Breakingviews - Corona Capital: U.S. banks, UK debt, Disney
NEW YORK/HONG KONG/LONDON/MILAN (Reuters Breakingviews) - Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.
- Gravity-defying banks
- Scary UK borrowing
- Walt Disney’s dilemma
BANKING'S WILE E. COYOTE MOMENT. Lenders reporting quarterly earnings this week are a bit like the cartoon canine who runs over the edge of a cliff without – at first – plunging. A fall in customer creditworthiness looks almost certain, but has not quite happened yet.
While JPMorgan, Citigroup and Wells Fargo put aside $23 billion on Tuesday to absorb bad loans, delinquencies are still mostly theoretical. At Citi, North American consumer debts overdue by 90 days or more fell slightly to just under 1% of that division’s loans. Delinquency rates also fell at JPMorgan.
Two forces are holding borrowers aloft. Banks are waiving fees and interest – Wells Fargo gave up almost $300 million this quarter. But government stimulus is also going into servicing debt. JPMorgan says that half of the credit card and car-loan borrowers to whom it has given forbearance made a payment anyway. That may not last, but as surprises go, it’s the better kind. (By John Foley)
DEATH AND TAXES. The pandemic makes more austerity a certainty for UK voters. The country’s Office for Budget Responsibility outlined how Covid-19 will hit the country’s finances in its latest fiscal sustainability report. In the watchdog’s central scenario, which assumes that effective treatments or vaccines soon become available, output will be 3% lower than forecast by 2025 and the budget deficit will still be 4.6% of GDP, over two percentage points above the forecast in March. Debt will hover just above 100% of GDP.
The longer-term outlook is spookier, as Britain’s finances suffer from an ageing population and higher healthcare costs. The added blow of the pandemic means debt could exceed 400% of GDP by 2070. To get borrowing back to 75%, every decade would need a fiscal adjustment equivalent to 2.9% of GDP, compared with 1.8% before the pandemic, the OBR reckons. Whoever is lucky enough to be prime minister will have to push through unpopular spending cuts and tax hikes. (By Neil Unmack)
NO MAGIC PILL. Walt Disney is in an awkward position. The $210 billion entertainment giant is temporarily closing its Hong Kong theme park on Wednesday after more than 50 new cases of Covid-19 prompted the government to mandate new measures to contain its spread. Yet the Magic Kingdom barreled ahead with plans to reopen Walt Disney World in Orlando, Florida last Saturday, even though the Sunshine State added 15,300 new Covid-19 cases on Sunday, more than any other state has reported, according to the New York Times.
Disney outlined all the steps it was taking to manage an outbreak, including temperature checks and required face covering, in a video reminiscent of airline flight-safety instructions. But the situation can get turbulent, fast. The National Basketball Association said on Monday that two of its players tested positive for Covid-19 while under quarantine. Where? Walt Disney World. (By Jennifer Saba)
WINNING STREAK. Shares of Macau casino operators including Wynn Macau and MGM China surged on Tuesday after authorities announced eased coronavirus-related border restrictions with neighbouring Guangdong province. That’s a welcome reprieve for the world’s largest gaming hub – gambling revenue slid 97% year-on-year in June. Nearly half of Macau’s Chinese visitors came from Guangdong last year, Morgan Stanley analysts reckon. Lifting a compulsory 14-day quarantine for visitors arriving from Macau to Guangdong could lure the high rollers back to empty baccarat tables.
Obstacles remain. Visas for individual visits, which account for 73% of Guangdong arrivals in Macau, remain on hold. A mooted travel bubble between Hong Kong and Macau looks less likely as the financial hub grapples with a resurgence of Covid-19 cases. With operators paying an estimated $15 million in daily operating expenses, according to Morgan Stanley, the news is nonetheless welcome. (By Sharon Lam)
LIGHTER BASKET. Ocado investors have received another mixed bag from the online grocer. Ocado’s army of vans delivered sales growth of 27% in the first half of the year but its technology business continued to burn through cash and wipe out profits. Group EBITDA fell 36% to 19.8 million pounds, leaving Chief Executive Tim Steiner nursing a pre-tax loss of 40.6 million pounds. The 15 billion pound company’s shares fell nearly 4%.
Grocery sales were a big plus, up 87%. But uncertainty in U.S. and British markets meant it was unable to ramp up its outlook. In its UK backyard, where the bulk of its warehouses sit, gross domestic product only grew 1.8% in May after falling over 20% in April. This could mean consumers cutting back on bulky online grocery bills. As long as Ocado’s chunky valuation is linked to rolling out big and costly warehouses, shareholders will have to get used to some knocks. (By Aimee Donnellan)
CLOCK TICKING. Swatch’s centre of gravity is shifting rapidly towards mainland China. The Swiss watchmaker reported its first ever half-year loss on Tuesday, with net sales down 46% at current exchange rates. Yet it remained optimistic – retail sales in China leapt 76% in May and 60% in June. In Hong Kong, traditionally an Asian watch hub, Swatch recorded almost no sales due to political unrest.
Mainland China’s importance to Swatch has grown since pro-democracy protests in the former British colony kicked off in 2019. Hong Kong accounted for an estimated 10%-12% of net sales in 2018, but that slumped to 6%-7% at the end of last year, when luxury groups started pulling down the shutters. By contrast, analysts reckon Swatch sales on the mainland accounted for a quarter of total revenue last year. With Hong Kong’s woes showing few signs of easing, the shift is starting to look permanent. (By Lisa Jucca)
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