UK risk appetite falls to 2008 low

Appetite for risk amongst UK CFOs has fallen to the lowest level since 2008. Now, only 4% believe that it is a good time to take greater risk onto their balance sheets — with 96% disagreeing.

This key finding is from the latest — second quarter — Deloitte CFO Survey, which researched the views of CFOs and group finance directors of UK major companies, both listed and private.

Richard Hoult, FCMA, CGMA, head of risk, audit, and assurance at Thames Water, the UK’s largest provider of water and wastewater services with 15 million customers, said there had been little change over the past few years in the company’s approach to balance sheet risk.

Hoult said the company was highly leveraged — with a lot of debt and debt facilities. To deal with unexpected expenditure, risk had been reduced by ensuring access to future borrowing in the debt marketplace. “That is not specifically shown on the balance sheet, but it is included in the notes to accounts,” he explained.

Finance leaders in the UK, according to the Deloitte report, regard Brexit as the biggest risk facing their business. On average, they have rated the risk at 65 on a scale of 1–100, where 100 is the highest possible risk and 0 represents no risk. This is up from 62 for the first quarter of the year.

Rising worldwide geopolitical risks are rated second at 60 for Q2 (55 for Q1).

Also rated at 60 (49 for Q1) is the US’s greater protectionism leading to an escalation of trade wars.

Other top risks that CFOs identify are weak demand in the UK, poor productivity or weak competitiveness in the UK economy, and a housing or other bubble and the risk of higher inflation.

Those surveyed are less worried about the prospect of rising interest rates, or weakness or volatility in emerging markets.

Hoult said that when considering risks from an external perspective, “cyber and data security are well up there at the moment, as with most other businesses with large customer bases and complex billing systems”. This risk, he said, “has definitely risen up the agenda”.

No-deal Brexit risks

On Brexit, a no-deal outcome is now regarded as more likely than previously, with UK Prime Minister Boris Johnson’s official spokesperson saying in late July “we must assume that there will be a no-deal Brexit on 31 October”, while at the same time the government remained “confident” that the EU will reverse its decision on refusing to renegotiate the Brexit Withdrawal Agreement.

Meanwhile, a substantial, well-funded publicity campaign to prepare citizens and businesses for a no-deal Brexit is planned by the UK government.

Hoult acknowledged that risk associated with Brexit has increased. “Obviously, two years ago we expected it to be done pretty quickly. [It is] causing additional stress on the business at the moment.”

He added: “What I would hope for a deal and a managed exit is that they find a way of making sure we don’t experience massive delays at the borders.”

Hoult said the risk was industry-wide. Chemicals to treat water and wastewater are largely supplied from Europe, he explained. “If those supplies are disrupted, we can’t hold a huge amount of chemicals on our sites — we don’t have the space to store large volumes safely, and some of the chemicals have short shelf lives.”

Some of the senior Thames Water staff, he said, have been involved in talking to the UK government and other water companies “to find ways of mitigating the industry-wide risks”.

Hiring outlook

In addition to increasing CFOs’ long-term pessimism (83% believe it will lead to a deterioration in the economic environment for business over the long term), Brexit is also affecting the hiring outlook over the next three years. According to the Deloitte survey, 62% of CFOs expect to reduce hiring over this period due to Brexit.

Thames Water is monitoring the medium-term labour risk — both for the company’s own and third-party labour. In particular, a number of water and waste networks operatives are from Eastern European countries; Brexit has made it less certain that they will decide to remain in the UK.

Micheál Briody, FCMA, CGMA, is CEO at Silver Hill Foods, which has operations both in Ireland and Northern Ireland and was acquired by the agri-food business Fane Valley, based north of the border, in March. He spoke to FM for a January 2019 article. Eight months on, he considers failing to secure market access in Asia to be Silver Hill Food’s primary risk, with Brexit and bio-security, avian flu in particular, also in the top three. These three risks remain unchanged from two years ago.

Brexit remains a considerable risk for the company as it exports 45% of its output of premium duck from Ireland to the UK.

Briody said the company has had a Brexit readiness plan in place since late 2016, which has adapted “as the political landscape has changed in the interim”. He added: “Unfortunately, some of our greater risks — WTO [World Trade Organization] tariffs — are difficult to mitigate against.”

The business, he said, was awaiting the definitive shape of Brexit in the latter half of 2019 “to press the button on investment plans”. However, he said a bigger reason for the wait was to ascertain if market access between Ireland and Malaysia can be opened.

He said: “Currently Ireland can export poultry to Singapore, Hong Kong, and Sri Lanka. If we don’t succeed in getting more Asian markets open, it will stifle our growth opportunities.”

Resilience risks

For Hoult, a further risk is around the company’s water supply network. The freeze-thaw experienced in early 2018 in the UK and a hot summer the same year caused a number of challenges with meeting customer demand for water and showed up some resilience gaps for the company.

He added that in April 2020 the company will enter a further “price control period” with Ofwat, the UK’s water and sewerage industry regulator, which lasts five years. “We submitted a business plan to increase expenditure to improve resilience levels, which is also one of the key areas of focus across the sector.”

Within the business, Thames is implementing a new SAP business platform that involves moving the data of around 9 million customers, which represents a further risk to the company. This is a phased implementation to manage some of the risk. Hoult said the company is also “grappling with” leakage targets that were missed two years ago. “The amount of money [and] resources going in trying to hit [them] for the end of this price control period should position the business better going into the next regulatory period.”

According to the Deloitte survey, for UK finance leaders, cost reduction across businesses remains a strong priority, as does increasing cash flow and introducing new products or services or expanding into new markets.

CFOs expect operating costs to rise over the next 12 months and corporate revenues to fall over the same period.

This bleak outlook is also mirrored by the latest forecast by the UK’s National Institute of Economic and Social Research think-tank. It believes there is around a 30% chance of output growth of less than zero per cent in 2020, given the UK’s current underlying performance, the fragile global economy, and the high probability of a no-deal Brexit that could also be disorderly.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.