividend cut is just plain silly.

Homeserve: Repairs required

Nick Hasell

The problem for investors in Homeserve has been that the product it sells - emergency cover for home repairs - was not widely available in the early 1990s recession, so it has been difficult to predict what would happen to its sales in a downturn.

But in today’s profit warning, they appeared to have received their answer: in the last seven weeks, customer retention rates in the UK have dropped from 84 per cent to 83 per cent.

That might sound modest given the rate of decline in other consumer-related businesses. The profit impact might also seem small: every 1 per cent drop in retention knocks £1.5 million off operating profits, which forecast at £92 million for the full year, does not translate into a precipitous rate of decline

But the stockmarket is in no mood to give untested businesses the benefit of the doubt when they show signs of weakening, and prompltly wiped 29 per cent from its shares.

At 875p, they trade at nine times current-year earnings, which is reasonable. However, given the scope for retention rates to deteriorate further, and for new policy sales to slow, it must be next year’s numbers that are the bigger concern. Avoid for now.

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