Markets live chat transcript for the chat ending at 12:19 on 13 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily market chat
PM:
Prometheus is right — few things gone splat this morning
NH:
Morning
PM:
Shall we alight on one of those straight away?
NH:
ICAP that’s gone splat
PM:
certainly has
PM:
Whether Michael Spencer likes it or not, his stock is getting destroyed this morning.
PM:
We’ve got a real selling frenzy.
NH:
ICAP cops it
PM:
ICOPPED
NH:
Shares are down 68.7p at 216p.
NH:
been as low as 197p
PM:
NH:
as things are that’s a 25% fall
NH:
company lost a quaer of its value this morning
NH:
And this is not after the publication of some more “garbage” from Goldman Sachs.
NH:
It has been caused by two facts
NH:
1. First , the WSJ has suggested the interdealer brokers are getting drawn into the regulatory enquiries in the US.
NH:
2. More immediately tho is a publication by Chris Manners at Morgan Stanley.
NH:
Headline will give you a flavour:
NH:
Interdealer Brokers
NH:
Deep EPS Cut and Revenue
Contraction – Downgrading
Contraction – Downgrading
NH:
We expect a contraction in underlying revenues in F2009 and F2010 driven by de-leveraging, lower risk appetite
and structural change in the market towards liquid transparent product.
and structural change in the market towards liquid transparent product.
NH:
• Higher fixed cost base than peers due to exposure to electronic trading leads
to negative operating leverage.
to negative operating leverage.
NH:
• Market volatility is at unprecedented levels (e.g. VIX got to above 80). We
expect ICAP volumes to decline when volatility normalises.
• Market volatility is at unprecedented levels (e.g. VIX got to above 80). We
expect ICAP volumes to decline when volatility normalises.
NH:
Key Value Drivers
NH:
• ICAP has a high-quality management team with a strong track record in
innovation and M&A, plus electronic and post trade capabilities as a
positive.
innovation and M&A, plus electronic and post trade capabilities as a
positive.
NH:
• Capital markets activity drives trading volumes and revenues
NH:
• Accretive M&A with smaller brokers –
(e.g. Link and Arkhe deals).
(e.g. Link and Arkhe deals).
NH:
• Growing electronic penetration of key products can facilitate outsize market
share gains.
share gains.
NH:
• Cost synergy delivery from integrating EBS and broader cost management
of variable cost base.
of variable cost base.
NH:
Potential Catalysts
• Preliminary 1H09 results, November 18, 2008.
• Stronger trading volumes driven by continued dislocation in credit and
other markets.
• Corporate activity – consolidation of IDBs and/or exchanges.
• Further consolidation of customer base reducing the appetite for prop
trading would be negative.
• Further movement of product to electronic trading, e.g. interest rate
swaps, allowing ICAP to capture a disproportionate share of the
shrinking revenue pool.
NH:
MS have a price target of 245p on this – slashed from around 700p or so.
NH:
But should add that they also have a bear case of 151p.
NH:
Bear 151p
8x Bear
Case
F2010e
8x Bear
Case
F2010e
NH:
F2010 EPS 17.2p; severe decline in volatility + pricing pressures lead to F2010 revenue decline of 34% YoY. Op margins decline to 21.8% given 25% fixed cost base, trough multiple applied reflecting uncertainties. Valuation at 10x for electronic trading (current DB1 multiple), 5.5x 09 for the voice in line with TLPR current multiple.
PM:
I was watching this earlier – it’s a real selling frenzy.
PM:
Is there any evidence that people are simply shorting these things because they can – a pressure release cos of the financials ban??
PM:
Specifically, are we seeking the same thing in Man Group.
NH:
Well, that ‘s recovered a bit this morning – or at least it has stopped falling.
PM:
BTW we should explain the “garbage” reference above.
PM:
Couple of weeks ago Goldman came out and said sell both ICAP and Tullett Prebon.
PM:
Ive got a bit of that here:
PM:
owngrade ICAP and Tullett Prebon to Sell
We downgrade both ICAP and Tullett Prebon to Sell and add ICAP to the Conviction List.
We reduce EPS forecasts for both stocks by 35%-50% on average for the next two years, leaving
our estimates 35%-50% below consensus.
We downgrade both ICAP and Tullett Prebon to Sell and add ICAP to the Conviction List.
We reduce EPS forecasts for both stocks by 35%-50% on average for the next two years, leaving
our estimates 35%-50% below consensus.
We also reduce our EPS forecasts for the European exchanges by 18%-26% to reflect a
more challenging volume environment.
We estimate that the European CDS market will generate c.€300 mn of revenues in 2008
If Deutsche Börse were able to attract the entire European CDS market from the OTC markets, then – assuming zero volume or pricing improvement – we calculate this would represent one-third the revenues from the joint Eurex/ISE division.
We believe that this understates the potential revenue opportunity for Deutsche Börse of bringing CDS on-exchange
The notional value of CDS outstanding has grown with a 5yr CAGR of 83%. Cyclical headwinds not withstanding, we would expect a transition to exchange trading to accelerate volume growth due to (1) the reduction in counterparty risks through centralized clearing, (2) improved price transparency, (3) lower frictional costs through standardised post-trade systems, and (4) the likely reduction in capital requirements. We quantify the impact on Deutsche Börse’s value per share of such as scenario in Exhibit 6.
Success is by no means certain
Eurex has proposed a “two stage” CDS solution that adds CDX to its current iTraxx CDS offering, before subsequently offering a full OTC clearing capability in 1H2009. In Europe, approximately 40% of single name CDS and 80% of index CDS trade electronically,
and it seems likely that these CDS represent the more likely revenue opportunity for
Deutsche Börse near term, although management highlight that they “haven’t limited themselves to Europe”.
PM:
Which an ICAP felt described as “garbage” when we printed it .
NH:
We should add that while MS have similarly downgraded both Icap and Tullett, their reasons are more broad-based.
NH:
Let more pub some more of the note:
NH:
1. De-leveraging to pressure top line as liquidity contracts from periphery to core – we now see a 12% contraction of the IDB revenue pool in 2009 in US dollar terms. We think that, post the bankruptcy of Lehman Brothers, adjustment in balance sheet leverage at banks (we expect a one-third reduction in investment-bank assets by the end of 2009, driven by trimming the trading book) and in the parallel banking system (i.e. hedge funds, private equity, real estate) point to unrealistic expectations baked into consensus earnings forecasts. Our TLPR and ICAP EPS estimates for next year are now 18-28% below consensus. Our bear case scenario, assuming a 35% contraction in revenues, would drive our EPS estimates some 43% below base for ICAP and 46% for Tullett.
NH:
2. An emerging negative trend: OTC volumes moving to centrally cleared venues, driven by need to mitigate
counterparty credit risk. We think the changing dynamics driven by broader de-leverage, combined with regulatory
pressure to improve the transparency (copied from FT Alphaville) and efficient operation of the markets, could drive a material break with the longer-term growth dynamics in the IDB revenue pool (longer-term historical ~5% revenue growth per year). We see a shift in favour of liquid, transparent, centrally cleared products playing in favour of a number of derivative exchanges – hence our Overweight ratings of ICE and DB1 (see ICE: Solid EPS $100 PT on CDS Monetisation, October 31, 2008 and Stressing Bear Case Reveals Emerging Value, Prefer DB1, July 23, 2008).
counterparty credit risk. We think the changing dynamics driven by broader de-leverage, combined with regulatory
pressure to improve the transparency (copied from FT Alphaville) and efficient operation of the markets, could drive a material break with the longer-term growth dynamics in the IDB revenue pool (longer-term historical ~5% revenue growth per year). We see a shift in favour of liquid, transparent, centrally cleared products playing in favour of a number of derivative exchanges – hence our Overweight ratings of ICE and DB1 (see ICE: Solid EPS $100 PT on CDS Monetisation, October 31, 2008 and Stressing Bear Case Reveals Emerging Value, Prefer DB1, July 23, 2008).
NH:
This is not to say that we see a wholesale shift in trading of OTC products to exchange format. We believe that user
preference, plus the unsuitability (due to a lack of standardisation) in a number of products makes this unlikely.
Equally, clearing functionality already exists in a number of OTC markets (e.g. interest rate swaps, repo, oil). However, in product groups that exist on an exchange traded format (e.g. equity derivatives) as well as OTC, we expect the combination of increased counterparty risk concerns plus renewed focus on balance sheet efficiency to encourage further exchange migration (e.g. in equity derivatives, which Bank of International Settlement statistics suggest were ~50% OTC, 50% traded on exchange). Equally, we expect these trends to lead to an increased
adoption of electronic trading as OTC products move to a centrally cleared format (e.g. CDS). This, we think, should be most positive for ICAP of the IDBs, in view of its strong electronic capability, as well as providing a new source of
revenue for the successful clearing provider. Our US colleague Patrick Pinschmidt believes that CDS clearing could be worth US$15 per share for ICE.
preference, plus the unsuitability (due to a lack of standardisation) in a number of products makes this unlikely.
Equally, clearing functionality already exists in a number of OTC markets (e.g. interest rate swaps, repo, oil). However, in product groups that exist on an exchange traded format (e.g. equity derivatives) as well as OTC, we expect the combination of increased counterparty risk concerns plus renewed focus on balance sheet efficiency to encourage further exchange migration (e.g. in equity derivatives, which Bank of International Settlement statistics suggest were ~50% OTC, 50% traded on exchange). Equally, we expect these trends to lead to an increased
adoption of electronic trading as OTC products move to a centrally cleared format (e.g. CDS). This, we think, should be most positive for ICAP of the IDBs, in view of its strong electronic capability, as well as providing a new source of
revenue for the successful clearing provider. Our US colleague Patrick Pinschmidt believes that CDS clearing could be worth US$15 per share for ICE.
NH:
3. Reducing costs and consolidation may be alternative
routes to value creation. A buoyant, volatility-driven revenue environment for the IDBs in 2007 and 2008 has led to elevated instances of staff poaching and comp ratios creeping up (e.g. TLPR comp ratio rose ~110bps in 1H08 vs. 1H07 to 57.4%). We expect this to fall as brokers accept lower bonuses to protect their jobs and staff turnover decreases. We assume a ~150bp reduction in voice operating margins 2009 vs. 2008 for both TLPR and ICAP in our base case, given negative operating leverage in spite of ~10% cost saves.
routes to value creation. A buoyant, volatility-driven revenue environment for the IDBs in 2007 and 2008 has led to elevated instances of staff poaching and comp ratios creeping up (e.g. TLPR comp ratio rose ~110bps in 1H08 vs. 1H07 to 57.4%). We expect this to fall as brokers accept lower bonuses to protect their jobs and staff turnover decreases. We assume a ~150bp reduction in voice operating margins 2009 vs. 2008 for both TLPR and ICAP in our base case, given negative operating leverage in spite of ~10% cost saves.
NH:
4. Pricing pressure is set to intensify as dealers seek to minimise costs. Given the revenue decay we think likely at investment banks – we estimate their revenues will shrink back to 2003 levels (see The Long Unwinding Road by Huw van Steenis et al published 06/11/08 for more) – IDB customers will probably be less willing and able to pay IDBs for their services, leading to more fee caps and lower commissions.
PM:
Well that certainly deserves a 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:
Who is this MS guy again?
NH:
Chris Manners.
PM:
Bad Manners in Michael Spencers book, I reckon.
PM:
Spenc will be banging the table.
NH:
yup, I can hear him now and he is in Broadgate
PM:
.Shall we put ICAP’s side of the debate on all the OTC stuff?
NH:
Good idea, we having lunch round there soon, aren’t we.
PM:
Yes, and I think they might also be coming in here to education some of the reporters.
PM:
Here’s their line
PM:
the quickest route
PM:
That’s a white paper, written by Mark Yallop, COO at ICAP
PM:
It’s partially coloured – but gives ICAP’s view of the future of the OTC markets.
PM:
Here’s some quick conclusions:
PM:
1.3. Specifically, the regulatory response to current events needs to focus on simplifying
and enhancing the transparency of the already existing OTC market infrastructure
and making this more robust in those areas where it is too fragile.
and enhancing the transparency of the already existing OTC market infrastructure
and making this more robust in those areas where it is too fragile.
1.4. Regulations should mandate – as the New York Federal Reserve and others have
been proposing – wider adoption of central counterparty (“CCP”) give up and/or
central clearing for OTC derivative markets. In those OTC markets that do not
already operate a central counterparty, a CCP/clearing house that is independent
of the trading platforms for those markets should be mandated.
1.5. The solution to current problems in financial markets does not lie in attempting to
mandate the transfer of OTC trading onto exchanges. The OTC markets have
traded, and need to continue to trade, separately from exchange markets for many
reasons. OTC markets are both larger in scale than exchange markets and a vital
risk management tool and as such their use benefits governments, corporations,
investors and individuals worldwide. An exchange solution needlessly grants the
exchange a monopoly on trade execution (which is usually accompanied by
restricted access to clearing) which thereby leads to increased trading costs and
risk and diminished flexibility.
1.6. The OTC market has already invested significantly in developing its infrastructure.
This infrastructure does already contribute hugely to reducing risk but needs to be
further developed and better leveraged for the benefit of all.
PM:
There’s then a list of specific recommendations,but you can go and read the full document for those.
NH:
so what’s Spencer’s net worth now??
PM:
Well, 25% less than yeserday
NH:
£250m now??
PM:
Actually — that’s prob inaccurate — he has a number of private businesses
PM:
And he is a very active investors in a PA sense
PM:
remember his shrewd dealings in M&S 
NH:
NH:
right, the market does not like the Wal Mart numbers
PM:
No way
NH:
and if they are having to warn on profits, things must be really, really bad
NH:
not buying expensive coffee at Starbucks is one thing
NH:
but Wal Mart
PM:
FTSE 100 now off 92 at 4090 and falling
PM:
98
PM:
100
NH:
Wal-Mart Sees FY09 EPS From Cont Ops Of $3.42-$3.46
PM:
102 lower
NH:
DJ Wal-Mart Sees 4Q EPS From Cont Ops Of $1.03 To $1.07
NH:
just trying to get the statement
PM:
Expected bounce showing thr Dow future earlier has been wiped out
PM:
London is stabilising — sort of — off 100
NH:
not up on the website
NH:
why do companies do that?
NH:
report results and never post the figures on the IR site until a day later
PM:
Cos they have sluggish IR departments, thats why
NH:
NH:
of course Wal Mart is not the only bad news to have come out of the US overnight
NH:
also had a profit warning from Intel
NH:
brought forward a trading statement to tell the Street of a dramatic cut in Q4 guidance
NH:
Intel now expects to report revenues for Q4 of $8.7bn to $9.3bn – having previously guided to $10.1bn to $10.9bn in the Q3 results in mid-October
NH:
Intel said it was seeing significantly weaker demand across all market segments and geographies.
NH:
and if that weren’t enough, Intel also cut guidance for gross margin from 57-61% to 53-57%.
NH:
mind, you the market actually traded higher this morning
NH:
in spite of that news and 400 point drop for the Dow overnight
NH:
Dow now just 110 points from last month’s low
NH:
and it will probably retest that low today
NH:
Dow has lost 7.4% over last three days
PM:
PM:
So what supported prices earlier here in London?
NH:
i have no idea. none whatsoever
NH:
perhaps it was this flurry of corporate news
NH:
today is another one of those manic Thursday’s
NH:
50 large compsreporting across Europe today
NH:
and quite a few small caps too
NH:
why do they all report on the same day
NH:
if you have some bad news I can understand it
NH:
otherwise
NH:
why not report on Friday or Monday
NH:
anyway, not all of the results have been bad
NH:
some have impressed
NH:
albeit against massively lowered expectations
PM:
Such as?
NH:
BT
NH:
oh, second biggest riser in the FTSE 100 at the moment
NH:
shares up 9.6p at 122.1p
NH:
shares up 9.6p at 121.1p
NH:
so, Q2 figures out and
NH:
other than the dismal performance of Global Services, which was pre-announced a couple of weeks ago
NH:
they look ok
NH:
cash flow looks good and BT are to axe 10,000 people
NH:
which always goes down well in the City
NH:
trends in the wholesale broadband business look OK
NH:
and of course, the other key positive, which was actually around yesterday
NH:
is that the trade unions are backing BT’s efforts to reforms its pension fund
NH:
BT’s pension deficit has been a dark cloud hanging over the stock
NH:
and what it wants to do is up the retirement age to 65 and
PM:
any analyst comment?
NH:
Plenty
NH:
this is from Caz
NH:
a good round up of the numbers
NH:
Results solid other than Global Services that had pre-announced. Positive news on pensions, although the concerns over the funding deficit will remain.
NH:
Strong cash flow in the quarter plus a commitment to a 10,000 total labour resource reduction. We understand this forms part of existing cost reduction programmes but BT hopes to retain more of the savings as opposed to them being re-invested in the business.
Revenues of £5,303m (+4.1%, -0.5% organic), 0.3% above our estimates and 2.1% above the consensus before the recent trading statement (referred to below as “original consensus”).
NH:
Wholesale revenue trends improved, although a further slowdown within consumer and in broadband growth may lead to some concerns.
EBITDA, pre leavers, of £1,429m (-1.3%) was 1.6% above our estimates, 1.8% below original consensus. Main outperformance was from “Other”, which is likely to represent phasing with Openreach also strong.
EBITDA, pre leavers, of £1,429m (-1.3%) was 1.6% above our estimates, 1.8% below original consensus. Main outperformance was from “Other”, which is likely to represent phasing with Openreach also strong.
NH:
EPS, pre leavers, of 5.9p (-3.6%) 4% above our estimates, 3% below original consensus, reflecting EBITDA.
Interim dividend of 5.4p, pre-announced. As expected, no new dividend commentary.
NH:
Free cash flow +£369m (+116%) against our forecast of £255m and original consensus of £235m. Good performance, although reflects lower tax and capex spend that is likely to be phasing.
NH:
Positive news on pensions: BT has gained union support for its proposed changes to the pension scheme including changes to retirements dates and accrual rates. If accepted by employees, these will reduce ongoing pension costs by c. £100m per annum (2% of EBITDA, 8% of equity free cash flow). However, it only affects current employees and future benefit accruals. Concerns will still remain regarding the funding position that will be calculated as at December 2008 and the future level of top-up payments. These are scheduled to re-commence at £280m per annum from December 2009, although this figure could be materially higher or lower – hence the uncertainty over future dividends.
NH:
Estimate changes: Limited if any at this stage. We will wait for the forthcoming pensions review before adjusting our estimates to reflect a lower ongoing pension cost, given the various large moving parts.
PM:
Right — thanks for all that
PM:
PM:
Note TB’s mention below…..
PM:
Sony about to announce large job losses
PM:
Sounds like an educated comment
NH:
PM:
We need to have a little look at the banking sector in the wake of Paulson’s huge u-turn overnight
PM:
Requests below
PM:
What’s the reaction Neil??
NH:
well, the banks are all lower
NH:
HBOS down 8.7p at 88.1p
NH:
Lloyds down 12.3p at 161p
PM:
Lower? They are getting smashed
NH:
and just look at poor RBS
NH:
down 4.2p at 51.8p
PM:
NH:
RBS sinking further below the placing price
PM:
Which is?
NH:
65.5p i think
NH:
and finally Barclays
NH:
off 9.5p at 158.7p
PM:
158p?? So it is 5p off this mandatory conversion price
PM:
Big part of the 7.3bn fund raising — swaps into stock next june at 153
PM:
Suddenly those warrants issued to the Middle east at 197p are looking less valuable
NH:
this is all about fears that the Mideast investors could just walk away from the proposed fund raising
PM:
really?
NH:
well it is one story that is doing the rounds
NH:
although they could be playing hard ball with the insititutional investors
NH:
but they say they have a binding contract over the £5.8bn cash injection
NH:
and don’t see why it should be amended just because of a couple of long only funds in the UK don’t like
NH:
and we all know what would happen if they walked
NH:
not only would Amanda Staveley not get her £40m commission payment
NH:
but Barclays would have to go cap in hand to the govt for funding
NH:
who would charge penalty rates in revenge for Bacr opting out of the great govt recap programme in the first place
PM:
I do think this whole Barclays situation is getting interesting
PM:
and critical for management
PM:
this could easily blow up in their faces
NH:
it will need some very, very good diplomacy to get this fund raising done and keep the investors in the UK and the mid east happy
PM:
PM:
Back to the TARP, or TERP
PM:
any read across for the European banks?
PM:
I am guessing a number would have been looking to sell assets to the TARP
NH:
they would
NH:
but the real impact is perhaps more subtle
NH:
this is explains it nicely
NH:
from Merrill Lynch
NH:
if the US Treasury’s direct its TARP focus towards further injections of
capital into the US financial system rather than purchasing toxic assets has two
obvious negative implications for European banks.
capital into the US financial system rather than purchasing toxic assets has two
obvious negative implications for European banks.
NH:
First, it suggests bank capital ratios in the US will continue to increase which puts additional pressure on
European banks to raise capital.
European banks to raise capital.
NH:
Second, it suggests the market values of toxic assets will come under further pressure now that there is no longer the prospect of the US Treasury as a buyer of last resort. This would imply further Q4 writedowns at certain European banks.
NH:
and one has to think that there will be more write downs at RBS in particular
NH:
they have all sorts of toxic waste on their balance sheet
NH:
hedged by all sorts of weird and wonderful companies
PM:
right
PM:
More writedowns — pretty obvious really
PM:
anything more to say on the banks?
NH:
well, there are a couple of downgrades around
NH:
you have already posted some of Sandy Chen’s thoughts
NH:
but another analyst and old friend of Alphaville has started coverage of the sector this morning
PM:
Who is that?
NH:
Bruce Packard
PM:
ah the former Pali analyst
PM:
who put a zero pence target price on Bungle Bank
NH:
yup
NH:
the Bank of England called for a copy of that report
PM:
where is he now??
NH:
round at Evolution Securities
NH:
working for Jason Streets the head of research
NH:
he has been working away at this note for a weeks
NH:
and I am happy to say it is very bearish
NH:
here’s some highlights
PM:
Or lowlights
NH:
and it starts off with a nice quote from Merv
NH:
Timing, not valuation
I hope it is now understood that the provision of central bank liquidity, while
essential to buy time, is not, and never could be, the solution to the banking crisis,
nor to the problems of individual banks. Central bank liquidity is sticking plaster,
useful and important, but not a substitute for proper treatment.
BoE Governor Mervyn King, 21 October 2008
I hope it is now understood that the provision of central bank liquidity, while
essential to buy time, is not, and never could be, the solution to the banking crisis,
nor to the problems of individual banks. Central bank liquidity is sticking plaster,
useful and important, but not a substitute for proper treatment.
BoE Governor Mervyn King, 21 October 2008
NH:
Before getting too carried away by interest rate cuts and by discounts to tangible
book value, we believe investors should bear in mind that:
book value, we believe investors should bear in mind that:
NH:
The average banking crisis traditionally lasts more than four years, according
to the Bank of England. In Finland and Japan, loan balances shrank for 10
years after their banks were recapitalised.
to the Bank of England. In Finland and Japan, loan balances shrank for 10
years after their banks were recapitalised.
NH:
Net interest income shrank as much as loans did because crisis-hit banks had
to shift into more liquid assets (ie government debt) to prevent a run by
international depositors. We expect UK banks’ net interest margins to be
squeezed, as overseas interbank finance comprises much of the £740bn
“funding gap” (UK loans less UK deposits).
to shift into more liquid assets (ie government debt) to prevent a run by
international depositors. We expect UK banks’ net interest margins to be
squeezed, as overseas interbank finance comprises much of the £740bn
“funding gap” (UK loans less UK deposits).
NH:
Indeed, despite the “re-pricing of risk”, UK banks remain tactfully silent on
their ability to improve net interest margins. We believe the UK authorities
were right to step in and recapitalise the banking system. But we do not
recommend taking up the rights issues.
their ability to improve net interest margins. We believe the UK authorities
were right to step in and recapitalise the banking system. But we do not
recommend taking up the rights issues.
PM:
that’s pretty clear then
PM:
Dont take up the rights, says Packard
NH:
and here are Bruce’s recommendations
NH:
Barclays Reduce – TP 140
HBOS Reduce – TP – 84
HSBC Add – TP 787
Lloyds Reduce – TP 133
RBS Reduce – TP 18
Standard Chartered Reduce – TP 650
HBOS Reduce – TP – 84
HSBC Add – TP 787
Lloyds Reduce – TP 133
RBS Reduce – TP 18
Standard Chartered Reduce – TP 650
PM:
hang on a minute
PM:
RBS
PM:
target price 18p??????????
PM:
PM:
Wot is that based on??
NH:
hang on
NH:
will find out
NH:
here it is
NH:
RBS’s new chief executive, Stephen Hester, is rightly lauded for the job he did “derisking”
the Abbey Wholesale bank.
the Abbey Wholesale bank.
NH:
The RBS group as a whole is currently undergoing a “strategic review”, so it is
difficult to comment on the investment case. Looking at the graph above, we would
not conclude that a shrinking process at RBS will be positive for near-term share
price performance.
difficult to comment on the investment case. Looking at the graph above, we would
not conclude that a shrinking process at RBS will be positive for near-term share
price performance.
NH:
So assuming just a decline in profitability to through-the-cycle levels suggests price
targets close to tangible book value. But assuming shrinking balance sheets and no
capital release suggests substantial discounts to tangible book.
targets close to tangible book value. But assuming shrinking balance sheets and no
capital release suggests substantial discounts to tangible book.
NH:
For the sake of consistency, we show banks with TTC profitability and shrinking BIS I
risk-weighted assets by 30%. Our key sell would be RBS, which we would trade at a
90% discount to tangible book (or 18p).
risk-weighted assets by 30%. Our key sell would be RBS, which we would trade at a
90% discount to tangible book (or 18p).
NH:
However, this is approach is unduly harsh on Asian banks which, with retail deposit
funding, are highly unlikely to shrink. Instead, we value HSBC at £7.87and STAN at
£6.50, with a TTC ROIC-based approach. This equates to 1.7x and 1.2x tangible
book, respectively.
funding, are highly unlikely to shrink. Instead, we value HSBC at £7.87and STAN at
£6.50, with a TTC ROIC-based approach. This equates to 1.7x and 1.2x tangible
book, respectively.
NH:
The risk to our call is that if either the UK growth or margin prognosis is better than
we think, there could be substantial upside.
we think, there could be substantial upside.
NH:
NH:
Promtheus good question on Merrill
NH:
why does everyone hate them?
NH:
Michael Lewis in his Wall Street is Dead piece
NH:
has a very, very take on Merrill
NH:
sorry that should be funny take
NH:
piece was simply titled “The End”
NH:
here it is
PM:
“We just shorted Merrill Lynch,” Eisman told him.
“Why?” asked Hintz.
“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.
PM:
Merrill Lynch was the little fat kid assigned the least pleasant role
NH:
NH:
brilliant
NH:
and for anyone who has not read that article
NH:
you should – it is fantastic
PM:
Give it another plug
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom
PM:
NH:
before we move on from the banks
NH:
should just mention HSBC
NH:
down 15p at 685p
NH:
and that’s down to a bearish note on Smug Bank from Cazenove
NH:
and here it is
NH:
and there are some stonking earnings downgrades in here
NH:
HSBC – Managing through a recession
[HSBA LN HSBA.L], 700p, Underperform, sector – Neutral
[HSBA LN HSBA.L], 700p, Underperform, sector – Neutral
We reduce our EPS estimates by 30-50% to reflect higher impairment, taking developed markets (US, Europe) to previous recessionary levels.
The economic outlook for Asia generally is less pessimistic, but we expect impairment to rise as economic growth slows.
NH:
HSBC remains profitable despite a more than three-fold increase in the impairment charge (to US$31.5bn in 2010E).
We expect the equity tier 1 ratio to bottom at 6.5% in 2010E (currently 7.6%). Given the inherent strengths of HSBC’s balance sheet, we continue to believe the group is soundly capitalised.
Consequently, and despite the cash cover falling to 1.0x, we maintain the dividend at 90c.
NH:
As confidence fades in EPS estimates this will inevitably lead to consideration of price/book as the most relevant valuation tool.
After a period of significant outperformance, HSBC trades on 1.7x 2008E NTAV, a substantial premium to domestic UK banks (0.6-0-.8x), Standard Chartered (1.4x) and the global peer group (1.3x).
We believe a premium is warranted given the more robust outlook for earnings and capital at HSBC than is the case at many of its peers, but see the share price moving towards a more moderate premium. A valuation of 1.4-1.5x NTAV suggests a share price of 550-600p.
NH:
We consider it unlikely that domestic UK banks will de-rate significantly further, and so HSBC is likely to experience a period of underperformance against the sector. We therefore cut our recommendation to UNDERPERFORM.
NH:
NH:
we have LIBOR fixes
NH:
and guess what
NH:
3-month dollar Libor up for the first time in 24 days
NH:
13/11/2008 11:38:20 DI *DJ 3-Month Euro Libor Fixed At 4.23125%, Vs 4.27375% Wednesday
PM:
Only a tad tho!
NH:
13/11/2008 11:38:07 DI *DJ 3-Month USD Libor Fixed At 2.14875%, Vs 2.1325% Wednesday
NH:
13/11/2008 11:37:53 DI *DJ 3-Month Sterling Libor Fixed At 4.2025%, Vs 4.31% Wednesday
NH:
OIS still falling though
NH:
market proving pretty resillient to all the bad news
NH:
FTSE 100 now off just 54 points at 4,127
PM:
Well there are increasingly numbers of people who are jsut sick of being bearish!
PM:
What did you think of King’s recession forecast?
NH:
in spite of the bearish headlines this morning
NH:
what struck me was the bullishness of King
NH:
he expects a recovery in 2010
NH:
the fan says so
PM:
PM:
he’s expecting what — gdp contraction of 1.9% next eyar
NH:
and then a quick recovery
PM:
Why — pray — should this recession be shallower than the last two?
PM:
It will be deeper, surely, because their has been more excess in the system needing to be cleared out
PM:
Im not bullish
NH:
PM:
Now — you know we had a laugh at the expense of the WSJ last week
NH:
Citi to buy bank – shock
PM:
PM:
Did i hear you saying earlier that the have put a name to the story?/
NH:
they have – it is no longer a mystery bank
NH:
Citi are looking to to buy
NH:
wait for it
NH:
Chevy Chase Bank
PM:
What that guy in national lampoon set a bank up?
PM:
NH:
he would probably have a got license a few years back
NH:
Cornelius Crane “Chevy” Chase (born October 8, 1943) is an American Emmy Award-winning comedian, writer, and television and film actor. Born into a prominent family, Chase became a sensation as a cast member in the inaugural season of Saturday Night Live, where his Weekend Update skit quickly became a staple of the show. Chase is also well known for his portrayal of the character Clark Griswold in four National Lampoon’s Vacation films. In addition to his numerous movie roles, he has hosted the Academy Awards twice (1987 and 1988) and briefly had his own late-night talk show, The Chevy Chase Show.
PM:
i thought Citi had enough comics working for them
NH:
did u see the piece on the WSJ
NH:
about pressure on th chairman Bischoff to go
PM:
i didnt see that
NH:
v interesting
PM:
But sounds v believeable
NH:
the Big C, or little c now it is trading below $10,
NH:
has fallen 70% since Pandit joined
NH:
and according to the Journal, some board director wonder just how much supervision there has been
NH:
and did you see who was being touted as a possible replacement?
PM:
no –gone on
NH:
Dick Parsons of AOL/Time Warner
PM:
Unlikely choice iwould have thought
Unlikely choice iwould have thoughtNH:
well he does know about bubbles, of the internet variety
PM:
True
PM:
PM:
What shall we finish off on
NH:
how bout the LSE
NH:
been splatted this morning
NH:
down 62p at 516.5p
PM:
I thought the figures were in line?!?
NH:
they were
NH:
but
NH:
it is all about the outlook
NH:
still it has rattled Clara
NH:
she has been coming out with gems like this
NH:
there is highly liquid market for negative comment
PM:
Hey – like that
– like thatNH:
anyway, back in the real world
NH:
the figs may been in line
NH:
but they highlight two things that investors are worried about
NH:
the implications of a downturn of revenues
NH:
and note this month cash equity volumes have fallen sharply
NH:
and the impact of increased competition
NH:
and that’s why they are down
NH:
as such the results are somewhat irrelevant
NH:
here’s a good summary of the bear case
NH:
from MF Global
NH:
Twin monsters of downturn and competition
The LSE reported broadly in line underlying interim results this morning, but the focus remains the weak
outlook
The LSE reported broadly in line underlying interim results this morning, but the focus remains the weak
outlook
NH:
The LSE is facing a cyclical downturn:
- Issuer services revenues were down on a lower number of IPOs. This situation will deteriorate once the announced rights issues are done. This division will also see lower annual fees due to lower market levels
- Issuer services revenues were down on a lower number of IPOs. This situation will deteriorate once the announced rights issues are done. This division will also see lower annual fees due to lower market levels
NH:
- Cash trading is suffering from lower trading volumes. We expect the drop to mirror market levels at best.
Furthermore, the new fees structure, with lower yield, introduced early September 2008 will take full effect
in Q3 – Information services revenues have held up well, but this hides the forthcoming drop in terminals as brokers lay off more employees.
NH:
The contractual agreements between users and information providers on
one hand and information providers and the LSE on the other make this division a late cycle one
one hand and information providers and the LSE on the other make this division a late cycle one
In addition, the LSE is facing strong competitive pressures:
Competition is already taking its toll on UK cash equity trading. Chi – X has already achieved more than a 13% aggregate market share, and Turquoise is powering ahead.
NH:
New entrants will attract trading volume despite the LSE’s decision to charge for routed trades. Furthermore, the LSE’s fees are a multiple of those of competitors (c0.65bps versus c0.30bps for new entrants)
- Competition will spill over to Information Services, the LSE’s second largest division, in due course.
Once competing trading platforms gain a critical mass in terms of trading market share, they will demand
to be paid for providing prices to users
NH:
The LSE has halted its share buyback- a wise decision. But this highlights the precarious situation they
are in
are in
The results included a number of one offs:
- GBP3.4m exceptional integration fees linked to Borsa Italiana
- GBP6.1m in bad debt linked to Lehman: unpaid trading fees and costs linked to Baikal, the LSE’s new
MTF
- GBP6.8m linked to a loss on cash flow hedge recycled to the income statement
- Net financing costs were much higher than expected as the LSE suffered from higher funding costs,
which were Libor based.
The annual figure should be close to GBP40m (versus GBP33m expected),
which adds to the LSE’s operational gearing at the wrong time of the cycle. The LSE should pay back its debt from cashflow from operations
NH:
Share overhang: Unicredit (UGC) marked down its LSE stake by Eur215m this week. UGC, just like UK brokers did during the last downturn, could very easily dispose of this stake should pressure on its balance sheet continue
Nothing in this statement changes our mind about our Sell recommendation.
Nothing in this statement changes our mind about our Sell recommendation.
We believe the LSE’s share
price could overshoot our 550p target to the downside
The LSE is trading on 11x our March year end 2010 EPS estimate, which is high for a firm facing a negative earnings outlook
PM:
so there is a possibility Unicredit could sell their holding
NH:
yup
NH:
here is a bit more comment
NH:
from Merrill Lynch
NH:
they are also bearish
NH:
LSE announced H1 FY09 adjusted basic EPS of 39.3p, up 10% YoY, but 1%
below our estimate of 39.8p and 2% below of consensus of 40.1p.
Sales revenues of £345.5mn were up 5% YoY, 1% below our estimate of
£347.6mn (consensus £348.5mn), operating costs of £165.6mn were 7% higher
than our estimate. The Company is also halting its current £500mn share
buyback programme. Synergies from the Borsa Italiana transaction have been
increased £4mn to £44mn next year although there is also an associated £4m
increase in implementation costs to £44mn.
below our estimate of 39.8p and 2% below of consensus of 40.1p.
Sales revenues of £345.5mn were up 5% YoY, 1% below our estimate of
£347.6mn (consensus £348.5mn), operating costs of £165.6mn were 7% higher
than our estimate. The Company is also halting its current £500mn share
buyback programme. Synergies from the Borsa Italiana transaction have been
increased £4mn to £44mn next year although there is also an associated £4m
increase in implementation costs to £44mn.
NH:
In terms of outlook the Company noted the “activity on the exchange will continue
to reflect changes in the market capitalisation and difficult and uncertain market
conditions”. We note that UK order book volumes have deteriorated and currently
tracking down ~40% YoY and Borsa Italiana volumes are down ~60% YoY in
November month-to-date.
to reflect changes in the market capitalisation and difficult and uncertain market
conditions”. We note that UK order book volumes have deteriorated and currently
tracking down ~40% YoY and Borsa Italiana volumes are down ~60% YoY in
November month-to-date.
We retain our Underperform rating and £7.00 PO and will review our estimates
after the results presentation at 09:30 UK time
PM:
thanks for all that
PM:
Market in LSE analysis actually looks a bit one way to me
PM:
Sell
NH:
why, oh why did they not accept the offer from the Nasdaq
PM:
Something like that
NH:
£14 wasn’t it
PM:
it failed to reflect the true value of the business, clearly
NH:
and of course the LSE has been another great example of SWF investing
NH:
what price did those guys get sucked in at??
NH:
£18
PM:
i cant remember
PM:
Sovereign Fleeced Funds
NH:
everytime they have a meeting with western financial institution they get their pockets picked
PM:
NH:
in fact it is much worse than that – they get mugged
NH:
burgled even
PM:
Anyway, are done?
PM:
NH:
think so
NH:
few bits of RAW to finish on
NH:
talk of even tougher training at Carpetright
NH:
also rumblings of something big happening at Carphone Warehouse
NH:
oh and one thing
PM:
very raw
NH:
for those watching the Rio/Bhp deal
NH:
reports out of Oz overnight, that BHP might have found a way round the EU objections
NH:
it was in the AFR
NH:
and the story went as follows
NH:
BHP is considering a multi-billion spin off of a portfolio of iron ore assets into a new company
NH:
and they are also considering selling this division to a rival like Anglo or Xstrata
NH:
now the author of this story has had a good track record on this deal
NH:
so i think there must be something in it
NH:
so it worth keeping an eye on
PM:
Interesting — cheers for that
NH:
one more thing
NH:
a bit of reaction to that story
NH:
from Liberum Capital
NH:
BHP Billiton considering iron ore spin off?
NH:
Australian press overnight reported the possibility of a spin-off of iron ore assets by
BHP in order to secure approval from the European Commission. A new company,
with a portfolio of iron ore mine assets and an independent board and management,
would essentially ‘create’ another competitor in seaborne iron ore markets. We see
this as one possible solution to regulator concerns in iron ore, and would highlight
important considerations in such a structure:
BHP in order to secure approval from the European Commission. A new company,
with a portfolio of iron ore mine assets and an independent board and management,
would essentially ‘create’ another competitor in seaborne iron ore markets. We see
this as one possible solution to regulator concerns in iron ore, and would highlight
important considerations in such a structure:
NH:
Financing not an issue in a spin-off
NH:
As Rio Tinto has experienced, potential
bidders are finding it difficult to obtain financing, even as asset values fall in the
resources space. A spin-off could be achieved without the need for additional
financing, although the EC would expect spinco’s capital structure to be
sufficiently robust to make it a viable entity.
bidders are finding it difficult to obtain financing, even as asset values fall in the
resources space. A spin-off could be achieved without the need for additional
financing, although the EC would expect spinco’s capital structure to be
sufficiently robust to make it a viable entity.
NH:
Value preserved
NH:
A spin-off would reduce the risk of value loss from selling
such assets at today’s depressed valuations. Existing shareholders would
receive shares in the new company, and benefit from the upside in any
improvement in resource company valuations.
such assets at today’s depressed valuations. Existing shareholders would
receive shares in the new company, and benefit from the upside in any
improvement in resource company valuations.
NH:
Infrastructure access agreements would likely form part of any spin-off –
NH:
Vertical integration from mine to port is essential to ensure iron ore capacity
actually reaches the seaborne market. We would expect the EC to require any
remedy package include short to medium term access agreements to rail and
port infrastructure. Such agreements could be structured more quickly and
would be less disruptive than third party access as BHP is familiar with the
infrastructure assets involved and the mine to port integration model would be
preserved.
actually reaches the seaborne market. We would expect the EC to require any
remedy package include short to medium term access agreements to rail and
port infrastructure. Such agreements could be structured more quickly and
would be less disruptive than third party access as BHP is familiar with the
infrastructure assets involved and the mine to port integration model would be
preserved.
NH:
The alternatives to a spin off are asset sales to potential industry buyers. We think
the leading contenders to acquire assets are Anglo American, Xstrata, Arecelor
Mittal and various Chinese companies such as Zijin. All of these companies
(including Anglo) are capital constrained – so innovative financing options need to be
‘on the table’. These could include the use of sovereign wealth funds to support bids
(think Barclays/ABN) or BHP Billiton taking some of the consideration in shares.
With the asset prizes so attractive, we think bidders will be willing to go the extra
mile.
the leading contenders to acquire assets are Anglo American, Xstrata, Arecelor
Mittal and various Chinese companies such as Zijin. All of these companies
(including Anglo) are capital constrained – so innovative financing options need to be
‘on the table’. These could include the use of sovereign wealth funds to support bids
(think Barclays/ABN) or BHP Billiton taking some of the consideration in shares.
With the asset prizes so attractive, we think bidders will be willing to go the extra
mile.
NH:
In the final stages with the EC
NH:
The table below highlights critical dates in the EC
review process. We believe the coming days and weeks are critical to reaching an
agreement with the EC. Should BHP offer remedies by mid-November, an
extension to the EC review can be avoided. However, should remedies be
submitted by early December, the EC timing slippage would be minimal and we
would expect a final decision by early February 2009, at the latest. The EC will take
the time between remedies offered and its decision date to ‘market test’ the
proposals, and we believe a spin-off and/or select iron ore asset divestitures will
ultimately lead to EC approval.
review process. We believe the coming days and weeks are critical to reaching an
agreement with the EC. Should BHP offer remedies by mid-November, an
extension to the EC review can be avoided. However, should remedies be
submitted by early December, the EC timing slippage would be minimal and we
would expect a final decision by early February 2009, at the latest. The EC will take
the time between remedies offered and its decision date to ‘market test’ the
proposals, and we believe a spin-off and/or select iron ore asset divestitures will
ultimately lead to EC approval.
NH:
If remedies are submitted beyond mid-November, the EC’s final decision is
subject to extension by 15 working days.
subject to extension by 15 working days.
NH:
We expect Rio shares to outperform BHP as discount to deal terms shrinks
Overnight in Australia Rio outperformed BHP by 3.5%, and Rio shares are now
trading at an 18% discount to the terms of BHP’s offer (see chart below),
compared to a 22% discount the prior day. We would expect a similar
outperformance in Rio shares today in London as we move closer to a resolution
of the critical regulatory path in this deal. Rio shares in London closed last night
at a 25% discount to the value of BHP’s bid (see chart below), providing a 34%
return to investors long the relative value trade. We see the spread as an
attractive investment to capture such upside, and also see Rio shares as the
cheap way into what will be an attractive new company. One reason for the wide
spread on the deal is fear of where RIO trades on a broken deal. We do not see
much downside as it is already trading at a ratio that is close to its share of the
combined company earnings (i.e. PER ratings parity). On a break we see upside
on BHPB (on a buy-back?), but not much price risk in RIO (balance sheet and
earnings risk fears overdone).
Overnight in Australia Rio outperformed BHP by 3.5%, and Rio shares are now
trading at an 18% discount to the terms of BHP’s offer (see chart below),
compared to a 22% discount the prior day. We would expect a similar
outperformance in Rio shares today in London as we move closer to a resolution
of the critical regulatory path in this deal. Rio shares in London closed last night
at a 25% discount to the value of BHP’s bid (see chart below), providing a 34%
return to investors long the relative value trade. We see the spread as an
attractive investment to capture such upside, and also see Rio shares as the
cheap way into what will be an attractive new company. One reason for the wide
spread on the deal is fear of where RIO trades on a broken deal. We do not see
much downside as it is already trading at a ratio that is close to its share of the
combined company earnings (i.e. PER ratings parity). On a break we see upside
on BHPB (on a buy-back?), but not much price risk in RIO (balance sheet and
earnings risk fears overdone).
RIO TINTO (RIO:LSE): Last: 2,509, down 37 (-1.45%), High: 2,586, Low: 2,419, Volume: 2.89m
BHP Billiton (BLT:LSE): Last: 921.00, down 27.5 (-2.90%), High: 948.00, Low: 898.00, Volume: 11.96m
PM:
Ta
PM:
We are done — run over
PM:
Thank you for joining us
PM:
We will try and cheer up at some stage
PM:
But only when weve seen house prices fall a further 30%
NH:
agreed – house prices still way too high
PM:
And a string of corporate defaults
PM:
default rate has only just begun to rise
NH:
one of the big housebuilders must go under before that market bottoms
NH:
and the Candy Brothers are still operational
PM:
Remember — the trend is your friend — and were remain parted for now
PM:
Dont be long!
NH:
in spite of Draaisma might have to say
NH:
Full House Buy Signal
PM:
back tomorrow at 11am