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Zccax77

Yes, I too was rather puzzled about the £600m MREL bondholders’ offer. However, I suspect they are committing to very little equity injection and it is mainly about restructuring the two MREL bonds - £250m 26/06/28 Fixed Reset Callable Subordinated Notes & £350m 08/10/25 Fixed Rate Reset Senior Non-Preferred Notes (incidentally both total to £600m).

My guess is that the position of the bondholders is that they are in much more trouble than has been acknowledged. Generally on most of its capital ratios Metros is trading above its regulatory minima but below the sum of regulatory minima and the confidential buffer - so already being given forbearance by the regulators on those ratios. However, for the ratio ‘total regulatory capital and MREL’ it is worse - Metro is below the minimum 20.2% at 18.1% (table at top of page 10 of the interims). This is difficult for the regulators to tolerate for too long.

If there was to be a bail in I think the bondholders are screwed. At 30 June 2023 Metro had £970m of net equity. If the £600m of bonds were to bailed in that would go up to £1,570m. However, there is the following:

Loans and most of the investment securities are accounted for at amortised cost in the balance sheet (on the basis they are held to maturity) but their current fair value is lower (see note 14 on page 44 of the interims), ie:

- Loans & advances to customers have a cost value of £12,572m but fair value of £11,782. Deficit of £790m;

- Investment securities have a cost value of £4,826m but fair value of £4,502. Deficit of £324m.

Of course the deficits have arisen because interest rates have flown up very quickly past the yield on these assets.

Then there are assets which would likely be valueless in a liquidation or sale situation (as the likelihood is that the business would not be sold intact but that it will be assets transferred and so branches will be shut and IT not used). These are:

- Intangibles, mainly software (£207m)

- “Right of use” leasehold assets (£197m)

- Leasehold improvements (£183m)

- Freehold premises of £343m. Probably not worth their carrying value in a sale. So say £100m less.

The above deficits and worthless assets totals £1,801m more than wiping out all bailed in equity. There are also likely bigger haircuts to assets in a forced sale, lease dilapidation costs, administrator/liquidator costs etc.

So the MREL bondholders are in a very uncomfortable position if Metro is bailed in (which they have to worry about). Their calculation may be that by putting in, say, £100m of equity it might save them £600m. I think their game will be to try to keep Metro going in the hope that it can trade out of its capital difficulties or at least long enough so that the loans & advances and the investment securities can be held to maturity without loss and so eventually reprice. It is probably just kicking the can down the road but often that is eno

33% - 36%. See top of page 8. I think it is roughly the same for the transceiver and systems business. They don’t make any split out but 2021/22 (33%) mainly had transceiver revenue, while 2022/23 (36%) mainly was systems. Of course revenue quite low and bumpy and so may not be a reliable guide to the future, particularly for systems which are bespoke projects.

https://srt-marine.com/wp-content/uploads/2023/08/Annual-Report-2023.pdf

Metro has £7.6bn of mortgage loans out of total customer lending of £12.8bn. I guess it is some (well almost half) of the mortgages it is looking to flog. The rest of its customer lending is to commercial or unsecured personal (mainly, I assume, through its Ratesetter brand which gives very short term loans to people with poor credit records). Metro is already trying to downsize its commercial book.

Over two thirds of the mortgage book is on LTVs of 50% plus (most of that 60%-80%) and over half of the book is interest only. A third of the book is retail buy-to-let. Heavy concentration to London and the SE.

I am not sure there is too much to interest Lloyds - although all depends on price.

I think it is over for Metro. They need a much bigger balance sheet to “support” their branch network (should be the other way around) but it is contracting. They will be selling half their mortgage portfolio and 25% of their overall lending portfolio.

The challenger banks are not really a threat to the incumbents.

I think the difficulty they have on selling part of the loan portfolio is that they may make a loss. Customer loans & advances of £12.6bn are held at cost in the balance sheet but fair value is £11.8bn. Perhaps they can dig out some of the better loans to sell, but I suspect the best ones already went to NatWest. Main advantage of selling off loans will be RWA reduction but that reduces balance sheet size and so potential profit.

They can call the £350m MREL bond in October 2024 and have to repay a year later. I think the problem if they don’t call is that the rate gets reset. There is no info in the accounts on this, but when the £250m MREL bond (also a Reset bond) was not called in June of this year the rate went from 5.5% to 9.139% adding £9m of extra interest cost. Perhaps that is the more immediate issue on the £350m bond.

A bit of care is needed in looking at net equity of £970m. Included in assets are property of £733m and intangibles (mostly software) of £207m. The property is carried at depreciated cost but mostly was bought/leased at the top of the market in what are now not deemed particularly desirable locations. I would be quite doubtful as to realisable sale value. Intangibles of course normally ignored.

Metro’s balance sheet is a bit unusual for a bank as its branch network and software represent a far greater part of net equity and probably this is something the regulators are taking into account.

This is from the interim financial statements for 30 June 2023 signed off on 31 July 2023. The going concern statement is for the 12 months from 31 July 2023. Note in particular for the downside scenario the statement: “as well as not seeking to raise any further regulatory capital”. So what changed in two months?

Interims signed off by the auditors, PwC, with a clean review opinion.

“The Directors have adopted the going concern basis in preparing these condensed consolidated interim financial statements. This assessment has been reached after assessing our principal risks, which remain unchanged from those disclosed in the risk report of the 2022 Annual Report and Accounts. As with the assessment undertaken at the year end the Directors placed additional consideration of the risk that we may have insufficient capital given that we continue to utilise regulatory buffers.

In reaching their conclusion the Directors considered the performance over the period against our Long-Term Plan as well as the continued delivery of our strategy, an update on which is provided within the Business Review section of this report. As part of their assessment the Directors have considered a wide range of information relating to present and future conditions, including projected future profitability, and capital resources and requirements as well as liquidity. The Directors have prepared a 'severe but plausible' downside scenario which involves a significant deterioration in the economy and deposit outflows over a period of 12 months from the date of this report. In this scenario we fell below regulatory minima during the period at a total regulatory capital plus MREL level, prior to any assumed actions that could be taken. The Directors considered the actions that could reasonably be deployed should such a scenario materialise. This involved making reasonable adjustments to our operating plans. While these mitigating actions did not in of themselves constitute any additional risk, they would involve us operating in our capital buffers for longer than envisaged. These actions centred around cost reductions, reducing lending origination as well as not seeking to raise any further regulatory capital.

The Directors believe the Group to remain a going concern and has sufficient resources to be able to continue to operate for a period of at least 12 months from when the interim financial statements are authorised for issue. They have also concluded that there are no material uncertainties that could cast significant doubt over this assessment.”

Yes, they simply don’t deliver. The d2p for bread is particularly irritating as they have had a three year exclusive contract with Bimbo for over a year now and in December 2022 were predicting £2.5m revenue from this product by now - nearly all would have been from Bimbo. I would guess it is less than £100K. However, it might be that they can make progress, as it seems the existing deployment in specialised brands has worked. It seems Bimbo is taking things cautiously:

“Sales of d2p AM for bread applications are growing slowly, with the technology currently being used in specialised brands in Mexico and Peru. We expect these markets to steadily expand in the coming months into more mainstream brands…”

Brighter spots were that the anti insect product with Rivulis held up being roughly the same as H2 2022 and the UAE factory partnership is operating to expectations.

One aspect is that they reduced admin costs by 11% in H1 but are aiming for 25% for the year. That implies a near 40% drop in H2. If that 40% drop is the new base level for 2024 then admin costs should come in at around £3m. Their admin costs have always been too high - Wells Plastics, admittedly more UK centric, has admin costs of £2.2m on around £20m sales.

If they get admin costs down to £3m, they need sales of around £8.0m to breakeven.

Not quite. There are various cases at different levels on PPI. In particular there is one in the Supreme Court (Canada Square Operations Ltd v Potter) which has been stuck there for over a year which is highly unusual (normally judgment in a few months). I don’t think many or any of these cases involve Lloyds but could affect it.

The cases are around the Plevin judgment and the statute of limitations. Broadly, the previous round of PPI settlement was on whether the policies had been mis-sold. If they were deemed to have been mis-sold all the commission was refunded. Plevin is about the commission being far too high ie it was OK to have sold the policy but the commission was unreasonably large and that excess part should be refunded. So the claims will be much less than the previous ones but unfortunately they will get the statutory judicial rate of interest (8%) on any successful claim from when the excess commission was incurred.

It is difficult to know whether this will take off. This class action is done on an opt in basis ie claimants have to actively sign up. US class actions and certain UK class actions (where a breach of competition law) are on an opt out basis ie it only takes one claimant to sue and other potential claimants are automatically enrolled. So much more difficult to defend. As claimants have to be found I think the £18bn (industry wide) figure is wildly exaggerated.

In the case of Lloyds and although they never gave final figures I think about 60% PPI policies were either fully paid out, dismissed or settled on a Plevin basis (Plevin was in force to some extent in the original suite of claims). So 40% never claimed. I cannot imagine they will ever claim. The question is how much of the 60% had their cases dismissed. I would guess not that many.

I think the risk on this is fairly low and the FSA may have powers to intervene and put a timetable on it. The banks will fight it hard but the fact that the claim is being launched now may indicate that certain lower level (effectively legal test) cases have been decided and are favourable to the claimants. Lloyds did mention that they were expecting certain cases to be decided toward the mid/end of 2023.

Certainly the EU ban has an impact but I think it is more general than that. This space in Western countries is dominated by activists that are very anti oil (in large part because they are virulently anti capitalist). So their focus has been on trying to ban oil based plastic or move to solutions such as compostable plastics which do not solve the problem. The activists simply do not want to support a product that in any way perpetuates the oil industry and so refuse to look at matters rationally. The Ellen MacArthur Foundation is one such opponent and they work very closely with WRAP, which is an NGO largely funded by the UK government and to which the government has effectively outsourced its activities on dealing with plastic. WRAP seems to be largely focused on supermarkets reducing plastic use and recycling rather than “fugitive” plastic ie litter.

There is a huge amount of disinformation and lack of understanding as is the case for much of this environmental stuff. It is possible that once we get to a point when supermarkets cannot reduce their plastic use any further and plastic is recycled more than, say, card and paper attention may turn finally to the fact that the real problem is what to do with plastic that escapes collection systems. There is a lot of chemical recycling capacity likely to come through in the next three years or so which is aimed at recycling single use plastic back into its original oil. This will mean that plastic packaging recycling, currently about 50%, should start to move up towards the 70%+ of paper/card.

In summary we need to get to a point where the activists cannot say that (a) we should (and can) get rid of plastic (ie we need an admission by, particularly, supermarkets that they have done all they can to reduce plastic and that for modern life plastic is here to stay); and (b) plastic is bad because it is non-recyclable.

Michael,Stephen, SYM Deputy Chairman, writes about this in Bioplastic News. He often repeats the same theme, which must be frustrating for him.

https://bioplasticsnews.com/author/mls7766/

I rather fear this is a “dead cat on the table “ announcement ahead of interim results where the outlook is shown not to be good. SYM have form on this. We need a proper update on the 100 (revised to 60) trials which potentially represent $40m recurring revenue i.e. the very positive updates that Laurier has been promising for 2023. There is less and less of 2023 left.

Also I wonder how it works for the 500 manufacturers. Presumably SYM supplies from its UAE factory to its own distributor. How do the other manufactures convert to oxo bio-degradable? It is not just a matter of blindly tipping the additive, in the manufacturing process, even if they can get hold of it. It has to be quite carefully calibrated for the conditions and end product.

It is notable that in the draft report posted by @Derek Rocholl DPDHL was aiming for 12,000 locker stations by end 2023, now it is 15,000. So presumably they are finding it works.

Although, the high streets are struggling they are still a place to congregate and the large supermarkets remain busy. I cannot see that changing any time soon. Also the current trend is for frequent “top up” shopping at local convenience stores. So there are many places of decent footfall.

My sense is that RM is missing a trick here. I think they have been distracted by parcel automation (which was the first priority to sort out) and changing working practices. If lockers and PUDO shops do fully take off it is likely differential pricing will creep in (per the report that is what has happened in eg Estonia) so it may not just be a problem on volume but pricing pressure.

Thanks for that Pacifico. I think the Tz regime is quite good for business now - certainly worlds away from Magufuli. Inevitably, not recognised in the share price. However, being Africa, it can change quite easily. The Mining Act remains a threat. I can see that they might be able to fend off it being applied to NLGM but they are in more danger on Singida, given built post Mining Act. The half year RNS said that the Mining Act had been altered again and I had hoped to get more clarity from Eric on the webinar but he brushed my question away.

I hope that chasing down the VAT does not provoke action. Strangely the back VAT seems to have gone down a bit from $23m to under $21m. Doubt any has been repaid, perhaps a bit was written off - although I cannot see any likely write off in the p&l.

@DerekRocholl

Thanks for the report. It obviously is a little out of date (2 years ago) and relying, mainly, on 2020 data as the most recent. I see the authors do the report annually - although to get hold of the most recent one you have to pay.

I had a rather different take on it. You pointed to Germany, but that seemed to be an outlier in terms of the countries specifically analysed. Use of lockers and PUDO shops was very low (less than 10%). Germany had a small number of lockers, albeit well established, (but at low density) but had a reasonable penetration of PUDO shops (first graph in the report).

However, the other three countries analysed seemed to make considerable use of lockers and PUDO shops. In Estonia lockers by a little distance were most preferred and it looks as though only about 40% of parcels were delivered to the home (I think the scale or size of bars are incorrect on the left hand side graph but that the size of the bars relative to each other are accurate). Finland had over 30% each going to lockers and PUDO shops and only 20% to homes. For Denmark it is 20% each for lockers and PUDO and 50% to homes. For Poland around 40% to lockers, 5% to PUDO shops and 45% to homes.

There are clearly differing levels of adoption rates with cultural factors, age of population and population density probably being the main factors. However, most of the countries show significant use of lockers and PUDO shops, albeit in different combinations, and looking at the comparison with the 2016 numbers there is a clear trend away from home delivery to lockers/shops. Even Germany’s DPDHL is said in the report to be planning a substantial expansion of its locker network. So, despite low current take up, they must feel there is demand.

It would be interesting to see a later report but, as said, it has to be paid for.

On the CWU’s attitude I was really only picking up on what was said in the video (the guy had worked for RM for 5 years). Although, the CWU have not resisted what I think were fairly limited PUDO schemes in the past (mainly delivering into the network - as opposed to dropping off at final end user?) I cannot see them being very happy for large quantities of parcels going to lockers or PUDO shops. Apparently, it is over ten times more efficient.

@Derek Rocholl

I don’t think the links I gave were “puff”. They show the rapid development by some big companies of their locker network plus Yodel delivering over 20% of its parcels to PUDO lockers/shops. That seemed to be some reasonably hard evidence of a trend, albeit Yodel is not a particularly large carrier.

Below is a link to a conversation on Royal Mail (it does not come down particularly on one side or another on OOH). It has one or two interesting points - that RM has had to be focused on mechanisation, Thompson re-emphasised delivery to the doorstep and that RM does not seem very engaged with Out Of Home. A particular point made is that the unions are likely to resist PUDO due to potential job losses and so cost efficiencies will be difficult. However, it seems that both management and the unions want to emphasise using the established RM infrastructure. It is difficult to know if this is the right strategy as the infrastructure is expensive to maintain. The danger is that RM thinking begins with the position of ‘we have a great asset so let’s use it’ when companies that do not have such extensive infrastructure take a more objective view of how the parcels market may develop.

https://www.parcelandpostaltechnologyinternational.com/analysis/analysis-priorities-for-new-ceo-of-international-distributions-services.html

Suggest you read the article, digest the numbers and let us know what you think it means for Lloyds’s future results. Fool is correct to highlight the numbers. I track them. Do you?

There never was any austerity. This is just a mendacious trope of the Left. There was a slight fall in REAL term spending while the Coalition grappled with the £150bn pa deficit Brown left. How can spending £400bn more than the government earned in revenue in the first three years of the Coalition government coupled with interest rates on the floor, plus all the QE remotely be called austerity?

Finally a Fool article worth reading.

https://www.fool.co.uk/2023/09/22/lloyds-shares-could-hit-60p-as-worst-case-scenario-likely-avoided/

TMS. Thanks. Yes it is puzzling that RM are not doing more on the locker side. GLS has said it is a priority for them in the coming year. RM does seem to have some sort of tie up with Evri to use their lockers but you rather feel they could get left behind. I suspect it is a matter of money and they are preoccupied with trying to sort out the operational basics in RM.

As with you, I rarely use home delivery - Amazon locker within 15 mins walk and for a fairly valuable item I recently used shop PUDO which required me to go further afield as I did not have a choice of carrier. All worked well.

Personally, I think most DOs are now in the wrong place. It is a function of history. They were sited somewhat out of town for cheapness. However, most DOs I know are now in residential areas given urban residential sprawl. Now there is an alternative in terms of lockers and shop PUDOs most people would find it more convenient to go there rather than a CSP in a DO. At a previous address my local DO was within about 5 minutes of Sainsbury’s/Waitrose/Homebase - so not that inconvenient but you might as well pick up in the shops. Also it had very restricted opening hours - from memory 9.30am - 4.30pm and closed for a couple of hours at lunch.

I would guess that as letters decline and parcels go PUDO it will make sense to have DOs covering a much larger area and re-sited further out of town on newer industrial estates. And then sell off the DOs for residential redevelopment. The land will be valuable.

About 4bn parcels are sent in the UK each year. A locker box can handle about 200 parcels a year (I assume 1-2 day turnaround and sometimes it is empty). Assuming my maths is right, if locker boxes were to take 50% of all parcels then 10m lockers would be needed.

As far as I can determine Inpost has 5,000 locker units, Evri 1,500 and DPD said last year it was installing 500 with an ambition to go to 5,000 in the next few years. Couldn’t find a figure for Amazon. UPS has a hookup with a company called Lockars (carrier agnostic) that aims to put 10,000 locker units into London and 25,000 in other major UK cities. Not very clear how far they have got yet.

Inpost’s 5,000 locker units translates into 290,000 locker boxes ie c60 per locker unit. That probably is at the high end. Assuming Amazon has quite a few more locker boxes than anyone else I would guess there are probably 1m or so locker boxes. The companies will perhaps get to the 5m locker boxes needed to handle 25% of the parcel market by the end of the decade. All companies seem to have ambitions to seriously increase their locker box numbers.

However, lockers are not the only Out Of Home option. There is also shop Pick Up Drop Off. I think there are about 55,000 PUDO points in the UK (figure may include locker units but immaterial if so) - mainly shops. Certainly my local Tesco Express seems swamped with parcels now and at a previous address the local mini-mart was similarly swamped with Hermes parcels.

Notably Yodel thinks that of the 190m parcels it will have delivered this year (to end June) 40m will be to PUDO (up from 25m last year). That is over 20% (and growing at 60%).

I think that PUDO (by shop or locker) will reshape the market quite quickly. It is entirely possible it will eventually become the default option and people will have to pay more for home delivery. I could imagine the pressure will come from the retailers to have more secure delivery so that their losses due to parcels being stolen or damaged by being left outside or simply fraudulently said not to have been received will be reduced. NewDealz may have a better view on the retailer’s view.

https://www.ofcom.org.uk/__data/assets/pdf_file/0033/248586/annual-monitoring-update-postal-market-2021-22.pdf

https://channelx.world/2023/03/inpost-reaches-5000-uk-parcel-lockers-milestone/

https://www.evri.com/parcelshops/lockers

https://apex-insight.com/dpd-uk-to-launch-parcel-locker-network/

https://lockars.com/

https://www.parcelandpostaltechnologyinternational.com/analysis/analysis-pudos-and-lockers-to-dominate-the-european-last-mile.html

https://www.independent.co.uk/news/uk/yodel-consumers-royal-mail-department-for-transport-b2359905.html

2/2

My main worry on BT is a different one - the altnets, especially CityFibre. If you look up City Fibre’s f/statements you will see that at end 2022 they had “passed” 2.5m households, having done 1m in that year and aim to have done 8m households by 2026. They had about 200,000 customers hooked up to their fibre. They are backed by deep pocketed investors - Goldman, Gulf sovereign funds etc.

BT has 15m customers and says its network can connect to 32m premises.

The particular problem I have is that CityFibre directly employs less than 2,000 people and BT (for its UK broadband operations) some 75,000. Both use contractors (not in the numbers just quoted), mainly for laying the new fibre, but once build is complete most contractors go so do not come into the equation. Staff costs are a significant part of the cost base of both companies. I cannot see how BT can easily compete with CityFibre (that has the potential to take half their customers - and the best ones) and so they will have to slash jobs and costs. BT has already said up to 55,000 jobs (including contractors) will go by 2030. The CWU has acknowledged that jobs will have to go but they will inevitably slow down the process and fight for the current arrangements in place since the 1984 privatisation (VR = 2 years!!, no compulsory redundancies).

I suspect cost and staff reduction needs to be accelerated and I don’t know if Kirkby, the new CEO will be up to the task. I think BT wore down the previous CEO, Jansen, although he achieved quite a bit.

It is all very much the same as RM - both are at a crossroads. The crunch point is likely to come around 2026.

I have kept out of BT as I don’t have a clear view on it. The share price is low (and has been much higher quite recently) and builds in a lot of the risks which anyway are probably a little way off coming to fruition, even if they do. Also the 7.7p dividend only costs around £750m a year - not a big amount in the context of BT’s numbers so probably that is fairly safe. If the share price goes low enough there could be a bid as there have been rumours. I suspect there is not too much downside at the current share price and it could recover quite well with a bit of good news.

However, the longer term fundamentals look rather uncertain to me, particularly if CityFibre starts to get traction. With IDS at least the overall business is backstopped by GLS.