Markets live chat transcript for the chat ending at 12:03 on 12 Dec 2008. Participants in this chat were: Paul Murphy, FT (PM) Bryce Elder, FT (BE)
PM:
Hello – and welcome to Markets Live.
PM:
And yes, I’m feeling much better, thanks you.
PM:
Nice to receive some much sympathy.
PM:
Been quite overwhelming
PM:
PM:
Im completely out of touch – as is Neil.
PM:
In fact he’s not even here. At a school play.
PM:
But doesn’t really matter, cos there’s no much going on other than the US auto sector collapsing, the dollar going into a death spiral
PM:
Stocks across Europe getting SMACKED.
PM:
HBOS…
PM:
Madoff…
PM:
Luckily Bryce is with me.
PM:
Just logging in
BE:
Right – I’m here
PM:
hi there
BE:
Right – I’m in at last
PM:
I should just say thank you to the reader that has sent us in the Rasta Lion for Xmas
PM:
marvelous
PM:
Before it goes in the charity bin we will get a flash done — like the rally monkey,
PM:
because the rasta Lion sings….
PM:
Here is a little song I wrote
You might want to sing it note for note
Don’t worry be happy
In every life we have some trouble
When you worry you make it double
Don’t worry, be happy……
You might want to sing it note for note
Don’t worry be happy
In every life we have some trouble
When you worry you make it double
Don’t worry, be happy……
PM:
Ain’t got no place to lay your head
Somebody came and took your bed
Don’t worry, be happy
The land lord say your rent is late
He may have to litigate
Don’t worry, be happy
Lood at me I am happy
Don’t worry, be happy
Here I give you my phone number
When you worry call me
I make you happy
Don’t worry, be happy
Ain’t got no cash, ain’t got no style
Ain’t got not girl to make you smile
But don’t worry be happy
Cause when you worry
Your face will frown
And that will bring everybody down
So don’t worry, be happy (now)…..
Somebody came and took your bed
Don’t worry, be happy
The land lord say your rent is late
He may have to litigate
Don’t worry, be happy
Lood at me I am happy
Don’t worry, be happy
Here I give you my phone number
When you worry call me
I make you happy
Don’t worry, be happy
Ain’t got no cash, ain’t got no style
Ain’t got not girl to make you smile
But don’t worry be happy
Cause when you worry
Your face will frown
And that will bring everybody down
So don’t worry, be happy (now)…..
PM:
There is this little song I wrote
I hope you learn it note for note
Like good little children
Don’t worry, be happy
Listen to what I say
In your life expect some trouble
But when you worry
You make it double
Don’t worry, be happy……
Don’t worry don’t do it, be happy
Put a smile on your face
Don’t bring everybody down like this
Don’t worry, it will soon past
Whatever it is
Don’t worry, be happy
I hope you learn it note for note
Like good little children
Don’t worry, be happy
Listen to what I say
In your life expect some trouble
But when you worry
You make it double
Don’t worry, be happy……
Don’t worry don’t do it, be happy
Put a smile on your face
Don’t bring everybody down like this
Don’t worry, it will soon past
Whatever it is
Don’t worry, be happy
11:06AM
PM:
before we get in to HBOS Bryce, just of Madoff
PM:
Gettign bad netowrk blockages this morning
PM:
on Madoff — the story is ALL over the place
PM:
Will take a number of hours to clarify…
PM:
Clearly much more than a simple story of a hedgie hitting retired types in Boca Raton
PM:
Big London operation in Mayfair
PM:
Office closed down — remember this was a FSA -regulated entitity in London…
PM:
50bn is the starter fig — just plucked out of the air by the FBI and SEC as far as i can tell
11:09AM
PM:
To HBOS….
BE:
Or, as Taxloss put it earlier – Halifecked
BE:
You can read the statement here
BE:
And it has just encouraged capitulation in the market
BE:
HBOS currently off 15p at 72.5p — down 17%
PM:
Eric Daniels – what have you done.???????
PM:
This was a brilliant – once in a generation opportunity to create a quasi-monopoly.
PM:
As I think one commenter put it here at the time…
PM:
If you mix ice cream and horseshit, you get horseshit.
BE:
BE:
Standing at a 10 per cent discount to the terms from Lloyds TSB — which has also been SMASHED
BE:
Lloyds down 28p at 130p – down 17.8%
PM:
Any comment on this Bryce???
PM:
From the analysts??
BE:
This from Jason Napier at Deutsche Bank
BE:
Trading update delivers material profit warning
HBOS’s profit warning ahead of this morning’s shareholder vote highlighted margin compression due to falling UK base rates and ongoing wholesale funding pressures, but the key downside comes from higher bad debts which we estimate would have seen the group lose around £2bn pre-tax in the two months to November 2008 and lead to a loss for the second half.
HBOS’s profit warning ahead of this morning’s shareholder vote highlighted margin compression due to falling UK base rates and ongoing wholesale funding pressures, but the key downside comes from higher bad debts which we estimate would have seen the group lose around £2bn pre-tax in the two months to November 2008 and lead to a loss for the second half.
BE:
Staggering rate of credit quality deterioration
The Corporate segment impairment charge is a serious concern with 1992 peak loss rates exceeded materially in 2H08. While the 3Q08 annualised Corporate charge of 428bps (£1,252m) represented a substantial deterioration over the 88bps (£469m) reported in 1H08, the 810bps annualised charge in the two months to end-November is truly staggering, and dwarfs the 284bps peak bad debt charge recorded by the sector in 1992. Residential mortgages are also substantially weaker at 66bps in the past two months compared with 18bps in 1H08 and 38bps in 3Q08.
The Corporate segment impairment charge is a serious concern with 1992 peak loss rates exceeded materially in 2H08. While the 3Q08 annualised Corporate charge of 428bps (£1,252m) represented a substantial deterioration over the 88bps (£469m) reported in 1H08, the 810bps annualised charge in the two months to end-November is truly staggering, and dwarfs the 284bps peak bad debt charge recorded by the sector in 1992. Residential mortgages are also substantially weaker at 66bps in the past two months compared with 18bps in 1H08 and 38bps in 3Q08.
BE:
Further recapitalisation now a realistic outcome
Given recent recapitalisations were framed with reference to 1992 loan loss rates, the substantially worse profits reported today must raise the prospect of further required recapitalisation efforts. We estimate HBOS losses in the past two months equate to a 27bps capital ratio reduction for the post merger Lloyds TSB/HBOS, which given the proforma 7.2% starting point suggests the Group could start 2009 with a core tier one ratio in the 6-7% range. We consider this too low in the current environment.
Given recent recapitalisations were framed with reference to 1992 loan loss rates, the substantially worse profits reported today must raise the prospect of further required recapitalisation efforts. We estimate HBOS losses in the past two months equate to a 27bps capital ratio reduction for the post merger Lloyds TSB/HBOS, which given the proforma 7.2% starting point suggests the Group could start 2009 with a core tier one ratio in the 6-7% range. We consider this too low in the current environment.
BE:
And, from JP Morgan, Carla Antunes da Silva comes to similar conclusions.
BE:
Impairments are significantly worse than our expectations in all divisions, especially corporate. Note our estimates are already
significantly more bearish than consensus.
significantly more bearish than consensus.
BE:
i) Retail – Secured impairment deterioration much worse than expected – £0.7bn at 11 month stage, 0.32% annualised (JPM £0.6bn 2008E, 0.26% of loans, £1.3bn 2009E, 0.53% of loans) implies 75bps annualised impairments in October and November. This will have a negative read across to the broader UK banking sector, and to Lloyds TSB standalone in particular. Unsecured impairments £1.0bn at 11mon stage (JPM £1.2bn 08E, £1.2bn 09E) so tracking more inline with our estimates, though we are incorporating further deterioration. Guidance is for trends to come under further pressure.
BE:
(ii) Corporate – Shocking impairment increase – £3.3bn at 11mon stage, 3.2% annualised (JPM £1.9bn 08E, 1.7% of loans, £2.2bn 09E, 1.8% of loans) – October and November run rate annualised at 8.4%. We suspect this is driven by deterioration in commercial real estate lending, though this run rate already seems worse than what we saw in the 1990s ( c.5-6%). This reads across negatively to RBS in particular. The corporate investment portfolio also experienced significant deterioration, with an estimated loss of £0.7bn in Oct/Nov.
BE:
• Net interest margin pressure – with government ownership and influence, the ability to increase asset margins is diminishing, and is being overwhelmed by liability spread deterioration. We are still currently expecting a pick up in net interest margins from 1.54% in 2008E to 1.70% in 2009E (1.56% H1 08), but this is at risk.
BE:
• Treasury asset losses continue to increase. – 11mon loss through the income statement £2.2bn (£1.8bn at Q3) and negative AFS reserves £4.5bn (£3.3bn at Q3). These further losses negatively impact NAV estimates by £1.5bn. Note also £35.4bn of Assets have been reclassified as loans and receivables under IAS39, the losses that these assets would have had has not been disclosed
BE:
• Financial Services Compensation Scheme – guidance of a £200mn cost in relation to the scheme in 2008. This is related to the losses on unwind of the Bradford & Bingley portfolio, owned by the government. Given the deterioration in asset quality we have seen, this charge may be
significantly higher in 2009, and will impact all the UK banks (note the
B&B portfolio was c.£40bn in magnitude, predominantly specialised
lending).
significantly higher in 2009, and will impact all the UK banks (note the
B&B portfolio was c.£40bn in magnitude, predominantly specialised
lending).
BE:
• In Summary, this update again highlights the fragile state of UK banking, and the risks that shareholders are facing. Asset quality deterioration continues to accelerate, and current run rates seem now greater than 1990s experience. For HBOS shareholders it highlights their need to vote the Lloyds transaction through, and for Lloyds TSB shareholders it illustrates the problems that they are acquiring. For the broader sector it again shows the earnings and capital risk, and we reiterate our Underweight recommendations on both the sector and all its constituents.
PM:
Need a moment to take all this in
PM:
Basic point is that we are now getting clear evidence of the severity of the general downturn
PM:
More banking prices? — Someone mentioned Barclays below???
BE:
BARC is off 20p at 140p
BE:
RBS down 11p at 55p.
PM:
dear dear me
PM:
HSBC??
BE:
Down with the rest – off 54p at 696p
BE:
Dresdner stuck a out a big bank sector review at 11pm last night. Forecasting HSBC to cut its dividend, among other things.
PM:
BE:
It’s a long read, but here are the highlights from the summary page.
BE:
2009 will be another tough year. Many mid-sized banks could disappear. More rights issues look inevitable. Government interference will be an issue. Average RoNAV might (barely) match sector CoE, but if our 200bp severe stress test crystallises, it could fall to as low as 7% in 2009-10. But not all is lost: a few large banks satisfactorily pass all our acid tests – and still look extremely cheap to us.
BE:
► Governments need the banks to keep on lending in order to avoid a vicious circle and prevent recessions from becoming depressions. Governments also want banks to keep lending margins low in order to avoid triggering even more bankruptcies.
► But banks cannot lend cheaply in a recession and recapitalise simultaneously as loan loss ratios (LLR) will increase abruptly. We substantially improve our severe LLR stress test (published in Gotterdammerung, 24 September), and now think that it might peak at 200bp in 2009. In that case, RoNAVs would fall to 7%, almost half the CoE.
BE:
► More capital increases virtually inevitable: There are potential solutions (improving deposit margins, substantial staff cuts, NPL-sharing mechanisms, moving the regulatory goalposts…) but none is ideal. The most convenient solution is to over capitalise the banks in advance.
► We calculate €75bn of capital deficit now, but it might get worse. The €75bn includes several large €6-8bn deficits at banks such as BNP, SocGen, UCG, CASA and HSBC. If the cycle worsens, this figure will increase. Besides, Basel III is on its way and we think it will mean tougher risk weightings and fewer hybrids allowed.
BE:
► Meet the new utilities: If you take a bank, over capitalise it, quasi regulate its tariffs, reduce risk, eliminate financial innovation… you have a utility. And if the state owns 60% of it, you have… a State utility.
PM:
Very good!
BE:
Here’s their recommendations
PM:
State utilities
BE:
► Buy the survivors – buy the large banks: One of the most consistent conclusions of all our analyses, both on capital and provisions, is that some of the players most at risk are the mid-sized domestics (the three Irish banks, Postbank, HREG, Piraeus, Sabadell, Aareal). We believe a number of those will lose their independence in 2009. Conversely, some of the larger-caps pass satisfactorily all our acid tests and continue to look
extremely cheap to us. Our core portfolio is predominantly large-cap.
extremely cheap to us. Our core portfolio is predominantly large-cap.
► Core Buy portfolio – Santander, Intesa, STAN, BBVA, NBG, Deutsche Bank and BNP:
Our combined portfolios have generated 3,070bp of alpha YTD, even though we stopped tracking the performance of our ‘unattractives’ when the shorting ban was announced.
► HSBC cut to Hold and removed from core portfolio: HSBC has been a core Buy for us the entire year, recording a stellar 34% outperformance vs. the Eurotop 300 Banks.
But we today cut our forecasts by 35% and cut the stock to Hold. As we now expect EPS 2009 to fall 20%, we also expect the 2009 dividend to fall. The stock now looks relatively expensive in all our ‘acid tests’. Finally, we believe there is zero visibility in terms of future impairment trends in Asia, especially in China.
BE:
► Emerging markets, key for performance: Many core Buy stocks are part emerging-market driven, and we are aware of the risks. We are extremely concerned about C&EE, but still think that the largest Asian and LatAm countries should fare reasonably well in 2009. The very limited level of growth that we might see in 2009 is likely to come from them.
BE:
And, while we’re here, a wee bit more on HSBC alone.
BE:
We still see HSBC as having one of the strongest balance sheets in Europe, capable of withstanding the impacts a global recession might provide. It is a highly liquid bank, attracting very good deposit inflows. However, a global recession is almost a certainty now, and we believe that some of HSBC’s main Asian countries might suffer this very substantially. We are raising our impairment charges to 269bp in 2009 and 240bp in 2010 and decreasing US$ EPS by 37% in 2009 and 33% in 2010.
BE:
(Sorry – that was meant to be in a quote box.)
BE:
We expect HSBC to be one of the few European banks that pays a cash
dividend in 2009. But with our forecast EPS now expected to fall by 37%
between 2007 and 2009, we expect a similar adjustment in the dividend. Hence, we now expect the dividend to fall by 39% between 2007 and 2009, to 74c in 2008 and 55c (37p) in 2009. HSBC shows a modest capital deficit in our calculations (se below) and we do not expect the bank to keep a dividend cover of less than 2x in the next two years.
dividend in 2009. But with our forecast EPS now expected to fall by 37%
between 2007 and 2009, we expect a similar adjustment in the dividend. Hence, we now expect the dividend to fall by 39% between 2007 and 2009, to 74c in 2008 and 55c (37p) in 2009. HSBC shows a modest capital deficit in our calculations (se below) and we do not expect the bank to keep a dividend cover of less than 2x in the next two years.
PM:
Cheers for all that
11:19AM
PM:
So how is the wider market doing??
BE:
Badly
BE:
We’re at session lows on the FTSE100 – down 186 points at 4202.
PM:
Hmmmm
BE:
Hope you all picked up your copies of How To Spend It this morning
PM:
Ah, the Friday special
BE:
Someone should to a correlation between HTSI coming out and the markets tanking
PM:
better not go there 
PM:
Other assets
BE:
Dollar holding at 90 vs the yen. Touched 88.4 overnight.
BE:
GBK is at 1.49 – but that’s only because the $ tanked.
BE:
Crude spot brent at $42
PM:
yes, Izabella has just done a post on crude — should be up soon on the home page
PM:
ive got some CDS prices here, but not sure how up todate….
PM:
ive got the Itraxx europe tarading at 212 and the Xover at 1040
11:23AM
PM:
Where now Bryce?
BE:
Can’t really escape the banks today
BE:
Note Goldman and Morgan Stanley report their finals next week. Goldman on Tuesday and MOST the day later.
BE:
I think the current consensus is for the small Goldman to print a Q4 loss by a couple of cents, and Morgan Stanley to hit breakeven.
BE:
Alex Potter at Collins Stewart has done a bit about the UK readthrough from this.
BE:
The last three months have been pivotal
For these two remaining November year-end reporters (Lehman & Bear no longer reporting), the past three months will have been pivotal to their year as well as to 2009 outlook. This time period encompassed the Lehman failure, as well as the nationalisations of Fannie Mae, Freddie Mac and AIG as well as a raft of other remarkable events. These two banks will be the first to report audited figures for this period.
For these two remaining November year-end reporters (Lehman & Bear no longer reporting), the past three months will have been pivotal to their year as well as to 2009 outlook. This time period encompassed the Lehman failure, as well as the nationalisations of Fannie Mae, Freddie Mac and AIG as well as a raft of other remarkable events. These two banks will be the first to report audited figures for this period.
BE:
Debt trading is the key area of weakness
Corporate advisory and equity revenues have held up relatively well during the credit crunch. However, the UK banks are very underweight these revenue streams our fear is that equity and advisory revenue pools are likely to shrink from here. The main weakness is in debt trading, which has been little short of disastrous (heavily negative) in recent quarters. Capital markets revenues in aggregate for 35-40% of the revenue streams of RBS and Barclays (pre-credit crunch), with debt trading (credit products in UK parlance) being the largest contributors to this, we estimate.
Corporate advisory and equity revenues have held up relatively well during the credit crunch. However, the UK banks are very underweight these revenue streams our fear is that equity and advisory revenue pools are likely to shrink from here. The main weakness is in debt trading, which has been little short of disastrous (heavily negative) in recent quarters. Capital markets revenues in aggregate for 35-40% of the revenue streams of RBS and Barclays (pre-credit crunch), with debt trading (credit products in UK parlance) being the largest contributors to this, we estimate.
BE:
Capital markets write-downs to worsen own debt to feature
We also expect write-downs and impairments to again increase and these US banks will give an early indication. Part of the difficulty for the UK banks is that, since the UK government guarantee and recapitalisation system has been put in place, the banks own debt has improved in value. Therefore the previous-offsetting benefits from weakening own debt values could also abate late in the year. There is clear potential for these to reverse in 2009, though it is early to make estimates surrounding this point.
We also expect write-downs and impairments to again increase and these US banks will give an early indication. Part of the difficulty for the UK banks is that, since the UK government guarantee and recapitalisation system has been put in place, the banks own debt has improved in value. Therefore the previous-offsetting benefits from weakening own debt values could also abate late in the year. There is clear potential for these to reverse in 2009, though it is early to make estimates surrounding this point.
BE:
UK bank valuations not explicitly cheap yet
RBS and Barclays are trading around 0.7x tangible book value, which was around the nadir during the early-90s recession. However, these figures exclude major year-end write-downs hence news from these US banks could be very instructive towards our thinking surrounding book values. Lloyds-HBoS is more expensive (at 1.03x end-08 book) with this including £10bn of net write-downs in line with management guidance for acquisition accounting the HBoS balance sheet this morning’s further profit warning from HBoS weakens this bank’s position again.
RBS and Barclays are trading around 0.7x tangible book value, which was around the nadir during the early-90s recession. However, these figures exclude major year-end write-downs hence news from these US banks could be very instructive towards our thinking surrounding book values. Lloyds-HBoS is more expensive (at 1.03x end-08 book) with this including £10bn of net write-downs in line with management guidance for acquisition accounting the HBoS balance sheet this morning’s further profit warning from HBoS weakens this bank’s position again.
BE:
There’s a lot more in there that’s worth reading. I’ll see if I can Longroom it later.
PM:
Cheers for taht
11:26AM
PM:
just going back to Madoff for a moment
PM:
If anyone has got any intel, would love to hear
PM:
Suspect this story is going to explode
PM:
This isn’t just about a load of retirees in Flordia getting skinned.
PM:
This stretches in every direction.
PM:
There are plenty of victims in London for example – firms – and also individuals.
BE:
Been talking to one friendly trader who used to work there.
BE:
He’s none too happy. They owe him money.
BE:
Apparently the Madoff offices in London were locked this morning.
PM:
Where are the offices?
BE:
Berkeley Street I think.
BE:
Had an active trading operation in London – supposed to be profitable.
BE:
Remember this was an FSA regulated entity in London – LSE member etc.
PM:
Counterparties will be hit — bound to be
11:30AM
PM:
Where now??
PM:
How’s Punch Taverns this morning ?
BE:
Unchanged at 60p
PM:
Seen this stuff in the Times by Dom Walsh?
BE:
Do share
PM:
Charles Winston, leisure analyst at Redburn Partners and a noted bear on the stock, issued a research note on Wednesday claiming that Punch was in danger of becoming “a near-empty shell” unable to access the cash being generated by its various securitised pub vehicles.
In short, he argued, Punch was “heading for zombie status”, adding: “We are moving our fair value on Punch shares to nil and reinstigating our sell recommendation.”
In short, he argued, Punch was “heading for zombie status”, adding: “We are moving our fair value on Punch shares to nil and reinstigating our sell recommendation.”
PM:
The only problem with Mr Winston’s thesis was that it contained a number of inaccuracies and 24 hours after issuing his original piece of research, he was forced to send out an updated version in which he admitted that there had been “an error in our understanding” that was “material”.
In what is an extremely detailed technical analysis of Punch’s securitised debt vehicles, the analyst admitted that he had failed to grasp that the group’s recent decision to buy back bonds in one of its vehicles in the market did not amount to a formal redemption of the bonds.
A spokesperson for Punch said: “His assumptions were based on some factual inaccuracies. He has now corrected those inaccuracies, but it would be nice if people got their facts right in the first place as it can be very damaging. He’s entitled to his view but this is irresponsible.”
In what is an extremely detailed technical analysis of Punch’s securitised debt vehicles, the analyst admitted that he had failed to grasp that the group’s recent decision to buy back bonds in one of its vehicles in the market did not amount to a formal redemption of the bonds.
A spokesperson for Punch said: “His assumptions were based on some factual inaccuracies. He has now corrected those inaccuracies, but it would be nice if people got their facts right in the first place as it can be very damaging. He’s entitled to his view but this is irresponsible.”
PM:
Here’s some more
PM:
Earlier in the year, Mr Winston had estimated that Punch would require a £1.35 billion rights issue to bolster its balance sheet. He has since revised his estimate downwards, first to £535 million, then to £460 million and this week to £250 million, although he believes that even this lower figure would be “a tall order given Punch’s current share price”.
BE:
Is this Dom Walsh, the former top reporter in the leisure sector?
PM:
Yep, we’re slapping a “former” label on Dom Walsh.
PM:
PM:
Not something we’d do lightly.
BE:
But acting as the apologist for Punch Taverns – that’s a strike out.
PM:
We’re going to stick with Charles Winston on this. Any investor who followed him on Punch from earlier this year would have saved themselves a lot of money.
PM:
Arguing over whether Punch might become a “zombie” company?
PM:
We know it’s mutant – what tighter definition is needed?
PM:
Specifically, on the suggest that Winston is somehow wrong for reducing his estimate of the likely cash call at Punch….
PM:
How is that? Of course the cap on what the company might raise is lowered as its share price falls
PM:
That’s market law
PM:
When your market value is 250m quid you cant raise as much as when you are valued at 2 billion
PM:
Winston has been right on this — so lay off Walsh! 
BE:
11:36AM
BE:
Cattles mentioned below
PM:
Ah, yes, jsut asaw a citi note pop up on that
BE:
Yup – they stuck out “response to share price” statement yesterday
BE:
Saying the banking approval process was stalled by a regulatory review
BE:
So it looks like it’ll be April at the earliest before they get an answer on whether they can take deposits
BE:
And there looks to be a fair chance the capital rules will be tightened
BE:
Think they’ve got about £500m of debt to roll over in July as well
BE:
Anyway, just got Caz comment through on this
BE:
Highlighting the readthrough from HBOS
BE:
Today’s trading update from HBOS has further highlighted the deterioration in conditions in the
unsecured lending market. In light of this, and Cattle’s recent statement that it expects any
decision on its application for a banking licence to be delayed, we have further reduced our profit
expectations to reflect both a higher cost of wholesale funding and a deterioration in credit
quality. As a result we expect the company to be loss making in 2009E. Because of this we no
longer expect a final dividend to be paid in respect of 2008E. We re
unsecured lending market. In light of this, and Cattle’s recent statement that it expects any
decision on its application for a banking licence to be delayed, we have further reduced our profit
expectations to reflect both a higher cost of wholesale funding and a deterioration in credit
quality. As a result we expect the company to be loss making in 2009E. Because of this we no
longer expect a final dividend to be paid in respect of 2008E. We re
BE:
Cattles reports its preclose statement on 18 December although it has already reported that its
application for a banking licence is likely to take longer than it had previously anticipated.
We expect that the deterioration in credit quality which has been reported through the year will
have continued. Fig 2 below shows the stark deterioration in the book quality over the 15 months
since mid 2007.
application for a banking licence is likely to take longer than it had previously anticipated.
We expect that the deterioration in credit quality which has been reported through the year will
have continued. Fig 2 below shows the stark deterioration in the book quality over the 15 months
since mid 2007.
BE:
Hang on – I’ll skip to the conclusion …
BE:
With the delay in the decision on a banking licence, the risk increases of a “chicken and egg”
situation with respect to negotiations with Cattles’ lending banks. The syndicate is likely to want to
see a banking licence granted, the FSA may well want reassuring that the lending banks are
committed. Either way, the risk has to be that the cost of funding that we had previously assumed
is unrealistic relative to current market conditions. When tobacco companies are raising debt at
9.5%, what cost is likely for a sub
situation with respect to negotiations with Cattles’ lending banks. The syndicate is likely to want to
see a banking licence granted, the FSA may well want reassuring that the lending banks are
committed. Either way, the risk has to be that the cost of funding that we had previously assumed
is unrealistic relative to current market conditions. When tobacco companies are raising debt at
9.5%, what cost is likely for a sub
BE:
In our view the scenario now facing Cattles is along the lines of the scenarios we laid out in our
note of 21 October “Not difficult to justify the price”. In our revised estimates we now assume
that the management seeks to shrink the loan book over the next couple of years, and we now
assume that the customer count at Welcome Finance reduces from a peak of ~584,000 at the
end of December 2008 to around 500,000 by end 2010E, although this will only take the
company back to levels similar to the end of 2007. On this basis the loan book at Welcome
Finance shrinks back to £2.5bn from a peak of £3.0bn. In our view it will be difficult to
aggressively cut costs as the likely increase in impairments will mitigate against headcount
reductions, albeit that we expect staff to be reallocated from new lending to maintenance.
On the scenario that we are now assuming, the company will record a loss in 2009E. We
therefore assume that the final dividend in 2008E is passed, and we do not expect dividends to
restart in our forecast period. The risk, in our view, is that equity shareholders may need to inject
more capital.
note of 21 October “Not difficult to justify the price”. In our revised estimates we now assume
that the management seeks to shrink the loan book over the next couple of years, and we now
assume that the customer count at Welcome Finance reduces from a peak of ~584,000 at the
end of December 2008 to around 500,000 by end 2010E, although this will only take the
company back to levels similar to the end of 2007. On this basis the loan book at Welcome
Finance shrinks back to £2.5bn from a peak of £3.0bn. In our view it will be difficult to
aggressively cut costs as the likely increase in impairments will mitigate against headcount
reductions, albeit that we expect staff to be reallocated from new lending to maintenance.
On the scenario that we are now assuming, the company will record a loss in 2009E. We
therefore assume that the final dividend in 2008E is passed, and we do not expect dividends to
restart in our forecast period. The risk, in our view, is that equity shareholders may need to inject
more capital.
PM:
Thanks for all that
11:41AM
PM:
As Bohemia notes below, we must return to Llooyds, Halifecked
PM:
Lloyds jsut come out with a statement
PM:
Which i will run back to front
PM:
The trading update from HBOS is broadly consistent with the impairment analysis conducted by Lloyds TSB as part of its review process in October 2008. Whilst the fair value adjustments can only be finalised after the completion of the acquisition and in accordance with market conditions at that time, the additional impairment losses being incurred by HBOS are not currently expected to have a significant impact upon the size of the net negative capital adjustments the Group is likely to make upon acquisition.
BE:
How panicky is that?
PM:
LLOYDS TSB COMMENTS ON THE FINANCIAL IMPLICATIONS OF RECENT CHANGES
TO ITS PERSONAL LOAN PAYMENT PROTECTION INSURANCE, THE FINANCIAL SERVICES
COMPENSATION SCHEME REQUIREMENTS AND TODAY’S TRADING UPDATE FROM HBOS
TO ITS PERSONAL LOAN PAYMENT PROTECTION INSURANCE, THE FINANCIAL SERVICES
COMPENSATION SCHEME REQUIREMENTS AND TODAY’S TRADING UPDATE FROM HBOS
PM:
Lloyds TSB has today announced that it will be launching a monthly premium, payment protection insurance (PPI) product for personal loan customers in January 2009 to replace its existing single premium policy. The transition to this new product is expected to reduce Lloyds TSB’s income by around £300 million over the next twelve months, largely as a result of a change in the timing of income recognition. The financial impact of this timing of income recognition in future years remains uncertain but the Group currently expects ongoing monthly product revenues to materially offset the reduction in annual income generation over a three year period.
In addition, the recent arrangements put in place to protect the depositors of Bradford & Bingley and other failed deposit-taking institutions involving the Financial Services Compensation Scheme (‘FSCS’) will result in a significant increase in the levies made by the FSCS on the industry. Lloyds TSB anticipates making a provision of approximately £120 million in its 2008 accounts in respect of its current obligation for the estimated interest cost on the FSCS borrowings. Going forward further provisions in respect of these costs are likely to be necessary until the borrowings are repaid. The ultimate cost to the industry, which will also include the cost of any compensation payments made by the FSCS and if necessary the cost of meeting any shortfall after recoveries on the borrowings entered into by the FSCS, remains uncertain although it may be significant.
The Group has also written off the total value of its investment in Bradford & Bingley, acquired as part of the sub-underwriting of the Bradford & Bingley rights issue earlier in the year, amounting to approximately £30 million.
BE:
Didn’t know they had an investment in Bungle Bank
PM:
Neither did I.
PM:
Price?
BE:
Well it hasn’t helped yet
BE:
Down 28p at 129p
BE:
HBOS is worse – down 18.4p at 69.2p. That’s off 21%.
PM:
Goodness me
PM:
Another fifth of the market value gone
PM:
Wonder whether these banks will make it to Xmas in the private sector
PM:
And I am not scaremongering
PM:
on quick reflection, i think it rather beggers belief that Lloyds foresaw the sort of write-downs revealed by HBOS this morning back in October
PM:
anyway, waht do i know
PM:
Where’s the Rasta lion?
PM:
Been taken off to the interactive desk i think
PM:
or Alida’s got it
PM:
be happy, buy hbos
PM:
joke
11:48AM
11:49AM
PM:
Graham — that is true Rasta Lion logic
PM:
On HBOS — another 20p is nothing if you bought above 10 quid
PM:
So what if it’s now 70p
PM:
You’ve already been wiped
BE:
Itzman – very amusing
11:51AM
PM:
Right Bryce — before we go
PM:
Cos i have a light lunch to attend with a higher-upper here at the FT
PM:
Very light lunch
PM:
Soup in fact
PM:
bryce — wot you got??
BE:
Well, we can end on a happy note. Of sorts.
BE:
Just got Cazenove’s 2009 outlook through
PM:
Oh do share
BE:
They’re calling the FTSE at 5,000.
BE:
Of course, they don’t mention what their 2008 target was.
PM:
BE:
Anyway, here’s the gist of it
BE:
UK equity returns have been significantly weaker in 2008 than we had expected at the beginning of the year. With UK
real GDP likely to contract by around 2% in 2009E, and global real GDP likely to grow by 1%, or less, we expect UK
companies’ profits to fall by 20-30% in 2009E.
real GDP likely to contract by around 2% in 2009E, and global real GDP likely to grow by 1%, or less, we expect UK
companies’ profits to fall by 20-30% in 2009E.
BE:
Over time, however, looser fiscal and monetary policy should support
a gradual strengthening in economic activity from around the middle of 2009 onwards. With equity valuations having
fallen to exceptionally low levels, we believe there is scope for valuation multiples to expand as profits contract. As
investors start to anticipate a recovery in profits in 2010, equity returns are, in our view, likely to strengthen over the
balance of 2009.
a gradual strengthening in economic activity from around the middle of 2009 onwards. With equity valuations having
fallen to exceptionally low levels, we believe there is scope for valuation multiples to expand as profits contract. As
investors start to anticipate a recovery in profits in 2010, equity returns are, in our view, likely to strengthen over the
balance of 2009.
BE:
Within the market, we believe an
improving household cash flow position will provide a backdrop against which consumer cyclicals, and cyclical
stocks generally, will outperform the broader market. In this context, we recommend overweight positions in general
retailers and housebuilders. Against this, we recommend an underweight position in food retailers. From a defensive
perspective, we favour tobacco and telecoms over pharmaceuticals, utilities, beverages, and food producers, and
from a yield perspective we favour the oil and gas sector.
improving household cash flow position will provide a backdrop against which consumer cyclicals, and cyclical
stocks generally, will outperform the broader market. In this context, we recommend overweight positions in general
retailers and housebuilders. Against this, we recommend an underweight position in food retailers. From a defensive
perspective, we favour tobacco and telecoms over pharmaceuticals, utilities, beverages, and food producers, and
from a yield perspective we favour the oil and gas sector.
BE:
That’s from Darren Winder and Robert Griffiths. Again, I can stick up more details in the LR if anyone’s keen.
BE:
Meanwhile, we’ve gone from talking about video games earlier in the week to talking about the intricacies of browser specific HTML coding …
BE:
Which I think is the cue to wrap up
PM:
yes…
PM:
Just checking libor numbers
BE:
*THREE-MONTH DOLLAR LIBOR 1.92% VERSUS 2%, BBA SAYS
BE:
*OVERNIGHT DOLLAR LIBOR LITTLE CHANGED AT 0.12%, BBA SAYS
BE:
(Londonbus – that’s Bloomberg for you)
PM:
The rest of the LIBOR numbers are without shocks
PM:
Right — gotta go
BE:
Indeed – thanks all
PM:
Note one headline — Omega agrees 30m STG management buyout — isnt that Zoomey boy?
PM:
Right — being shouted at below
12:00PM
PM:
Thank you for joining us today
PM:
We will be back on Monday at 11am
PM:
We hope
BE:
PM:
Assuming markets open
BE:
See you