Neil Collins Notebook: Cruise control

Do you fancy a sea cruise? Too much to eat and drink, and bragging rights to the neighbours about all those exotic locations where your sea-going block of flats briefly stopped. It was a booming industry, thanks to the growing class of affluent pensioners. The world leader, Carnival, boasts more than 100 ships capable of processing 200,000 passengers at once.

Then came the virus. Corona stopped Carnival, owner of P&O Cruises, dead in the water. The ships are going nowhere before October, the ports are closed, and the vulnerable elderly cruisers are terrified at the thought of being cooped up in quarantine, even if they don’t get ill. In January (BC) the shares had hit £37, valuing the business at £33bn. By 26 March, the price had sunk to 620p, as a shock profit warning coincided with the stock markets’ nadir.

Since then, as the pandemic has worsened, the company has raised over $6bn in debt and new equity to shore up (sorry) the balance sheet. The shares have recovered, to almost twice that low point, as investors bet on the returning romance of the sea cruise.

Well, maybe. The industry faces formidable, perhaps even insurmountable problems in its current form. As Morgan Stanley’s analysts noted this week: “Cruising is about as international as travel gets, with an average ship carrying several thousand passengers from multiple nationalities mingling for an extended period visiting several destinations.”

More than half the 20m previous passengers are American, whose collective view of the dangers will be crucial. The operators need to persuade each port to let the ships dock, and some – Venice, for example – may decide that life is better without the invasion of the floating monsters, despite the loss of revenue.

Nervous passengers must be convinced that it’s safe to board, while the difficulty of maintaining social distancing in a confined space is obvious. As the brokers conclude: “When sailing does resume, it might take only a small outbreak on one ship to cause global operations to be suspended again, so the industry needs to get this right first time.”

There is no margin for error. Meanwhile the ships are expensive to maintain even at anchor, and the industry has debt levels from the days when they were valued as floating real estate. Mass international cruising faces a very long way back to 2019, if it ever gets there. For early boarders, there will be bargains, but probably not among the shares.

Banking for the brave

British banks have been terrible investments. While UK shares have recovered to a three-month high, the banks have gone the other way. Lloyds Banking shares have fallen by a third, and at 35p they yield nearly 10 per cent. Or rather, they would, had the board not been told it couldn’t pay anything, despite the dividend being twice covered by declared profits.

When a business is barred from paying out earnings, it’s no wonder that investors flee, asking whether their company is a commercial entity or merely a branch of the state’s system of financial control. In fact, they hardly need to argue. Lloyds was told to take one for the team, and this year it will take a few more.

Between them the banks have dished out £18.5bn in “Bounce Back Loans” to 600,000 small businesses. The lenders get a 100 per cent government guarantee, but if, as they fear, more than half the money has gone in failure or fraud, the treasury will be desperate to claw back something from the financial wreckage. The banks will be in the PR firing line.

Then there is the government policy of financial repression. The rules brought in after the last crisis have forced bank capital into the “safe” area of home loans, while imposing penalties for making other advances. The result is ridiculously cheap, profitless mortgages, painfully expensive terms for everything else, and bank shares selling at half stated asset value.

So essentially, 2020 will be a write-off. Gary Greenwood at Shore Capital is fairly typical in forecasting £1.7bn in pre-tax profits this year, against £7.5bn last year. Given the way banks behave towards their customers, you might say a little financial pain serves them right, but a resurgent economy needs strong banks, and the only strong bank is a profitable one.

Greenwood looks beyond the current year, to a time when the state has taken its boot off the banks’ throats, and they are allowed to pay some of the resulting profits to the owners. Half of his projected earnings equal a 2p dividend for Lloyds, with more in later years. It is hard to see sentiment towards the sector getting worse, and every chance that banks will one day be re-rated to something closer to the value of their assets.

Neil Collins used to write the Inside London column for FT Weekend for many years, and before that was City Editor of the Daily Telegraph.