Markets live chat transcript for the chat ending at 12:07 on 16 Jan 2009. Participants in this chat were: Neil Hume, FT (NH) Paul Murphy, FT (PM) Izabella Kaminska, FT (IK)
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Oh shoot, the machine’s stuck.
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Welcome!
NH:
This is Markets Live – FT Alphaville’s daily market commentary
NH:
Murph – we’re going to have to go to manual.
NH:
Let’s start with the Citi figures which are out NOW
PM:
Just trying to find them online
NH:
and have knocked 20 points off the market
NH:
Paul has the numbers
NH:
no he hasn’t
PM:
NH:
and a BoA press release as well
NH:
trying to get that too
PM:
Finally…
PM:
Citi Reports Fourth Quarter Net Loss of $8.29 Billion, Loss Per Share of $1.72
Net Loss from Continuing Operations of $12.14 Billion, Loss Per Share of $2.44, Primarily Due to Write-Downs and Losses in Securities and Banking, Higher Credit Losses, Additions to Loan Loss Reserves, and Restructuring Costs Related to Headcount Reductions
Progress on Lowering Expenses, Headcount and Assets
Continued Capital and Structural Liquidity Strength
Full Year 2008 Revenues of $52.8 Billion, Net Loss of $18.72 Billion
PM:
Key Items
* Results reflect the negative impact from $7.8 billion in revenue marks in Securities and Banking, a $5.3 billion downward credit value adjustment on derivative positions, excluding monolines, $2.5 billion of losses in private equity and equity investments, $2.0 billion of restructuring costs, and a $6.0 billion net loan loss reserve build.
* Deposit base remained stable compared to the third quarter 2008 despite the challenging environment.
* Net interest margin increased 73 basis points versus the fourth quarter 2007.
* Expenses excluding restructuring and repositioning charges were down 4% since the third quarter 2008 and 14% since the fourth quarter 2007.
* Headcount reduced by approximately 29,000 since the third quarter 2008 and approximately 52,000 in the full year 2008.
* Increased capital position by issuing $45 billion of preferred stock and warrants to the U.S. Treasury as part of the TARP. The Tier 1 capital ratio was approximately 11.8%.
* Closed sales of the German retail banking operations and Citi Global Services Limited for after-tax gains of $3.9 billion and $192 million, respectively.
PM:
i dont like have to do this manually
NH:
did we get the $10bn loss?
NH:
at Citi?
PM:
For the full year 2008, Citigroup reported a net loss of $18.72 billion, or $3.88 per share. See Schedule C for full year business segment results.
NH:
come on
PM:
19bn
NH:
paste the figures
NH:
oh, you have
NH:
I need to refresh
PM:
“Our results continued to be depressed by an unprecedented dislocation in capital markets and a weak economy. However, a number of our core customer franchises continued to perform well as Citi’s customers remain active and engaged with us. We continued to make progress on our primary goal in 2008—which was to get fit. We significantly strengthened Tier 1 and structural liquidity, we reduced our balance sheet, expenses, and headcount. We also made significant progress in reducing risk from our balance sheet. Our legacy assets declined to approximately $300 billion, over $300 billion of assets are now covered by a loss sharing arrangement, and we added $14 billion to our loan loss reserves. We expect reduced volatility from marks in 2009 as a result of actions we’ve taken to reduce risk, and reclassify certain securities and loans from trading and available or hold for sale to hold to maturity or held for investment.
“Today, we announced that we would separate the company, for management purposes, into two separate businesses—Citicorp and Citi Holdings. We are setting out a clear roadmap to restore profitability and enable us to focus on maximizing the value of Citi and strengthening TCE.
PM:
Splitting the business
PM:
here’s some stuff for Sam
PM:
he ABCP and CDO-squared component of Citi’s CDO Super Senior sub-prime direct exposures are subject to valuation based on an intrinsic cash flow methodology and not based on observable transactions, other than losses associated with liquidations. During the course of the fourth quarter inputs used for the purposes of estimation have been modified to reflect market developments. The methodology takes into account both macroeconomic factors, including estimated housing price adjustments over the next four years, unemployment rates, interest rates and their volatility, and mortgage performance data, and microeconomic factors, including loan attributes, such as age, credit scores, documentation status, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio. In addition, the methodology takes account of estimates of the impact of geographic concentration of mortgages, estimated impact of reported fraud in the origination of sub-prime mortgages and the application of discount rates for each level of exposures.
The High Grade and Mezzanine component of the Super Senior sub-prime direct exposures are valued based on transactions in the underlying collateral. This change was made because the High Grade and Mezzanine positions are now largely hedged by short positions that are valued based on observable transactions, and there were a number of liquidations of high grade and mezzanine positions during the third quarter.
Estimates of the fair value of the ABCP and CDO-squared Super Senior exposures depend on market conditions and are subject to further change over time. In addition, while Citi believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including as a result of market developments. Further, to the extent that observable transactions in respect of some or all of these ABCP and CDO-squared exposures are occurring or occur in the future, these observable transactions, rather than estimates, could be used to determine fair value.
Most of the lending and structuring direct sub-prime exposures are fair valued based on observable transactions and other market data. The majority of such exposures are classified as Level 3 assets.
Securities and banking also has trading positions, both long and short, in U.S. sub-prime residential mortgage-backed securities (RMBS) and related products, including ABS CDOs that are not included in these figures. The exposure from these positions is actively managed and hedged, although the effectiveness of the hedging products used may vary with material changes in market conditions.
NH:
Ok, got the BoA figs
PM:
Do share
NH:
Bank of America Earns $4 Billion in 2008
Fourth-Quarter Net Loss of $1.79 Billion
CHARLOTTE, N.C., Jan. 16 /PRNewswire-FirstCall/ — Bank of America Corporation today reported full-year 2008 profit of $4.01 billion compared with net income of $14.98 billion a year earlier.
NH:
Earnings after preferred dividends and available to common shareholders were $2.56 billion, or $0.55 per diluted share, down from $14.80 billion, or $3.30 per share.
In the fourth quarter of 2008, the company had a net loss of $1.79 billion compared with net income of $268 million a year earlier. The net loss applicable to common shareholders was $2.39 billion, or $0.48 per diluted share, down from net income of $215 million, or $0.05 per share, in the same period in 2007. Results include Countrywide Financial, which Bank of America purchased on July 1, but not Merrill Lynch & Co., Inc., which was acquired on January 1, 2009.
NH:
and here’s what they say about the bailout
NH:
which was announced early this morning
NH:
Merrill Lynch preliminary results indicate a fourth-quarter net loss of $15.31 billion, or $9.62 per diluted share, driven by severe capital markets dislocations. (See the Transition Update section of this news release and supplemental earnings information provided on http://investor.bankofamerica.com for further details.)
PM:
Oh dear 15bn
NH:
In view of the continuing severe conditions in the markets and economy, the U.S. government agreed to assist in the Merrill acquisition by making a further investment in Bank of America of $20 billion in preferred stock carrying an 8 percent dividend rate.
In addition, the government has agreed to provide protection against further losses on $118 billion in selected capital markets exposure, primarily from the former Merrill Lynch portfolio. Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90 percent of any subsequent losses. Bank of America would pay a premium of 3.4 percent of those assets for this program.
NH:
look at the Merrill loss
NH:
staggering
PM:
I know i know
NH:
did they not do any due dilligence?
PM:
We had a laugh at that at the time, no?
NH:
ah yes, we did
NH:
of course in the press conference
NH:
we did a special ML session
NH:
and Ken Lewis was saying
NH:
DD, just trust us
NH:
we know what we are doing
NH:
and that’s Ken Lewis, banker of the year
PM:
Here — ive foudn the stuff
NH:
actually Paul has found the ML transcript from that day
PM:
NH:
now we have all calmed down we are going to summarise that call for you all
PM:
NH:
Ken Lewis
NH:
we have spend $50bn on ML (price as of Friday)
NH:
and done it all on the back of DD from JC Flowers
NH:
but don’t worry that things might go wrong
PM:
in two days
NH:
because
NH:
and i quote
NH:
“WE ARE GOOD AT THIS”
PM:
PM:
Click, brrrrr
NH:
and that was it
NH:
no details
NH:
few figures
NH:
just – trust us
NH:
we are good at this
PM:
oh dear dear dear
now we have all calmed down we are going to summarise that call for you all
PM:
NH:
Ken Lewis
NH:
we have spend $50bn on ML (price as of Friday)
NH:
and done it all on the back of DD from JC Flowers
NH:
but don’t worry that things might go wrong
PM:
in two days
NH:
because
NH:
and i quote
NH:
“WE ARE GOOD AT THIS”
PM:
PM:
Click, brrrrr
NH:
and that was it
NH:
no details
NH:
few figures
NH:
just – trust us
NH:
we are good at this
PM:
oh dear dear dear
NH:
ah, so its Flowers to blame
PM:
NH:
he did the work
NH:
so, they paid what, $50bn in stock for ML
NH:
and BoA are worth what now?
NH:
$65bn, I’ll say
NH:
this deal is the US equivalent of Lloyds/HBOS
PM:
Squared
NH:
NH:
actually just got some pre market quotes in Citi and BoA
NH:
BAC & Citi pre mkt…
both BAC & C seem to be holding onto pre mkt gains at the moment but
very little volume has gone through since the numbers hit the tape
C $4.06 last…+6.01%
BAC $9.20 +10.58%
will let you know if they trade from here
NH:
that’s from a friendly broker
NH:
that’s Carlo
PM:
thanks even
NH:
Reuters has not updated its market cap on BoA again
NH:
they really are poor
NH:
would not get that on Bloomie
NH:
anyway the market is taking all this red ink quite well
PM:
So well its turned the screen from red to blue
NH:
and as Praxis notes below, all sorts of rumours flying around about Citi
NH:
and what is gonna happen this weekend
NH:
how much cash the US govt will inject
NH:
and what assets they are going to guarantee
NH:
$200bn backstop plus $50bn injection from second bit of Tarp
NH:
is one set of numbers I have seen
PM:
Should add that the Footsie is now up 71 points at 4192
PM:
Gone bailout blue
PM:
Over 4200 earlier — quite a bounce
NH:
of course, this is probably just a dead cat
NH:
market been down seven days in a row
NH:
it won’t last
PM:
11:19AM
PM:
Time to look at the UK banks
PM:
Just for Bored with Banks below
NH:
yeah, the short selling ban is off
NH:
but the Monsters of Mayfair have not attacked
NH:
yet
Royal Bank of Scotland Group (RBS:LSE): Last: 42.80, up 2.9 (+7.27%), High: 43.20, Low: 40.20, Volume: 81.24m
Barclays PLC (BARC:LSE): Last: 130.20, down 0.2 (-0.15%), High: 138.50, Low: 126.80, Volume: 31.69m
HSBC Holdings plc (HSBA:LSE): Last: 546.50, down 1 (-0.18%), High: 558.25, Low: 539.50, Volume: 20.62m
Lloyds TSB Group (LLOY:LSE): Last: 105.90, up 2.4 (+2.32%), High: 109.20, Low: 103.90, Volume: 33.01m
Standard Chartered (STAN:LSE): Last: 772.50, up 6 (+0.78%), High: 787.00, Low: 749.50, Volume: 4.02m
HBOS (HBOS:LSE): Last: 70.10, no change, Volume: 0.00
PM:
Thanks for HBOS Neil
NH:
that’s the HBOS memorial quote
PM:
NH:
gone, but not forgotten
NH:
a bit like Lady Di
PM:
But we should talk about this Bad Bank thing
PM:
there alarming news
PM:
Pestowire appears to have been unplugged.
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
NH:
what, the ISDN line from Muswell Hill to the Treasury has gone down?
PM:
Seem to have — i’ll call IT
PM:
Actually — logged on to pestowire this morning only to read
PM:
Taxpayer support for big companies
What would you think about lending a few bob to a giant FTSE-100 company?
And when I say “you”, I mean all of us, as taxpayers.
Because the next phase in the government’s attempt to stem the contraction of credit – that pernicious trend that’s driven us into recession – will probably be to put a “sovereign wrap” around bonds and tradable paper issued by big companies.
PM:
Meanwhile, over at the Times
PM:
New bank bailout planned to fight deepening recession
A package of radical measures to get British banks lending more is due to be hammered out at the weekend in an attempt to prevent the recession souring into an even more serious downturn.
PM:
Amid a growing sense of urgency, ministers are working on proposals paving the way for fresh capital injections into banks, for relaxation of rules on balance-sheet strength and for government guarantees of toxic assets on bank balance sheets.
Treasury and Bank of England officials are bracing themselves for a hectic weekend as Alistair Darling tries to finalise measures in time for an announcement early next week.
Treasury and Bank of England officials are bracing themselves for a hectic weekend as Alistair Darling tries to finalise measures in time for an announcement early next week.
NH:
It’s the bit in the middle you want – pure Westminster spin briefing…the sort of stuff Pestowire used to get before the ISDN line went down
NH:
The Treasury and Downing Street are cautious over whether a deal can be finalised by Monday, and sources said that an announcement later next week looked more likely at this stage.
A source close to the negotiations told The Times that Mervyn King, the Governor of the Bank of England, is pushing for a swift agreement, while Mr Darling is insisting that maximium care be taken before committing the taxpayer to risks.
A source close to the negotiations told The Times that Mervyn King, the Governor of the Bank of England, is pushing for a swift agreement, while Mr Darling is insisting that maximium care be taken before committing the taxpayer to risks.
NH:
The source said: “It’s not about saving the banks this time, it’s about saving the economy.”
According to another source close to the negotiations, the Government could inject fresh cash into some banks in return for preference shares.
However, the banks would pay a much lower interest rate on the shares than the penal 12 per cent that was agreed in the last £37 billion bailout.
According to another source close to the negotiations, the Government could inject fresh cash into some banks in return for preference shares.
However, the banks would pay a much lower interest rate on the shares than the penal 12 per cent that was agreed in the last £37 billion bailout.
NH:
Ministers are also considering relaxing capital rules, to let banks temporarily run down their capital cushions.
A third element would be the ringfencing of toxic assets on bank balance sheets, which would then be partly guaranteed by the Government.
Ultimately this could be the precursor to the creation of a state-owned fund that would buy the assets outright from banks, the “bad bank option”.
A third element would be the ringfencing of toxic assets on bank balance sheets, which would then be partly guaranteed by the Government.
Ultimately this could be the precursor to the creation of a state-owned fund that would buy the assets outright from banks, the “bad bank option”.
NH:
Mr Darling is also expected to act to break the stalemate in wholesale financial markets by offering guarantees worth tens of billions of pounds to help companies raise money.
PM:
This bad bank thing — or a version thereof — looks pretty certain all of a sudden.
NH:
It is
PM:
But look – this is hugely price sensitive for the banking sector, no?
NH:
Well er – yes.
NH:
and your point
PM:
Okay – I know this is a stupid question – but why can Westminster felts brief openly on this – when anyone in the corporate world would get the full 10,000 page market abuse tome thrown at them?????
PM:
Can we have an investigation please into who was buying Lloyds at the close yesterday???? And why??
PM:
RBS – up 7%??
PM:
Any whitehall staffers have accounts at spreadbetting firms??? – Ten pounds per point on the Footsie? Certainly sir, trust your information is as shrewd as usual……..
NH:
actually that report seems to be helping the GBK this morning
PM:
Okay — 10 pound a tick then
NH:
according to our currencies reporter Peter Garnham
NH:
and as we said earlier
NH:
this is being taken quite seriously
NH:
here’s a bit of comment
NH:
from
NH:
Bank of Tokyo-Mitsubishi UFJ
NH:
The reports regarding the formulation of plans by the UK authorities are
perhaps more significant with regards to reinvigorating bank lending.
The Times is reporting that UK government is close to hammering out
plans which includes a fresh wave of bank recapitalizations, relaxation
of rules on balance sheet strength, and government guarantees on toxic
assets held on banks balance sheets.
perhaps more significant with regards to reinvigorating bank lending.
The Times is reporting that UK government is close to hammering out
plans which includes a fresh wave of bank recapitalizations, relaxation
of rules on balance sheet strength, and government guarantees on toxic
assets held on banks balance sheets.
NH:
The relaxation of capital rules
would allow the banks to run down their capital cushions. The
ring-fencing and guaranteeing of bad assets on banks balance sheets
could ultimately prove a precursor for the adoption of a bad bank
structure. We believe the measures will prove supportive for the pound
given they address both the undercapitalization of the system and helps
to remove uncertainty over future losses on toxic assets. In these
circumstances, we believe there is some scope for GBP/JPY to extend its
recent gains (Chart 2).
would allow the banks to run down their capital cushions. The
ring-fencing and guaranteeing of bad assets on banks balance sheets
could ultimately prove a precursor for the adoption of a bad bank
structure. We believe the measures will prove supportive for the pound
given they address both the undercapitalization of the system and helps
to remove uncertainty over future losses on toxic assets. In these
circumstances, we believe there is some scope for GBP/JPY to extend its
recent gains (Chart 2).
PM:
Cable is 1.4927
EURGBK= 0.8986
NH:
right
NH:
after that explosive start
NH:
let’s pause for a moment
NH:
to reflect
11:29AM
PM:
any more fun to be had with HSBC? – and their spat with MOST??
NH:
Well there’s stuff from Arturo de Frias at Dresdner, but I don’t think it will be to your taste?
PM:
In what sense?
NH:
It’s positive.
PM:
Oh
PM:
Share anyway
NH:
On December 12th we cut HSBC from Buy to Hold, and removed it from
our “core Buy” portfolio, mentioning an almost inevitable dividend cut and
a potential $10bn capital deficit. In the last month, HSBC has fallen by 23%,
underperforming the Eurobanks index by 14%. We think that at current
prices, a dividend cut is fully discounted. We upgrade HSBC back to Buy
and place it again in our “core Buy”.
our “core Buy” portfolio, mentioning an almost inevitable dividend cut and
a potential $10bn capital deficit. In the last month, HSBC has fallen by 23%,
underperforming the Eurobanks index by 14%. We think that at current
prices, a dividend cut is fully discounted. We upgrade HSBC back to Buy
and place it again in our “core Buy”.
NH:
In “HSBC – a dividend cut on the cards”, published on Dec 12th, we cut our EPS
forecasts by 35% on average (to $1.28 for 2008, $1.03 for 2009) mainly driven
by a substantial increase in our provisions expectations, particularly in Asia. We
also said that, given that we now expected its EPS to fall by 37% between 2007
and 2009, we thought HSBC would be unable to keep its dividend. Assuming a
roughly stable 1.8x dividend cover we estimated a new DPS of 74c in 08 (vs.
90c in 07) and 55c in 2010.
We also said in that note that HSBC might show a potential $10bn capital deficit.
But that was, in our view, only if the AFS impairments were to prove definitive,
which is not the case, yet. In our 2009 banks sector outlook report “Life after
near-death”, published also Dec 12, we estimated that HSBC’s minimum core
T1 ratio, given its business mix and risk profile, was 7.75%. And we calculated
that deducting the AFS impairments HSBC’s core T1 was 7.05%, hence a
potential 70bp deficit ($10bn).
forecasts by 35% on average (to $1.28 for 2008, $1.03 for 2009) mainly driven
by a substantial increase in our provisions expectations, particularly in Asia. We
also said that, given that we now expected its EPS to fall by 37% between 2007
and 2009, we thought HSBC would be unable to keep its dividend. Assuming a
roughly stable 1.8x dividend cover we estimated a new DPS of 74c in 08 (vs.
90c in 07) and 55c in 2010.
We also said in that note that HSBC might show a potential $10bn capital deficit.
But that was, in our view, only if the AFS impairments were to prove definitive,
which is not the case, yet. In our 2009 banks sector outlook report “Life after
near-death”, published also Dec 12, we estimated that HSBC’s minimum core
T1 ratio, given its business mix and risk profile, was 7.75%. And we calculated
that deducting the AFS impairments HSBC’s core T1 was 7.05%, hence a
potential 70bp deficit ($10bn).
NH:
We have not changed our views: we continue to expect a dividend cut, and if the
AFS losses become definitive, HSBC might need a $10bn top-up of its core
capital. But there has been a major change in the last few weeks: HSBC’s
valuation. In the last month, HSBC has fallen 23%, underperforming the sector
by 14%. If by Dec 12 we calculated that HSBC was trading at a 20% premium
on both stress-test P/E 2009 and P/NAV 2009, it now trades fully in line. And this
is in our view a Buy opportunity.
AFS losses become definitive, HSBC might need a $10bn top-up of its core
capital. But there has been a major change in the last few weeks: HSBC’s
valuation. In the last month, HSBC has fallen 23%, underperforming the sector
by 14%. If by Dec 12 we calculated that HSBC was trading at a 20% premium
on both stress-test P/E 2009 and P/NAV 2009, it now trades fully in line. And this
is in our view a Buy opportunity.
PM:
Hang on – they’re saying the dividend will def be cut and it “might” need a $10bn equity top up.
PM:
Buy?
PM:
No thanks.
NH:
i’ll pass on that one too
NH:
and in the interests of balance
NH:
I have to report that someone is saying sell HSBC this morning
NH:
the banks team at RBS
PM:
NH:
in fact it is part of wider report
NH:
which is very detailed
PM:
yes — have been ploughing thru that
NH:
and its main conclusion is
NH:
Domestic UK banks are technically insolvent, on a fully marked to market basis
PM:
NH:
here’s the note
NH:
Domestic UK banks (report attached)
We publish today a report on the sector that further supports our Underweight stance on the UK banks relative to their European peers. Frustratingly, this was due out a few days ago but was held up in production. However, despite the recent large moves in in the stocks, we stand by our target prices and recommendations: downgrade Barclays to Sell (TP GBP1.10), downgrade HSBC to Sell HSBC (TP GBP4.50), downgrade STAN to Sell (TP GBP6.40), and upgrade Lloyds to Hold (TP GBP1.05). Our preferred stock in the European banking sector remains UBS
We publish today a report on the sector that further supports our Underweight stance on the UK banks relative to their European peers. Frustratingly, this was due out a few days ago but was held up in production. However, despite the recent large moves in in the stocks, we stand by our target prices and recommendations: downgrade Barclays to Sell (TP GBP1.10), downgrade HSBC to Sell HSBC (TP GBP4.50), downgrade STAN to Sell (TP GBP6.40), and upgrade Lloyds to Hold (TP GBP1.05). Our preferred stock in the European banking sector remains UBS
NH:
Principal arguments:
* Domestic UK banks are technically insolvent, on a fully marked to market basis
* Scarce & expensive wholesale debt means that unguaranteed new lending appetite will remain limited until FY10F at least.
* RBS credit strategists believe that post 1Q risk asset rally, credit spreads will hit new wides FY09, due to heavy issuance and rising defaults.
* Domestic UK banks rely on GBP1.7 trillion wholesale funding (57% assets), with GBP490bn maturity mismatch
* Core deposits and free capital generate c40% sector net interest income, which gets crushed when rates <3% and loan spreads cannot widen sufficiently to offset
* Unguaranteed credit availability is likely to remain constrained, which flags further economic slowdown (GDP down cumulative 6% by end FY10F)
* Historic bad debt regression implies UK banks loss making FY09/10F, as impairments rise and pre-impairment falls
* Structural & cyclical rise in RWA/asset ratio means marked to market FY11F core tier 1 ratio @5.4%: implies GBP34bn equity shortfall vs our blended 7.5% tgt (39% mkt cap) unless rule book changes or investors accept lower capital cushion
* Capital adjusted new world RoTCE = c13%
* Next Gvt help on its way, but we see further debt / asset guarantees as more likely than Citi/UBS style equity investor friendly good bank /bad bank any time soon.
* Domestic UK banks are technically insolvent, on a fully marked to market basis
* Scarce & expensive wholesale debt means that unguaranteed new lending appetite will remain limited until FY10F at least.
* RBS credit strategists believe that post 1Q risk asset rally, credit spreads will hit new wides FY09, due to heavy issuance and rising defaults.
* Domestic UK banks rely on GBP1.7 trillion wholesale funding (57% assets), with GBP490bn maturity mismatch
* Core deposits and free capital generate c40% sector net interest income, which gets crushed when rates <3% and loan spreads cannot widen sufficiently to offset
* Unguaranteed credit availability is likely to remain constrained, which flags further economic slowdown (GDP down cumulative 6% by end FY10F)
* Historic bad debt regression implies UK banks loss making FY09/10F, as impairments rise and pre-impairment falls
* Structural & cyclical rise in RWA/asset ratio means marked to market FY11F core tier 1 ratio @5.4%: implies GBP34bn equity shortfall vs our blended 7.5% tgt (39% mkt cap) unless rule book changes or investors accept lower capital cushion
* Capital adjusted new world RoTCE = c13%
* Next Gvt help on its way, but we see further debt / asset guarantees as more likely than Citi/UBS style equity investor friendly good bank /bad bank any time soon.
NH:
Key risks:
* Gvt funded good bank/bad bank with equity friendly terms; replicating Citigroup model could double target price of beneficiary banks
* Credible regulatory capital rulebook change: run rate RWA/asset ratio would increase post-cycle core tier 1 from 5.4% to 7.3%, and so less need for new equity.
* Debt spreads continue to tighten (not the view of RBS credit analysts) post 1Q risk asset rally
* Gvt funded good bank/bad bank with equity friendly terms; replicating Citigroup model could double target price of beneficiary banks
* Credible regulatory capital rulebook change: run rate RWA/asset ratio would increase post-cycle core tier 1 from 5.4% to 7.3%, and so less need for new equity.
* Debt spreads continue to tighten (not the view of RBS credit analysts) post 1Q risk asset rally
PM:
that’s the note I did a post on earlier
NH:
it is
NH:
and here’s the stuff on HSBC
NH:
We expect that a synchronised global slowdown will lead to a further rise in loan
impairments in FY09 to around 330bp (of loans), depressing RoTCE to a cyclical
low of 6%, making the current P/TCE of 1.8x look stretched. Also, given the
group’s TCE capital shortfall, we see no cash dividends until after FY11. Sell.
impairments in FY09 to around 330bp (of loans), depressing RoTCE to a cyclical
low of 6%, making the current P/TCE of 1.8x look stretched. Also, given the
group’s TCE capital shortfall, we see no cash dividends until after FY11. Sell.
NH:
We expect HSBC’s earnings to decline 79% yoy in FY09
We reduce our FY09 EPS estimate from 135 cents to 29 cents, driven by a 16% yoy decline in pre-impairment profit (underlying income down 12%, costs down 9%) and a 28% increase in impairments. Our income forecast declines 12%, as the Household book shrinks and GBM momentum slows with the average ‘funded balance sheet’ declining 6%.
We reduce our FY09 EPS estimate from 135 cents to 29 cents, driven by a 16% yoy decline in pre-impairment profit (underlying income down 12%, costs down 9%) and a 28% increase in impairments. Our income forecast declines 12%, as the Household book shrinks and GBM momentum slows with the average ‘funded balance sheet’ declining 6%.
NH:
We expect asset quality to deteriorate, with impairments reaching 3.37% of loans in FY09F.
FY09F household loan losses to reach US$20bn
FY09F household loan losses to reach US$20bn
We expect the Household book to generate 65% of the group’s loan-impairment charge in FY09, at US$20bn (split – mortgage US$8bn and non-mortgage US$12bn).
NH:
Our writeoff
forecasts here assume that two-month-plus mortgage and non-mortgage NPLs in FY09 rise to 21% and 11% of loans respectively, from 11% and 8% 3Q08A.
We expect 100% capitalisation dividends in FY09-11F (vs historical average of 33%)
At FY08F, the core tier one is only 6.8% and TCE/RWA is uncomfortably low at 5.3% (credit asset mark-to-market basis, ex own debt gains). This gives a capital shortfall of US$24.1bn FY08F relative to our mix-adjusted 7.4% target TCE/RWA.
forecasts here assume that two-month-plus mortgage and non-mortgage NPLs in FY09 rise to 21% and 11% of loans respectively, from 11% and 8% 3Q08A.
We expect 100% capitalisation dividends in FY09-11F (vs historical average of 33%)
At FY08F, the core tier one is only 6.8% and TCE/RWA is uncomfortably low at 5.3% (credit asset mark-to-market basis, ex own debt gains). This gives a capital shortfall of US$24.1bn FY08F relative to our mix-adjusted 7.4% target TCE/RWA.
NH:
We expect this to narrow gradually via 100% capitalisation dividends in FY09-11F (cumulatively worth US$21.4bn), though more immediate rebuild via new equity issuance cannot be ruled out given the multitude of interesting banking assets likely to be put up for sale over coming months. Our
base case organically-rebuilt FY11F TCE/RWA ratio is 6.9%.
base case organically-rebuilt FY11F TCE/RWA ratio is 6.9%.
Valuation and recommendation
We believe the group’s strong funding and liquidity position will not drive an outperformance in 2009 (as in 2008), given the extensive government guarantees now in place. With the focus shifting to peak-cycle provisioning and HSBC’s 6-7% FY09-10F RoTCE, we see substantial room for a derating from the run-rate FY10F P/TCE of 1.8x for normalised 18% RoTCE. Our probability-weighted target price falls from £8.50 to £4.50 (on revised macro outlook). Sell.
NH:
Don’t suppose the HSBC PR company will be circulating that piece too widely today
PM:
NH:
hang on there is some govt response to the Time story
NH:
*DJ UK Govt: Continue To Mull “Wide Range Of Options” On Bks
NH:
DJ UK Govt: “Any Action” To Be Aimed At Real Econ, Not Just Bks
PM:
Oh — so Pesto might have been closer to the truth
PM:
nothing m,ore on that for now
PM:
Actually there’s some stuff on Reuterss
PM:
Neil just getting that
NH:
LONDON, Jan 16 (Reuters) – New British government measures to boost bank
lending could come as early as next week, a Treasury source told Reuters on
Friday.
Officials are looking at a range of options to unblock frozen credit
markets and plans to guarantee interbank lending are likely to feature high on
the agenda of any package, the source said.
“The Chancellor (finance minister Alistair Darling) has always said
something would be announced before the end of the month and it could come as early as next week,” the source added.
lending could come as early as next week, a Treasury source told Reuters on
Friday.
Officials are looking at a range of options to unblock frozen credit
markets and plans to guarantee interbank lending are likely to feature high on
the agenda of any package, the source said.
“The Chancellor (finance minister Alistair Darling) has always said
something would be announced before the end of the month and it could come as early as next week,” the source added.
NH:
Treasury-sponsored report by James Crosby, former chief executive of
HBOS Plc, recommended last year that the Treasury guarantee mortgage-backed
securities in an effort to get the home loans market moving again.
The government could even consider widening the scope of the the
guarantees beyond just mortgage-backed securities as many large companies are
finding it difficult, if not impossible, to raise funding as a global credit
crunch bites.
HBOS Plc, recommended last year that the Treasury guarantee mortgage-backed
securities in an effort to get the home loans market moving again.
The government could even consider widening the scope of the the
guarantees beyond just mortgage-backed securities as many large companies are
finding it difficult, if not impossible, to raise funding as a global credit
crunch bites.
NH:
hmmm
NH:
the market likes all this
NH:
FTSE 100 up nearly 100 points
PM:
Yep – sea of blue
11:38AM
PM:
More banks…
NH:
we’ll stop soon promise
NH:
lots and lots of rumours around in the French banking sector today
NH:
all of it RAW though
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
BNP to merge with Soc Gen
NH:
BNP to merge with Credit Agricole
PM:
NH:
and this
PM:
Wont do both — im assuming
NH:
Citing unnamed sources, an article in this morning’s La Tribune states that BNPP has proposed a merger of BNPP Securities Services (BNPP 2S) with CACEIS, the securities services operations owned 50%/50% by CASA and Natixis. If confirmed, we estimate that the impact from such an operation on BNPP’s CT1 would be neutral, while it would generate 17bp of T1 for Natixis, should it sell its stake. Our Outperform recommendation on BNPP remains unchanged.
NH:
Background and strategic rationale. (1) Natixis. At the 3Q08 results, the Natixis’ CEO had said that “we were proceeding with a detailed review of our assets, to see if the scope of Natixis could be changed”. Management also indicated that “one of the criteria which could guide us in our asset disposal decisions, beyond the strategic asset, could be the impact on Tier 1 ratio” (3Q08 transcripts).
NH:
(2) BNPP/CASA/Private equity. While none of the players have communicated on a tie-up, we see a strategic and financial rationale in a merger. The securities service industry has been marked by consolidation driven by the need for economies of scale, given the large IT investment requirements. The merger of the two securities service entities would create the #1 player in Europe and the #5 worldwide, and would allow the extraction of material cost synergies. A final consideration is the lower market value of the assets under adminstration and custody, due to the current market turmoil.
NH:
Sale of CACEIS by Natixis to private equity. The first scenario indicated in La Tribune is a CACEIS shareholding structure, whereby CASA has 55% and 45% is sold to a private equity fund (TPG or CVC). According to the article, the offer by the private equity funds would value 100% CACEIS at €1.7bn-1.8bn. For Natixis, this would result in €700mn proceeds.
Merger of BNPP 2S and CACEIS. An alternative scenario cited by La Tribune is a merger of BNPP 2S and CACEIS, whereby the new entity would be held as follows: BNPP 60%, CASA 20% and a private equity fund 20%. BNPP would bring BNPP 2S as an asset contribution to the JV. The offer of BNPP would value CACEIS at €2bn and result in €1bn proceeds for Natixis. The higher proceeds for Natixis than in the previous scenario would be made possible through the extraction of cost synergies between the merged entities.
PM:
remains raw — but a situation to watch
11:41AM
NH:
and now for something completely different
PM:
What’s this – just been sent this link.
NH:
It’s Polish or something
NH:
can’t read a word of it
PM:
But it’s got albert Edwards in it.
PM:
Gospodarka USA wchodzi w fazę depresji, a gospodarka Chin „imploduje”, prognozuje Albert Edwards, strateg inwestycyjny Societe Generale.
PM:
Izabella!
PM:
Izabella!
PM:
What’s this?
IK:
It’s a Polish newspaper called Puls Biznesu
PM:
ah
NH:
( R Bradley I am bored of the Marx quotes, my trigger finger itching to zap someone)
IK:
And yes it’s a piece on Albert Edwards
PM:
What’s it saying?
IK:
Just how he is predicting depression in the US
IK:
and China to implode
PM:
So they’ve picked up on his note from yesterday
IK:
or rather “imploduje”
PM:
Excellent
PM:
imploduje
IK:
Indeed, seems he’s a big hit in the Polish finance world too
PM:
We’re going to imploduje
PM:
thanks for that
11:45AM
PM:
oh i know what i meant to say
PM:
well done on Eidos
PM:
NH:
oh yes
NH:
we mentioned the bid rumours of yesterday’s special emergency session of Markets Live
NH:
mind you, the stock was up something like 40% at the time
NH:
So it did stick out like a sore thumb
PM:
yeah thats why i put the up
upNH:
nevertheless, looks like we flushed out another statement
PM:
yep
NH:
and from what I was picking up yesterday afternoon
NH:
it seems a number of disillusioned shareholders told the company to hoist for the sale after the recent profits warning
PM:
do we have any idea who the bidder is?
NH:
not really
NH:
but the most likely predator must be Time Warner given that they own
NH:
almost 20%
PM:
At the wrong price
NH:
and are developing a Batman game with the company
PM:
400p purchase price — so they can, er, average down
NH:
of course we should warn people here
NH:
Eidos has been in takeover talks many, many times before
NH:
and it always comes to nothing
NH:
in fact it usually comes to nothing and the company then issues a profit warning
NH:
just too really kick shareholders in the teeth
PM:
yeah — why does it never come come to anything
NH:
well, the stumbling block has always been
NH:
and will probably be this time
NH:
intellectual property
NH:
Eidos has pretty inflated idea of what its IP – which is basically Lara Croft – is worth
NH:
which means they will probably want something in the region of 30p
NH:
given that Time Warner bought the vast majority of their stake at 400p
NH:
they might pay that
NH:
but then again
NH:
of course there could be another bidder out there
NH:
in which case Time Warner is going to be kingmaker here
NH:
and one name in the frame is a Japanese company called Square Enix Holdings
NH:
whose titles include
NH:
The SQUARE ENIX Group provides high-quality games such as the FINAL FANTASY® series, DRAGON QUEST® series, and KINGDOM HEARTS series to the growing worldwide market, and has produced a number of million-hit titles.
NH:
The SQUARE ENIX Group plans, develops, distributes, and operates network-compliant online game services. The main business of this segment is the operation of FINAL FANTASY® XI, a massive multi-player online role-playing game (MMORPG) with approximately 500,000 paying subscribers in Japan, North America, and Europe. The Group is ever-striving to promote new genres and new business models in this field.
PM:
I am sorry
PM:
that name does not mean much to me
NH:
nor me
PM:
Anyway — Eidos stock up another 3p at 15 this morning
PM:
Neil is just trying to find the last price Time Warner paid
PM:
Neil’s taking ages
PM:
But …
PM:
last bought on Dec 15
PM:
Before the last profit warning
PM:
At……..
PM:
Over to the chart….
PM:
Circa — 18p
NH:
yep, 18p
11:53AM
NH:
some more RAW
NH:
looks like woz right on Venture Production
NH:
we thought Centrica had been up to something
NH:
either plotting a bid
NH:
or trying to amass a stake
NH:
and that’s because they were being so cagey when we called them about it
NH:
anyway
NH:
this popped up on the Telegraph website this morning
NH:
not sure I understand all the fund raising details
NH:
but the central thrust of it explains why the Venture price went bananas on Wednesday afternoon
NH:
Centrica has been examining a £1bn-plus bid for North Sea oil and gas company
Venture Production.
The owner of British Gas has been working with advisers at Citigroup and Deutsche Bank on a potential offer for Venture, The Daily Telegraph can disclose.
Last night sources close to Centrica said that the utility group has abandoned its possible offer for Venture. The company declined to comment.
NH:
Centrica has a promised £ 1.5bn warchest from the banks that underwrote its recent £ 2.2bn rights issue, providing the firepower for a potential run at Venture, which has been in the City spotlight since Wednesday when its shares jumped almost 23pc.
The company was forced to issue a statement yesterday saying it had received “no approaches in relation to any potential offer”.
NH:
Last November, Centrica launched a deeply discounted rights issue to help fund its acquisition of a share in nuclear generator British Energy.
The group also raised £1bn through corporate bonds to fund the deal and in the next two weeks a debt facility of up to £ 1.75bn will be cleared by the banks that underwrote the rights issue.
The group also raised £1bn through corporate bonds to fund the deal and in the next two weeks a debt facility of up to £ 1.75bn will be cleared by the banks that underwrote the rights issue.
Venture could yet prove to be a good acquisition target for Centrica because two thirds of its North Sea production is from gasfields, making it more resilient to sinking oil prices.
NH:
If Centrica revived its interest in Venture it could spark a wave of consolidation among London-listed oil and gas producers. Analysts have long predicted that the oil sector could see significant merger activity as falling oil and share prices provide opportunities to pick up rivals at lower valuations.
NH:
actually, the oil sector is awash with rumours this morning
PM:
go on
NH:
well, there is talk that Shell is dusting down a file on Tullow Oil
Tullow Oil (TLW:LSE): Last: 670.00, up 17 (+2.60%), High: 678.50, Low: 661.00, Volume: 1.80m
NH:
and weighing the pros and cons of a bid
NH:
and on Tullow
NH:
there was a very nice piece by our energy editor in the paper this morning
NH:
if you missed it
NH:
you can find it here
NH:
and perhaps the most pertinent line as far as these bid rumours go was
NH:
If Tullow fails to inspire investors with its announcements, it will attract attention in the industry. With a fairly simple portfolio, it is exactly the sort of company that a big group might want to acquire.
Al Stanton of RBC Capital Markets says: “Somebody like Shell could build a business in both regions by buying it, so Tullow could well be a takeover candidate.”
Al Stanton of RBC Capital Markets says: “Somebody like Shell could build a business in both regions by buying it, so Tullow could well be a takeover candidate.”
NH:
and there is one more rumours doing the rounds
NH:
that a Chinese oil company is looking at Dana Petroleum
11:56AM
PM:
hey you seen this Neil
NH:
no, but it sounds interesting
PM:
Someone pointed it out yesterday
NH:
ha
NH:
some very funny stuff on Dan Roberts – ex of this parish
PM:
Doesnt say who the author is
NH:
and the great jeff randall
Jeff Randall, the Telegraph’s Editor-at-Large is available for speaking engagements through The Gordon Poole Agency, the UK’s premier talent and speaker bureau. Fee group: £5k – £10k.
PM:
Not by Randall — but there’s a post about him
PM:
And one about Dan “Bilbo Baggins” Roberts,
PM:
He’s recently taken over my old job at the Guardian
PM:
Dont know why they’re calling him Bilbo baggins — byut anyway
PM:
Another blog for us to keep an eye on
NH:
thanks for that Stacy
NH:
that’s the BoA company song
PM:
Ah yes — but ihang on
PM:
its actually about the MBNA bani of america merger
PM:
You MUST see that youtube vid
PM:
Helen did stuff on it ages ago
NH:
are we done?
12:01PM
PM:
Tell you what we haven’t done for a while – tiddlers
NH:
Well we’ve watched a few stocks become rather dreadful.
PM:
Yeah – but how about the real clown issues.
PM:
Like what’s this – Weather Lottery
NH:
Oh, I don’t know – probably what it sounds like.
NH:
Price is 0.1p to 0.3p
NH:
Why don’t the authorities just clear this stuff off the market?
NH:
It’s just in the way.
PM:
Is there any news on it?
NH:
Nothing new – just some statement from before Xmas
NH:
Group Restructuring & Liquidation of Subsidiary
12 December 2008
It is with regret that the Company has today taken steps to put one of its subsidiaries, Lottery Service Providers Limited, into liquidation.
Unfortunately, due to the current economic situation, the Company has been unsuccessful in sourcing new working capital, and this restructuring will enable the business to continue via another wholly owned subsidiary, while reducing the level of current liabilities.
PM:
ha
PM:
Found the site now
PM:
The leading lottery fundraiser in the UK. Helping to raise funds for Charities, Education, Sports organisations and other societies.
NH:
course it is
PM:
14th January
We have five lucky £200 winners today, Miss M Whitney of Branham FC, Mr K Kirk of Friends of Toothill School, Mrs D Taylor of Latham Hall Scouts, Mr T Gough of The National Trust and finally Mr R Rown of Shopmobility St Helens…. Well done everyone
We have five lucky £200 winners today, Miss M Whitney of Branham FC, Mr K Kirk of Friends of Toothill School, Mrs D Taylor of Latham Hall Scouts, Mr T Gough of The National Trust and finally Mr R Rown of Shopmobility St Helens…. Well done everyone
PM:
RECENT £10,000 WINNERS !!!
Mr G R Stephens – The National Trust
Mrs K Tomlin – Shopmobility Burnley
Mr C Withers – Winchester Conservatives
Mrs B Whan – The Ben Fund
Mr K Jarman – Round Table Children`s Wish
Mrs J Dahms – North Somerset Crossroads
Mr A Wellings – Lincoln City FC
Mr Taylor – St Josephs School
Mr G Mundin – Lincoln City Football Club
Mr P Bowden – Beechwood Cancer Care
RECENT £10,000 WINNERS !!!
Mr G R Stephens – The National Trust
Mrs K Tomlin – Shopmobility Burnley
Mr C Withers – Winchester Conservatives
Mrs B Whan – The Ben Fund
Mr K Jarman – Round Table Children`s Wish
Mrs J Dahms – North Somerset Crossroads
Mr A Wellings – Lincoln City FC
Mr Taylor – St Josephs School
Mr G Mundin – Lincoln City Football Club
Mr P Bowden – Beechwood Cancer Care
NH:
shareholders not among those i suspect
12:03PM
PM:
Right — we are done.
PM:
Some very good gags below this morning
PM:
Thank you for all those
PM:
We’ve got to go
PM:
Got a mountain of stuff to catch up with
NH:
just like what?
PM:
Got to sort my holiday out
NH:
when are you off?
PM:
Middle of next week — leave this in your safe hands
PM:
But keep you finger off the zapper
NH:
I will try – not going to zap anyone else in Jan
PM:
ah yes
PM:
And have i got angry with IT?
NH:
not yet
PM:
no
PM:
But i am here Monday and Tuesdaty
PM:
We are off — thanks — and have a good weekend
PM:
FKA — no
NH:
yep, have a good weekend all
NH:
that’s all folks
NH:
cya
PM:
Thanks for that Stacy
PM:
seeya