The inside word from the City: Credit crisis

Canines on parade

Tue, 13 May 2008 10:25:18 GMT

Much to the chagrin of Tiddles, Cityblogger spent a sweltering Sunday perusing the stalls at a local dog show. As he wandered about enjoying a 99 (one has to when it costs an extortionate £2!), Cityblogger’s eyes were drawn to a ridiculous spectacle – a pink skinned hairless little creature strutting along in a bright pink collar and lead and adorned in a wet tea towel. And it was this image which Cityblogger recalled this morning as he examined Alliance & Leicester’s howler of a trading statement.

Stock market underachievers - ‘dogs’, as they are known in City parlance - are ten a penny in the banking sector. But A&L has grabbed the limelight after it became the latest bank to unveil hefty write-downs from the credit crunch. The credit squeeze cost the company £192m in write-downs on treasury and credit assets in the first four months of the year, and A&L is taking a further £199m post-tax asset write-down - higher than expected by analysts. What’s more, funding costs are also expected to rise to £150m this year. Unsurprisingly, the shares dipped by 7 per cent to 473.75p and are down a painful 60 per cent on the year. Ouch! Analyst James Hamilton at broker Numis described the trading statement as “terrible – as expected” and reduced his target price on the shares to 485p, stating that there is “better value elsewhere”. At least there’s no mention – as yet – of a rights issue…

Another canine on show was Enterprise Inns, which unveiled half-year figures. Shares in the pub operator are already down 34 per cent on the year, and fell another 4 per cent today after pre-tax profits dipped by 33 per cent. Yet chief executive Ted Tuppen said this was a “solid” performance given the tough trading environment right now. And Richard Carter, analyst at broker Numis, reckons the company is holding up better than many of its peers as consumer cut back on leisure spending.

A strong performance from European travel company TUI boosted the FTSE100 initially this morning, but worries about high UK inflation figures have pushed it back below the 6200 mark to 6144. Our Merv could soon have to put pen to paper and explain to Gordon Brown why inflation is so high.

But commentators say market falls below 6200 – as also seen on Monday - are unlikely to be serious. “Like other recent forays below this psychological level, so far this has proved to be short lived,” says David Jones, chief market strategist at IG Index. “Recent slides back towards the 6150/6180 area have brought the buyers back out in droves – and for now it looks like only a prolonged move below here would suggest that the positive sentiment is starting to fade.”

Here’s hoping!

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It might as well be snowing...

Tue, 06 May 2008 10:44:53 GMT

The sun may be shining as though the height of summer is upon us – Cityblogger already boasts some colour on his usually pasty-looking limbs - but in some City hearts it might as well be snowing. With the pleasant May bank holiday already a distant memory, UBS has set about once more with its axe. The Swiss banking giant says it is to trim another 2,600 jobs by next year due to heavy losses sustained in the US subprime mortgage debacle. The bank made a $11bn loss in the first quarter and has been one of the biggest casualties of subprime, swallowing write-downs of $19bn and planning to shed a total of around 5,500 jobs. Merrill Lynch and Citigroup also announced major job cuts last month and no doubt this is the tip of the iceberg for City workers. The boffins at the Centre for Economic Research expect 11,000 job cuts this year and another 9,000 in 2009. Razor blades, anyone?

More gloom was forthcoming from Bovis Homes, too, as the housing market continues to deteriorate. Reservation levels at the housebuilder are down 30 per cent compared to the same period last year, and the company says half-year profits will now be significantly lower than analysts’ forecasts. However, Chris Millington, analyst at broker Numis, maintains his buy recommendation on the shares, pointing out that while Bovis is, like Persimmon, finding it tough out there, it still has strong operating margins and low debt levels compared to some of its peers.

Meanwhile, over the weekend Microsoft dramatically pulled out of takeover talks with Yahoo and is now thought to be cosying up to AOL already. How heartless! Some Yahoo shareholders are said to be unimpressed by chief executive Jerry Yang’s failure to cement a deal with Microsoft, with some commentators wondering if Microsoft’s action is deliberately designed to galvanise shareholders into action to rekindle the deal. “Yahoo!’s shareholders will be furious, forcing Jerry Yang’s team to think again, or return $4 billion to shareholders,” says one. Yahoo shares fell 15 per cent on Monday.

On the bright side, after faltering initially, the FTSE is up almost 2 per cent ahead of lunchtime, with oil stocks boosted by record crude prices and news that Tullow has stuck oil in Ghana.

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FTSE in a whirl

Wed, 30 Apr 2008 11:02:47 GMT

Cityblogger’s poor head is still spinning from the merry-go-round that is the FTSE100 this week. In his ignorance he dared to hope for a second that the worst of the credit crunch was over yesterday morning as the index steamed ahead, gaining 39 points to reach a stunning 6,130. Shell and BP’s stellar first quarter results boosted the FTSE100, at least for the early part of the day, with shares in both companies up strongly yesterday.

But it was not to be. By the afternoon the index had begun to shed its gains, and finished up largely unchanged on the day. Banks and mining shares were hit, with HBOS shares down 2 per cent after it unveiled its £4bn rights issue, the worst kept secret in the City after it was widely leaked on Monday. The 2 for 5 issue went down as something of a damp squib, and HBOS shares are down a further 3.5 per cent this morning. Analysts have criticised the cut in the dividend, with some suggesting investors give the shares a wide berth. “We do not believe HBOS has adequately explained its rationale for raising £4bn of equity from its shareholders,” says Tom Rayner, analyst at Citigroup, who maintains a sell recommendation on the shares. “[And] we believe HBOS will be vulnerable to further evidence of property market weakness.” Investors are waited with baited breath to see which bank will be next with its cap in hand to shareholders.

And there’s little cheer about in the markets today. The FTSE100 is down just under half a per cent to 6054 – mercifully still above 6,000 - with mining companies on the run following a lacklustre production update from Kazakhmys and profit taking by investors. Oil and gas giant BG is one of the biggest fallers, with its shares down 5 per cent this morning following its unsolicited swoop for Origin, which values Australia’s utility company at $12bn.

And there is more doom and gloom on the house price front. According to a survey by Nationwide, house prices have suffered their first annual fall in 12 years and are down for the sixth consecutive month (April).

Pass the razor blades! On the bright side there's speculation the Bank of England could cut interest rates again soon.

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Tin hat time

Thu, 24 Apr 2008 11:21:21 GMT

It’s hard to remember it now, but time was that the banking sector was as safe as houses. Now the whole industry feels swathed in sand and fog. And there’s been little letup this week - today was another tough day for banking stocks, helping send the FTSE100 down over 100 points and back below the crucial 6,000 mark.

Credit Suisse kicked off the party by unveiling a SFr 5.3bn ($5.2bn) write-down on the back of leveraged finance losses. The Swiss might be known for their financial acumen, and certainly investors had thought the bank would emerge relatively unscathed from the credit crunch, but it appears they thought wrong. Credit Suisse made a $2.1bn loss in the first quarter with net revenues down a shocking 72 per cent. At least its chief executive Brady Dougan – an American – had the good grace to label the results “clearly unsatisfactory”!

And Cityblogger has watched the day progress further into the dog house. Royal Bank of Scotland already has egg on its face from the recent rights issue announcement, (particularly given that the need for it is partly due to its acquisition of ABN Amro debacle) but now Barclays has stepped up to the plate. Although it isn’t – yet – unveiled its own rights issue, the bank says first quarter profits will be down on last year’s due to disappointing trading at Barclays Capital and Barclays Global Investors.

Drug giant AstraZeneca failed to inject any health into the markets either, with shares down 3 per cent following disappointing results. And Persimmon put the icing on the cake by announcing that it is to stop building new homes altogether due to higher cancellation rates and falling sales. The decision by mortgage lenders to tighten lending criteria and withdraw certain products from the market has put the squeeze on the house builder. The shares fell 8 per cent this morning and sent panic through the equities markets of further house price doom and gloom.

“It’s really strange, but the FTSE100 has spent a lot of energy going nowhere,” David Jones, chief market strategist at IG Index told Cityblogger. “There’s been quite a lot of bad news today and there’s no good news [on the horizon]. We all know this but the market seems to forget. It’s schizophrenic. Unfortunately I can’t see things getting any better in the near term. We’ve had RBS’ rights issue and there’s a feeling that it could start a bit of a trickle from the other banks.”

Tin hat, anyone?

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Never a dull moment

Tue, 22 Apr 2008 09:37:44 GMT

To the untrained eye, Cityblogger could appreciate how the City with its dusty old institutions might appear a dull sort of place inhabited by fat men in suits. But nothing could be further from the truth – well, with the exception of the rotund gentlemen, such as er…Cityblogger himself. Not a day goes by that the newspapers don’t feature a doom and gloom piece on the credit crunch. Perhaps the last time the City featured so heavily in the headlines was Black Monday.

And, luckily for these poor hacks, the credit crisis continues apace. Yesterday the Bank of England launched its latest attempt to patch up the gaping hole in banks’ finances and encourage them to lend to each other by allowing them to swap mortgage debt for government bonds, a scheme it says is worth £50bn.

But some commentators say the scheme is too costly for banks and doesn’t go far enough in preventing certain banks from ‘hoarding’ their cash and refusing to lend to others. “It seems that the initial reaction from financial markets and those that the scheme is designed to assist appeared somewhat diffident on the basis of cost in relation to risk,” explains Howard Wheeldon, senior strategist at BGC Partners. “That suggests to me that only the weakest banks may initially take up what is on offer from the Bank of England and that larger banks may stand aside for a while.”

Certainly the equity markets’ reaction was mute yesterday and the interbank lending rate LIBOR has, as yet, failed to drop significantly. What’s more, Mr Wheeldon believes further rights issues will be on the cards as banks bow to shareholder pressure to strengthen their balance sheets.

And another credit crunch victim - Royal Bank of Scotland - finally launched its much-rumoured £12bn rights issue today. The 11 shares for 18 rights issue at 200p will help cover a potential £5.9bn asset write-down. But the bank admits the timing of the takeover of ABN Amro’s wholesale business didn’t help. Previously highly respected chief executive Fred Goodwin, the sort of chap who appears in the top five of best CEO lists, admits that extending the bank’s exposure to the wholesale money markets last year was, in hindsight, not ideal.

Be assured, this probably won’t be the last banking rights issue this year.

Meanwhile Nomura is reportedly investigating an employee for suspected insider trading…On the bright side the FTSE100, while down slightly, remains past the 6,000 mark.

The City? Dull? I think not!

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Sand castles in the air

Tue, 08 Apr 2008 10:05:24 GMT

Cityblogger has returned from his surprisingly sunny Norfolk retreat to further economic doom and gloom, it seems. After a delightful week’s crabbing by the bracing North Sea, he had dreamt of stretching his mortgage to encompass a modest holiday villa. But alas this was merely a sand castle in the air. Certainly if Halifax’s house price survey today is anything to go by.

The mortgage lender’s report has little in it of good cheer for homeowners. House price growth last month was the lowest for over a decade, with prices down 2.5 per cent on average. And even worse, Halifax now says prices will fall this year instead of its previous expectations that they would be flat.

But first time buyers won’t be rubbing their hands together in glee, either. Abbey has become the latest to ditch its 100 per cent no deposit mortgages, following in the footsteps of other lenders, including Halifax, Alliance & Leicester and Nationwide.

So after a strong rally last week, the FTSE100 fell this morning almost 1 per cent to 5970, with banks and house builders’ shares taking the brunt once again.

Investors had been hoping that the worst of the banking crisis had abated, but many City commentators believe this is far from the case. “The liquidity problem in the UK remains very acute,” argues David Buik at Cantor Index. “The credit crisis itself has only just started to bite. The cost of mortgages in the UK has increased [while] the availability of money for mortgages and loans has consequently decreased.”

Meanwhile traders are hoping the Monetary Policy Committee will see fit to trim interest rates again this week to inject some confidence.

Elsewhere, there is speculation that the Qatar Investment Authority may up its stake in Sainbury’s, while the burgeoning love affair between Yahoo and Microsoft has turned somewhat sour, with the two love birds busy scribbling rather public poison pen letters to each other and Microsoft threatening a hostile takeover.

Not exactly love’s young dream!

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FSA wades in

Thu, 20 Mar 2008 08:47:43 GMT

Yesterday was yet another whirlwind day in the banking sector, with HBOS shares slumping 17 per cent on wild rumours that the bank was seeking emergency funding. Other banking shares, including Alliance and Leicester, also slipped in sympathy.

City pundits expressed disbelief at the stories, considering HBOS’ long-held reputation for conservatism. “What is unforgiveable is to perpetrate rumours about a pillar of financial society without foundation,” complains David Buik at Cantor Index. “This bank is about as conservative as it comes and does not compete aggressively for market share.”

And now it seems the Financial Services Authority has seen fit to comment on the market speculation – something it NEVER does – insisting that it’s all a lot of damaging rubbish and no meetings have been held with any institutions for emergency funding. The regulator plans to hunt down the ‘vagabond’ traders trying to make a fast buck on false rumours. Frankly this, coupled with the big US interest rate cut which has sparked hopes of further UK rate cuts, ought to sooth us a little, but instead the FTSE100 has opened down this morning, with a profits warning from Credit Suisse suggesting further bad news is to come from other international banks.

Meanwhile revolting Northern Rock shareholders and the UK Shareholder Association are launching a legal fighting fund to challenge the government’s nationalisation and puny compensation for shareholders who lost out. For more information contact 0870 70 60 600 or uksa@uksa.org.uk

Cityblogger plans to drown his sorrows by spending quality time with his rather satisfyingly rotund Easter egg, and wishes a very pleasant Easter to you all.

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Banking on Lehman's

Mon, 17 Mar 2008 14:43:13 GMT

No prizes for guessing that far from JP Morgan’s takeover of Bear Stearns serving to calm the market, investors are now trading rumours about which US bank could be the next to fail. The name on their lips is Lehman Brothers which is due to report results on Tuesday. Such is the fear in the markets that shares in the bank are already down a painful 22 per cent this afternoon merely on idle speculation.

Lehman’s insisted this morning that it has no liquidity problems. But then these were the famous last words of Bear Stearns too. As Mark Dampier at Hargreaves Lansdown told Cityblogger this morning: “You can’t even believe what a CEO says right now. And the lot you really don’t want to listen to is the politicians. If they say it’s not that bad – as Alistair Darling did in the Budget - then you really should worry."

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