Markets live chat transcript for the chat ending at 12:15 on 29 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hello
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s oh-so-laid-back markets chat
NH:
it has been a relatively quiet weekend
PM:
zzzzzzZ
NH:
just a few things to pick over this morning
NH:
no need to rush
PM:
Was there some news out of Iceland earlier?
NH:
oh, only one of its banks has been nationalised
PM:
Oh
NH:
others could follow
PM:
never mind
PM:
Anything closer to home?
NH:
Bungle Bank nationalised
PM:
HM Bungle
PM:
Anything happening Europe wise – -good to be continentally aware
NH:
a few bits and pieces but nothing to get excited about really
NH:
Fortis saved by a EUR11bn government intervention
NH:
Hypo Bank secures an emergency funding line
NH:
Dexia off 20% on funding fears
NH:
as for the US
PM:
oh dear
NH:
well
NH:
Wachovia in takeover talks with Well Fargo
NH:
and there has finally been an agreement on the Tarp or Economic Stabilisation act
PM:
So bits of pieces — typical for a fine late september morning
PM:
have colour probs with my screen tho
NH:
why is it all RED??
PM:
yeah. odd
PM:
what happened to the Paulson bounce?
NH:
er, I think we had that a couple of Friday’s ago
NH:
NH:
So, the FTSE 100 is back below 5,000
NH:
down 150 points at 4,939
PM:
NH:
almost it low for the day
PM:
NH:
the picture elsewhere is also pretty grim
NH:
Dax off 3%, Cac down 3%
NH:
and it goes on
NH:
in Iceland
NH:
Icex index
NH:
paul is just to fund it
NH:
but stacy has some CDS prices on the Icelandic banks
NH:
kaupthing
NH:
looks like it is
NH:
hang on system crashed
PM:
The Irish stock market index is down almost 7 per cent
NH:
Kaupthing is a whacking 1,700 bps says Stacy
NH:
wow
PM:
cant get Icelandic exchagne
NH:
1655 on Friday
NH:
could be a run on stocks with a big Icelandic shareholder
NH:
Debenhams, Woolies,
NH:
JJB Sports
NH:
Sainsbury – Kaupthing have helped finance Tchneguiz stake in Sainsbury
NH:
and his stake in Mitchells
PM:
FOOTSIE WATCH — down 160 points
NH:
RBS and Lloyds being carted out as we speak
PM:
RBS down 14,4%
PM:
Lloyds down 14%
Royal Bank of Scotland Group (RBS:LSE): Last: 178.50, down 29.5 (-14.18%), High: 202.00, Low: 165.00, Volume: 69.40m
Lloyds TSB Group (LLOY:LSE): Last: 227.50, down 23.5 (-9.36%), High: 253.50, Low: 227.25, Volume: 20.56m
PM:
HBODS trying to catch up — off 11%
HBOS (HBOS:LSE): Last: 157.30, down 16 (-9.23%), High: 168.40, Low: 154.00, Volume: 16.82m
PM:
Those automatic quotes are 15mins delay
NH:
on RBS, what we are trying to figure out is the impact of events at Fortis
NH:
they have written down by 50% the value of their holding in ABN Amro
NH:
they acquired the retail and private banking bits
NH:
will RBS have to follow suit and what impact would there be
NH:
any thoughts, appreciated
PM:
NH:
in fact, the European banking sector has taken a real beating in the wake of the Fortis rescue
NH:
check some these prices
NH:
Dexia down 23%
NH:
Commerzbank off 18%, was down 24% earlier
NH:
Fortis, which for some bizarre reason was actually higher earlier this morning
NH:
Fortis down 3.5%
NH:
which seems generous for a bank that has been nationalised
PM:
what a wipeout
PM:
the Fortis rescue really has spooked the European banks
NH:
it has and investors are looking round and asking who is next
NH:
after all if Fortis can go then….
PM:
amazing to consider, that Fortis was telling everyone on Friday that things we OK
PM:
that they had a plan
PM:
Before they sacked the chief exeecutive 
PM:
And all the other banks asked for their money back
NH:
yup and most analysts had target prices in excess of the current share price
NH:
another classic line from the CEO
PM:
PM:
But one shouldn’t laugh
NH:
right, while we are talking about European banks
NH:
have you seen Hypo?
NH:
off 62%
NH:
and that’s recovery
NH:
was off 70% earlier
PM:
is this the bank that JC Flowers has an interest in??
NH:
yes, 25%
PM:
so what has triggered the fall?
NH:
well, the bank reached a deal list night to get some cash to meet a refinancing squeeze
NH:
as yet we don’t know the details of the deal
NH:
what it had to borrow and how much
NH:
but it looks like the credit line was around EUR35bn
NH:
on top of that Hypo has scrapped its dividend
NH:
and take a bit hit on the value of its holding Depfa bank
PM:
OK, lots to digest there
PM:
and we have not even got on to Bungle Bank
PM:
PM:
Update — Lloyds has been 16% off a moment ago
PM:
Selling frenzy in Lloyds
PM:
Why oh why did it go for HBOS???
PM:
Footsie off 154 at the mo
NH:
what on earth are Lloyds’ shareholders making of all this??
NH:
up until a few weeks ago they were sailing along relatively happily
NH:
and then = bang
PM:
Crunched themselvs
NH:
agree to buy HBOS, the divi gets slashed and the share price goes into meltdown
NH:
still think they will vote in favour of the deal??
PM:
I just dont dont know
PM:
The spread’s ran out to 20 per cent or so earlier.
NH:
narrowed a bit
NH:
and this is a live Lloyds price – down 14% at 216p
PM:
Are people actually betting against the deal??
NH:
Well they’re not actually betting against – that’s illegal.
PM:
Oh, dumping the stock. then
PM:
Can Lloyds just pull out?
NH:
Dunno
NH:
Offer was worth £12.2bn as of 17 Sept.
NH:
Lloyds then 279.75p a share – 0.83 terms valued HBOS at 232p
NH:
Was at a 58% premium at the time.
NH:
Scheme of arrangement doc “to be posted by November”
NH:
as a scheme it does seem Lloyds shareholders could block
NH:
The Acquisition is conditional on, among other things, certain approvals by Lloyds TSB Shareholders and HBOS Shareholders and the sanction of the Scheme by the Court. Merger control approvals and regulatory clearances from, inter alia, the Financial Services Authority will also need to be obtained. In order to become effective, the Scheme must be approved by a majority in number of HBOS shareholders voting, representing three-fourths in value of the HBOS Shares that are voted, at the Court Meeting. In addition, a special resolution implementing the Scheme and sanctioning the related reduction of capital must be passed by HBOS Shareholders representing 75 per cent. of the votes cast at the HBOS Extraordinary General Meeting.
PM:
HBOS need 75%
NH:
well, they will all vote
PM:
NH:
Lloyds needs a 50% shareholder vote
NH:
not sure they will
PM:
Just looking thru the conditions — there’s nothing we’ve missed is there?
PM:
General guff and…
PM:
• there having been no adverse change in the business, assets, financial or trading position, profits or prospects of any member of the Wider HBOS Group which is material in the context of the Wider HBOS Group taken as a whole;
PM:
get it all here if you want:
PM:
http://www.hbosplc.com/investors/stockexchangeannounce.asp
NH:
that looks like a pretty standard MAC clause to me
PM:
yeah
NH:
in these markets, however, one could imagine the MAC being activated
PM:
Interesting stuff from Cazenove on Lloyds this morning.
PM:
Basically taking the example of Fortis and saying Lloyds should raise money now to avoid the same fate.
PM:
danger that if you hang around with a drawn out asset disposal and cash raising plan, the market bites you – hard.
PM:
Better for Lloyds to say what they need right now – take the writedowns and get on with it.
PM:
Lloyds TSB (LLOY.L LLOY LN IN-LINE/NEUTRAL 251p)
Diverging approaches to funding acquisitions
Events in recent days illustrate the different approaches to capital.
Fortis had planned to raise capital in a series of transactions over a timetable of many months to fund its acquisition of ABN. In contrast the last week has seen acquirers write-down the assets and issue equity to retain confidence. The share price of Fortis fell as investors doubted its ability to raise the necessary capital, an action that appears to have become self-fulfilling.
We believe that Lloyds should follow the more recent examples in its acquisition of HBOS; announce fair value write-downs with a capital raising. Our view is that there is sufficient shareholder support for the deal if the capital position was addressed and further that Lloyds has a uniquely strong negotiating position with the authorities to enhance the deal for Lloyds’ shareholders.
However we understand that in meetings with shareholders management is saying that it sees no pressing need to raise capital and by commenting on the similarity of accounting approaches, appears to suggest that write-downs of HBOS assets are unlikely. While we expect that the combined group will become highly capital-generative, this approach is higher risk as it requires the passing of time to demonstrate adequate capital and, as such, will restrain the share price of Lloyds.
Diverging approaches to funding acquisitions
Events in recent days illustrate the different approaches to capital.
Fortis had planned to raise capital in a series of transactions over a timetable of many months to fund its acquisition of ABN. In contrast the last week has seen acquirers write-down the assets and issue equity to retain confidence. The share price of Fortis fell as investors doubted its ability to raise the necessary capital, an action that appears to have become self-fulfilling.
We believe that Lloyds should follow the more recent examples in its acquisition of HBOS; announce fair value write-downs with a capital raising. Our view is that there is sufficient shareholder support for the deal if the capital position was addressed and further that Lloyds has a uniquely strong negotiating position with the authorities to enhance the deal for Lloyds’ shareholders.
However we understand that in meetings with shareholders management is saying that it sees no pressing need to raise capital and by commenting on the similarity of accounting approaches, appears to suggest that write-downs of HBOS assets are unlikely. While we expect that the combined group will become highly capital-generative, this approach is higher risk as it requires the passing of time to demonstrate adequate capital and, as such, will restrain the share price of Lloyds.
PM:
Why is the share price of HBOS at a wide discount to the value of the Lloyds’ offer?
On Friday’s closing prices, HBOS (HBOS.L HBOS LN IN-LINE 173p) trades at a 20% discount to the value of the Lloyds offer (including dividend).
There are a number of factors affecting the valuation but we do not believe that the discount implies a high chance of the offer failing.
On Friday’s closing prices, HBOS (HBOS.L HBOS LN IN-LINE 173p) trades at a 20% discount to the value of the Lloyds offer (including dividend).
There are a number of factors affecting the valuation but we do not believe that the discount implies a high chance of the offer failing.
PM:
With shorting restricted since the announcement of the acquisition, there is an absence of arbitrage activity.
Even though the chances of the bid failing are relatively low in our view, the downside to the HBOS share price in that scenario is substantial. Therefore on a weighted probability it still requires a meaningful discount.
There is a risk that the terms are amended. We expect that the overriding principle in deciding the terms is that Lloyds will not pay a premium to book value, i.e. there is no goodwill created on the deal. In terms of capital the size of the discount to book value makes no difference; the total equity acquired is unchanged. At the current share price, Lloyds’ offer is worth £11bn compared to our estimate of HBOS’ tangible book value at 31 December 2008E of £21bn. Therefore Lloyds has headroom of approximately £10bn post-tax in fair value adjustments. Clearly the larger the fair value adjustments the greater the capital deficit, and for which changing terms has no effect. In our view Lloyds had done little detailed due diligence prior to announcing the terms and therefore in putting together the Scheme Document it may change its estimate of the fair value adjustments. Market estimates of the size of fair value adjustments vary widely but at the top end do eliminate the goodwill and in that event there is a high probability of resetting the terms in our view.
Politically there are sensitivities. We believe that Lloyds needs to be seen to be paying “a fair price” given the waiving of competition issues and not creating alarm by suggesting minimal value in the HBOS equity.
Even though the chances of the bid failing are relatively low in our view, the downside to the HBOS share price in that scenario is substantial. Therefore on a weighted probability it still requires a meaningful discount.
There is a risk that the terms are amended. We expect that the overriding principle in deciding the terms is that Lloyds will not pay a premium to book value, i.e. there is no goodwill created on the deal. In terms of capital the size of the discount to book value makes no difference; the total equity acquired is unchanged. At the current share price, Lloyds’ offer is worth £11bn compared to our estimate of HBOS’ tangible book value at 31 December 2008E of £21bn. Therefore Lloyds has headroom of approximately £10bn post-tax in fair value adjustments. Clearly the larger the fair value adjustments the greater the capital deficit, and for which changing terms has no effect. In our view Lloyds had done little detailed due diligence prior to announcing the terms and therefore in putting together the Scheme Document it may change its estimate of the fair value adjustments. Market estimates of the size of fair value adjustments vary widely but at the top end do eliminate the goodwill and in that event there is a high probability of resetting the terms in our view.
Politically there are sensitivities. We believe that Lloyds needs to be seen to be paying “a fair price” given the waiving of competition issues and not creating alarm by suggesting minimal value in the HBOS equity.
PM:
We believe the probability of the acquisition failing is low, but there is a risk that the terms are reset. The degree of success of the TARP will influence the fair value of the ABS assets within treasury and so the chances of amending the terms. In our view we doubt that the terms will change but expect the discount to narrow only later in the timetable. The next event is the publication of the Scheme Document which is scheduled for November.
PM:
but lets mvoe on
PM:
PM:
We havent even discussed the TARP yet
PM:
Sorry, the Economic Stabilisation Act
NH:
or the MOAB
PM:
that market reaction has been pretty negative
PM:
Why? thought it was supposed to be a buy signal!?!!?!?!
NH:
that was before a load of stuff got tacked on to the bill, which still has not been passed
NH:
this is just an agreement at the moment
NH:
on top of that
NH:
The Repulicans, for example, have got their insurance scheme
NH:
the Treasury has got powers to do something about executive pay
NH:
all in all, it is less Wall Street friendly than was originally proposed
NH:
and we still have to wait another 45-days before it comes in
NH:
and by then who knows what might have happened
NH:
also of the $700bn Congress will give to the Hank only $250bn is likely to be available immediately with another $100bn accessible at the
request of the president.
request of the president.
NH:
For the remaining $350bn it seems that Congress would have to further review
NH:
this is typical of the reaction to the plan
NH:
comes from Credit Suisse
NH:
The plan as put forward contains three bits of goods news: a) potential
postponing of mark to market (subject to SEC approval); b) less
disincentives for banks to use the programme (by limiting the dilution
through warrants and caps on executive pay); c) less onerous funding and
mortgage guarantee burdens.
postponing of mark to market (subject to SEC approval); b) less
disincentives for banks to use the programme (by limiting the dilution
through warrants and caps on executive pay); c) less onerous funding and
mortgage guarantee burdens.
NH:
The disappointment features of the plan are the same as on Friday: a)
there is no direct capital injection into banks; b) the size of the
package is too small; and c) there is no fiscal stimulus package (which
the US economy badly needs).
there is no direct capital injection into banks; b) the size of the
package is too small; and c) there is no fiscal stimulus package (which
the US economy badly needs).
Our Washington specialists believe that the House should pass the bill
today, the Senate (where apparently the passage of the bill is easier)
by Wednesday. We have seen plenty of unexpected political events in the
last 4 days- so nothing is guaranteed!
NH:
With the House in recess after Wednesday until November 6th, any further
package could only be passed if President Bush declares a state of
emergency and recalls Congress (something the Republicans we are sure
would want to avoid!). This suggests that if there is no deal or an
inadequate deal this week, then it is very easy to see 10% downside.
Buffet even warned it could be “the biggest financial meltdown in US
history”.
package could only be passed if President Bush declares a state of
emergency and recalls Congress (something the Republicans we are sure
would want to avoid!). This suggests that if there is no deal or an
inadequate deal this week, then it is very easy to see 10% downside.
Buffet even warned it could be “the biggest financial meltdown in US
history”.
To succeed three preconditions need to be fulfilled:
NH:
Capital: we estimate that the banks in the US need $200bn of capital and
in Europe at least as much again. Thus the most critical issue is the
price the Treasury pays. This has been left deliberately vague (probably
good news). If credit prices are unchanged, then just $15-25bn of
capital has been injected into banks.
in Europe at least as much again. Thus the most critical issue is the
price the Treasury pays. This has been left deliberately vague (probably
good news). If credit prices are unchanged, then just $15-25bn of
capital has been injected into banks.
Improved liquidity: $700bn (the first two tranches combined are $350bn)
represents about 12% of the ex-GSE mortgages and is probably an
appropriate amount to ensure markets become more liquid. Funding
mismatches are now being addressed as central banks lengthen the
maturity of their repo operations (which was started on Friday). The
package is however too small (RTC 1 bought $700bn of assets in today’s
prices yet this crisis looks worse).
Workability: The dis-incentives for banks using this programme (in terms
of caps on executive pay and warrants) have been watered down.
NH:
Credit is the judge and jury of this package:
(a) as above, it would improve the mark to market; (b) historically
credit leads a turn in equity by a quarter at major turning points;(c)
60% of corporate funding is LIBOR-related in the UK, some 10% of
consumer funding; (d) The credit spread is the main determinant of the
warranted equity risk premium. At current credit spreads, the equity
risk premium should be close to 5%- against 4.5% now. At around,
1110-1150 on the S&P500, the equity risk premium rises to be above 5%
(depending on what happens to bonds).
If LIBOR and credit spreads do not improve, then equities fall 10% or
more. But we think spreads should fall- not least because credit offers
value. We expect the House to vote on TARP today, Senate by Wednesday.
On equities, we still believe the market stays in a 1,150-1,350 S&P 500
range. The downside is limited by valuation support for equities (1,130
the equity risk premium rises to 5% – our deep value target) and credit
(implied default rates are above previous peaks).
(a) as above, it would improve the mark to market; (b) historically
credit leads a turn in equity by a quarter at major turning points;(c)
60% of corporate funding is LIBOR-related in the UK, some 10% of
consumer funding; (d) The credit spread is the main determinant of the
warranted equity risk premium. At current credit spreads, the equity
risk premium should be close to 5%- against 4.5% now. At around,
1110-1150 on the S&P500, the equity risk premium rises to be above 5%
(depending on what happens to bonds).
If LIBOR and credit spreads do not improve, then equities fall 10% or
more. But we think spreads should fall- not least because credit offers
value. We expect the House to vote on TARP today, Senate by Wednesday.
On equities, we still believe the market stays in a 1,150-1,350 S&P 500
range. The downside is limited by valuation support for equities (1,130
the equity risk premium rises to 5% – our deep value target) and credit
(implied default rates are above previous peaks).
NH:
The Fed,
Administration and Congress have looked over the abyss and realised what
is at stake- if this does not work, then more conventional partial
nationalization will follow. Additionally, the fall in the oil price,
dissipating inflationary pressures and China’s easing of monetary policy
are all good news.
Administration and Congress have looked over the abyss and realised what
is at stake- if this does not work, then more conventional partial
nationalization will follow. Additionally, the fall in the oil price,
dissipating inflationary pressures and China’s easing of monetary policy
are all good news.
NH:
This can’t be a bull market: very fundamental economic problems remain:
too much leverage, policy mistake in Europe and 2ml excess homes in the
US. Consensus GDP numbers in Europe, US and globally are at least 1% too
high and consensus earnings numbers are about 20% too high. We stay, as
we have been since August 2007, overweight defensives and underweight
banks.
too much leverage, policy mistake in Europe and 2ml excess homes in the
US. Consensus GDP numbers in Europe, US and globally are at least 1% too
high and consensus earnings numbers are about 20% too high. We stay, as
we have been since August 2007, overweight defensives and underweight
banks.
NH:
Moving onto the likely B&B nationalisation this morning. It seems Santander are inline
to take on the deposits with the UK Government now becoming the leading provider
of buy-to-let mortgages in the UK and home to a large share of the selfcertified
mortgage market. It seems inconceivable that the Government would want to do
anything other than run this portfolio down leaving another huge hole in the supply of
future UK mortgages. UK house prices continue to be set for a huge fall. Overnight
we’ve also seen the situation at Fortis come to a head.
to take on the deposits with the UK Government now becoming the leading provider
of buy-to-let mortgages in the UK and home to a large share of the selfcertified
mortgage market. It seems inconceivable that the Government would want to do
anything other than run this portfolio down leaving another huge hole in the supply of
future UK mortgages. UK house prices continue to be set for a huge fall. Overnight
we’ve also seen the situation at Fortis come to a head.
PM:
dear oh dear
NH:
It’s not good is it
PM:
PM:
Quick update — footsie off 170 points
NH:
this suckers going down
PM:
We are going down — as Bush predicted
PM:
PM:
PM:
PM:
PM:
RBS down 14.6%
PM:
ICAP off 17.3
NH:
they have had results this morning, which were a touch disappointing. we can come to those later if anyone is interested
PM:
£?$ cable close to dropping thru 1.80
NH:
(VW – cautious outlook statement on Icap and general market malaise)
NH:
NH:
a felt has just sent through a note on RBS
NH:
and basically it says -don’t pani there is no read across from Fortis
NH:
the note is from Simon Pilkington at Caz
NH:
he says there are two stories around this morning
NH:
both unilkely, eps the one where RBS buys the Fortis/ABN business
NH:
There appear to be two stories circulating with respect to Fortis:
NH:
1. Fortis has not paid for its share of ABN. This is clear nonsense. Fortis raised its €24bn at the time of the acquisition. The capital shortfall at Fortis arises from the fact that it does not fully consolidate ABN until 2009 and has elected to run with a low tier 1 ratio on a see-through basis on the technicality that it is an associate and does not need the capital until it becomes a subsidiary next year. For RBS, the tier 1 ratio is quoted on the proportional basis but, because there is excess capital within ABN, the ratio is higher on full consolidation.
NH:
RBS is responsible to the Dutch regulator for ABN. However the balance sheet of ABN is dominated by the businesses acquired by RBS and the addition of the retail/commercial bank operations make little difference to either risk or funding in our view. Fortis disclosed that its share of ABN amounted to total assets of €171bn (£134bn, 31 December 2007) of which c.85% are customer loans. Customer deposits are c. €130bn (£100bn) leaving a wholesale funding of c. €41bn (c. £33bn). In comparison, RBS acquired £533bn of assets from ABN (31 December 2007).
NH:
2. RBS will buy the Fortis shareholding in RFS Holdings (i.e. ABN). We regard the probability of RBS buying ABN’s retail/commercial bank as low. The assets are attractive (high market shares, c.90% deposit/loan ratio) to other banks that operate in the region but do not fit RBS’ strategy. Therefore, the price that RBS would be willing to pay is substantially below the economic value and so RBS is highly unlikely to acquire the Fortis stake. In the improbable event that it did acquire the business, it would be highly accretive for earnings, net asset value and capital.
NH:
While we retain our recommendation we believe that the share price fall today (-14% vs Barclays -7% for example) is an over-reaction.
PM:
Hmmm
PM:
think quite holders of RBS are happy to dump now and seek clarification later on this
PM:
Stock off 15%
NH:
well, it is not a surprise. the ABN deal was so complex.
NH:
not sure everyone really understood how it had been put together
PM:
PM:
We can put it off for no longer
PM:
PM:
we must look at the Bungle Bank
NH:
the story broken by the BBC
PM:
PM:
oh yeah sure
NH:
anyway, what is there too look at??
NH:
Bungle has gone
NH:
RIP
NH:
shareholders wiped out
PM:
Not just a former bank?
NH:
dead bank
NH:
the government now the proud owner of a dodgy £40bn BTL mortgage book
PM:
Government will just run down the buyto flip mortgage book
NH:
the only good bits of the bank have gone to Santander
NH:
they take the branches and the £20bn of deposits
NH:
paying around £600m
NH:
looks a pretty good deal for Santander
NH:
which alongside Lloyds (assuming the HBOS deal goes through) will be a duopoly
NH:
this is what Alex Potter at Collins Stewart made of the deal
NH:
: B&B nationalised, branches & deposits sold to SAN for £612m
B&B is being nationalised, shares are delisting and the loan book is being taken into public hands. This now means the UK taxpayer owns two of the most poorly-performing loan books in the country. The deposit base and branches have been sold to SAN and will mean, in effect, Abbey, A&L and B&B are all merging on the High St. Deposits are well-protected, we feel.
B&B is being nationalised, shares are delisting and the loan book is being taken into public hands. This now means the UK taxpayer owns two of the most poorly-performing loan books in the country. The deposit base and branches have been sold to SAN and will mean, in effect, Abbey, A&L and B&B are all merging on the High St. Deposits are well-protected, we feel.
NH:
All banks with deposit/loans under 65% now gone… bar one
Deposits/loans measures how much of the loan book is deposit-funded. All UK banks with less than 65% of loans funded by deposits have now been nationalised or sold. NRK was 31%, HBoS is 57%, B&B 61% and A&L 64%. Sadly, one remains – the combined Lloyds-HBoS measures 62%. This group is materially larger with stronger credit ratings so should have a brighter future than B&B though we would be avoiding shares in both Lloyds and HBoS at this stage. Whilst the combined group is marginally cheap (0.92x book), we need stronger liquidity either from the organic market or from a new government scheme with long maturities to enable us to feel more positive towards this new bank.
Deposits/loans measures how much of the loan book is deposit-funded. All UK banks with less than 65% of loans funded by deposits have now been nationalised or sold. NRK was 31%, HBoS is 57%, B&B 61% and A&L 64%. Sadly, one remains – the combined Lloyds-HBoS measures 62%. This group is materially larger with stronger credit ratings so should have a brighter future than B&B though we would be avoiding shares in both Lloyds and HBoS at this stage. Whilst the combined group is marginally cheap (0.92x book), we need stronger liquidity either from the organic market or from a new government scheme with long maturities to enable us to feel more positive towards this new bank.
NH:
Housing market weakness to be exacerbated – BTL in trouble
Four of the top six UK buy-to-let lenders have now gone or are retrenching: B&B, HBoS, Paragon and Lehman. BKIR’s Bristol & West unit is also likely to make it five restricting credit. We estimate this to be over 2/3 of the UK BTL market which is likely to mean material interest stress for BTL landlords (when fixed rates and teaser offers expire and cannot be replaced). This will drive rising arrears and likely to mean landlords dumping property. The concentration risk of the BTL stock (London, university cities) will further exacerbate house price declines and will impact the wider housing market.
Four of the top six UK buy-to-let lenders have now gone or are retrenching: B&B, HBoS, Paragon and Lehman. BKIR’s Bristol & West unit is also likely to make it five restricting credit. We estimate this to be over 2/3 of the UK BTL market which is likely to mean material interest stress for BTL landlords (when fixed rates and teaser offers expire and cannot be replaced). This will drive rising arrears and likely to mean landlords dumping property. The concentration risk of the BTL stock (London, university cities) will further exacerbate house price declines and will impact the wider housing market.
NH:
HSBC remains our only preferred stock
With the credit crunch a year old, its impacts are only now showing fully in credit availability to UK consumers and both the housing market and the banking system is creaking loudly now. Without a clear way out, we believe only well-funded, well-capitalised and diverse banks will survive. HSBC’s current position of power is only increasing in value, in our view.
With the credit crunch a year old, its impacts are only now showing fully in credit availability to UK consumers and both the housing market and the banking system is creaking loudly now. Without a clear way out, we believe only well-funded, well-capitalised and diverse banks will survive. HSBC’s current position of power is only increasing in value, in our view.
NH:
just been looking at the housebuilders
NH:
they seem to have been impacted by the Bungle Bank news
PM:
Why??
NH:
well, the govt presumably is going to run off the BTL mortgage book
NH:
as that happens, the landlords will be forced to re-mortgage elsewhere
NH:
now, assuming they can find another loan
NH:
what price is that going to be at??
PM:
a punative rate
NH:
yup
NH:
so
NH:
that has left Taylor Wipeout 4.25p lower at 38.75p
NH:
Barratt Devs off 8.25p at 113.25p
NH:
of course we have also had some shocking mortgage approval data this morning
NH:
mortgage approvals in August were 32,000, which represents a 70% decline year on year and a 3% decline in the last month.
NH:
Monthly mortgage approvals have now fallen year on year each month since May 2007
NH:
net mortgage lending retreated to just £143 million in August from £2.9 billion in July and £7.9 billion at the end of 2007.
NH:
the housing market ground to halt in August
NH:
sell estate agents
NH:
here’s some analysis from Cazenove
NH:
In our view, the outlook for mortgage approvals and therefore the UK housebuilders remains unattractive. We believe that the swiftly arranged marriage between LloydsTSB and HBOS may restrict mortgage availability further as HBOS (UK mortgage market share c.20%) comes under the more conservative wing of Lloyds TSB (UK mortgage market share c.9%).
NH:
Following quick on the heals of the Lloyds TSB/HBOS tie up it appears that we are heading towards a UK mortgage duopoly with Santander (UK Mortgage market share: Abbey c.10%, Alliance & Leicester c.4%) close to agreeing the purchase Bradford and Bingley’s (UK mortgage market share c.3%) branch network. Should all these transactions complete then three of the top ten UK mortgage lenders would disappear.
NH:
It appears that no buyer could be found for Bradford & Bingley’s £42bn mortgage book and as a result Bradford and Bingley was nationalised. To our mind, this demonstrates just how far away we are from a resolution to the mortgage availability problem.
Mortgage issues may have kick started the current problems in the banking sector, but in our view the problem of mortgage availability looks increasingly like a side show to a wider banking crisis and ever further from a solution. We also doubt that trust between banks will rebuild quickly following the resolution and conclusion of the US ‘bail out’ plan.
NH:
In our view, the Government’s housing package, released to some fanfare early in September appears now to be a small plaster on a gapping wound.
NH:
and this is from Howard Archer
NH:
at Global Insight
NH:
Given these very poor fundamentals for the housing market, the recently announced government measures to support the housing market are very unlikely to have any significant impact in stabilizing activity or prices.
NH:
Indeed, we continue to expect house prices to fall by 15% in 2008 and 12% in 2009, and see the risks to these forecasts significantly increasingly to the downside given the heightened financial sector turmoil, the deepening economic downturn and markedly rising unemployment. Consequently, house prices are seen falling 26% in nominal terms from their August 2007 peak of £199,612 on the Halifax measure to stand at £147,478 at the end of 2009. Reduced falls in house prices are expected in the first half of 2010, taking them down to a low of £140,104, which would be 30% below their August 2007 peak. House prices are then seen flattening out in the latter months of 2010.
PM:
PM:
LIBOR break
NH:
here we go
NH:
*THREE-MONTH DOLLAR LIBOR 3.88% VERSUS 3.76%, BBA SAYS
NH:
OVERNIGHT LIBOR FOR EURO FALLS TO 4.72% VS 4.79%, BBA SAYS
*THREE-MONTH STERLING LIBOR UNCHANGED AT 6.26%, BBA SAYS
*THREE-MONTH STERLING LIBOR UNCHANGED AT 6.26%, BBA SAYS
NH:
THREE-MONTH LIBOR FOR EURO 5.24% VS 5.14%, BBA SAYS
*OVERNIGHT DOLLAR LIBOR 2.57% VERSUS 2.31%, BBA SAYS
*OVERNIGHT STERLING LIBOR 5.26% VS 5%, BBA SAYS
*OVERNIGHT DOLLAR LIBOR 2.57% VERSUS 2.31%, BBA SAYS
*OVERNIGHT STERLING LIBOR 5.26% VS 5%, BBA SAYS
NH:
OIS spread??
NH:
Sterling LIBOR-OIS spread is 152bps vs 150
NH:
and the US??
PM:
ahvent got that yet
NH:
Libor-OIS dollar is up again – 220bps vs 202
NH:
ouch – that is really, really bad
NH:
I mean really bad
PM:
That is the pure measure of stress in the US financial system
PM:
And its just got 10 per cent worse
PM:
NH:
this feels really bad
PM:
hmm
NH:
NH:
right something lighter
NH:
Bungle Bank
PM:
NH:
usually raises some laughter
PM:
(Thank you Dick below!)
NH:
what else is there to do but laugh
NH:
if you didn’t, one would go made with worry
PM:
actually one thing struck me at the weekend
PM:
people like the ABI could not figure out why Bungle had been nationalised
PM:
they were puzzled that a bank with a high Tier 1 Capital ration and secured funding for the next couple of years could go under
NH:
yes
NH:
I read the statement
NH:
here it is
NH:
Peter Montagnon, Director of Investment Affairs, ABI said:
NH:
We understand the need for action to protect consumers and customers in these febrile conditions, but it is also a matter of concern that a bank with one of the strongest capital ratios in the sector should have become a casualty. There is a paramount and urgent need for the Bank of England to build confidence by making it absolutely clear that liquidity support will be available for all solvent banks.
NH:
Given the size of Bradford & Bingley’s capital, investors will also look to the authorities to manage the rundown of its business in such a way as to maximise value for all concerned, including existing shareholders and bondholders. It should not be a forgone conclusion that all residual value is wiped out by any nationalisation. This should not be the sort of fire sale which an administrator would undertake.
NH:
it is a bit frightening that ABI don’t get what is happening at the moment
NH:
this is not about Tier One capital
NH:
it is about liquidity
NH:
and in the case of B&B
NH:
what seems to have happened is that FSA moved in after the recent credit downgrade
NH:
on the parent company and the covered bonds, in particular
NH:
another downgrade would seemingly have triggered a big call for cash
NH:
clearly the Bugle did not have it
NH:
or have access to pay that call
NH:
obviously, there was also the fact that savers were taking money out
NH:
that did not help
NH:
but the game is not about Tier 1 at the moment
NH:
and one last thing on Bungle
NH:
a quick hat tip
PM:
Who to??
NH:
Bruce Packard
NH:
he used to be the banks analyst at Pali
NH:
I say used to, because Pali let him go a few weeks back
NH:
which seems an odd decision given that the banking sector is facing its greatest crisis since the 1930’s
NH:
anyway, he deserve a hat tip
NH:
because he was the first analyst to put a zero price target on the Bungle
NH:
in fact he might have been the only analyst to put a zero pence target price on the Bungle
PM:
Packard’s a great read!
NH:
actually the BoE approached Bruce to get his note on the Bungle
PM:
He’ll pop up somewhere else v shortly
NH:
Bruce thought he was in trouble, in fact there were interested in his analysis
PM:
NH:
which as it proved was very prescient
NH:
anyway, here is one of his last notes
NH:
Nationalisation, we believe, is on the agenda for UK banks. On 22 July the UK Tripartite Authorities published Financial Stability and Depositor Protection: Special resolution regime which amongst other objectives intended to look at reducing the impact if a bank gets into difficulties. Like the Authorities, shareholders should also be considering the impact of a major bank failure, in our view. We have looked at the Nordic banking crisis of the early 1990s, for potential lessons that might be applied to UK banks.
NH:
Norway saw the first bank failure occur in 1988, but loan losses peaked three years later in 1991 at 4.6% of total commercial bank assets. This resulted in the failure of 3 of the 4 largest banks.
Neither retail deposit holders nor interbank lenders lost money, despite high fiscal costs (11% of GDP in the case of Finland).
Nordic bank shareholders suffered different fates depending on country. Two large banks in Norway saw their existing equity written down to zero, but in Finland where the fiscal cost of the crises was higher (as a percentage of GDP), shareholders saw dilution, but were not written down to zero.
No change to our existing recommendations or targets on UK banks. We believe it is too early to see nationalisation as an inevitable and if it does occur at all, nationalisation could still be several years away. We do however already value BB/ Sell TP 0.
Neither retail deposit holders nor interbank lenders lost money, despite high fiscal costs (11% of GDP in the case of Finland).
Nordic bank shareholders suffered different fates depending on country. Two large banks in Norway saw their existing equity written down to zero, but in Finland where the fiscal cost of the crises was higher (as a percentage of GDP), shareholders saw dilution, but were not written down to zero.
No change to our existing recommendations or targets on UK banks. We believe it is too early to see nationalisation as an inevitable and if it does occur at all, nationalisation could still be several years away. We do however already value BB/ Sell TP 0.
PM:
Any idea where he is going to?
NH:
Nowhere, at the moment
NH:
hopefully he will pop up somewhere soon
NH:
NH:
right, for anyone who is interested
NH:
we are just going to stick up a few notes on the European banks from this morning
NH:
where the crunch is spreading
NH:
Hypo first. this from Citi
NH:
Consortium Provides Liquidity Lines — HRE has announced that “a consortium
from the German financial sector has provided HRE & subsidiaries with a multibillion
Euro short-term and mid-term credit facility sufficient to cover the
Group’s funding needs well into the future”.
from the German financial sector has provided HRE & subsidiaries with a multibillion
Euro short-term and mid-term credit facility sufficient to cover the
Group’s funding needs well into the future”.
NH:
Reflects Problems in Wholesale Funding — HRE is almost entirely reliant on
wholesale funding, via a mixture of covered bonds, senior bonds, and short
term borrowing. Management refer to “extremely challenging conditions on the
international money markets”. Observers (eg FT Deutschland this weekend)
had started to question whether HRE could continue to fund itself.
wholesale funding, via a mixture of covered bonds, senior bonds, and short
term borrowing. Management refer to “extremely challenging conditions on the
international money markets”. Observers (eg FT Deutschland this weekend)
had started to question whether HRE could continue to fund itself.
NH:
Goodwill Impairment Charge — HRE say that as a consequence of the
arrangement, it will have to impair the €2.5bn goodwill from its 2007
acquisition of DePfa Bank.
arrangement, it will have to impair the €2.5bn goodwill from its 2007
acquisition of DePfa Bank.
No Dividend This Year — Management now also acknowledge that “a dividend
distribution for financial year 2008 is not expected.”
NH:
Is Funding Completely Fixed? — We do not know how much funding is being
made available to HRE, nor at what cost. Would it be enough if covered bond
markets become inaccessible too? Will the pricing leave any profit for the
equity holders? Also, it leaves the question of how sustainable the groups’
wholesale-funded business model is over the longer term.
made available to HRE, nor at what cost. Would it be enough if covered bond
markets become inaccessible too? Will the pricing leave any profit for the
equity holders? Also, it leaves the question of how sustainable the groups’
wholesale-funded business model is over the longer term.
Reiterate Sell: Leverage and Credit Pressures Remain — HRE also has other
problems. It has exceptionally high leverage (0.6% 2Q08 tangible equity / total
assets), which may no longer be viable. Also, we believe it is likely to
experience losses on real estate loans, causing more damage to earnings and
capital. We reiterate our Sell recommendation.
NH:
just a few things to say on Dexia
NH:
this morning’s fall has obviously been triggered by events at Fortis
NH:
and also a report that it is planning a capital increase
NH:
not sure how it would get a capital raise away at the moment
NH:
and on top of that there is a very bearish note out from RBS
PM:
which says?
NH:
er, sell obviously
NH:
because the bank’s balance sheet it really weak, the outlook for its core operations is dire
NH:
and there is a need for a cash call
NH:
all in all, more pain to come from shareholders
NH:
We see three main exposures at Dexia: Financial Security Assurance (FSA); the credit spread portfolio; and Dexia ex FSA exposure
PM:
FSA?
NH:
Financial Security Assurance
NH:
Dexia’s US bond insurance unit
NH:
1) FSA has US$28bn exposure to non-prime RMBS and
has accounted for a very low level of impairments on the portfolio – less than 11% coverage on Alt A/Heloc.
has accounted for a very low level of impairments on the portfolio – less than 11% coverage on Alt A/Heloc.
2) The credit spread portfolio includes €17bn MBS and €500m Lehman bonds. 3) Dexia has a further €11bn exposure outside FSA, including €2bn CMBS and €3bn LBOs.
NH:
In total, we estimate €3.7bn resulting impairment risk after tax, based on our expected losses scenario.
Potential €3.7bn post tax impairment implies €2bn of new equity
Our total impairment scenario on a spot basis in 2H08F would lead to a €2bn rights issue – 17% of market cap – despite Dexia’s 2H08F capital generation. This estimate is based on the company’s target tier-1 of 10.5%.
NH:
If impairments do not crystallise in 2H08, the FSA exposure could remain a
threat for the stock until most of the ABS portfolio matures (at least three years away). Moody’s decision on FSA’s rating in the coming weeks could be a downside trigger.
threat for the stock until most of the ABS portfolio matures (at least three years away). Moody’s decision on FSA’s rating in the coming weeks could be a downside trigger.
Weak outlook in the key business lines: 2010F PTP down 20% vs 2006
We believe Dexia has lost its defensive earnings profile. We forecast 2010 underlying pre-tax profit will be down 20% vs 2006 as a result of the weak outlook in key business lines: 1) Treasury and financial markets revenues are likely to fall (downsizing the credit-spread portfolio could hit
revenues by 28%); 2) competitive pressure continues in Belgium retail; 3) an uncertain US credit enhancement outlook and FSA’s exit from the ABS business could mean around 50% income shortfall; 4) the asset-management franchise is likely to continue underperforming KBC.
NH:
Sell; €8.60 target price – expensive BV multiple when accounting for risks
Dexia trades at 1.7x 2008F TBV with a 14% ROTE. Including the €2bn possible rights issue linked to our impairment scenario, the 2008F TBV multiple comes to 2.1x on TERP, which is expensive given the risk to the business model. We recommend a pairs trade with BNP Paribas. BNP Paribas is one of our top picks; we believe it offers resilient earnings at a cheaper earnings multiple and
very limited balance sheet risk.
Dexia trades at 1.7x 2008F TBV with a 14% ROTE. Including the €2bn possible rights issue linked to our impairment scenario, the 2008F TBV multiple comes to 2.1x on TERP, which is expensive given the risk to the business model. We recommend a pairs trade with BNP Paribas. BNP Paribas is one of our top picks; we believe it offers resilient earnings at a cheaper earnings multiple and
very limited balance sheet risk.
PM:
ok
PM:
where is Dexia trading at the moment?
NH:
off 23% at EUR7.685
PM:
Any comment on Fortis??
NH:
yes
NH:
this is from Caz
NH:
FORTIS – Break-up of Fortis Group in government bailout [FOR.AS, €5.20] Stock: Downgrading to IN LINE Sector: Neutral
NH:
Fortis Group is being bailed out by the Belgian, Dutch and Luxembourg governments in a partial nationalisation of Fortis Bank after financial markets lost confidence in the ability of management to steer the group through the credit crisis and the integration of ABN AMRO.
Shareholders of Fortis Group will own 100% of Fortis’ insurance business and 51% of Fortis Bank. The deal is therefore a partial break-up of Fortis Group.
NH:
The government intervention follows a sharp decline in the share price last week amid rumours that Fortis had liquidity problems. However, despite management assurances to the contrary it has not restored confidence in the share price and therefore the group. The Benelux government and regulators have intervened in order to avoid a further escalation of the crisis. Fortis Bank now has three stable shareholders and the time to sell its ABN stake in an orderly manner.
The combined Benelux governments will inject €11.2bn of capital into Fortis Bank and in exchange will retain 49% ownership of the bank. The Belgian government will inject €4.7bn in Fortis Bank Belgium, the Dutch government will inject €4.0bn in Fortis Bank Netherlands and the government of Luxembourg will inject €2.5bn in Fortis Bank Lux.
NH:
The integration of ABN AMRO has been cancelled. Fortis is expected to sell its economic stake in ABN (through RFS Holdings) to a third party for what we estimate will be a total consideration of c.€10bn. This is likely to include only the retail and private banking activities. The asset management activities are now already integrated and part of a joint venture deal with Ping An (assuming this is still going through).
The estimated sale price of ABN is an estimated 50% of what Fortis initially paid for the retail and private banking activities. The valuation is based on current distressed multiples within the banking sector and excludes the deal synergies which Fortis at the time priced into the value of the takeover. We estimate that the impact of the sale of ABN will boost core solvency capital by €4.0bn as per 2008H1 as ABN was still consolidated as an associate.
In addition, in order to derisk the balance sheet Fortis will mark down assets in its investment portfolio and intangible assets by c.€5.0bn, which we assume includes c.€750m of subprime CDO exposures, €1.2bn in deferred tax assets and the balance goodwill and other US ABS.
NH:
Downgrading to IN LINE
It is unclear what the outlook for the group will be in the medium term and for how long the governments intend to hold their stakes. There is no communication on what will happen with the proceeds when the sale of the ABN stake is concluded. The government intervention is aimed at stabilising the share price and giving Fortis management time to unwind the acquisition of ABN AMRO. While the current solution does maintain value for Fortis shareholders the medium term strategic outlook for the group is uncertain. As such we are downgrading the stock to IN LINE.
It is unclear what the outlook for the group will be in the medium term and for how long the governments intend to hold their stakes. There is no communication on what will happen with the proceeds when the sale of the ABN stake is concluded. The government intervention is aimed at stabilising the share price and giving Fortis management time to unwind the acquisition of ABN AMRO. While the current solution does maintain value for Fortis shareholders the medium term strategic outlook for the group is uncertain. As such we are downgrading the stock to IN LINE.
NH:
Normalised EPS: We will be fine tuning our EPS estimates at a later stage once we have more information. As we understand it, shareholders now have the rights to an earnings stream which is c.51% of Fortis Bank excluding ABN once it is sold and 100% of the insurance business. We estimate a normalised EPS of €0.90 for 2009E (down from €2.18 previously) and €1.04 for 2010E (down from €2.59 previously). Based on these new EPS figures the stock is trading at a 2009E P/E of 5.8x vs a bank sector at 7.9x and insurance sector at 8.3x. Our EPS estimate for 2008 was €1.44 per share on a published basis excluding the government measures announced today. Our estimates below show what the group would look like on a normalised basis. We will fine tune our 2008E EPS at a later stage.
NH:
Solvency: The immediate impact on solvency including ABN is that Fortis will have a €9.5bn surplus at the end of 2008Q3, a sufficient buffer to absorb any material further writedowns on problem assets or the ABN sale. The status of the capital support agreement between the consortium banks is now seems uncertain. The bank core Tier I will be above 9% under Basel I at the end of the third quarter according to Fortis.
We have conservatively valued Fortis based on the new economic stake shareholders are expected to have. This is not based on a SOTP fair value but based on the current sector multiples (insurance sector 8.3x) bank sector (7.9x), Private Banking c.14x. This would value the group at roughly €7.5 per share. However, given the many questions that remain open regarding this bailout we believe that the shares are likely to trade at a discount until clarity is achieved over the future strategic direction of the group.
We have conservatively valued Fortis based on the new economic stake shareholders are expected to have. This is not based on a SOTP fair value but based on the current sector multiples (insurance sector 8.3x) bank sector (7.9x), Private Banking c.14x. This would value the group at roughly €7.5 per share. However, given the many questions that remain open regarding this bailout we believe that the shares are likely to trade at a discount until clarity is achieved over the future strategic direction of the group.
NH:
and this is from RBS’s credit team
NH:
Overnight Fortis was effectively nationalised. The statement is very brief, but essentially the govt of Belgium has injected 4.7bn for 49% of common equity in Fortis Bank NV/SA, NL has injected 4.0bn for 49% ownership of Fortis Bank NL, a subsidiary of FB NV/SA, (via a new class of share which will not be entitled to receive the proceeds of any sale ABN stake); Luxembourg has injected EUR2.5bn via a mandatory convertible which if triggered will convert to 49% equity stake in Fortis Banque Luxembourg, again a subsidiary of Fortis NV/SA. The Belgian and Dutch governments’ stakes will rank as equity so junior to hybrids. Less clear about the Luxembourg convert, though expect similar or pari at worst.
NH:
No statement as to whether equity dividend will be paid. Senior is looking pretty good value now and is a buy, as is T2 (especially dated). The Tier 1s are slightly less clear but would appear to rank ahead of the government so should be principal protected. Insofar as no statement has come from the authorities on the coupons, it would look like these should be paid – a trigger event (for example in the 4.625 14-49) may well have occurred for non-payment, but our read is that it needs to be existing on the coupon payment date which would mean that post the recap this is not the case. This is our first take on the T1 coupons, so this may change as we delve deeper into documentation, but that’s the early indication.
NH:
As a corollary, Fortis is to sell its interest in ABN Amro (currently residing on the RBS balance sheet in RFS Holdings) – this is expected to be done at a loss to the book value (no surprise) so a hit to core equity. ING is rumoured to be a buyer of this within the next two weeks. So long as the sale price is above EUR12bn it is not expected to impact core equity, but anything between EUR12bn and EUR24bn will come out of total reg capital. Asset Management will not be divested. RBS will not be affected of there is a sale of the Fortis part; indeed taking Fortis’ RFS share off the balance sheet will give some clarity.
NH:
The group though as it stands, i.e. banking and insurance and asset management, will retain its shape. We do not envisage a break-up for the foreseeable future, which was being mooted over the weekend via a BNP/AXA joint bid (failed on no risk shield).
Also, writedowns on the EUR41.7nm structured credit book will be will be stepped up resulting in EUR5bn post tax hit in Q3. Marks are going to be pretty aggressive: within the (admittedly small) CDO origination portfolio, IG assets to be written down to 25% and the mezz and warehouse positions to 10%. On average 78% of the total CDO origination portfolio is written down. The remaining net exposure on the CDO origination portfolio is expected to amount to EUR 1.1bn. Other marks to be taken on remaining structured credit unknown. There will also be an impairment of EUR1.2bn on US tax deferred assets.
Also, writedowns on the EUR41.7nm structured credit book will be will be stepped up resulting in EUR5bn post tax hit in Q3. Marks are going to be pretty aggressive: within the (admittedly small) CDO origination portfolio, IG assets to be written down to 25% and the mezz and warehouse positions to 10%. On average 78% of the total CDO origination portfolio is written down. The remaining net exposure on the CDO origination portfolio is expected to amount to EUR 1.1bn. Other marks to be taken on remaining structured credit unknown. There will also be an impairment of EUR1.2bn on US tax deferred assets.
NH:
PM:
phew — thanks for all that
NH:
WACHOVIA -50% PRE-MKT
PM:
Hmm — Futures pointing to 400 point fall on the Dow
NH:
FTSE off 180 points at the moment
PM:
Sorry — that is WRONG
PM:
Dow future at 10950
NH:
you mean the US futures??
PM:
Pointing to 200 point fall on Dow
PM:
ICAP down 19%
PM:
RBS off 16%
PM:
Lloyds – 14%
NH:
got a comment on the ICAp results
NH:
from Citi group
NH:
Attempts to Reassure in 1H09 Trading Statement
NH:
Outlook remains positive and projecting growth yoy in Mar 09 PBT — Key
takeaway from ICAP’s 1H09 trading statement is that despite issues affecting
broker-dealers, management believes the outlook “remains positive”. They
highlight the difficulty in current markets of making forecasts, but project that
Mar 09 underlying PBT should grow yoy (from £330m).
takeaway from ICAP’s 1H09 trading statement is that despite issues affecting
broker-dealers, management believes the outlook “remains positive”. They
highlight the difficulty in current markets of making forecasts, but project that
Mar 09 underlying PBT should grow yoy (from £330m).
NH:
-30% fall in 3 months suggests market appears more cynical about any growth
– Consensus PBT is for 12% growth yoy to ~£370m (Citi forecast £368m) and
so is likely to come down, although management states that if market
developments (presumably a reference to TARP) and FX is favourable, the
increase in PBT could well be ahead of £330m. The fall in the share price
suggests the market is highly cynical the IDB industry has gone ex-growth.
– Consensus PBT is for 12% growth yoy to ~£370m (Citi forecast £368m) and
so is likely to come down, although management states that if market
developments (presumably a reference to TARP) and FX is favourable, the
increase in PBT could well be ahead of £330m. The fall in the share price
suggests the market is highly cynical the IDB industry has gone ex-growth.
NH:
Reassurance over diversification of customer base — Management states the
Lehman failure has had an immaterial effect and no single customer accounts
for more than 5% of total group revenues.
20% revenue growth for 1H09 yoy to ~£750m — ICAP details strong volumes
Apr-June 08 and particularly vibrant in September. However, the market is
likely to question sustainability. Products with good growth include FX, interest
rate derivatives, equity derivatives, and energy.
Lehman failure has had an immaterial effect and no single customer accounts
for more than 5% of total group revenues.
20% revenue growth for 1H09 yoy to ~£750m — ICAP details strong volumes
Apr-June 08 and particularly vibrant in September. However, the market is
likely to question sustainability. Products with good growth include FX, interest
rate derivatives, equity derivatives, and energy.
NH:
Electronic and post-trade performing strongly — ICAP’s electronic trading of
Treasuries/FX was very strong in September and management expects
continued expansion. Post trade services are benefiting from demand for more
efficient processing and greater use of netting. We understand management
are likely to break this out as a third division in FY2010. The voice division
(~60% of op. profits) is, however, where slowdown concerns are focused.
Share sell-off overdone — ICAP is down ~30% in 3 months and -48% ytd. It is
trading at 10.5x Mar 09E P/E (9.5x cal 09E). We believe ICAP is well positioned
in electronic and post-trade services to manage the current crisis affecting its
customer base. The voice division will shrink and evolve into more specialised
areas. The increased profitability of products migrating electronic should offset
most of the pressure of volume declines. For this reason, we reiterate our Buy.
Treasuries/FX was very strong in September and management expects
continued expansion. Post trade services are benefiting from demand for more
efficient processing and greater use of netting. We understand management
are likely to break this out as a third division in FY2010. The voice division
(~60% of op. profits) is, however, where slowdown concerns are focused.
Share sell-off overdone — ICAP is down ~30% in 3 months and -48% ytd. It is
trading at 10.5x Mar 09E P/E (9.5x cal 09E). We believe ICAP is well positioned
in electronic and post-trade services to manage the current crisis affecting its
customer base. The voice division will shrink and evolve into more specialised
areas. The increased profitability of products migrating electronic should offset
most of the pressure of volume declines. For this reason, we reiterate our Buy.
NH:
NH:
and we had a couple of questions earlier about Lonmin earlier
NH:
personally, with the Xstrata price hovering around £17 I can’t see anyway they will make a bid for Lonmin
NH:
even if they can get the funding
NH:
and it seems as if the market agrees with me
Lonmin (LMI:LSE): Last: 2,210, down 259 (-10.49%), High: 2,550, Low: 2,183, Volume: 637.93k
NH:
however, Merrill Lynch takes an opppositve view
NH:
check this
NH:
Will Xstrata walk away from Lonmin? In our opinion, no.
Under Uk Takeover Panel rules, Xstrata has until the 2nd October to make a firm
offer for Lonmin, which must be at least 3300p. If this does not happen, Xstrata
cannot bid for Lonmin for another 6 months, and cannot bid at lower than 3300p
for another 12 months. Given Xstrata’s long standing interest in Lonmin, where it
sees opportunity both in terms of the long term outlook for the platinum industry,
and in the quality of Lonmin’s assets, we view it highly unlikely that Xstrata will let
this current opportunity pass. Some market participants have concerns about
Xstrata’s ability to raise finance. Our comment: despite current market
conditions, we believe Xstrata could still raise US$10 billion in these credit
markets.
Under Uk Takeover Panel rules, Xstrata has until the 2nd October to make a firm
offer for Lonmin, which must be at least 3300p. If this does not happen, Xstrata
cannot bid for Lonmin for another 6 months, and cannot bid at lower than 3300p
for another 12 months. Given Xstrata’s long standing interest in Lonmin, where it
sees opportunity both in terms of the long term outlook for the platinum industry,
and in the quality of Lonmin’s assets, we view it highly unlikely that Xstrata will let
this current opportunity pass. Some market participants have concerns about
Xstrata’s ability to raise finance. Our comment: despite current market
conditions, we believe Xstrata could still raise US$10 billion in these credit
markets.
NH:
Key takeaways from our M&A chronology
As an interesting reference point for this transaction, we take another look at
Xstrata’s historical acquisitions since its IPO in 2002. Through these, Xstrata has
grown its business significantly both in terms of volume and diversification
(geographical and by commodity). ~$30bn total deal value since IPO, bringing
significant commodity and geographical diversification as well as volume growth.
The Falconbridge acquisition represents about 2/3s of the total. Xstrata’s
acquisitions have all been cash offers. Two major acquisitions, MIM Holdings
and Falconbridge, have been partly funded with right offerings. Out of five
takeover attempts that have either been hostile, or where Xstrata has faced
competition from other bidders, Xstrata has succeeded in two: Falconbridge in
2006 for ~$18bn; and Resource Pacific Holdings in 2008 for ~$1bn.
As an interesting reference point for this transaction, we take another look at
Xstrata’s historical acquisitions since its IPO in 2002. Through these, Xstrata has
grown its business significantly both in terms of volume and diversification
(geographical and by commodity). ~$30bn total deal value since IPO, bringing
significant commodity and geographical diversification as well as volume growth.
The Falconbridge acquisition represents about 2/3s of the total. Xstrata’s
acquisitions have all been cash offers. Two major acquisitions, MIM Holdings
and Falconbridge, have been partly funded with right offerings. Out of five
takeover attempts that have either been hostile, or where Xstrata has faced
competition from other bidders, Xstrata has succeeded in two: Falconbridge in
2006 for ~$18bn; and Resource Pacific Holdings in 2008 for ~$1bn.
NH:
What is the read across for the Lonmin bid?
Whilst Xstrata has previously walked away from transactions, it has usually only
done so after a protracted process where its offer has been increased and Xstrata
was outbid. Contrast this to the current Lonmin bid which is still at a relatively
early stage and where rival bidders have not (yet) surfaced. We see no reason
Whilst Xstrata has previously walked away from transactions, it has usually only
done so after a protracted process where its offer has been increased and Xstrata
was outbid. Contrast this to the current Lonmin bid which is still at a relatively
early stage and where rival bidders have not (yet) surfaced. We see no reason
PM:
PM:
We are done for now. FTSE 100 off 183 at 4905
PM:
We MAY be back later when Wall St gets underway
PM:
Enough songs please!
PM:
Some were very funny and original
PM:
PM:
But Alphaville is not getting clogged up with them!
PM:
And thank you Mr K Marx!
NH:
where is Rowan Williams this morning??
PM:
Thanks for joining us and thanks for ALL the comments
PM:
Seeya!