Markets live chat transcript for the chat ending at 11:54 on 18 Aug 2008. Participants in this chat were: Paul Murphy (PM) Sam Jones (SJ) Bryce Elder (BE)
PM:
Hi there
PM:
Welcome to Markets Live.
PM:
We’re busking this morning.
PM:
Myself and Sam.
SJ:
Hi there
PM:
Basically that useless Hume is STILL on holiday.
PM:
And now Bryce has gone off to Scotland or something.
PM:
So I’ve had to rope Sam in.
PM:
Which is something I’d usually try and avoid, since it risks a stream of smart-ass remarks,
SJ:
PM:
And then some discussion of some programme on Freeview that ive never watched.
PM:
And if I pull him up on that he’ll suddenly start talking about the credit markets, which generally leaves me bewildered.
SJ:
I promise to behave.
PM:
You’d better.
PM:
SJ:
I no longer have the face of princess beatrice
PM:
You can start off by telling me what the index is doing.
SJ:
The iTraxx? I’ll get have to get onto Markit.
PM:
NO. THE FOOTSIE
PM:
Tell us what the Top 100 is doing – you know, that barometer of corporate Britain.
SJ:
Er, I think you’ll find the Footsie has a rather more international flavour these days Murph.
PM:
Yes, yes
PM:
Just tell us what the FTSE 100 is doing.
SJ:
Down 16.5 currently at 5437.3 has been as low as 5425. And as high as 5437.
PM:
Driven by?
SJ:
Myriad factors
SJ:
There is no particular trend to befriend this morning
SJ:
Bit of a bounce amongst some of the miners and the oils – but its nothing to write home about.
SJ:
Against that we’ve got some renewed weakness amongst some of the retailers.
SJ:
Sainsbury off.
SJ:
And Debenhams
Sainsbury (J) (SBRY:LSE): Last: 333.50, down 11.25 (-3.26%), High: 344.50, Low: 332.25, Volume: 1.91m
Debenhams (DEB:LSE): Last: 51.50, down 2.5 (-4.63%), High: 54.50, Low: 49.75, Volume: 4.15m
PM:
Debs is a Mid-250 stock.
SJ:
So it is. Do you want that index?
PM:
Er, yeah, why not
SJ:
The FTSE Mid 250 index – that barometer of middle corporate England – is off 72.9 at 9122.
PM:
Okay – so the Footsie is down about 0.3% and the 250 is off 0.8%
PM:
Second line sell off.
SJ:
I should mention Rightmove – taken a dreadful hit this morning.
PM:
Go on
SJ:
Price down 23p at 296p – fall of more than 7 per cent.
PM:
I guess that is on the back of its own house price survey this morning.
SJ:
Certainly is
SJ:
LONDON (Dow Jones)–Asking prices for homes put on sale in the U.K. posted
their biggest annual drop for at least six years in August, as sellers adapted
to the credit crunch and weaker demand, data from online estate agent Rightmove
showed Monday.
The average asking price for a residential property plunged 4.8% on the year to mid-August, the biggest annual drop since Rightmove launched its survey in August 2002. It fell 2.0% on the year in July.
On the month, prices slumped 2.3%, the biggest drop recorded for the month of August and the largest month-on-month decline since December last year. Prices fell 1.8% on the month in July.
“National asking prices reached a peak for the year at GBP242,500 in May and have now fallen by GBP12,684 to GBP229,816,” Rightmove Commercial Director Miles Shipside said in a statement.
“This rapid readjustment during the last three months comes as some
discretionary sellers choose not to enter the market, leaving a higherproportion of forced sellers who price more aggressively,” he said.
Rightmove’s survey, which measures prices when homes are put on the marketrather than the price at the point of sale, also showed the average unsold stock of property per estate agency branch rose to a record high of 78 from 77 in July.
U.K. residential property sales have slumped and prices have fallen this year as demand was hit by the tight mortgage market and concerns about the economic outlook. Higher food and fuel prices have also squeezed people’s finances.
“Despite some deals being done at prices that begin to address affordability concerns, the number of transactions this year is in danger of being the lowest since 1959,” Shipside said.
The Rightmove data suggest sellers are increasingly adjusting to the reality of the market. Rightmove’s index had lagged other house price indicators even though the market is facing its most severe downturn since the early 1990s when the country was in recession.
In London, asking prices plunged 5.3% on the month in August after rising 0.3% in July, leaving them 3.8% lower on the year.
Rightmove, which measured 106,885 asking prices for properties put on sale between July 13 and Aug. 9, said new listings during the period were 25% lower than it would expect for the time of year.
It also added its voice to those calling for clarity on whether the
government would introduce a suspension in stamp duty, a tax levied on house purchases. The uncertainty was causing hard won house sales to fall through, it said.
Last week, U.K. Chancellor of the Exchequer Alistair Darling fueled
speculation of a reduction in stamp duty when he said the government was considering a number of measures to breathe life into the moribund residential property market.
Rightmove warned that a stamp duty holiday would fail to tackle the shortage of mortgage funding and said any short-term transaction spike caused by the tax break would lead to a trough when it ended.
“We appear to have very few sound remedies, and all have some undesirable consequences,” Shipside said. “The lack of mortgage finance is central to the problem, and perhaps that is where policymakers’ attention should be focused, as the banks can’t or won’t sort out the mess they were instrumental in creating.”
their biggest annual drop for at least six years in August, as sellers adapted
to the credit crunch and weaker demand, data from online estate agent Rightmove
showed Monday.
The average asking price for a residential property plunged 4.8% on the year to mid-August, the biggest annual drop since Rightmove launched its survey in August 2002. It fell 2.0% on the year in July.
On the month, prices slumped 2.3%, the biggest drop recorded for the month of August and the largest month-on-month decline since December last year. Prices fell 1.8% on the month in July.
“National asking prices reached a peak for the year at GBP242,500 in May and have now fallen by GBP12,684 to GBP229,816,” Rightmove Commercial Director Miles Shipside said in a statement.
“This rapid readjustment during the last three months comes as some
discretionary sellers choose not to enter the market, leaving a higherproportion of forced sellers who price more aggressively,” he said.
Rightmove’s survey, which measures prices when homes are put on the marketrather than the price at the point of sale, also showed the average unsold stock of property per estate agency branch rose to a record high of 78 from 77 in July.
U.K. residential property sales have slumped and prices have fallen this year as demand was hit by the tight mortgage market and concerns about the economic outlook. Higher food and fuel prices have also squeezed people’s finances.
“Despite some deals being done at prices that begin to address affordability concerns, the number of transactions this year is in danger of being the lowest since 1959,” Shipside said.
The Rightmove data suggest sellers are increasingly adjusting to the reality of the market. Rightmove’s index had lagged other house price indicators even though the market is facing its most severe downturn since the early 1990s when the country was in recession.
In London, asking prices plunged 5.3% on the month in August after rising 0.3% in July, leaving them 3.8% lower on the year.
Rightmove, which measured 106,885 asking prices for properties put on sale between July 13 and Aug. 9, said new listings during the period were 25% lower than it would expect for the time of year.
It also added its voice to those calling for clarity on whether the
government would introduce a suspension in stamp duty, a tax levied on house purchases. The uncertainty was causing hard won house sales to fall through, it said.
Last week, U.K. Chancellor of the Exchequer Alistair Darling fueled
speculation of a reduction in stamp duty when he said the government was considering a number of measures to breathe life into the moribund residential property market.
Rightmove warned that a stamp duty holiday would fail to tackle the shortage of mortgage funding and said any short-term transaction spike caused by the tax break would lead to a trough when it ended.
“We appear to have very few sound remedies, and all have some undesirable consequences,” Shipside said. “The lack of mortgage finance is central to the problem, and perhaps that is where policymakers’ attention should be focused, as the banks can’t or won’t sort out the mess they were instrumental in creating.”
PM:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
PM:
PM:
I’m surprised some of these names haven’t fallen out of the index.
SJ:
Well you have to fall a long way to fall out of the FTSE Mid 250 these days.
PM:
Hmm.
PM:
When’s the next constituent review?
SJ:
September 10 I think
SJ:
Actually, ive got a little table of possible risers and fallers – from a v helpful broker.
SJ:
Here’s the Top 100 list
SJ:
Relegation Cap £m Rank
ALLIANCE TRUST 2,075 98
ICTL.HTLS.GP. 2,072 99
FRIENDS PROVIDENT 2,063 100
WHITBREAD 2,061 101
NEXT 2,044 102
PETROFAC 1,860 108
CARPHONE WHSE.GP. 1,842 112
ENTERPRISE INNS 1,771 116
ITV 1,766 117
FERREXPO 1,504 127
Market
Promotion Cap £m Rank
FRESNILLO 2,582 82
AUTONOMY CORP. 2,457 86
HOME RETAIL GROUP 2,244 88
PENNON GROUP 2,222 89
INMARSAT 2,219 90
SERCO GROUP 2,099 95
STAGECOACH GROUP 2,076 97
TATE & LYLE 2,043 103
BURBERRY GROUP 2,025 104
BALFOUR BEATTY 1,999 105
ALLIANCE TRUST 2,075 98
ICTL.HTLS.GP. 2,072 99
FRIENDS PROVIDENT 2,063 100
WHITBREAD 2,061 101
NEXT 2,044 102
PETROFAC 1,860 108
CARPHONE WHSE.GP. 1,842 112
ENTERPRISE INNS 1,771 116
ITV 1,766 117
FERREXPO 1,504 127
Market
Promotion Cap £m Rank
FRESNILLO 2,582 82
AUTONOMY CORP. 2,457 86
HOME RETAIL GROUP 2,244 88
PENNON GROUP 2,222 89
INMARSAT 2,219 90
SERCO GROUP 2,099 95
STAGECOACH GROUP 2,076 97
TATE & LYLE 2,043 103
BURBERRY GROUP 2,025 104
BALFOUR BEATTY 1,999 105
PM:
Those numbers of market cap followed by its ranking — so Ferrexpo def for relegation at 127
SJ:
Indeed – sorry formatting has gone a bit awry
SJ:
Anyway – here’s the list for the Mid 250
SJ:
Relegation Cap £m Rank
HARDY OIL & GAS 273 367
HEADLAM GROUP 265 379
TRINITY MIRROR 263 381
NORTHGATE 253 390
MORGAN SINDALL 251 392
SPEEDY HIRE 249 393
SOUTHERN CROSS HLTHCR. GP. 241 400
QUINTAIN ESTATES & DEV. 234 403
WORKSPACE GROUP 225 414
GALIFORM 211 426
Market
Promotion Cap £m Rank
SYNERGY HEALTH 459 286
GOLDMAN SACHS DYM.OPPS. 413 298
HSBC INFRASTRUCTURE CO. 410 300
BABCOCK & BROWN PBPART. 404 302
THAMES RVR.MLT.HEDGE PTG 387 310
ELEMENTIS 383 313
PARAGON GP.OF COS. 348 327
SPICE 336 333
FIDESSA GROUP 335 334
BTG 333 337
HARDY OIL & GAS 273 367
HEADLAM GROUP 265 379
TRINITY MIRROR 263 381
NORTHGATE 253 390
MORGAN SINDALL 251 392
SPEEDY HIRE 249 393
SOUTHERN CROSS HLTHCR. GP. 241 400
QUINTAIN ESTATES & DEV. 234 403
WORKSPACE GROUP 225 414
GALIFORM 211 426
Market
Promotion Cap £m Rank
SYNERGY HEALTH 459 286
GOLDMAN SACHS DYM.OPPS. 413 298
HSBC INFRASTRUCTURE CO. 410 300
BABCOCK & BROWN PBPART. 404 302
THAMES RVR.MLT.HEDGE PTG 387 310
ELEMENTIS 383 313
PARAGON GP.OF COS. 348 327
SPICE 336 333
FIDESSA GROUP 335 334
BTG 333 337
SJ:
And here’s the rules for automatic promotion/relegation:
SJ:
FTSE 100 FTSE 250
IN 90 or above 325 or above
OUT 111 or below 376 or below
IN 90 or above 325 or above
OUT 111 or below 376 or below
PM:
Thanks for that random BUY emoticon Sam
SJ:
…again, crummy formatting
PM:
Thanks anyway
PM:
PM:
V good point below from Montesquieu on Rightmove
PM:
On this subject of the FTSE Mid 250 future
PM:
I can remember that launching — was at least 15 years ago
PM:
Goodness knows why it still lacks liquidity
PM:
And given that it still does, why do people still bother running it?
PM:
PM:
What’s the Bradford and Bungle situ?
SJ:
Well, underwriters left with 72% — stuck is trading just a fraction below the rights price.
PM:
55p – so it’s a stick not a rump.
SJ:
Well, yes – unless there is a sudden rally.
SJ:
Speculation now on what the new ceo, Richard Pym, might do with it.
PM:
He’s the old Alliance & Leicester boss.
SJ:
He is – and people now are wondering whether he might want to sell the bank.
PM:
Really?
SJ:
Well, Pym was recruited by JC Flowers for their putative bid for the Crock, so some people are saying private equity might get involved with B&B
Readers may also know this former bank as Northern Rock.
PM:
Hmm – if that was going to happen think we would have seen it by now.
PM:
TPG ran a mile, remember.
SJ:
sure
SJ:
Also worth noting that Pym is very much on the record warning about the mess that Bradford & Bingley subsequently became
PM:
How so?
SJ:
Well at A&L he warned aggressively against too much buy to let business
SJ:
And he was also very much against self-cert mortgages
SJ:
Warned repeatedly that it would end in tears
PM:
Which it has for Bungle Bank.
PM:
Hang on – isn’t A&L also up to its ears in liar loans and buy-to-flip???
SJ:
Well, I don’t think it went into those areas until Pym had left – which was about 15 months go
PM:
So this Pym guy has a reason or two to feel smug?
SJ:
Guess so
PM:
Not much broker research on B&B
PM:
Tho i do have a note from Collins Stewart
PM:
Guess what it says
SJ:
?
?PM:
PM:
SELL | Target: 50p | Price: 55p | UK | Banks | 18 August 2008
Another rights failure. Stock remains unappealing
■ Rights acceptances better than HBoS but still weak
B&B announced 27.84% take-up in its recent £400m offering. This is better than the 8.29% achieved by HBoS (on £4bn) though still a relatively weak figure. Underwriters (UBS and Citigroup) now have four days to find further subscribers at >55p before they (and the sub-underwriters) become owners.
■ Press reporting Richard Pym (ex-A&L) to be new CEO
At A&L, Richard Pym did a competent job and continued to build of one of the UK’s higher-quality mortgage books. Pym is a “safe pair of hands” in our view to try to shepherd B&B through the coming asset quality problems we feel it will suffer however we also feel he can do little to avert said problems.
Another rights failure. Stock remains unappealing
■ Rights acceptances better than HBoS but still weak
B&B announced 27.84% take-up in its recent £400m offering. This is better than the 8.29% achieved by HBoS (on £4bn) though still a relatively weak figure. Underwriters (UBS and Citigroup) now have four days to find further subscribers at >55p before they (and the sub-underwriters) become owners.
■ Press reporting Richard Pym (ex-A&L) to be new CEO
At A&L, Richard Pym did a competent job and continued to build of one of the UK’s higher-quality mortgage books. Pym is a “safe pair of hands” in our view to try to shepherd B&B through the coming asset quality problems we feel it will suffer however we also feel he can do little to avert said problems.
PM:
B&B’s mortgage book remains relatively high-risk
Buy-to-let and self-cert lending comprise around three-quarters of B&B’s loan book and these remain unproven in a downturn. We believe that landlord stress from unpleasant refinancing events will drive the probability-of-default higher and that concentration risk will likely drive loss-given-default higher too. Our belief is that such specialised mortgage books are super-cyclical – growth has been higher than the wider mortgage market in good times and will likely underperform in the coming 12-24 months.
■ Takeout seems unlikely
SAN bought A&L largely to add to its existing Abbey network in the UK – from this perspective it was actually an in-market deal. B&B has only a limited branch network (under 200), a relatively weak brand, is positioned in a very difficult market segment and has little earnings diversity. We feel it does not make a sensible beach-head for a foreign acquiror nor offers much interest to the few UK names that could consider a deal (HSBA or LLOY).
■ Cheap but remains unappealing
B&B trades at 0.5x tangible book value though still a high-single digit PE with the earnings risk materially geared to the downside, in our view. Whilst discounts to book have been good places to buy UK banks in downturns, B&B’s business model has not existed in a previous downturn. We would continue to avoid the stock. 1H08 results are due on 29 August 2008.
Buy-to-let and self-cert lending comprise around three-quarters of B&B’s loan book and these remain unproven in a downturn. We believe that landlord stress from unpleasant refinancing events will drive the probability-of-default higher and that concentration risk will likely drive loss-given-default higher too. Our belief is that such specialised mortgage books are super-cyclical – growth has been higher than the wider mortgage market in good times and will likely underperform in the coming 12-24 months.
■ Takeout seems unlikely
SAN bought A&L largely to add to its existing Abbey network in the UK – from this perspective it was actually an in-market deal. B&B has only a limited branch network (under 200), a relatively weak brand, is positioned in a very difficult market segment and has little earnings diversity. We feel it does not make a sensible beach-head for a foreign acquiror nor offers much interest to the few UK names that could consider a deal (HSBA or LLOY).
■ Cheap but remains unappealing
B&B trades at 0.5x tangible book value though still a high-single digit PE with the earnings risk materially geared to the downside, in our view. Whilst discounts to book have been good places to buy UK banks in downturns, B&B’s business model has not existed in a previous downturn. We would continue to avoid the stock. 1H08 results are due on 29 August 2008.
PM:
SJ:
Interesting point from fxtrader below
PM:
Very interesting. No idea if tis feasible
PM:
Although seen it in the past — companies getting taken over for their tax losses
PM:
What else on the banks?
SJ:
Well there’s some lively discussion about RBS this morning – although the price is pretty much unaffected.
SJ:
Currently down 3p at 230p
PM:
So what people saying?
SJ:
Well, let’s start with Goldman Sachs on RBS
SJ:
Changes and Implications
We have updated our estimates. We do not view these changes as
material, and there is no change to our investment thesis, rating or price
target.
For methodology and risks associated with our price target, please see our
previously published research.
We have updated our estimates. We do not view these changes as
material, and there is no change to our investment thesis, rating or price
target.
For methodology and risks associated with our price target, please see our
previously published research.
PM:
Is that it?
SJ:
Yup – racy stuff, huh
PM:
A forty word broker note?
SJ:
More or less
SJ:
Forty words of investment recommendation – followed 40,000 words of disclosures etc.
PM:
How we going to fill Markets Live every morning if analysts start restricting their notes to 40 words.????
PM:
This could be a disaster.
PM:
SJ:
Luckily we’ve still got banks like Citigroup
PM:
What are then saying?
SJ:
Here u go
SJ:
Steadying the Ship
Steady progress — RBS is making steady progress towards its goal of reducing
leverage, boosting capital ratios, and integrating the new businesses. Although
our estimates now reflect an outcome where RBS Insurance is retained rather
than sold, we show the Equity Tier 1 ratio still reaching 6.2% by 2009E. Capital
strength in the face of weaker economic growth arguably remains the key risk
for the group to manage over the next 12 months.
Non-performing loan trends a positive feature — Given the economic downturn
and RBS’ exposure to commercial real estate and US mortgages, we believe the
15% annualised rise in non-performing loans in 1H08 was encouraging. We
still expect this to deteriorate over the next couple of years but already reflect
this in our loan impairment estimates which we forecast to rise from £2bn in
2007 to £5bn in 2009E.
Steady progress — RBS is making steady progress towards its goal of reducing
leverage, boosting capital ratios, and integrating the new businesses. Although
our estimates now reflect an outcome where RBS Insurance is retained rather
than sold, we show the Equity Tier 1 ratio still reaching 6.2% by 2009E. Capital
strength in the face of weaker economic growth arguably remains the key risk
for the group to manage over the next 12 months.
Non-performing loan trends a positive feature — Given the economic downturn
and RBS’ exposure to commercial real estate and US mortgages, we believe the
15% annualised rise in non-performing loans in 1H08 was encouraging. We
still expect this to deteriorate over the next couple of years but already reflect
this in our loan impairment estimates which we forecast to rise from £2bn in
2007 to £5bn in 2009E.
SJ:
Global Banking & Markets the main opportunity — Although market conditions
argue against making significant investment into GBM, we believe RBS has the
opportunity to extract synergies from the integration of ABN. This is likely to be
focused on increasing cost efficiency with our expectation for the cost: income
ratio in GBM falling from 54% to 45% by 2009E.
Retain Buy recommendation, Price Target 270p — We expect a recovery in
earnings in 2010E to push the RoE back c19%-20% with better disclosure
increasing earnings visibility. We increase our target price from 250p to 270p,
equivalent to 1.5x 2009E tangible book value per share of 175p. Progress on
the group’s disposal programme could act as a positive catalyst at some stage.
argue against making significant investment into GBM, we believe RBS has the
opportunity to extract synergies from the integration of ABN. This is likely to be
focused on increasing cost efficiency with our expectation for the cost: income
ratio in GBM falling from 54% to 45% by 2009E.
Retain Buy recommendation, Price Target 270p — We expect a recovery in
earnings in 2010E to push the RoE back c19%-20% with better disclosure
increasing earnings visibility. We increase our target price from 250p to 270p,
equivalent to 1.5x 2009E tangible book value per share of 175p. Progress on
the group’s disposal programme could act as a positive catalyst at some stage.
PM:
Okay, thanks for that.
SJ:
RBS is making steady progress towards its goal of de-leveraging its balance
sheet and integrating the ABN businesses. Although the Equity Tier 1 ratio of
5.7% at 1H08 looks a little weak and the disposal of the insurance business far
from certain, efforts to reduce RWAs across the group, most notably in GBM,
should support the capital position. We expect loan impairments to rise as
economic growth slows but believe RBS to be less vulnerable to negative
surprises on its structured credit portfolio. Improving earnings visibility should
start to build investor confidence and help the rating. Positive news on the sale
of RBS Insurance would be a useful catalyst but perhaps one that cannot be
relied upon in the current environment. We are increasing our target price from
250p to 270p and retain a Buy (1M) recommendation.
sheet and integrating the ABN businesses. Although the Equity Tier 1 ratio of
5.7% at 1H08 looks a little weak and the disposal of the insurance business far
from certain, efforts to reduce RWAs across the group, most notably in GBM,
should support the capital position. We expect loan impairments to rise as
economic growth slows but believe RBS to be less vulnerable to negative
surprises on its structured credit portfolio. Improving earnings visibility should
start to build investor confidence and help the rating. Positive news on the sale
of RBS Insurance would be a useful catalyst but perhaps one that cannot be
relied upon in the current environment. We are increasing our target price from
250p to 270p and retain a Buy (1M) recommendation.
PM:
Great cheers.
SJ:
Non-performing loans show modest increase in 1H08
Figure 1 shows that total potential credit risk loans grew by 15% annualised in
1H08. We show that the coverage ratio fell from 59% to 56% in 1H08, but the
‘uncovered’ portion fell from 19% to 15% of tangible equity. This compares
favourably to Barclays where the percentage of ‘uncovered’ NPLs has risen to
36% of tangible equity.
Figure 1 shows that total potential credit risk loans grew by 15% annualised in
1H08. We show that the coverage ratio fell from 59% to 56% in 1H08, but the
‘uncovered’ portion fell from 19% to 15% of tangible equity. This compares
favourably to Barclays where the percentage of ‘uncovered’ NPLs has risen to
36% of tangible equity.
Figure 2 shows that non-performing loans (including potential problem loans)
rose sharply as a percentage of the Royal Bank of Scotland loan book as the
UK economy went into recession in the early 1990s.
PM:
Okay – fine – that’s enough
SJ:
Coverage ratio has fallen to 56%
Figure 3 shows that since 2005 the coverage ratio has been on a gradual
downward trend. We expect a pick up in non-performing loans and a
stabilisation in the coverage ratio to lead to a significant increase in loan
impairment charges. This is already factored into our earnings estimates.
Figure 3 shows that since 2005 the coverage ratio has been on a gradual
downward trend. We expect a pick up in non-performing loans and a
stabilisation in the coverage ratio to lead to a significant increase in loan
impairment charges. This is already factored into our earnings estimates.
SJ:
Deleveraging Supports Capital Position
Following its £12bn rights issue the company reported a ‘Core Tier 1’ ratio of
5.7% at the half year and reiterated its expectation that this would be within
the 6%-7% target range by the end of 2008. However, we show in Figure 4 that
RBS does not allocate the £1.6bn of Tier 1 deductions to its core capital and
that doing so would reduce the Equity Tier 1 ratio by 30bp to 5.4%.
Following its £12bn rights issue the company reported a ‘Core Tier 1’ ratio of
5.7% at the half year and reiterated its expectation that this would be within
the 6%-7% target range by the end of 2008. However, we show in Figure 4 that
RBS does not allocate the £1.6bn of Tier 1 deductions to its core capital and
that doing so would reduce the Equity Tier 1 ratio by 30bp to 5.4%.
PM:
YES – that’s enough. Got the picture.
SJ:
Under Basel II a deduction is made against regulatory capital to reflect the
difference between the expected loss that banks model on their loan books and
the impairment provision that can be made under IFRS accounting rules. This
difference arises as IFRS significantly limits the extent to which impairments
can be forward looking, with the deduction applied equally to Tier 1 and Tier 2
capital. As the difference reflects an expected hit to equity we believe that it is
prudent to apply it to Equity Tier 1 capital.
difference between the expected loss that banks model on their loan books and
the impairment provision that can be made under IFRS accounting rules. This
difference arises as IFRS significantly limits the extent to which impairments
can be forward looking, with the deduction applied equally to Tier 1 and Tier 2
capital. As the difference reflects an expected hit to equity we believe that it is
prudent to apply it to Equity Tier 1 capital.
Although the starting point is a little light, we anticipate a combination of
business sales and deleveraging of the GBM business to considerably improve
the capital position. Figure 5 shows that we expect the Equity Tier 1 ratio to
rise to 5.8% by the end of 2008, increasing to 6.6% by 2010. This is after
making the deductions and assumes that the insurance business is not sold.
SJ:
Forecast Changes
The biggest changes we have made to our revenue estimates is the reallocation
between net and non-interest income given the better disclosure now available.
In terms of total revenue, we have left 2008E unchanged but increased 2009E
by 5% and 2010E by 8%. We have increased costs by 3%-4% in both 2009E
and 2010E to reflect the stronger revenue performance. Loan impairment
estimates have been largely unchanged in 2008E and 2009E but increased in
2010E to reflect our view that the impact of the economic downturn will be
prolonged. Excluding write-downs, we have made material upgrades to PBT
and EPS in 2009E and 2010E in the region of 15%-20%. We increase our DPS
estimate by 6% in both years, reflecting the greater need to retain earnings in
order to rebuild the group’s capital ratios.
The biggest changes we have made to our revenue estimates is the reallocation
between net and non-interest income given the better disclosure now available.
In terms of total revenue, we have left 2008E unchanged but increased 2009E
by 5% and 2010E by 8%. We have increased costs by 3%-4% in both 2009E
and 2010E to reflect the stronger revenue performance. Loan impairment
estimates have been largely unchanged in 2008E and 2009E but increased in
2010E to reflect our view that the impact of the economic downturn will be
prolonged. Excluding write-downs, we have made material upgrades to PBT
and EPS in 2009E and 2010E in the region of 15%-20%. We increase our DPS
estimate by 6% in both years, reflecting the greater need to retain earnings in
order to rebuild the group’s capital ratios.
PM:
SJ:
‘Underlyingitis’ Monitor
On a pro-forma reported basis in 1H08, revenues fell 31% and costs fell 1%,
resulting in a 60% reduction in pre-provision operating profits. We net
insurance claims against revenues (£1927m in 1H08, £2415m in 1H07) and
strip out gains from Southern Water (£nil in 1H08, £79m in 1H07) and Angel
Trains (£570m in 1H08, £nil in 1H07). We also strip out the fair value of own
debt (£812m in 1H08, £nil in 1H07) and operating lease depreciation (£125m
in 1H08, £192m in 1H07). This gives underlying revenue growth on a Citi basis
of -42%. The company adjusts pro-forma revenues by adding back credit
market write-downs (£5925m in 1H08, £86m in 1H07), netting off the gain
from Southern Water (£nil in 1H08, £79m in 1H07) and stripping out the fair
value of own debt (£812m in 1H08, £nil in 1H07). This results in company
underlying revenue growth of -1% in 1H08.
On a pro-forma reported basis in 1H08, revenues fell 31% and costs fell 1%,
resulting in a 60% reduction in pre-provision operating profits. We net
insurance claims against revenues (£1927m in 1H08, £2415m in 1H07) and
strip out gains from Southern Water (£nil in 1H08, £79m in 1H07) and Angel
Trains (£570m in 1H08, £nil in 1H07). We also strip out the fair value of own
debt (£812m in 1H08, £nil in 1H07) and operating lease depreciation (£125m
in 1H08, £192m in 1H07). This gives underlying revenue growth on a Citi basis
of -42%. The company adjusts pro-forma revenues by adding back credit
market write-downs (£5925m in 1H08, £86m in 1H07), netting off the gain
from Southern Water (£nil in 1H08, £79m in 1H07) and stripping out the fair
value of own debt (£812m in 1H08, £nil in 1H07). This results in company
underlying revenue growth of -1% in 1H08.
On underlying costs, we adjust for operating lease deprecation (£125m in
1H08, £192m in 1H07) and add purchased intangibles amortisation (£182m in
1H08, £43m in 1H07) and the share of shared assets (£224m in 1H08, £102m
in 1H07). These adjustments to reported costs result in a 2.5% increase in
costs on a Citi underlying basis. The company basis is as reported with a 1.4%
reduction in costs in 1H08 (pro-forma).
On a reported basis, operating profit growth was -60% YoY and on a company
adjusted basis operating profit growth was -1% YoY. The adjustments we make
to revenues and costs lead to operating profit growth of -105% in 1H08 vs.
1H07 (Figure 10).
PM:
ENOUGH
SJ:
I thought you wanted lots of words.
SJ:
PM:
I want lots of interesting words.
SJ:
How about “underlyingitis?”
SJ:
I think that’s a very interesting word.
PM:
Yeah, roll back to that.
SJ:
‘Underlyingitis’ Monitor
On a pro-forma reported basis in 1H08, revenues fell 31% and costs fell 1%,
resulting in a 60% reduction in pre-provision operating profits. We net
insurance claims against revenues (£1927m in 1H08, £2415m in 1H07) and
strip out gains from Southern Water (£nil in 1H08, £79m in 1H07) and Angel
Trains (£570m in 1H08, £nil in 1H07). We also strip out the fair value of own
debt (£812m in 1H08, £nil in 1H07) and operating lease depreciation (£125m
in 1H08, £192m in 1H07). This gives underlying revenue growth on a Citi basis
of -42%. The company adjusts pro-forma revenues by adding back credit
market write-downs (£5925m in 1H08, £86m in 1H07), netting off the gain
from Southern Water (£nil in 1H08, £79m in 1H07) and stripping out the fair
value of own debt (£812m in 1H08, £nil in 1H07). This results in company
underlying revenue growth of -1% in 1H08.
On a pro-forma reported basis in 1H08, revenues fell 31% and costs fell 1%,
resulting in a 60% reduction in pre-provision operating profits. We net
insurance claims against revenues (£1927m in 1H08, £2415m in 1H07) and
strip out gains from Southern Water (£nil in 1H08, £79m in 1H07) and Angel
Trains (£570m in 1H08, £nil in 1H07). We also strip out the fair value of own
debt (£812m in 1H08, £nil in 1H07) and operating lease depreciation (£125m
in 1H08, £192m in 1H07). This gives underlying revenue growth on a Citi basis
of -42%. The company adjusts pro-forma revenues by adding back credit
market write-downs (£5925m in 1H08, £86m in 1H07), netting off the gain
from Southern Water (£nil in 1H08, £79m in 1H07) and stripping out the fair
value of own debt (£812m in 1H08, £nil in 1H07). This results in company
underlying revenue growth of -1% in 1H08.
PM:
That is very funny actually.
SJ:
Citi reckon underlying revenue at RBS was down 42% in the first half
SJ:
And the bank puts it at 1 per cent.
PM:
And Citi are buyers of the stock.??
PM:
Id be a seller on that simple matter of RBS claiming the credit market write-downs are not relevant to its underlying revenue.
PM:
Imagine if you were one of its investment clients – holding CDOs or something.
PM:
And you got a statement saying that while 80 per cent of your money was actually gone, on an underlying basis the bank was going to pretend it was still there.
PM:
PM:
I notice Bryce has managed to get on line in Scotland
PM:
Hello Bryce — are you on holiday?
PM:
What’s up with Friends Provident?
SJ:
Vague bid rumour around earlier- as Bryce notes below
BE:
I’ll type up here – it’s probably easier.
PM:
Price is up 3.3 at 92
PM:
Any names?
BE:
The story has been around for a week or so that someone’s taking another look
PM:
Hmmm
BE:
The only name so far that has come up is Cowdery
PM:
Bandit rating?
BE:
But that’s been played down by folk who should know a bit about such things
PM:
Fair enough
BE:
In terms of today’s rumour, it’s very much the talk of 
and 
and BE:
But last week the sector went a bit gossip crazy, with Friends and RSA both talked about as potential targets.
PM:
All feels a tad flaky to me
BE:
Yup. As ever, when there’s no names, it falls into the category of extreme raw.
PM:
Right — quick chat about Kingfisher
SJ:
Note out from HSBC earlier…
Kingfisher (KGF:LSE): Last: 127.30, down 2.8 (-2.15%), High: 129.80, Low: 125.80, Volume: 4.46m
PM:
I’m jsut trying to get hold of that — bear with me a mo
PM:
We believe there is underlying value within Kingfisher and we have confidence that the
new management team will unlock it – in due course. However, in a deteriorating macro
environment, we expect that the investment community will stand on the sidelines whilst
European consumers are buffeted. We think the Kingfisher share price will be influenced
more by macro fears and near-term trading than by the group’s recovery prospects. With
this note we are making a heavy cut to our 2009/10 forecasts with pre-tax profit going
from £437m to £376m. In the short term we believe the stock could succumb to profittaking,
along with others in the sector. Shorting activity could increase as the extent of the
pressures on UK retail in 2009 become evident. Whilst expectations for the UK (B&Q)
are now at very depressed levels, we also see the potential for negative shocks elsewhere:
new management team will unlock it – in due course. However, in a deteriorating macro
environment, we expect that the investment community will stand on the sidelines whilst
European consumers are buffeted. We think the Kingfisher share price will be influenced
more by macro fears and near-term trading than by the group’s recovery prospects. With
this note we are making a heavy cut to our 2009/10 forecasts with pre-tax profit going
from £437m to £376m. In the short term we believe the stock could succumb to profittaking,
along with others in the sector. Shorting activity could increase as the extent of the
pressures on UK retail in 2009 become evident. Whilst expectations for the UK (B&Q)
are now at very depressed levels, we also see the potential for negative shocks elsewhere:
PM:
France – will the French consumer prove more resilient than the British, as is
widely assumed?
widely assumed?