Aurelia Butler

Virgin Money has made a bigger than expected provision for bad loans, which hit the UK lender’s profits and sent its shares down by 10 per cent on Thursday, as the cost-of living crisis dents customers’ ability to pay their credit card balances.Provisions for bad loans at the challenger bank increased nearly sixfold to £144mn in the six months to March 31, from £21mn in the same period in 2022 and above expectations of £129mn. Statutory pre-tax profits fell 25 per cent to £236mn, beating analysts’ estimates of £226mn. Revenues rose 10 per cent to £933mn, the bank said on Thursday. The consensus was for £911mn.“We are seeing a modest pick-up in arrears, said chief financial officer Clifford Abrahams. “They’re not spiking but there is more normalisation which you would expect.”The group increased its model for expected credit losses by £83mn to £455mn in the first half of the year, against £372mn in 2022 as it factored in updated economic conditions such as UK GDP, inflation, unemployment rates and house prices.Abrahams said data from credit bureaus, which signalled higher levels of customer indebtedness, had also driven changes in the model. High utility bills, meanwhile, dented customers’ affordability, reducing the amount of new business for the lender.Virgin Money said it anticipated a “continued increase” in arrears, notably in its credit cards portfolio, which was the “primary driver” behind the downgrading of some of its unsecured loans.The amount of relief — such as an extension in repayment terms — the bank granted to customers struggling to pay their credit card bills totalled £73mn across more than 18,000 accounts in the first half, up from £62mn across nearly 16,000 accounts in the previous six months. The volume of credit card balances reaching 180 days past due also increased, driving a slight rise in write-offs for unsecured loans, the bank said.Nearly 90 per cent of the FTSE 250 lender’s impairment charges were linked to its unsecured book. Impairment charges related to unsecured lending rose nearly two-fold from the same period last year to £126mn.Chief executive David Duffy, however, insisted the challenger bank was seeing “no sign of stress” in its mortgage book and no “material deterioration” in any asset classes across its portfolio.“What we’ve done is update our model . . . anticipating the stresses in the economy,” he said.The board of the FTSE 250 lender, which in November announced a 7.5p per share dividend for 2022, recommended an interim dividend of 3.3p per share.It plans to reward investors with a 30 per cent full-year dividend payout ratio this year and expects further share buybacks throughout the year, subject to the Bank of England’s stress tests.The group upgraded the full-year outlook for its net interest margin — the difference between the interest it receives on its loans and the rate it pays for deposits — which it now expects to reach 1.9 per cent in 2023.Shares in Virgin Money have fallen 16 per cent this year, having been hit by fears of wider contagion in the banking sector after the collapse of Silicon Valley Bank and trouble at other lenders, including Credit Suisse. More

Good morning. Voting is under way in parts of England. My best wishes to all our readers who are either standing in these elections, campaigning or putting a brave face on the results in the overnight shift. Some thoughts on how “local” these elections are or aren’t in today’s note. It’s the cost of living, stupidThe real star of the local elections? This fry-up, courtesy of Valentina Romei. Not, you understand, because politicians have been eating them on the campaign trail. But because of what it represents: prices of essential goods up and households feeling the pressure. (Though, frankly, I would gladly settle for being priced out of ever being able to see, let alone eat, baked beans again. Horrible things.) This is, still, far and away the most important fact in British politics. It was eroding the government’s political position long before the invasion of Ukraine: it is the story of the slow decline in the Conservative position under Boris Johnson. And one consequence of Liz Truss’s premiership is that it not only hurt the Tory party directly but increased the share of the blame that voters put on it for the UK’s economic woes. It is a big part of why so many people tell pollsters they want to rejoin the EU and a big part of whatever happens today in the local elections. Local polls, national issuesOver at the Elections Etc blog, John Curtice and Stephen Fisher explain that what really matters as far as the fortunes of the political parties are concerned isn’t how many seats are won and lost today, but what it means for the “projected national vote”. This is because not everywhere in England is voting. So in order to get a read on what these results are actually telling us about public opinion, Curtice and Fisher produce a projected national vote for the BBC, while Colin Rallings and Michael Thrasher of Plymouth University produce an equivalent figure for the Sunday Times. As Fisher and Curtice explain, the two figures have never been that far from each other: but it is useful to have two simply because there are a lot of trade-offs and finely balanced judgments involved. But wait a second, I hear you ask: aren’t these elections actually about local councils? Why do they tell us anything about national politics? Well, the answer is “because most people don’t vote on local issues in local elections”. Here’s Ipsos Mori:Note that most of the things in this chart are nothing to do with local government, and the ones that are, are largely policy areas where local government is sharply constrained by national mandates. Opinion polls are useful, but revealed preference is even more useful. Did every Labour council in, say, London, become considerably more competent overnight when the party went into opposition in 2010? And did every Conservative council in London become more incompetent? And yet more incompetent still after 2016? Of course not.That’s not to say that local factors can’t aggravate national factors, or work against them. When the Liberal Democrats were losing councils at a clip during the coalition years, some high-performing local authorities were able to wow their residents enough to hold on or suffer only marginal losses, and that is true for all political parties. In very good years for the Conservatives and the Labour party, some local authorities end up swinging against the national tide because they are pretty rubbish at what they do.But for the most part, most of today’s results will reflect satisfaction (or the lack thereof) with the parties nationally, rather than being about how these councils have performed locally. Much more about what it all means in tomorrow’s newsletter.Now try thisI continue to rattle through Succession. So I was particularly excited to see that Isabel Berwick tackles the topic of succession planning in the new look Work and Careers email. Top stories todayPolling day | Here’s our guide to today’s elections with details on which areas are voting, the issues at stake and where the parties stand.Gray area | Sue Gray should be able to take up her role as Labour chief of staff ahead of the next general election, according to figures close to the Whitehall body that vets external appointments of former ministers and officials.AI review | The competition watchdog is launching a review of the artificial intelligence market, including the models behind popular chatbots such as ChatGPT, as the industry comes increasingly into global regulators’ crosshairs. More

Federal Reserve chair Jay Powell made no promise to pause a forceful campaign to rein in inflation after the US central bank lifted its benchmark interest rate above 5 per cent for the first time since 2007. But for anyone listening to his nearly hour-long press conference on Wednesday, it was abundantly clear which way he was leaning. “He couldn’t commit to a pause, but he all but did,” said Mark Zandi, chief economist of Moody’s Analytics. The trajectory of US monetary policy has entered a new phase after 10 successive interest rate rises since March 2022. Raging inflation has begun to subside and economic growth is slowing. Turmoil in the financial sector, with failures of regional banks such as First Republic this week, have emboldened arguments for a pause in rate increases. The Federal Open Market Committee nodded to the new landscape in a statement following its decision to raise the federal funds rate by a quarter-point to a new target range of 5 per cent to 5.25 per cent. The committee ditched guidance it provided after its last meeting in March, when it said it “anticipates that some additional policy firming may be appropriate” to bring inflation under control. Rather, on Wednesday it said that “in determining the extent to which additional policy firming may be appropriate”, officials would take into account factors including incoming data and the cumulative impact of its recent string of rate increases.The change, which Powell later described as “meaningful”, implied that while the Fed was soon likely to call time on further rate rises, it was not ruling them out. Powell stuck to that message at the start of his press conference, saying in his opening remarks that the central bank is “prepared to do more if greater monetary policy restraint is warranted”.But as the question-and-answer session progressed, Powell’s comments more directly hinted that with interest rates now above 5 per cent and a credit crunch among stressed regional banks likely to further cool the economy, the Fed may have finally reached a point where it has done enough to bend inflation down towards its longstanding 2 per cent target.“There is a sense that we’re much closer to the end of this than to the beginning,” he told reporters. “If you add up all the tightening that’s going on through various channels, we feel like we’re getting close or maybe even there.”Tiffany Wilding, chief US economist at Pimco, said pausing rate rises at the Fed’s next meeting in June would be the right call, given her concern that a pullback in bank credit could act as a “major drag” on the economy. According to Powell, the Fed’s latest report tracking banks’ lending practices — the Senior Loan Officer Opinion Survey, due to be publicly released Monday — will show midsized banks further tightening lending standards.“Powell and others have always said that monetary policy is an exercise in risk management, and I think what has become clear is that the downside risks to the outlook have grown, potentially substantially, and given that shifting balance of risk, it’s appropriate to pause,” Wilding said. Powell acknowledged that in light of bank stress, the Fed need not raise interest rates “quite as high” as they would have in a more stable situation. But he made clear that the magnitude of the impact was uncertain and complicated the central bank’s assessment of when the policy rate has reached a so-called “sufficiently restrictive stance” — meaning one in which demand is damped enough to push inflation down to target.Zandi at Moody’s Analytics went so far as to say it was a “mistake” for the Fed to have raised rates on Wednesday, citing not only the fact that the labour market is showing clear signs of weakening and inflation is easing, but that the bank stress is “serious” and not yet resolved. “The system is still very fragile and unsettled, and they need to pay attention to this,” he said.For some economists, the bigger error from Powell was in hinting too strongly that a pause is forthcoming, leaving the Fed exposed to having to abruptly change course if economic data suggests the inflation problem persists. Jonathan Pingle, the chief US economist at UBS who used to work at the Fed, has warned that the wage data in Friday’s monthly jobs report is likely to be strong, as is core inflation measured by the consumer price index to be released next week. These could create what he called a “tough communications challenge” as the Fed would need to explain why it was “looking through that”. Powell “may have wanted to increase the optionality towards a pause, but in the way he answered questions he pushed too far,” said Peter Hooper, vice-chair of research at Deutsche Bank, who worked for the Fed for almost 30 years. “I think he may regret [that].” More

A coalition of investors that oversee $10tn in assets has called on companies including Amazon, PepsiCo and McDonald’s to drastically reduce their reliance on plastics, saying a failure to do so exposes them to financial risks. The 183-strong group has written to 30 of the world’s biggest grocery, retail and consumer goods companies to warn that continued production of plastics poses risks to public health, biodiversity, climate change and human rights. The coalition, which includes Amundi, Legal and General Investment Management, Aviva Investors, Axa Investment Management and Rockefeller Asset Management, is the largest ever formed to put pressure on companies over plastics.It has urged the businesses, which also include Tesco, Carrefour and Danone, to phase out single-use plastics, significantly reduce material consumption and implement re-use systems for packaging.Angélique Laskewitz, executive director at Dutch Association of Investors for Sustainable Development (VBDO), the campaign’s co-ordinator, said it was worrying that most companies in the consumer and food retail sectors were taking only limited action to mitigate the risks posed by plastics. “Investors are now sending a clear signal to these companies that they will face ever-increasing pressure if they do not act soon to substantially reduce their plastic footprint,” said Laskewitz. VBDO estimates that plastic pollution costs society more than $100bn a year. A study published in 2017 found that 8.3bn tonnes of plastics had been produced since the industry began to expand after the second world war. About four-fifths has been dumped as waste, while just 9 per cent has been recycled. A growing cohort of institutional investors has raised concerns about plastics and the damage to the world’s oceans, especially after David Attenborough’s Blue Planet television series. Some fund managers, including Axa IM and Lombard Odier, have launched funds to tap into the transformation needed when it comes to plastics and waste. The investors brought together this week say companies that fail to take action on plastics will be exposed “to financial risks that threaten value creation and investment returns, given the wave of action to tighten legislation around the world, the increasing number of lawsuits against companies, and potential threat to brand value.”The investors, who also want companies to phase out hazardous chemicals used in plastics, plan to establish targets for each company, following up with letters and calls. The investor coalition is also calling for companies to stop lobbying against policy proposals aimed at reducing plastic waste and pollution, including the Global Plastics Treaty and the EU’s Packaging and Packaging Waste Regulation, which is currently being overhauled.

Arthur van Mansvelt, senior engagement specialist at Achmea Investment Management, said lobbying efforts by industry associations were weakening efforts to tackle the plastic crisis. “The Global Plastics Treaty offers a historic opportunity to tackle the problem at source. We need companies supporting its ambition on prevention and reuse, not lobby against it,” said van Mansvelt. Danone, which is facing a legal action over plastic pollution, pointed to its website, where it says it has pledged to halve its use of virgin fossil-fuel packaging by 2040.Amazon said it was “committed to minimising single-use plastics in our packaging all around the world” and that it had eliminated the use of more than 1.5mn tons of packaging materials since 2015. Carrefour, McDonald’s and Tesco did not respond to a request for comment. PepsiCo declined to comment. More

Regulators have to follow the law of going with the least-cost bid, Powell said.Regulators seized First Republic and sold its assets to JPMorgan on Monday, in a deal to resolve the largest U.S. bank failure since the 2008 financial crisis and draw a line under a lingering banking turmoil.The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and signaled it may pause further increases. Powell said that the resolution of First Republic was “an important step to drawing a line” under a period of severe stress in the banking system.He added that he was very focused on what happens with credit availability and would broadly monitor what is going on in the banking sector.Powell added that the speed of the run on SVB needed to be reflected in supervision and regulation.Startup-focused lender SVB Financial Group, which did business as Silicon Valley Bank was closed by regulators on March 10 in a sudden collapse. More