Markets live chat transcript for the chat ending at 12:08 on 27 Feb 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Good morning and welcome to Markets Live – FT Alphaville’s daily markets commentary.
PM: Neil Hume is with me.
PM: Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks Banks banks banks
PM: as usual, we start with the banks
PM: and a very grisly reaction to the annual results from HBOS
NH: yep
NH: stock down 60p at 645p
NH: that’s a fall of 8.5% – the biggest in the FTSE 100
NH: stock has traded as a low of 632p
NH: now before we look at the results, which have unsettled a few investors, worth pointing out
NH: that the whole banking sector is weak this morning
NH: and that’s because of rumours that someone has been to the Bank of England to get financing
PM: Although i believe that has been comprehensively denied now
PM: Funny rumour tho
NH: well it always sounded like rubbish to us
NH: HBOS and RBS were the names mentioned
NH: but given HBOS has just raised its dividend and RBS reports tomorrow
NH: we just can’t see it
PM: Certainly prompted some lively comments in the market this morning
PM: here’s what the grim reaper thought of it
PM: HBOS – THE MOST RIDICULOUS RUMOUR
PM: FIGURES THIS MORNING AND NO MENTION OF FUNDING PROBLEMS, SOMEBODY PUTTING A
STORY ROUND THAT BofE HAVE CALLED A EMERGENCY MEETING DUE TO PROBLEMS AT HBOS –
PLEASE GIVE US SOME CREDIT THIS IS EMBARRASSING
NH: actually there is another rumour doing the rounds now
PM: Go on
NH: BoE are going to meet and inject 3 month funds into the market.
NH: no idea if it is true but it has ruffled a few feathers
PM: Lets get back to these HBOS figs
PM: because the shares are not down 8.5% because of some daft rumour
NH: no, its the results
NH: which on the surface look OK
NH: but the devil really is in the detail
NH: right
NH: Underlying EPS was 106p – bang in line with expectations.
NH: FY divi increased by 18% to 49p
PM: that’s a pretty confident signal from management
NH: it is
NH: but here’s where it starts to turn a bit gloomy
NH: Group Net Interest Margin fell 9bp in the year
NH: unsurprisingly, most of this fall came in the second half of the year as the credit crisis unfolded
NH: and here’s the worrying bit
NH: although it was becoming less profitable to write new mortgage business
NH: HBOS’ market share rose to 22% in H2, u from 8% in H1
PM: Argh
PM: they are increasing market share in a housing market that is slowing down rapidly
NH: indeed
PM: I am starting to understand why the shares are down 8% this morning
NH: rising market share in a falling market
NH: that suggests to me that Halifax are picking up the mortgage clients that no one else wants
NH: and to cap it all off, profits in the UK retail bank 4% between H2 and H1
PM: Any write downs?
NH: yep
NH: In treasury
NH: fair value adjustments of £227m taken through income line in p&l
PM: which is about the lowest of all the UK banks
PM: Anything else lurking in the balance sheet that we havent picked up on ??
NH: according to our banking analyst Peter Tha Larsen
NH: analysts are pointing out to c£500m adjustment to carrying value of RMBS taken through reserves. HBOS has also disclosed it’s holding c£7bn of Alt-A mortgages in its Treasury operations.
PM: Hmmm
PM: and what about the performance of the corporate bank?
PM: that was seriously involved in a lot buyouts last year
PM: and has been a key profit driver for HBOS
NH: well, looks like it was down 13% H2 on H1
NH: basically it has not been able to report many large PE related gains
PM: I see
PM: so any analyst comment??
NH: here’s one number cruncher who would prefer anonymity
NH: Conclusion: Headline numbers are in-line. However question for us is what happens if securitisation markets don’t re-open: HBOS Loans/Deposits 1.77x, A&L 1.73x, BB/ 1.67x, and/or what happens if UK enters a severe downturn. Our recommendation is Neutral.
NH: this is from ABN Amro
NH: they have a sell rating on HBOS
NH: HBOS (sell): FY07 op EPS 106.2p, 6% up YoY and in line with ABN and consensus 106-7p.DPS 48.9p, up 18% YoY but light vs ABN 50.9p forecast. Headline PBT is 6% below forecast, ie bigger than expected one-time negatives. So TCE (tangible common equity) is 3% lower than we thought at GBP4.76, vs forecast GBP4.92.
NH: Also, looks like taken advantage of Basle 2 to lower capital ratio targets a little
(doesn’t change the view that if earnings fall FY08F, they will need to raise
new equity or reign in loan growth – RWA up 20% YoY, vs 7% H107). Outlook
statement is rather vague, and less upbeat than normal. “financial markets to be
difficult 2008… HBOS well positioned to deliver good growth in shareholder
value over the next few years”.
NH: Share price will depend on delivery at 930 conf
call. Detail: By division, outliers vs expectations = Corporate & Treasury: c10%
light (lower revenue and higher bad debts); and International Retail: 13% ahead
(stronger loan growth but also GBP42m +ve experience variance). Also, some much
larger than expected treasury exposures: GBP42bn ABS where further mark downs look inevitable. By operating P&L item vs expectations, group revenues slightly
light, offset by slightly lower bad debts.
PM: This the outlook statement was just a tad too honest, in my view
PM: Said things are looking tough — which they are
NH: but it does look as if the market has had a look at the HBOS balance sheet and found a few things it does not like
PM: Any more comment to paste up?
NH: Andy Hornby is arguably the best-looking CEO of any UK bank. He is also
arguably the best at his job. While Barclays and RBS seek to fulfil their
global ambitions by getting out a cheque book and signing off value
destructive acquisitions, we admire Andy for doing International the hard
way – through organic growth. However, despite his many attractions, Andy
does not appear to be very popular – HBOS trades on a miserly 5.5x 2009e
earnings, versus Lloyds TSB on a racy 7.9x. I attach a report on HBOS,
entitled “Hidden beauty”.
NH: Moving to the other Scottish bank, in our recent note “Megalomaniac or
shareholder champion?” (18 February), we urged investors to buy RBS ahead
of its results on 28 February. The response has been great – an 18% rise in
the share price in just over a week – but it is still not too late to join
the party. With 69% upside and 24 hours to go, an incredible opportunity
remains. Fred has a few treats in store for us tomorrow. A 15% increase in
the 2007 dividend would put RBS on a 2007 dividend yield of 8.4%!
PM: The gorgeous Andy Hornby???
PM: that’s from James Eden at Exane
PM: We did a short post earlier with picks of the big five guys
PM: helen said: “Er, slim pickings.”
PM: We were inviting people to vote — but no one has yet 
NH: back on HBOS
NH: Peter Thal Larsen
NH: points out that HBOS corporate
NH: reported a large jump in lending
NH: he thinks not all of this would be have been voluntary
PM: so, clients have been drawing down on credit lines
NH: Looks that way
NH: here are the key lines from the statement
NH: Advances to customers increased by 14% to £430.0bn (2006 £376.8bn),
reflecting the strong growth in Corporate (22%) and International (38%), with
lower growth in Retail (7%).
Growth in Corporate lending originations increased in the second half reflecting
the changing conditions.
NH: Loans and advances to customers increased by 22% to £109.3bn (2006 £89.6bn), largely due to strong
originations and lower levels of refinancing and sell-down activity in the second half of the year.
PM: Thanks for that
PM: 
PM: Qucikly to some comments below
PM: Apols to Monkey who got caught in our spam filter yesterday i believe
PM: Lemmy — fair point on Eden 
PM: Whenwewereyoung — we mised a BIG trick with the earthquake
PM: clearly
PM: Good point by VP are re-setting the housing market
PM: Abolish half
PM: balcrain — thanks for comments on russian series — but the writer was neil Buckley (note Hume – who knows nothing about russia)
PM: And he’s not allowed out of the office
PM:
NH: just going back to HBOS very quickly
NH: Sandy Chen, analyst at Panmure
NH: making some good points about risky assets
NH: Results are a touch ahead of consensus, outlook is cautious and there is a risk
of further ABS charges.
NH: Underlying PBT of £4.7bn and underlying EPS 106.2p were a touch ahead of consensus;
and 4% ahead of our forecasts, final dividend of 32.3p is up 16%. 2007 results at first
glance are largely as expected – there are margin pressures in both Retail and Corporate,
but asset quality has remained good – even actually showing improvement in some key
areas such as overall mortgages, personal loans, and credit cards. This is probably a
reflection of management’s relatively early decision to choose margins and quality over
growth over the course of 2007.
NH: As for structured credits, there appears to be £17.8bn of non-market observable ABS
exposure (£5.4bn in financial assets and £12.4bn in available-for-sale), against which a
£78m fair value adjustment was recognised on the P&L and £158m fair value adjustment
was recognised in the AFS reserves account in shareholders’ equity. We’re expecting
further charges over the course 2008/2009 as the underlying macro deteriorates – wait for
details of these exposures at the analysts’ meeting.
NH:
NH: staying with banks, there have been some very big trades in Lloyds and RBS this morning
NH: 50m RBS traded at 400p
NH: and 30m Lloyds
NH: at 467p
PM: Hmmm
NH: now, some traders reckon the Qatar Investment Authority have been buying stock
PM: what in both Lloyds and RBS???
NH: sorry, just RBS
PM: that would be insane to buy ahead of the RBS numbers
PM: unless of course…..
NH: don’t go there
NH: listen
NH: what I think is happening
NH: is that these trades are dividend related
NH: apparently being done by Lehman Brothers or one of the big US banks
NH: what happens i think happen is
NH: a bank buys stock from an institution before the dividend is declared
NH: it is then parked in France, where there seems to be favourable tax treatment of divis
NH: once the divi is announced the stock is returned to the institution
NH: and the investment bank pockets the money saved on the dividend
PM: so essentially they borrow the stock
NH: yep, the same as you would borrow stock to sell short
NH: except it is never sold
NH: just moved around
NH: hang on minute, here is a better explanation from a corporate broker I know
NH: here it is
NH: All UK divs have 10% withheld by Crest for withholding tax
French institutions are able to offset this 10% against their domestic Corporate Tax liabilities
In order for this to happen, the shares have to be registered on the ex-date in the French brokers nominee account
The trade is structured such that that the “lender” of the shares (i.e. the natural, long term shareholder) receives the dividend as normal together but also receives a fee representing a proportion of the benefit to the “borrower” of the tax recovery
The trade is executed as an OTC swap rather than a stock loan (via an inter-dealer broker) and this is why it is subject to trade reporting alongside other bargains. I understand that for the tax position to be robust it is beneficial if the transaction is a market transaction and not a bilateral agreement between the parties, such as a stock loan.
I further understand that the minimum period for the swap ( for it to be deemed by the tax authorities to be a proper trade) is 31 days but in practice there is no fixed duration.
It is worth noting that these types of transactions have become relatively common across the market and we are seeing the same kind of movements in other client company registers particularly those with heavy dividend yields
PM: Blinking ‘eck
PM: Thanks for that
NH: of course, RBS has yet to declare a dividend – results are tomorrow. but perhaps the block of stock needs to be parked in France ahead of that
PM: seems to be a much better explanation that the QIA buying
PM: Can we have some prices?
NH: of course
HBOS (HBOS:LSE): Last: 643.50, down 61.5 (-8.72%), High: 683.50, Low: 632.00, Volume: 41.09m
Barclays (BARC:LSE): Last: 507.00, down 11 (-2.12%), High: 515.50, Low: 497.25, Volume: 26.96m
Royal Bank of Scotland Group (RBS:LSE): Last: 403.25, down 10.25 (-2.48%), High: 410.50, Low: 398.25, Volume: 88.98m
Lloyds TSB Group (LLOY:LSE): Last: 474.50, down 7.75 (-1.61%), High: 483.50, Low: 466.00, Volume: 46.66m
Standard Chartered (STAN:LSE): Last: 1,696, down 8 (-0.47%), High: 1,701, Low: 1,670, Volume: 2.03m
PM: Alliance & Leics down 18p at 582
PM:
PM: Now before we look at the wider market…
PM: We do now have some earthquake stuff
PM: And i print this as a Northerner!
PM: At 00:54 on Wednesday 27rd February an earthquake measuring 4.8 on the Richter scale
hit Doncaster, South Yorkshire, causing untold disruption and distress.
Many were woken well before their giro arrived. Several priceless collections of
mementoes from the Balearics and Spanish Costas were damaged. Three areas of
historic and scientifically significant litter were disturbed. Thousands are confused and bewildered, trying to come to terms with the fact that something interesting has happened in Doncaster.
PM: hang on — got to censor it a bit
PM:
According to police, however, looting, mugging and joyriding did carry on as
normal.
The British Red Cross have so far managed to ship 4000 crates of Sunny Delight to
the area to help the stricken masses. Rescue workers are still sifting through
the rubble and have found large quantities of personal belongings, including
benefit books, heroin, and jewellery from Elizabeth Duke at Argos.
HOW YOU CAN HELP
£2 buys chips, scraps and blue pop for a family of four.
PM: We can laugh at ourselves
PM: Bron: Oldham, Lancs
PM: born, even
PM:
£10 can take a family to Sprotborough for the day, where children can play on an
unspoilt canal bank among the national collection of stinging nettles.
22p buys a biro for filling out spurious compensation claims.
PLEASE ACT NOW – Collection points are available at your local branches of Netto,
Iceland and Clinton Cards.
PM: Thanks Maximus — didnt know that
PM:
PM: neil! Wider market?
NH: right, banks dragging us down
NH: down 52 at 6,033
PM: Just looking at the major fallers — its just about all banks
PM: But then also LSE
NH: before we have a look at that Blue HorseShoe
NH: the reason you cannot see the print is because of MIFID
PM: stupid mifid, that is
NH: banks can now print LSe trades on a number of platforms
NH: BOAT, PLUS, CHI-X as well I think
NH: now our Reuters system aggregates them
NH: I don’t tink Bloomberg does and certainly the data providers used by retail investors don’t
NH: of course, this is all quite ironic as MIFID was designed to improve market transparency
PM: yes, so in the interests of intra-market competition across Europe, the results is more opacity
PM: Driving us nuts
NH: it is and very soon there is going to be a real issue with this
NH: take this example from earlier this week
NH: On Monday, the counter bidders pull out of the race for Biffa
NH: so, then the exisiting bidders raid the market for stock
NH: buy 10% of the company
NH: but no one sees it print
NH: because it gets printed on BOAT or somewhere else
NH: so we get to Tuesday morning, when the stake is formally announced via RNS
PM: good example
NH: and there have been others
PM:
PM: Greenback — we have not heard that rmr re barlcays — but we think a lot of WILD stuff is giong round this morning
NH: we will need to keep an eye on the Libor fix
NH: that might tell us if there is any real stress out there
PM: Ah — we have rather taken our eye of the libor ball
NH: we have and that’s quite ignorant
NH: as 3month money has risen for 10 session in a row
PM: yesterday’s figs were 5.68 for sterling 3m
PM: Watch out for that a bit later
PM:
PM: In the meantime, back to the LSE….
NH: stock down 46p to £14.64 – a loss of 3%
NH: now, this stock is starting to suffer big time
NH: started the year at almost £20
NH: and just look at it now
PM: Wots going on??
NH: obviously hopes of a bid battle between Borse Dubai and QIA have faded
NH: so that has taken some of the speculative froth out of the share price
NH: and then competition is increasing from the likes of Chi-X
NH: and then we have MIFID – day of the MIFID
NH: now this is all very complicated and quite dull unless trade reporting is your thing
NH: so I will let Norma Cohen explain
PM: mentioined by fttrader below
NH: here’s what she put in the paper on Monday
NH: Share trading and the reporting of trades in the largest European shares show signs of fragmenting since the introduction of new rules last November aimed at promoting competition among exchanges, new data to be released today will show.
However, the figures, collected by Reuters, suggest that far from undermining liquidity in stock markets, trading activity is as robust, if not more so since the new rules became effective.
NH: They also show that the new investment-bank backed initiative for trade reporting, known as Markit Boat, has steadily captured roughly a quarter of the market in the largest UK equities as measured by the value of transactions and its market share in other stocks hovers between 16 per cent and 19 per cent.
“Market data in terms of trading have become pretty fragmented as a result of Mifid (the European Union’s Markets in Financial Instruments Directive),” said Andy Alwright, business manager in charge of exchange data at Reuters.
The fragmenting data market is a boon to companies such as Reuters and its competitors, which see a new business line in reconnecting it via its own data transmission service.
However, it is bad news for those exchanges that make hefty profits from the sale of data.
NH: For the LSE, data is a significant revenue provider and customers are expected to press the exchange to cut the cost of data feeds, arguing that these are no longer as comprehensive as before.
Mr Alwright noted that so far, the data are far from conclusive on the subject of customers’ choice of trading venue; while the LSE shows a slight decline in market share of overall European equities trading over the month, it is not clear that any single exchange is the beneficiary of it.
By the value of shares traded, the LSE’s market share of European stocks dipped from 18.35 per cent to 15.97 per cent in January.
However, because of the growth of the overall market, LSE trading volumes were nearly as high in January as in November, suggesting that losing market share does not necessarily mean lower profits or revenues.
NH: Meanwhile, Markit Boat’s success in capturing trade reporting has bounced around in the first three months of operation.
Mr Alwright also cautioned against reading too much into the data since the exchange reporting the trade may not have been the venue where it was executed.
He noted that some of the trades reported by large exchanges may have been conducted off-market, with participants choosing only to use its services for reporting and not for execution. Thus, the data may actually overstate the activity each exchange is undertaking.
PM: so that’s all quite bearish for the LSE
NH: it is
NH: and how will they respond??
PM: Oh, usual — talk about getting some more listings from china or something
NH: yeah, but that’s all going to Singapore from what I hear
PM:
NH: can we have a look at Rio Tinto quickly
PM: We can
NH: Aluminum Corp. of China and Alcoa Inc.
won’t have their purchase of a stake in Rio Tinto Group blocked by
Australia’s competition regulator.
PM: Chinalco cleared!
PM: I had missed that
NH: that hit the wires earlier this morning
NH: and the view in the market seems to be that the Aussie govt would not be too bothered if the chinese bought more
PM: Hm.. Think there’s a limit to that tho
NH: Rio up 27p at £57.83
PM: Somehow cant see the Aussies agreeing to any sort of Chinese control over Rio
PM: Must be irritating to BHP tho
PM:
NH: yep
PM: To some comments below
PM: Think my views on china are well rehearsed
PM: Shanghai was up 2.5% overnight
PM: That’s seemingly because the government have stopped any disruptive share issues
PM: Everything hold together to the Olympics? Sure — if they’ve got a big enough army
PM: think the best guide to China stress is to look at the price of pork
PM: But look Neil — got anything on Barratt Dev for Maximus below??
NH: shares up 10.2p to 434p
NH: results look ok – everything in line
NH: fundamentally I would avoid it
NH: here’s s snap reaction from Cazenove
NH: At 424p the Group trades on a CY2007E price to book (excluding goodwill) of c.0.6x, which in our view reflects
the risks involved, including relatively high gearing, recently acquired land from Wilson Bowden and high
exposure to the apartment and Buy to Let markets. The outlook comment begins, “the new calendar year has
started well”, this would appear an unlikely starting point with visitor levels down 13% with trading conditions
“more difficult”.
Having acquired Wilson Bowden at twice book asset value in May 2007, the group is carrying a heavy debt and
goodwill burdens. We believe that share price performance since the acquisition reflects this and the poor
market conditions now facing the group. We do not anticipate an improvement in market conditions in the
short term and believe the group’s market comments will become increasingly bearish.
NH:
NH: news flash
NH: *INVESTMENT CORP. OF DUBAI PRESENTS BID FOR COLONIAL
NH: that’s Colonial of Spain
NH: stock was suspended earlier this morning at EUR1.7
NH: Dubai offering 1.85 in cash
PM: That will come as a relief to some people
NH: wants to acquire at least 50.1% of the company
PM: Dubai had asked for more time to do due diligence
PM: And youve had Goldman Sachs circling as a creditor
PM: Colonial is Spain’s second largest property firm
PM: Got into a serious mess
NH: and what’s interesting is that another property company has been bid for
NH: yesterday we had Mapeley
NH: no Colonial
PM: Hmmm — that was a nice hit on Mapeley
NH: and rumours swirl around Minerva
PM: Minerva still v much at the rumour stage??
NH: one broker reckon a US company has amassed a 7% stake
NH: i asked the company this morning if it was LeFrak
NH: and they do not know
NH: LeFrak is rumoured to be working on a bid and we know it already has a 2% holding in Minerva
Minerva (MNR:LSE): Last: 137.50, down 3.5 (-2.48%), High: 142.00, Low: 136.00, Volume: 495.27k
PM: Hm — thanks for that
Mapeley (MAY:LSE): Last: 1,828, up 78 (+4.46%), High: 1,850, Low: 1,750, Volume: 84.72k
NH: and as our property correspodent Dan Thomas said in today’s paper, the bidder is fortress and they are going to offer around £19 a share
PM: Nice two day gain for those brave enough to back it
PM:
PM: V quickly
PM: Libor up a tad — from 5.68 to 5.7 3m sterling
PM: And we should also mention that story by Rob and yourselves on a certain prime residence
NH: yep £16m pad in Holland Park
PM: An exclusive £16m ($32m) residency on one of London’s most sought-after streets is set to come under the control of administrators to Global Trader Europe.
The seven-bedroom terrace house on Ilchester Place, Holland Park, is owned by a subsidiary of an investment vehicle linked to the collapse of the spread trading firm, which went into administration this month after a default on a client account led to a £10m deficit in GTE’s regulatory capital.
PM: Smith & Williamson, administrator to GTE, is understood to be in the process of taking control of the subsidiary that owns the property. Smith & Williamson declined to comment.
The property, for sale via Powis Properties, an estate agent in Notting Hill, is vacant and in need of renovation
However, it does boast 5 bathrooms, 4 reception areas, a library, wine cellar and cinema, as well as a gym, swimming pool and jacuzzi. The added attraction is the recently gained planning permission that could increase capacity of the property to more than 10,000 square feet.
According to Powis, the residency is a “fantastic opportunity to purchase a freehold property in Holland Park’s premier street”.
Holland Park, in the Royal Borough of Kensington and Chelsea, is home to a host of celebrities and leading business people including Sir Richard Branson and X Factor judge Simon Cowell.
A 7,000 sq ft property was recently sold in Ilchester Place for £12m.
Smith & Williamson has received about 20 enquiries after offering GTE for sale.
PM: Wonder who was living there??
NH: dunno
PM: 
NH: i wonder if the readers do??
PM: Know some of the neighbours — cos you can get that info thru the electoral register
PM: Stephen Hestor of British Land lives in the street
PM: As does Alain Levy — ex-EMI
PM: And there’s a Chippendale Keswick
PM: Anyway — tehre is also a dedicated Global Trader victim website now
NH: what is it??
PM: er
PM: www.globaltraderclients.com
NH: interesting site. thanks
PM: Right — we are done.
PM: Thanks for joining and thanks for all the comments
PM: We will be back at 11am tomorrow
PM: 
NH: bye
PM: Majormajor — thanks for that forthright analysis!
PM: seeya