THE quarterly reporting season is upon us – an ideal time, one would think, to stop and take stock of corporate earnings and future prospects. If only it were that easy. The conflicting signals coming from our big European and American companies are not easy to interpret. But so far, among these large corporations, there has been more good news than bad and provides hope that the knock-out blow that has floored financial institutions exposed to the credit crunch is not being felt in the wider economy.

Take last week, for example. Boeing, Amazon, Apple and Volkswagen all produced strong growth in quarterly earnings, a welcome relief following the gloom that descended on Wall Street after General Electric’s profit warning a fortnight ago. One view is that there is enough momentum in order books to sustain earnings for this year, particularly for companies, such as aerospace group Rolls-Royce, with strong exposure to Asian markets. Industrial stocks also look like weathering the immediate storm.

The concern is what will happen next year. As Sir Martin Sorrell, chief executive of advertising group WPP, said last week: “When will the real world start feeling the slowdown’s effect? My feeling is that it is 2009 when the rubber really hits the road.” For some companies, particularly those exposed to the indebted consumer, the downturn has already come. Both Punch Taverns, the pub group, and Persimmon, the housebuilder, last week came out with very gloomy forecasts and more will follow. A number of retailers are in a similar position. For sectors outside leisure, property and retail, the City’s earnings forecasts for this year may stand the test of time. There may have to be some big revisions for next year, however.

If you are not in oil services, mining and related industries, the slowdown is going to start to bite. As one retailer told me last week: “Everybody is waiting for the punch from the consumer and we know it is going to hurt.”

Tom’s thumbs up

THE chairman of Royal Bank of Scotland, Sir Tom McKillop, didn’t have a good week when he tried to sell the bank’s £12 billion rights issue to the market. He has my sympathies – I doubt anyone could have done the job better. Banks are not supposed to lose money, let alone have rescue rights issues. This one was forced to admit to a litany of strategic errors that laid it guilty to both charges.

And it was McKillop who took the full force of the investor backlash. As a result, rightly or wrongly, he may ultimately pay the price and step aside within 18 months to make way for a businessman with more banking experience.

That may be rough justice. McKillop is a man of international stature, he had an exemplary record at Astra Zeneca, where he was chief executive, and was at one time mooted to become chairman of BP. But last week’s events prove how this can quickly be forgotten.

McKillop stood up for his embattled chief executive at a time when Sir Fred Goodwin needed it most. He must be disappointed that the voices of some of his board colleagues have not been as publicly vociferous as he would have liked. That silence, unless quickly addressed, may deny him a second chance to stay at RBS and serve the tenure that was originally intended.

He will know that when investors support cash calls, they usually demand a scalp. McKillop’s strategic error was to lack allies in the right places when he needed them. Many investors felt he was arrogant. Certainly within the financial media he had ignored the key role of allies when backs are against the wall.

As I said in this column last week, Goodwin will be given a second chance. At a time when the bank is faced with a huge integration job with ABN Amro, his expertise is too valuable to lose and there are few candidates around to replace him.

If there is one thing the credit crunch has done, it is to expose the scarcity of international talent to fill these positions.

Rights and wrongs

ON the subject of Royal Bank of Scotland, the bank’s auditors were blamed last week for having failed to identify the scale of its exposure to dodgy American mortgages at the time of its last set of results.

The write-down, announced alongside the rights issue, came in at £6 billion. However, the City had identified the wrong culprit. It had little to do with the auditor and a lot to do with the underwriters who were backing the rights issue.

This was an underwriters’ valuation, designed to kitchen-sink the value of the bank’s potential exposure and ensure that there was no threat of future litigation. It was more brutal than anything an auditor would have done. Some analysts last week applied the scale of RBS’s write-down to other banks. It was a pointless task and would only be relevant if another financial institution were to have a rights issue.

Coffey break

FOR those looking for a ray of optimism in these difficult times, read my colleague Kate Walsh’s article. It is about a London-based hedge-fund manager who has turned his back on an employee share-option package that would have made him £125m over the next five years. Instead he is leaving to set up his own hedge fund. His name is Greg Coffey and we are going to hear a lot more of him. Although we probably won’t see much of him – he screen-trades 20 hours a day.

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