Hambros profits dive in bleak year for City

BY JOHN EISENHAMMER

Financial Editor

Hambros yesterday halved its dividend payment after profits collapsed by 57 per cent, the latest victim of a disastrous year that saw member firms on the London Stock Exchange lose a total of pounds 127m.

In its latest quarterly report, the Stock Exchange said low trading volumes and difficult economic conditions world-wide combined to cut profits for member firms in 1994 to their lowest level since 1990.

Sir Adam Ridley, an executive director at Hambros, the blue-blooded merchant bank, described the collapse in pre-tax profits to pounds 37m for the year to 31 March as its worst result since the early 1980s. Hambros's share price slumped 28 pence to close yesterday at 183p, as dealers reacted to the halving of the dividend to 7.5p.

Lord Hambro, chairman, described the financial year as "exceptionally difficult, particularly in the treasury and bond markets". He said trading since 1 April had not improved.

Hambros's results swung the spotlight back onto the difficulties of merchant banks and speculation of more consolidation and takeovers following last month's purchase of SG Warburg by Swiss Bank Corporation. The Stock Exchange said City houses continued to run vast global operations that had expanded in boom times, paying big bonuses to retain key staff despite plummeting revenues. Member firms saw expenditure rise 10 per cent in 1994 to pounds 3.5bn while earnings slumped by 22 per cent to pounds 3.4bn. The downturn was particularly marked in the final quarter.

The 1994 total loss of pounds 127m offered a stark contrast to the bumper profits of pounds 1.2bn made during the stampeding bull markets of 1993. Warburg's demise has been the most dramatic to date but it reflects the pressures facing many merchant banks. Integrated investment houses like Warburg, seeking to offer all global products and services under one roof, have suffered the heaviest losses, said the Stock Exchange. The overall figure, however, masked considerable divergences, with loss-making firms showing a deficit of pounds 747m while profit-making firms enjoyed gains of pounds 620m.

Hambros's poor result as dealing profits fell ended an 11-year growth run in its banking division. The firm said it is closing down its clearing operation. Provisions for bad debts rose from pounds 9.4m to pounds 13.5m.

Hambros has also been badly hit by the stagnant housing market, on which it has banked heavily as part of its focus on retail financial services. In October, the firm bought Nationwide Building Society's estate agencies. The group now disposes of a 762-strong network of residential estate-agent offices. "Confidence in the market remains elusive," noted Lord Hambro.

Total returns on capital in Hambros before tax dropped to 7 per cent last year compared with 17 per cent in 1993.

The poor performance raised Hambros's profile within the already-swollen group of potential City takeover targets. But Johnny De la Hey, analyst at Societe Generale Strauss Turnbull, said it is unlikely anyone would want to buy it. "The management has failed to bring this business together," he said.

He downgraded his pre-tax profit forecast for the current year to pounds 55m from a previous pounds 75m.

Attempting to banish post-Barings worries about merchant banks trying to do too much on flimsy capital bases, Hambros stressed it enjoys a strong balance sheet with a consolidated capital adequacy ratio of more than 15 per cent. But a report earlier this week from the ratings agency Moody's pinpointed the limited capital resources of British merchant banks.

"This industry is ripe for acquisition and consolidation, despite the preponderance of family, or other blocking stakes," Moody's said. "The recent announcement by the largest merchant bank, SG Warburg, that it had entered into a conditional agreement with SBC to sell its investment- banking businesses, casts doubt on the continuing independence of the remaining players."