HBOS’ pre close trading update marks a broadening of investor concerns, from a focus on financial market issues (e.g. treasury write-downs) to consideration of the consequences for the real economy, which will inevitably lead to higher loan impairment

According to SPIEGEL sources, Allianz has been in negotiations with the British financial instititution Lloyds TSB for several weeks concerning a sale of Dresdner Bank. The British are even said to have offereda purchase offer, although a non-binding one.. With Lloyds TSB, there are now three serious interested parties with Commerzbank and the Spanish bank Santander.

Allianz is ready to take billions in writedowns on its investment in its banking subsidiary should it be able to complete a sale. On its balance sheet, Dresdner Bank is valued at twelve billion euro. However, the likely sale price lies closer to eight billion euros.

Die Allianz verhandelt nach SPIEGEL-Informationen seit mehreren Wochen mit dem britischen Finanzkonzern Lloyds TSB wegen eines Verkaufs der Dresdner Bank. Die Briten sollen sogar schon ein allerdings unverbindliches Kaufangebot abgegeben haben. Damit gibt es nun neben der Commerzbank und der spanischen Großbank Santander drei ernsthafte Interessenten.

Die Allianz ist bei einem Verkauf bereit, auf ihre Banktochter Abschreibungen in Milliardenhöhe vorzunehmen. In ihrer Bilanz steht die Dresdner Bank noch mit etwa zwölf Milliarden Euro, der tatsächlich erzielbare Verkaufswert liegt eher bei acht Milliarden Euro.

We have revised our forecasts and price targets on LLOY to reflect the rapidly
deteriorating UK macro outlook.

We also expect impairments will rise on the £103bn mortgage book.
None of the above is specific to LLOY; it is simply a reflection of the deteriorating UK macro trends. The last time that LLOY went through something like this, provisioning charges per RWA were 159bp in 1990, 252bp in 1991, 195bp in 1992 and 133bp in 1993; this time, we expect impairment charges per RWA will rise from 111bp in 2007 to 135bp in 2008 and 185bp in 2009.

We now expect that ROIC will fall from 13.2% in 2007 to 10.2% in 2008 and 8.5% in 2009.

I think that this would be a terrible deal for LTSB. CEO Eric Daniels has made the point on numerous occasions that a cheap valuation is not a good reason to buy an asset and I agree. In any case, at approximately 12x earnings and >1x book for an ROE of <10%, this does not appear outstandingly cheap in comparison with today's peer group valuations.

The Wall Street bank is now expected to cut up to 10 per cent of staff in the division that handles mergers and acquisition advice and corporate fundraisings over the course of 2008, with a fresh round of trimming starting last week.
EDITOR’S CHOICE
Goldman earns $2.1bn in second quarter – Jun-17
Goldman’s SIV deal welcomed – Jun-17
Video: Ben White on Goldman Sachs – Jun-17
Lex: Wall Street risk – Jun-17
Editorial comment: SIV civilisation – Jun-17
New hope for restructuring SIVs – Jun-17

The latest cutbacks, which come in spite of impressive second-quarter results, are separate from Goldman’s annual performance review, which typically sees the worst-performing 5 per cent of staff leave the bank.

Wall Street rival Citigroup is already in the midst of a 10 per cent reduction to its 65,000 strong investment banking staff. People at the bank say half of the layoffs have been made with further cuts likely in the coming weeks.

Goldman has so far suffered the least damage in the global credit crunch and remains the leading M&A adviser. But in an environment where mega buy-outs have disappeared and M&A activity has fallen sharply, even Goldman has felt the squeeze.

Goldman, in common with the rest of the industry, has been gradually shedding staff this year, or sending bankers previously based in the US and Europe to the Middle East and Asia, where business remains buoyant. Group headcount fell by about 400 between the first and second quarter.

However, job losses across the industry have been less severe than many expected this year, and Goldman’s heightened pessimism about its need to retain its more experienced staff during the rest of 2008 could prove a pretext for other banks to wield the axe with greater force.

Job losses are now gathering pace in Europe, which bankers say is lagging behind the US in adapting to slower conditions. Credit Suisse last week confirmed a fresh round of 75 job cuts in investment banking and support services in the UK, a move which it said reflected market conditions.

The Centre for Economics and Business Research anticipates 11,000 job losses in London this year, and a further 8,200 in 2009.

Bankers said business lines that had proved resilient so far – such as equities, rates and currencies – looked particularly vulnerable given mounting pressures on banks to reduce risk as well as the investment community’s continued attempts to reduce leverage.

The fixed-income business has suffered the brunt of the assault so far, but was in some firms now approaching a level where further cuts risked creating a competitive disadvantage.

One senior banker said back-office functions were likely to attract the attention of senior managers. “It is always the front office that gets hit first, because no one is quite sure what back office does and they are less visible. Back office is also helped because that is where human resources is based,” he said.

Goldman is still expected to increase its overall headcount this year, although its staffing mix will change as it recruits aggressively from universities.

“Any bank that says it’s not cutting is lying,” said one industry insider on Sunday. “It’s getting to halfway through the year and everyone can see that business hasn’t picked up.”

Following Shire’s formal launch of Vyvanse in the adult setting, US scrip data over the next 6-8 weeks will be a major focus. A visible up-tick in market share is likely to prompt a share price re-rating. 2Q results (July 31) will provide management with another opportunity to confirm its 2008 sales outlook for Vyvanse.

Valuation
Shire trades on a 2009E P/E of 14.5x – in-line with mid-cap peers despite a superior 2007-12E EPS CAGR of 16% (versus 12% for peers). Given the uncertainty surrounding Vyvanse this is perhaps unsurprising, however even on our worst-case scenario Shire trades at a 15% discount to peers on 2012E P/E. Moreover,
on an ex-HGT basis Shire’s remaining business trades at a 18%-22% discount to peers on 2009E EV/EBITDA and EV/Sales. Our unchanged 12-month target price of 1015p (27% potential upside) is calculated using DCF and returns-based methodologies (2:1 weighted).

The Company announced on 15 June 2008 that it was in discussions with a number
of external parties to address the working capital requirements of its
suppliers, and therefore its own working capital position.
During these discussions, the directors have received an approach from one of
the parties to acquire the entire share capital of its sole trading subsidiary.
This approach would see the trading subsidiary being provided with substantial
working capital facilities that would fully resolve the working capital issues
and ensure all suppliers have a strong and ongoing relationship with the
business.
To enable discussions to be progressed to a speedy conclusion the Company has
entered into exclusive discussions with the external party, and due diligence is
underway.
However, as these discussions have developed, it has become clear to the
Directors of ScS that the extent of the additional working capital funding
required may result in only negligible value being attributed to the shares in
ScS Upholstery PLC.
As a result, the Directors of ScS have requested a suspension in the trading of
the Company’s shares with immediate effect.

John Lewis’s total sales were down 3% in May and Next has reiterated that H1 LFL sales expectations are at the bottom end of their range at -7% and pointed to a weaker 2009 sales outlook, which doesn’t bode well for Debenhams.

Coinciding with this is a move by Debs to extend its payment terms with suppliers to 96 days, according to press articles. Debenhams will issue an IMS on 3rd July which, has not been brought forward to this point. In contrast to these events, market share data has continued to show Debs is advancing compared to its peers, and various of their initiatives continue to provide considerable self-help on both margins and debt.

To maximise shareholder return, investors should use bid spec premium as a
selling opportunity as fundamentals deteriorate and forecasts are downgraded.
On fundamentals, we briefly outline our Sell case:

2. A 50% premium to the sector is not deserved
There are no significant revenue catalysts for 25 months until the football
World Cup in July 2010. Given the downside earnings risk from a consumer
downturn, it is too early to put a recovery premium on either business.
On fundamentals, we believe JJB should trade in line with the UK general retail
sector and the current 50% premium is unjustified.

3. The recovery plan is not enough to prevent earnings attrition
We have backed Chris Ronnie to deliver strong gross margin growth this year
(+175bp). But given the very geared nature of the JJB P&L, any gross margin
upside must to accompanied by a return to positive LFL to offset cost growth.
Given the –6.5% retail LFL during the first quarter of the financial year, we fear
for 2Q gross margin softening as Spring/Summer stock is cleared through June
and July.

4. We expect the UK consumer environment to weaken further through
calendar 2008 with no recovery in 2009
Macro indicators suggest consumers’ available cash is going to reduce
throughout 2008, with no recovery in 2009. JJB operate in the middle of the
market selling to the lower/middle demographic most impacted in a consumer
slowdown. We fear trading conditions will deteriorate throughout calendar 2008
and 2009.