Moodys Corporation (NYSE: MCO) have said that the stable for the Oil & Gas and Tobacco markets is stable for the new year.
Today, Moody’s investors have said that the oil/gas industry and tobacco scene looks broadly stable for 2020.
The oil price will remain volatile next year, Moody’s said, with key issues being producer responses to growing inventories, the recovery in Saudi Arabian volumes, accelerating US output, and a slowing in demand in general across the world.
Big names such as FTSE100 (INDEXFTSE: UKX) listed Shell (LON: RDSB) saw their profits take a hit at the end of October, as the firm alluded to tough trading conditions and volatile oil prices.
Shell saw their profits sink during this time, however they comfortably beat market and analyst expectations posting earnings of $4.8 billion (£3.7 billion), well ahead of the $3.91 billion anticipated.
“The stable outlook for the integrated oil and gas sector is driven by an expected recovery in earnings before interest, tax, depreciation, and amortisation on the back of upstream production growth and higher refining margins,” said Steve Wood, a managing director at Moody’s.
“Companies’ financial policies will become more shareholder friendly, with rising dividend payments. These firms will also increase their investments in low-carbon operations,” Wood added.
The exploration & production sector’s outlook remains stable, Moody’s said, and it forecasts low single-digit growth in Ebitda in 2020. Volume growth will ease, but will remain at 5% to 7%, with a focus on capital discipline and cash flow “pivotal”.
In the tobacco scene, Moody’s believes the global industry will see operating profit growth of 3% to 4% in 2020, with low-to-mid single-digit falls in cigarette volumes offset by price rises.
“While heated tobacco and vaping products will continue to gain traction, increasing investment needs will constrain profit growth for some companies,” said Roberto Pozzi, a Moody’s senior vice president.
Notable performance in the tobacco industry came from British American Tobacco PLC (LON: BATS) who saw their shares rally on after the firm gave a confident expectation outlook for 2019.
BAT continues to expect US industry volumes for 2019 to be down by 5.5%, while for 2020 it expects a drop in the range of 4% to 6%.
For the Tobacco Heating Products division, the glo product in Japan held its volume share at 4.9% reborn with the launches of glo Pro and glo Nano in a highly saturated market.
Earlier this week, Moody’s lowered the Irish banking outlook from positive to stable.
The credit ratings agency said banks’ earnings will come under pressure from low interest rates, with asset risk continuing to fall.
Profitability will decline,” said Moody’s analyst Arif Bekiroglu. “Irish banks’ high reliance on net interest income makes them sensitive to the low interest rate environment. High exposure to low-margin tracker mortgages, rising costs due to increased debt issuance, revenue losses from sales of problem loans, and Brexit uncertainty are further headwinds for profitability.”
Expenses will remain high, as IT costs surge on a move towards digitalization, regulation and pending fines.
The agency continued: “Meanwhile, banks’ asset risks are set to keep falling, as economic growth and low rates support borrowers’ finances, and as banks continue to sell and restructure problem loans. Enhanced risk management and stricter Central Bank of Ireland affordability guidelines should prevent excessive risk taking, holding back new problem-loan formation. Moody’s also expects capital ratios to hold steady, and funding and liquidity to remain strong.”
The performance from the Bank of Ireland (LON: BIRG) however seems to defy the change made on Tuesday. Bank of Ireland recorded €1.5 billion of net lending growth in the nine-month period, which is 800 million higher than in the same period a year ago.
Additionally, Moody’s lowered the UK Banking sector outlook from stable to negative, which caught news headlines at the start of December.
“The UK’s economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country’s growth prospects,” said Laurie Mayers, associate managing director at Moody’s. “Meanwhile, persistently low interest rates and increased mortgage market competition are eroding the net interest margins of most UK lenders. These challenges will outweigh the sector’s strong capital and liquidity buffers, and an expected decline in banks’ conduct costs.”
Moody’s believes “problem loans” will increase moderately on weaker economic growth and higher unemployment.
“Even so, banks’ capital will remain broadly stable as they will likely counterbalance lower organic capital generation by reducing their shareholder distributions,” Moody’s added.
In compliance with EU regulations, UK lenders will continue to issue loss absorbing debt, wheich Moody’s said will create an “additional buffer” to protect depositors and bondholders.
“In addition, banks will continue to reinvest cost savings achieved in enhancement of IT platforms and digitalisation of processes and channels. Some large lenders, however, will likely report higher net profit in 2020, helped by a sharp fall in conduct costs after an August 2019 deadline for compensation claims for mis-sold payment protection insurance,” the credit rater added.
Amid the tensions from the Brexit negations, the General Election results announced this morning , the ongoing saga between China and the United States and political tensions in Hong Kong, the state of the global finance industry has not looked so gloomy since the financial crash of 2008. However, many British lenders have seen shares in green following the Conservative landslide.
“A deteriorating operating environment weighs on banks’ asset quality and profitability, and low interest rates and increased competition in mortgages reduce net interest margins of most UK lenders,”
Moody’s said in a report on Tuesday. “The UK’s economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country’s growth prospects,” said Laurie Mayers, Associate Managing Director at Moody’s Investors Service.
“Our base case is that the UK and the EU will ultimately reach a free-trade agreement, but it is increasingly unlikely that any such deal will substantially mitigate the negative economic impact of Brexit,” Moody’s concluded.
