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Brewin Dolphin Press Office 020 3201 3330 Comments from Brewin 11/09/14 Brewin Dolphin Press Office 020 3201 3330 Comments from Brewin Dolphin CEO and analysts Scottish Independence – potential impacts for clients and markets: Contents: Brewin Dolphin Chief Executive’s comment Sterling - Guy Foster – Head of Research ISAs – Marc Wilkinson – Head of Brewin Dolphin Scotland BT Group – Nik Stanojevic Diageo and SSE - Elaine Coverley Retail Sector: Sainsbury’s, Tesco and Morrisons – Nicla di Palma Lloyds and RBS – James Box Aberdeen Asset Mgmt and Standard Life - Ruairidh Finlayson Investment Trusts – John Newlands David Nicol, Chief Executive of Brewin Dolphin said: “Since our merger with Bell Lawrie and Stocktrade in 1993 we have expanded the business and grown our client base and funds under management both north and south of the border. We have shared the costs of business development and regulation with our wider firm throughout the UK and created economies of scale; this has helped us to reduce costs and keep our charges to savers and investors competitive. If the additional expense of local regulation and reporting for clients in another jurisdiction had to be borne solely by our Scottish offices – this could feed through to higher charges for customers. So the lack of certainty is still palpable for our clients and for us. However, we would like to reassure all our clients that we are committed to our Scottish business. We confirm that all clients’ Sterling cash is, and will continue to be, held in Banks authorised by the Prudential Regulation Authority (PRA) and for which the Bank of England is the lender of last resort. Brewin Dolphin Ltd and the nominee, in which clients’ assets are held including all ISAs, are both English registered companies. We will do all we can to manage the impacts of whatever the future may hold for savers and investors in Scotland.” Sterling - Guy Foster – Head of Research Guy Foster, at Brewin says: "The pound could fall five to ten per cent if Scotland votes 'yes' on Thursday. Our currency would be seen as riskier, while an independent Scottish currency would be a desperate situation. However, the silver lining is that a weaker pound would help UK companies which have been suffering from the strength of the pound". We estimate that a yes vote could see the pound fall 5-10% in total (including moves as the chances become more acute). The reasons are as follows: Logically gilts should suffer a higher risk premium given that the some portion of the debt is set to be passed through from Scotland to the remaining UK with the remaining UK still guaranteeing the full debt. There has, however, been curiously little reaction in the CDS market, so far... It is assumed that Scotland would use sterling as its currency. Westminster reiterates that this would not be formally permitted as a currency union, but of course that is all it can prohibit and within ‘sterlingisation’ it is unlikely in the short term that monetary policy would be dramatically different either way. An independent Scottish currency would be a desperate outcome as given the size of the trade links between the two countries the increase in transaction costs and potential volatility for businesses would create a substantial and unnecessary cost. Nevertheless the weakness of the pound, if it continues should be beneficial for UK equities more generally, which have suffered from the strength of sterling year to date and would be susceptible to a weaker euro if the ECB pursues more aggressive easing. ISAs – Marc Wilkinson – Head of Brewin Dolphin Scotland We expect Scottish savers in existing ISAs will be able to retain their ISA savings and any benefits they continue to accrue, for the foreseeable future in their current tax free wrapper. So do not sell ISAs. The Scottish Government has not confirmed whether or not ISAs will be extended or what savings incentives they may develop in their place. If a Scottish savings scheme is introduced, it is probable that current ISAs held by Scots would be transferrable into the new contract. All Brewin Dolphin and Stocktrade ISAs are held in our English registered nominee. BT Group (BT/A LN) pension fund and Scottish independence – Nik Stanojevic While Independence is a significant risk for BT, there are important mitigating factors to consider. BT believes that in the event that Scotland gains independence, there are likely to be transition arrangements which could dilute the negative impact. While investor relations were not keen to discuss details, they did not rule out a split of the pension fund into two (8% of BT’s employees are in Scotland). And we believe, BT has the debt capacity to pay down the entire deficit, if necessary. SSE (SSE LN) Scottish Independence - Elaine Coverley SSE is more exposed than peers to the risks surrounding a possible Scottish Yes vote, with around half the groups EV coming from Scottish operations, due to the investments made in renewable and regulated networks. The Government has highlighted the issue of stranded generation and network assets, saying it “will not continue to provide a support mechanism for new or existing renewables in Scotland post separation”. The UK might continue to source renewable power from Scotland post-independence but at a price that would be determined via negotiation. Scottish renewables would need to compete against other sources of renewable power both internal and external to the UK. SSE has 931MW of wind capacity in operation in Scotland out of a total onshore wind portfolio of 1,477MW. We would expect the Scottish government to continue to support the renewable industry given its importance for the economy, and we would expect the Scottish and UK Government to agree a regulatory support mechanism for an integrated electricity transmission network. Diageo (DGE LN) Scottish Independence - Elaine Coverley Elaine Coverley, Head of Equity Research, "Scotch can only be made in Scotland, and it is 30 per cent of Diageo's sales. We're worried about currency risks and changes to import tariffs in an independent Scotland." Diageo is the one of the largest producers of Scotch Whisky globally and the implications for Diageo are two fold, firstly currency disruption. Scotch whisky is invoiced in US$ irrespective of where it is sold. Therefore the only transactional FX exposure that the company faces is GBP/US$ which is typically hedged on a 12mth basis. Currency in an independent Scotland could be much more volatile and more difficult and expensive to hedge. Secondly, a standalone Scottish government would have significantly diminished negotiating powers over scotch import tariffs. At present scotch enjoys tariff free access to the EU’s 28 member states (the EU accounts for around 20% of Diageo sales). Sainsbury’s, Tesco and Morrisons – potential end of national pricing Nicla di Palma Most of the UK retailers (food and general) in our coverage have a significant presence in Scotland. As an example, Tesco has a 30% market share, Morrison 15% and Sainsbury 8%. So far, retailers have implemented national pricing within the UK. The costs associated with selling in Scotland are generally higher due to logistics and geography as well as additional regulation costs (there are already currently additional regulations governing the sale of some products, e.g. alcohol in Scotland, but these could increase). There have been several comments from the CEOs of major retailers stating that they would be unwilling to subsidise Scottish sales. Doing business in an independent Scotland would lead to a rethink of national pricing, in our view. This would mean higher prices for food and other items (clothing, etc). Clearly, there would be good reasons for doing so. Furthermore, currently the UK has 0%-VAT rate on a large majority of food products. This does not apply in the EU. An independent Scotland (within the EU) would have to impose VAT on its food products. Potentially, these could lead to retailers abandoning national pricing altogether. We do not think it makes much sense to charge the same price in the wealthy South East as in the poorer parts of Northern England. Land costs, labour costs are higher in the South East and the prices charged should reflect that in our view. Lloyds Bank – how quickly will it relocate and what are the costs? James Box Lloyds has been far from complacent on Scottish independence: the management team has mentioned on numerous occasions that it has a contingency plan in place – which means it is already a critical step ahead of the UK government. The precise terms of independence will determine the specifics of Lloyds’ contingency plans, which could include moving the registered office to the UK and reconfiguring the legal structure to ring-fence Scottish assets and liabilities. Lloyds is a multi-branded group which could be helpful: for instance Bank of Scotland could become the “Scottish brand” while the Lloyds and Halifax brands remain south of the border. If the Yes vote passes, the uncertainty around the precise terms of Scottish independence is likely to weigh on sentiment towards the stock. Independence will also undoubtedly result in one-off re-organisational costs relating to the contingency plan. Lloyds insists, however, that independence will not materially change its long-term strategy or its competitive strengths. Specialist Financials – AAM and Standard Life - Ruairidh Finlayson Standard Life: Nine out of ten customers are south of the border. It would therefore make more sense for Standard Life to move its registered company address and potentially its headquarters to London. It has already set up an English and Welsh shell company and there have been rumours that it is looking at suitable buildings in London for the transition. Will people move their pensions away from Standard Life as a result of independence? Unlikely, particularly if it is quick to move its registered address and given the sheer length of time it takes to transfer pension providers.
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