Markets live chat transcript for the chat ending at 11:01 on 27 Jan 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder, FT (BE)
NH:
Good morning and welcome to Markets Live
NH:
Alphaville’s Daily stroll around the markets
NH:
and in case anyone did not know
NH:
we are Murphyless for another five sessions
NH:
he is still at the beach hit in Mozambique
NH:
so that means Bryce Elder joins me again this morning
NH:
when he can log in that is
NH:
are you there Bryce?
NH:
come in Bryce
BE:
Yup – morning all
BE:
I guess we had better start with Barclays
NH:
yes
NH:
after 9 consecutive sessions of losses, which saw its share price drop from 184.6p to 51.2p on Friday
NH:
barclays is up
NH:
it has launched a fight back
NH:
and proving the pen is mightier than the sword
NH:
chairman Marcus Agius has put pen to paper
NH:
to tell us why everything is OK at Barclays
NH:
and it seems to have worked
BE:
yeah, shares currently up 38.4p at 89.6p
BE:
a cool 75%
NH:
wow
NH:
I had been thinking this was just a dead cat bounce when it was up 35%
NH:
NH:
but am not so sure now
BE:
Hm.
BE:
I’m not so sure myself
BE:
We’re still a quid below where we were a fortnight ago
BE:
As Q says, this may just be a bit of short covering rather than a change of opinion
NH:
True
NH:
but it will give them some time
BE:
yeah it will allow the top brass including Mr Agius to jet off to Davos
BE:
which as one Sunday newspaper said
BE:
is either act of monumentally arrogant
BE:
or a display of their supreme confidence
NH:
hmmm
NH:
anyway, the letter is in important in that it could stop the rot
NH:
if Barclays had taken another say three of four sessions of losses
NH:
the public would have started to talk
NH:
and we all know where that could lead
NH:
furthermore the letter does address some of the market’s concerns
NH:
specifically on the need for more cash
NH:
Barc says it has £17bn of capital above and beyond the FSA’s minimum requirement
NH:
which should be enough to weather the storm
NH:
or get them through June
NH:
after which time they will be able to raise more capital without having to worry about handing a large chunk of the bank to its friends in the middle east
BE:
Indeed. Those mandatory convertibles vest then
NH:
yup
NH:
I suppose the only negative in here is that the gross write-downs are slightly higher than expected
NH:
right, let’s put up a bit of comment
NH:
Here’s what Bruce Packard of Evo Securities made of it all
NH:
Barclays is fighting its ground and reiterating profit and capital ratios. We would like to know how it has avoided the losses reported by others. Certainly buying a subprime lender (EquiFirst) and bidding for ABN in 2007, and then buying a Russian bank (Expobank) in H1 2008 do not seem to be the actions of a bank “battening down the hatches” in preparation for a 50 year storm.
NH:
DETAILS – Barclays re-iterated PBT will be ahead of consensus of £5.3bn and also said that Barclays Capital has had a strong Jan 2009. Year end capital ratios 6.5% equity tier 1, and 9.5% tier 1. BARC confirm they are not seeking to raise capital. Capital position could benefit further from two other sources: first, the UK Government announced measures announced 19 January – the procuring of insurance would have the effect of reducing capital consumption (which would allow the writing of new business in the UK) – second, the FSA is attempting to reduce the pro-cyclical effects of the International Basel Accord. That reduction would be a source of further ratio strengthening.
NH:
VALUATION AND RECOMMENDATION – We rate BARC Reduce, although the shares have collapsed through our target price of 140p in the last week. Shares initially rallied +25% when BARC put out their original statement on Friday 16, so shares could bounce today.
NH:
and here’s Simon Pilkington at Cazenove
NH:
Open Letter attempts to address market’s concern; against last week’s halving of the stock price, it probably does address part of them, so we’d expect a relief rally. Co has repeated its Jan 16th assertions that its 08 PBT will be well ahead of £5.3bn consensus. It expects Eq tier 1 ratio at y’end 08 of 6.5%, with total tier 1 capital having some £17bn capital above and beyond the FSA’s regulatory minimum requirement – plenty of capital reserves to get through this storm. Co confirms that it neither needs new capital nor is it seeking to raise any. Trading statement for start of FY09 (all three weeks of it…) suggests that things are going well. Shares remain a HOLD, but recover today.
NH:
Preliminary results brought forward to 9th February (was 17th), date agreed with auditors.
Reiterates that 2008 pre-tax profit will be well ahead of £5.3bn consensus, after gross credit market write-downs of £8bn (Caz: £5.8bn). In H1, gross write-downs were £3.3bn after £0.5bn of attributable income (new disclosure). We estimate the H2 gross write-down of £4.7bn is c.15% of disclosed credit market assets (£31.9bn).
Reiterates that 2008 pre-tax profit will be well ahead of £5.3bn consensus, after gross credit market write-downs of £8bn (Caz: £5.8bn). In H1, gross write-downs were £3.3bn after £0.5bn of attributable income (new disclosure). We estimate the H2 gross write-down of £4.7bn is c.15% of disclosed credit market assets (£31.9bn).
Net write-downs of £5bn after fair value gains on own debt and attributable income are broadly consistent with our estimate (£4.7bn, H1: £2.0bn).
Group income generation was at a record level in 2008 (we assume this is pre write-downs).
NH:
Regulatory capital
Barclays repeats its statement of 16th January: it will report an equity tier 1 ratio (before deductions) of approximately 6.5% and a tier 1 ratio of 9.5% for Dec08, compared with regulatory minima of 4% and 6-7%, respectively.
Barclays calculates that its year end tier 1 capital exceeds the FSA minimum requirement by the equivalent of £17bn in pre-tax profit. The letter makes reference to the impact of sterling weakness and pro-cyclicality of Basel II on RWA growth, though does not quantify the effect.
Given this capital buffer, Barclays states that it is not seeking further capital, either from Government or the private sector.
Barclays repeats its statement of 16th January: it will report an equity tier 1 ratio (before deductions) of approximately 6.5% and a tier 1 ratio of 9.5% for Dec08, compared with regulatory minima of 4% and 6-7%, respectively.
Barclays calculates that its year end tier 1 capital exceeds the FSA minimum requirement by the equivalent of £17bn in pre-tax profit. The letter makes reference to the impact of sterling weakness and pro-cyclicality of Basel II on RWA growth, though does not quantify the effect.
Given this capital buffer, Barclays states that it is not seeking further capital, either from Government or the private sector.
NH:
Barclays expects to benefit from the proposed asset insurance scheme and the FSA’s intention to reduce significantly the pro-cyclical effects of Basel II.
NH:
Current trading
Barclays states that it has has a good start to 2009.
In particular, Barclays Capital’s operating performance has been “extremely strong”, but also the trends that lie behind the “strong” operating performance of GRCB in 2008 are “again observable in its performance in January”.
Barclays states that it has has a good start to 2009.
In particular, Barclays Capital’s operating performance has been “extremely strong”, but also the trends that lie behind the “strong” operating performance of GRCB in 2008 are “again observable in its performance in January”.
Cazenove Comment
Overall, the letter reads reassuringly – Barclays does not intend to raise capital, and the gross write-downs are higher than we had expected, though with a similar net impact.
NH:
actually, one thing worth touching on is the performance of Bar Cap
NH:
which does look to be strong
NH:
i have to admit
NH:
in the past week they have seven chunky bond issues for the likes of SSE, Anhuser-Busch
NH:
and thanks to the Lehman Brothers acquisition
NH:
they have a pretty strong position in the US Treasuries market
BE:
Really?
NH:
Yep
NH:
this is from the press release Bar Cap sent out last week, after it completed the acquisition of Lehman
NH:
it is all in caps for some reason
NH:
BARCLAYS CAPITAL US TREASURY SECURITIES BUSINESS INCREASED ITS MARKET SHARE AS A RESULT OF
ITS INTEGRATION WITH LEHMAN BROTHERS BY 38$ FROM 9.2$ FOR THE FIRST THREE QUARTERS OF THE
CALENDAR YEAR 2008 TO 12.7$ IN THE FOURTH QUARTER, WHILE ITS FEDERAL AGENCY SECURITIES
BUSINESS, EXCLUDING MORTGAGE BACKED SECURITIES, INCREASED FROM 9.9$ FOR THE FIRST THREE
QUARTERS OF THE CALENDAR YEAR TO 12.7$, A 28$ INCREASE, ACCORDING TO FEDERAL RESERVE
DATA. IN THE UNITED STATES, BARCLAYS CAPITAL RANKED TOP IN FOUR CATEGORIES IN TREASURY AND
AGENCY TRADING, AND RANKED FIRST OR SECOND IN AN ADDITIONAL THREE CATEGORIES.
ITS INTEGRATION WITH LEHMAN BROTHERS BY 38$ FROM 9.2$ FOR THE FIRST THREE QUARTERS OF THE
CALENDAR YEAR 2008 TO 12.7$ IN THE FOURTH QUARTER, WHILE ITS FEDERAL AGENCY SECURITIES
BUSINESS, EXCLUDING MORTGAGE BACKED SECURITIES, INCREASED FROM 9.9$ FOR THE FIRST THREE
QUARTERS OF THE CALENDAR YEAR TO 12.7$, A 28$ INCREASE, ACCORDING TO FEDERAL RESERVE
DATA. IN THE UNITED STATES, BARCLAYS CAPITAL RANKED TOP IN FOUR CATEGORIES IN TREASURY AND
AGENCY TRADING, AND RANKED FIRST OR SECOND IN AN ADDITIONAL THREE CATEGORIES.
BE:
didn’t know that. Interesting, if a bit shouty.
BE:
actually, got a bit more comment on the Barclays statement
BE:
this is from KBW
BE:
After a near 50% drop in the share price last week, Barclays has reaffirmed
its 16 January profit/capital guidance, indicated £8bn gross (£5bn net)
write-downs for 2008 and confirmed that it is not seeking new capital. In
addition, the results will be brought forward to 9 February. In terms of 2008E
profit, there are still too many moving parts to be specific, and we await the
results before assessing the underlying performance of the business.
However, confirmation that it is not seeking a capital increase should provide
some reassurance to the market ahead of that. We would expect some share
price recovery today. We rate the shares Market Perform.
NH:
Thanks for that
NH:
that should be easier for the readers
NH:
moving on to the wider market
BE:
Before we do
BE:
a quick round up on the other banks
BE:
so we can get it out of the way early
BE:
they are all up
Lloyds TSB Group (LLOY:LSE): Last: 59.30, up 10 (+20.28%), High: 59.50, Low: 50.10, Volume: 28.35m
Royal Bank of Scotland Group (RBS:LSE): Last: 14.40, up 2.3 (+19.01%), High: 14.70, Low: 12.20, Volume: 78.12m
Standard Chartered (STAN:LSE): Last: 803.00, up 49 (+6.50%), High: 814.50, Low: 728.50, Volume: 2.15m
HSBC Holdings plc (HSBA:LSE): Last: 546.25, up 30.75 (+5.97%), High: 548.75, Low: 514.00, Volume: 12.70m
NH:
hmmmmm
NH:
the UK banks could also been getting a bit of a lift from the news ING
NH:
the state have come riding to the rescue of the Dutch lender
NH:
with a pretty generous scheme
NH:
I wounder if this can form a blue print for the UK asset protection scheme?
NH:
the Dutch govt taking on a load of poisonous mortgage assets
NH:
at 90 cents on the dollar
NH:
when they are probably trading at around 65 cents
NH:
here’s a quick note from the specialist sales team at KBW
NH:
Great carryover from super-generous Dutch state aid should it set a trend
for other schemes across Europe (i.e. to aid European banks). Should also see
up to 20% further relative upside for ING.
for other schemes across Europe (i.e. to aid European banks). Should also see
up to 20% further relative upside for ING.
NH:
* The Dutch state is taking 80% of the risk in ING’s Alt-A RMBS portfolio. The
assets are probably trading at 65c in the market and the State appears to be
buying it at 90c. This seems to be materially better than the UBS deal where
they transferred assets below market prices to reflect a liquidity discount.
assets are probably trading at 65c in the market and the State appears to be
buying it at 90c. This seems to be materially better than the UBS deal where
they transferred assets below market prices to reflect a liquidity discount.
NH:
The protection on the €21.6bn has a neutral P&L impact in 1Q08 (though €400mn
per annual cost and fading going forward), but raises equity €5bn by
eliminating the negative revaluation reserve, reduces RWA by -€15bn and hence
enhances the CT1 by 40bps.
per annual cost and fading going forward), but raises equity €5bn by
eliminating the negative revaluation reserve, reduces RWA by -€15bn and hence
enhances the CT1 by 40bps.
* This deal seems massively more attractive than the UBS state deal, which saw
UBS rally on the event (CHF4bn net negative impact for the cost of ring-fence,
see link below). From an ING persepctive, this seems almost to good to be
true, but they confirm they HAVE cleared it with the EU. Clearly not all
states will necessarily adopt as generous approach, but it may help to provide
a trend of improving terms of state aid.
NH:
This could be positive for Aegon. Also for the KBC CDO risk if a similar
approach is adopted by the Belgians. I don’t think Dexia would see the same
benefit as the marks to the AFS portfolio are too big and I am not sure the
Govt bids on their assets will be good enough for them to transfer them. The
size of the asset transfer would also potentially be too big. Of the Germans
this type of deal could even lure DBK in, and hence could be a positive for
them. While German GAAP could crystalize some AFS losses for CBK & DPB, that
said DPB could rally on a ‘sweet deal’ even if it had to recapitalise, given
its low valuation without a ‘broken business model’ risk. For Postbank too,
they do currently include the burden from AFS reserves within their tier 1
ratio…while we add this back in our adjusted numbers, competitors don’t
appear to. DPB trades at ~2x EPS so even if accompanied by a massively
dilutive capital raising, the resultant ‘cleaned’ entity could still look
cheap on a P/E basis (and <1x NAV).
approach is adopted by the Belgians. I don’t think Dexia would see the same
benefit as the marks to the AFS portfolio are too big and I am not sure the
Govt bids on their assets will be good enough for them to transfer them. The
size of the asset transfer would also potentially be too big. Of the Germans
this type of deal could even lure DBK in, and hence could be a positive for
them. While German GAAP could crystalize some AFS losses for CBK & DPB, that
said DPB could rally on a ‘sweet deal’ even if it had to recapitalise, given
its low valuation without a ‘broken business model’ risk. For Postbank too,
they do currently include the burden from AFS reserves within their tier 1
ratio…while we add this back in our adjusted numbers, competitors don’t
appear to. DPB trades at ~2x EPS so even if accompanied by a massively
dilutive capital raising, the resultant ‘cleaned’ entity could still look
cheap on a P/E basis (and <1x NAV).
NH:
An improving trend of state terms would of course help the UK, given we still
await details of the cost of insuring their risky assets. While the Swiss may
have set theiN own precedent scene with the UBS scheme, should they reconsider
to the Dutch terms, I’m sure CS would benefit.
* As for ING itself, given its name was synonymous with Alt-A risk which has
been removed, it should travel to 70-80% of NAV to put it in the French Banks
range. NAV €9ps, price target then 7.2 or 80% of NAV for 19% further relative
upside.
await details of the cost of insuring their risky assets. While the Swiss may
have set theiN own precedent scene with the UBS scheme, should they reconsider
to the Dutch terms, I’m sure CS would benefit.
* As for ING itself, given its name was synonymous with Alt-A risk which has
been removed, it should travel to 70-80% of NAV to put it in the French Banks
range. NAV €9ps, price target then 7.2 or 80% of NAV for 19% further relative
upside.
11:15AM
NH:
Right, we were going to move and look at Cattles
NH:
but change of tack
NH:
because Wolseley is in melt down
NH:
stock off 37% at the moment
NH:
down 105p at 180.7p
BE:
yes disasterous trading statement
BE:
just horrible
NH:
now, we had been wondering here at FT Alpaville
NH:
Why Wolseley had kept mum on those very detailed fund raising stories that kept appearing in the papers
NH:
and now we know
NH:
it could not tap shareholders for cash
NH:
even though it probably wanted to and tried
NH:
while it was sitting on a big fat profits warning
NH:
no one would have underwritten it
BE:
(Itzman: Wolseley – the world’s biggest plumbers’ merchant and Anglo-American lumber and building supplies firm.)
NH:
so what are the lowlights?
BE:
well, it is difficult to know where to start
BE:
trading deteriorated in November and December
BE:
Sales and trading profits are down 10%
BE:
and 50% on a constant currency basis in the first five months to of the fiscal year.
BE:
debt has risen further
BE:
to £3,028m (£2,685m at end-October, £2,482m at end-Jul)
BE:
thanks to a £557 adverse movement in currencies.
BE:
and this also implies that the group generated no free cash on a constant currency basis in the fist five months of the year.
NH:
urgh
NH:
what’s Wolseley market’s cap now?
BE:
after today’s fall I’d guess at about £1.3bn or thereabouts.
NH:
so debt’s over double the market cap
NH:
not good
NH:
not good at all
BE:
all of which means, than unless Wolseley can someone make £1bn of debt disappear in the next seven months
BE:
and given that it is generating no free cash flow, that looks tough
BE:
it will probably breach its banking covenants
NH:
right
NH:
and was their any reference to a cash call in today’s statement
BE:
nope
BE:
it appears Wolseley are going to try and trade their way through the downturn
BE:
which is either monumentally arrogant
NH:
or they have no choice because who on earth is going to underwrite a cash call from a heavy indebted business, generating no cash with most of its markets in free fall
NH:
the answer is: no one
NH:
in fact I don’t where Wolseley goes from here
NH:
a break up?
NH:
but where are the buyers?
BE:
er, good question – Stock in the US is still shipping money out
BE:
They’ve clearly been told repeatedly by all sides either to raise cash or sell
BE:
But just kept on with “we’ll trade through”. And this is where it’s taken them.
BE:
anyway some analyst comment
BE:
This is from Cazenove
BE:
Wolseley – Trading update – estimates unchanged but negative risk remains (WOS.L WOS LN 286p Underperform (Sector Neutral)
Trading Statement for 1st 5M (to end 12/08) – Europe very weak in recent months.
Further deterioration in markets, and expects no upturn until macro conditions stabilise.
N America profit -16%, better than we expected, with Ferguson again fairly resilient but Stock loss $100m in 1st 5M. Expects N Am performance to decline until consumer confidence returns and customer finance availability increases.
Europe profit -60%, worse than we expected, with UK & Ireland -80% with further deterioration in recent weeks. France macro conditions weakening. DT Group (Nordic) profit -40% with deteriorating markets in all four Nordic countries.
Debt: currency moves increased debt to £3b at 31/12/08 but expected to be lower at 1/09 due to working capital inflow (our est £2.5b). Hedging undertaken to mitigate further adverse effect of £/€ weakness. (We estimate debt is 55% €, 17% $).
BE:
WOS continues to expect to be compliant with covenants at 1/09 – we note the timescale focus on 1/09, whereas previously it had been on 7/09. No comment is made ref. 7/09 compliance. WOS is ‘continuing to evaluate all the options and implement the actions necessary’ to position the balance sheet appropriately for the medium term.’ In our view an equity issue continues to be a live possibility.
Outlook – expects macro to deteriorate in short-term. Management focused on achieving compliance with banking covenants – we note no mention of seeking covenant renegotiation or temporary waiver. Additional exceptional costs of £39m to reduce costs.
Estimates – unchanged
Our initial view is to make no changes, with recent £ weakness balanced by weaker trading. We continue to see estimate risk as negative.
7/09E £286m PTP, EPS 31.2p
7/10E £349m PTP, EPS 37.9p.
BE:
Recommendation
PE 9.2x 7/09E, 7.5x 7/10E on above estimates, before c.14% dilution from a £400m issue.
We note no comment on renegotiation or temporary waiver of covenants – there may be comment on this at the analyst meeting (9.30am).
In our view expectation of an equity issue will continue – see our email of 19/1/09. In our view simple process takes time before such an issue can be launched. Completion of an issue would reduce risk somewhat.
However in our view the underlying trading continues to weaken, and creates risk of need for second equity issue, and risk of debt for equity.
BE:
And this from Collins Stewart
BE:
Debt up, profits down, no rescue-rights
Wolseley’s trading update was disappointing. Debt increased 22% to £3bn, trading profits fell 45% and – despite widespread press speculation – there was no rights issue. We believe a capital raising is inevitable. We cut our EBITDA estimates for 09/10 by 7%, and estimate the group needs to raise £700m to bring net debt/EBITDA to 3x.
A grim update
Net debt rose to £3bn following a £557m fx loss, as most of Wolseley debt was in dollars and Euros. The group has since hedged its position, and sees working capital bringing debt levels down. Debt factoring in the UK also helped by £72m.
Weak trading triggers 7% EBITDA downgrade
Trading profits fell 45% versus our FY forecast of –36%. We have cut our 09/10 EBITDA to £608m, a cut of 7%. UK trading profits fell 80%, France fell 60% (read-through St Gobain), Eastern Europe –85% (read-through Wienerberger). In the US, the loss-making Stock business doubled its losses to £80m. US flagship Ferguson continues to hold up, with trading profits down 13%. It is exposed to commercial construction, which has only been falling since Q408 and will drop 35-40% in the next two years in our view.
Valuation
Wolseley has missed an excellent chance to raise capital, in our view. We have been advocating such a move for many months, and still believe it is inevitable. On our new estimates, Wolseley would breach its 3.5x debt/EBITDA covenant by year end, with a ratio of 4.15x on our estimates. We calculate the group needs to raise circa £700m, which would represent a 1-for-2 rights and would be 23% dilutive to earnings. The net debt to EBITDA would fall to 3x under this scenario. We keep our Sell on Wolseley. Our target price is derived from CS Quest™, increasing the cost of capital from 4.9% to 5.9%.
NH:
(come on Tim)
NH:
and finally a little something from Panmure Gordon
NH:
H1 trading update . higher debt and weak trading
Trading conditions remain tough for the group across most of its main areas
and are not likely to improve in the near term. While net debt has risen, the
group expect to remain covenant compliant in the short term, which is why
there is no rights issue today. But the uncertainty remains and we stay
cautious on the shares.
Trading conditions remain tough for the group across most of its main areas
and are not likely to improve in the near term. While net debt has risen, the
group expect to remain covenant compliant in the short term, which is why
there is no rights issue today. But the uncertainty remains and we stay
cautious on the shares.
Headlines. In many respects we have been here before with Wolseley, as trading
conditions continue to deteriorate and uncertainty remains on the debt position.
Trading-wise the outlook remains uncertain, with no improvement likely in the short
term and funding concerns unlikely to go away.
NH:
Divisional. Weak US housing continues to impact Stock, although Ferguson continues
to outperform due to more stable commercial and industrial markets. Canada has
achieved a small organic advance in revenues, but gross margins are under pressure. In
Europe Nordic profit is down 40%, UK/Ireland -80% and conditions in France/Eastern
Europe are tough.
to outperform due to more stable commercial and industrial markets. Canada has
achieved a small organic advance in revenues, but gross margins are under pressure. In
Europe Nordic profit is down 40%, UK/Ireland -80% and conditions in France/Eastern
Europe are tough.
NH:
Financial. Net debt has increased to £3bn due to a £557m hit from currency
movements. The debt structure is now US$ 14% (26% FY 2008A), € 48% (from 60%)
and sterling 38%. Additional working capital improvements have been achieved with
management expecting the group to be covenant compliant at the end of January. It
continues, however, to review all options which we assume includes additional equity
funding.
movements. The debt structure is now US$ 14% (26% FY 2008A), € 48% (from 60%)
and sterling 38%. Additional working capital improvements have been achieved with
management expecting the group to be covenant compliant at the end of January. It
continues, however, to review all options which we assume includes additional equity
funding.
Impact on forecasts. Management have indicated that adjusted H1 PTP is down 66%
which, if translated into our FY forecasts, would equate to £320m. We will update our
forecasts post the 0930 analyst meeting. Our current forecasts are FY 2009E PTP
£400m, EPS 43p; Reuters consensus appears to be PTP £342m, EPS 35.9p. For FY
2010E our PTP is £410m, EPS 44p with consensus PTP £320m, EPS 33.9p.
NH:
Valuation. On our forecasts, the calendar 2009E P/E is 6.6x which is at a premium to
its Merchanting peer group average. (PTP of £320m equates to a P/E of 9x.) The
EV/Sales is an attractive, by historic standards, at 0.28x. The passing of the DPS means
there is no yield. The FCF is strong but reflects cash conservation and cost control going
through the business.
its Merchanting peer group average. (PTP of £320m equates to a P/E of 9x.) The
EV/Sales is an attractive, by historic standards, at 0.28x. The passing of the DPS means
there is no yield. The FCF is strong but reflects cash conservation and cost control going
through the business.
Recommendation. Our cautious view on Wolseley has been due to its end market
uncertainty. While additional funding would shore up the balance sheet, it would dilute
the current share price. In the current climate we do not expect it to be easy for
companies to raise additional funding by the equity route. We stay cautious for now.
From time to time, we may offer investment banking and other services (IBS) to Wolseley. We buy and sell these securities from customers on a principal basis. Accordingly, we may at any time have a long or short position in any such securities. We may make a market in the securities of Wolseley.
11:27AM
NH:
Ok, where now?
NH:
wider market?
BE:
Sure
NH:
the FTSE 100 is up
BE:
Yup
BE:
Up 45 points at 4096
BE:
Banks leading the way
BE:
elsewhere
BE:
the GBK
BE:
was very weak weak first thing vs the dollar
BE:
almost touched Friday’s low
BE:
has rallied since, on the Barclays news
BE:
cable now at $1.3802
NH:
thanks for that
NH:
Pfizer/Weyth deal terms just coming over the wires
11:29AM
NH:
Pfizer to Acquire Wyeth, Creating the World’s Premier Biopharmaceutical Company
NH:
Pfizer (NYSE: PFE) and Wyeth (NYSE: WYE) today announced that they have entered into a definitive merger agreement
under which Pfizer will acquire Wyeth in a cash-and-stock transaction currently valued at $50.19 per share, or a total
of approximately $68 billion. The Boards of Directors of both companies have approved the combination.
under which Pfizer will acquire Wyeth in a cash-and-stock transaction currently valued at $50.19 per share, or a total
of approximately $68 billion. The Boards of Directors of both companies have approved the combination.
NH:
Under the terms of the transaction, each outstanding share of Wyeth common stock will be converted into the right to
receive $33 in cash and 0.985 of a share of Pfizer common stock, subject to the terms of the merger agreement. Based on
the closing price of Pfizer stock as of January 23, 2009, the stock component is valued at $17.19 per share. The
transaction provides immediate value to Wyeth shareholders through the cash component, as well as continued
participation in the future prospects expected to result from the combination through their ownership of approximately
16 percent of Pfizer’s shares.
receive $33 in cash and 0.985 of a share of Pfizer common stock, subject to the terms of the merger agreement. Based on
the closing price of Pfizer stock as of January 23, 2009, the stock component is valued at $17.19 per share. The
transaction provides immediate value to Wyeth shareholders through the cash component, as well as continued
participation in the future prospects expected to result from the combination through their ownership of approximately
16 percent of Pfizer’s shares.
NH:
In connection with the proposed transaction between Pfizer and Wyeth, the Board of Directors of Pfizer has
determined that, effective with the dividend to be paid in the second quarter of 2009, it will reduce Pfizer’s quarterly
dividend per share to $0.16, which continues to be competitive with other industry participants. Pfizer believes the
transaction offers significant opportunities to enhance long-term shareholder value.
determined that, effective with the dividend to be paid in the second quarter of 2009, it will reduce Pfizer’s quarterly
dividend per share to $0.16, which continues to be competitive with other industry participants. Pfizer believes the
transaction offers significant opportunities to enhance long-term shareholder value.
NH:
Pfizer’s lead financial advisors are Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan. Barclays and
Citigroup are acting as financial advisors. Its legal advisor is Cadwalader, Wickersham & Taft LLP. Wyeth’s financial
advisors are Morgan Stanley and Evercore Partners and its legal advisor is Simpson Thacher & Bartlett LLP. In addition,
Wachtell, Lipton, Rosen & Katz served as counsel to Wyeth’s Board of Directors.
Citigroup are acting as financial advisors. Its legal advisor is Cadwalader, Wickersham & Taft LLP. Wyeth’s financial
advisors are Morgan Stanley and Evercore Partners and its legal advisor is Simpson Thacher & Bartlett LLP. In addition,
Wachtell, Lipton, Rosen & Katz served as counsel to Wyeth’s Board of Directors.
NH:
barclays on the ticket for this one too
NH:
where did Wyeth close on Friday?
NH:
fizer and Wyeth will be conducting an analyst and investor conference call/webcast Monday January 26, 2009 at
8:30am to discuss its proposed combination. The webcast can be accessed on the investor relations sections of the two
companies’ websites, www.pfizer.comand www.wyeth.com. You can also listen to the conference call by dialing either (866)
331-6338 in the United States or (347) 284-6938 outside of the United States. The password is “Pfizer”.
8:30am to discuss its proposed combination. The webcast can be accessed on the investor relations sections of the two
companies’ websites, www.pfizer.comand www.wyeth.com. You can also listen to the conference call by dialing either (866)
331-6338 in the United States or (347) 284-6938 outside of the United States. The password is “Pfizer”.
BE:
$43.74
NH:
so a bit in it, depending on the performance of Pfizer
NH:
and as a reader notes below, big divi cut in there
BE:
Any detail on the debt breakdown?
NH:
no, but I have the conditions
NH:
he proposed transaction is subject to customary closing conditions, including approval by the stockholders of Wyeth
and notification and clearance under certain antitrust statutes. In addition, the proposed transaction is subject to
Pfizer’s financing sources not declining to provide the financing due to a material adverse change with respect to
Pfizer or Pfizer failing to maintain credit ratings of A2/A long-term stable/stable and A1/P1 short term affirmed. There
are no other financing conditions to closing in the merger agreement. Pfizer and Wyeth expect the transaction to close
at the end of the third quarter or during the fourth quarter 2009.
and notification and clearance under certain antitrust statutes. In addition, the proposed transaction is subject to
Pfizer’s financing sources not declining to provide the financing due to a material adverse change with respect to
Pfizer or Pfizer failing to maintain credit ratings of A2/A long-term stable/stable and A1/P1 short term affirmed. There
are no other financing conditions to closing in the merger agreement. Pfizer and Wyeth expect the transaction to close
at the end of the third quarter or during the fourth quarter 2009.
BE:
… cutting 10% of jobs and closing 5 plants.
11:33AM
NH:
right, we will give people a few moments to digest that
NH:
before looking at Cattles
NH:
the door step lender
NH:
sorry consuner finance company
11:33AM
BE:
So – the Consumer Finance Company …
NH:
Cattles
NH:
has given up on its plans to become a bank no?
BE:
Yeah
NH:
and as we have said before
NH:
Cattles is a binary bet
NH:
either it gets the license and is worth 100p or more
NH:
or it doesn’t
BE:
(Just like the banks, paradoxically)
NH:
and equity shareholders get wiped out
BE:
So what are the shares doing this morning?
NH:
er, down 5.25p at 12.75p
NH:
that’s a fall of 30%
BE:
so why have we not had total wipeout
NH:
good question
NH:
I think it is something to do with the statement
NH:
Cattles say they are withdrawing their application because of current market conditions
NH:
the implication being that they will apply for another when things improve
NH:
but who knows when that will be
BE:
yeah, how long is a piece of string?
NH:
and some analysts reckon it could be worth 16p a share in run off
NH:
but I not sure what incentive there are for the banks to keep this company alive
NH:
they could let it go under and pick up some of the business
NH:
anyway
NH:
the company is at the mercy of its bankers pretty much
NH:
sure, they have been doing all the right things – cutting costs etc
NH:
but it will need the support of the banks to trade through this
BE:
Hm.
BE:
still surprised the stock has not really tanked
BE:
perhaps the markets are going a bit soft
NH:
Possibly
NH:
Anyway, here’s a bit of comment on the FTSE 250 consumer finance company
NH:
this is from Merrill Lynch
NH:
Cattles announced this morning that it was withdrawn its application to take retail
deposits, as it “has become clear that permission is unlikely to be forthcoming” in
the current turmoil in the financial market and until the Group has renegotiated.
Since we were expecting some solid progress on negotiations of its loan facilities
coming due, by the end of February, this could suggest that negotiations with the
banks are complex, although the company promises an update by “the end of the
first quarter”.
deposits, as it “has become clear that permission is unlikely to be forthcoming” in
the current turmoil in the financial market and until the Group has renegotiated.
Since we were expecting some solid progress on negotiations of its loan facilities
coming due, by the end of February, this could suggest that negotiations with the
banks are complex, although the company promises an update by “the end of the
first quarter”.
NH:
Finally, the company states that current trading is “in line with expectations”.
We will not be changing our estimates as we were only expecting an aggregate
£200m to be refinanced out of £635m due for refinancing in 2009. This outcome
does take off some of the potential upside on Cattles’ share price, as it is unlikely
the company will resume lending with full access to funding. We will review our
price objective as a consequence.
We will not be changing our estimates as we were only expecting an aggregate
£200m to be refinanced out of £635m due for refinancing in 2009. This outcome
does take off some of the potential upside on Cattles’ share price, as it is unlikely
the company will resume lending with full access to funding. We will review our
price objective as a consequence.
NH:
The outlook on Cattles’ share price remains binary: if Cattles manages to stay
ahead of its interest covenants we believe that it is worth its run off value (which
we estimate to be around 57p) and the optionally value of the group getting
access to funding. If Cattles breaches their covenants we believe that there may
be little value for equity holders. The market’s implied probability of the latter
outcome is too high in our view. We therefore reiterate our Buy recommendation
ahead of its interest covenants we believe that it is worth its run off value (which
we estimate to be around 57p) and the optionally value of the group getting
access to funding. If Cattles breaches their covenants we believe that there may
be little value for equity holders. The market’s implied probability of the latter
outcome is too high in our view. We therefore reiterate our Buy recommendation
BE:
brave call
NH:
yep
NH:
and here’s another
NH:
from Citigroup
NH:
Withdrawing application to take retail deposits — Cattles has withdrawn its
application for a banking licence, citing the fact that “permission is unlikely to
be forthcoming” until the current financial market turmoil has subsided and
terms of renegotiation of £635m bank facilities are known.
application for a banking licence, citing the fact that “permission is unlikely to
be forthcoming” until the current financial market turmoil has subsided and
terms of renegotiation of £635m bank facilities are known.
Already in the price — We believe that this bad news is already reflected in the
share price. We have previously estimated a ‘run-off’ value for the group at 18p
(see ‘Liquidity and Credit Quality’ published 19 December) in the event that it
is unable to renew its bank funding and cannot get a banking licence. Despite
the stock currently trading at that level, we expect sentiment-driven share price
falls today.
NH:
Why withdraw? — Cattles had previously indicated that granting of a banking
licence would be delayed until markets had stabilised and its £635m debt had
been renegotiated. That Cattles has seen necessary to actually withdraw its
application might suggest that it is trying to head off the embarrassment of an
outright rejection from the FSA: Not good for market sentiment today.
licence would be delayed until markets had stabilised and its £635m debt had
been renegotiated. That Cattles has seen necessary to actually withdraw its
application might suggest that it is trying to head off the embarrassment of an
outright rejection from the FSA: Not good for market sentiment today.
Fair value unlikely to matter — Cattles is still in talks with its bankers to
renegotiate its £635m debt maturing this year. In our forecasts, we assume
that only £150m gets renewed, and that the group is successful in its cost
cutting plans. On that basis, we estimate fair value of 90p per share (see
‘Liquidity and Credit Quality’, 19 December), but that’s unlikely to hold any
weight today.
NH:
All the bad news? — It is hard to see what positive catalysts the company can
provide for the share price in the near term. Equally, there must surely be little
bad news left to provide. The renewal of the £500m bank debt maturing in July
is now crucial to the investment case, in our view.
All the bad news? — It is hard to see what positive catalysts the company can
provide for the share price in the near term. Equally, there must surely be little
bad news left to provide. The renewal of the £500m bank debt maturing in July
is now crucial to the investment case, in our view.
Binary outcome — If investors believe Cattles will survive as a going concern,
we think the stock offers compelling value at 18p per share. However, even
though we estimate an 18p per share ‘run-off’ value, if the group looks as
though it is heading for a run-off situation, sentiment would likely drive the
shares down further. This is a binary outcome stock, in our view. Until we see
more clarity on the direction of the business, we move our price target back to
18p, our estimate of run-off value set out in our note on 19 December
11:39AM
NH:
right, just been sent a link to something on Dubai
NH:
and this provides an interesting snapshot
NH:
http://www.daijiworld.com/news/news_disp.asp?n_id=55704&n_tit=Indians+Flee+Dubai+as+Dreams+Crash++-+Fall+out+of++Economic+Crisis
NH:
Mumbai/DUBAI – JAN 14: It’s the great escape by Indians who’ve hit the dead-end in Dubai.
Local police have found at least 3,000 automobiles — sedans, SUVs, regulars — abandoned outside Dubai International Airport in the last four months. Police say most of the vehicles had keys in the ignition, a clear sign they were left behind by owners in a hurry to take flight.
The global economic crisis has brought Dubai’s economic progress, mirrored by its soaring towers and luxurious resorts, to a stuttering halt. Several people have been laid off in the past months after the realty boom started unraveling.
On the night of December 31, 2008 alone more than 80 vehicles were found at the airport. “Sixty cars were seized on the first day of this year,” director general of Airport Security, Mohammed Bin Thani, told DNA over the phone. On the same day, deputy director of traffic, colonel Saif Mohair Al Mazroui, said they seized 22 cars abandoned at a prohibited area in the airport.
NH:
Faced with a cash crunch and a bleak future ahead, there were no goodbyes for the migrants — overwhelmingly South Asians, mostly Indians – just a quiet abandoning of the family car at the airport and other places.
While 2,500 vehicles have been found dumped in the past four months outside Terminal III, which caters to all global airlines, Terminal II, which is only used by Emirates Airlines, had 160 cars during the same period.
“The construction and real estate industry has been hit following the global slowdown and the direct fallout is that professionals working in the realty industry are rapidly losing their jobs,” said a senior media professional, in-charge of a realty supplement in Dubai. “In fact, my weekly real estate supplement usually had 60% advertisement and ran into 300-odd pages. In the last seven weeks, it’s down to 80 pages and with fewer advertisments,” he added.
BE:
Startling stuff.
BE:
Dubai beginning to resemble 28 Days Later.
NH:
it is
NH:
highways clogged up with abandoned cars
NH:
amazing, if accurate
BE:
If …
11:42AM
NH:
nsurers look a bit more stable today
BE:
That’s after Friday’s sell-off
BE:
which revolved around fears that bank nationalisations would make worthless the hybrid bank debt propping up their books.
BE:
Good story on this from the weekend edition
BE:
Which included this intriguing line
BE:
… the UK’s financial authorities were called to an urgent meeting with banks and investors this week to discuss the issues surrounding these tier one capital instruments – the next category of a company’s funding to default, after its equity …
BE:
Anyway, Bruno Paulson, Bernstein’s resident banks bull, says it’s all totally overplayed.
NH:
does he
BE:
We see this risk as fairly limited as (1) we think the UK banks should be able to avoid nationalisation, (2) it is only the preferred share element of hybrid Tier 1 that is in real peril in the event of ationalisation, and (3) while Prudential and Legal & General have around £2bn of hybrid debt, only a fraction of this will be in the troubled ‘Big 3′ banks. We would also point out that this concern on bank hybrid debt is part of a wider anxiety about fixed income exposure, but we do not expect either (1) default losses close to current spreads or (2) severe regulatory action on the back of the high current spreads. As a result, we are positive on the UK insurers as well as the UK banks.
BE:
Current share prices alone are sufficient evidence that the UK banks are under threat of nationalisation, as structurally profitable businesses are languishing at around a mere 0.2 times our estimates of end 2008 tangible book, implying chances of survival of 13 to 30% depending on the bank and assumptions used.
We would argue that while the banks’ position does look distinctly binary, they should have a far better chance of survival than the current prices suggest, not least because of the authorities’ plans to boost the capital ratios by cutting Risk Weighted Assets.
We would argue that while the banks’ position does look distinctly binary, they should have a far better chance of survival than the current prices suggest, not least because of the authorities’ plans to boost the capital ratios by cutting Risk Weighted Assets.
BE:
The fate of the banks’ bonds in the unfortunate event of nationalisation is not clear, given the government’s level of discretion, but the risk looks particularly acute for preferred shares, the closest tranche to equity and about 60% of the UK bank hybrid capital, given the precedent of the nationalisation of the Northern Rock preferred. The other significant risk is that interest could be deferred (i.e. passed) on non-cumulative Tier 1 elements, cutting its value even if the principal is preserved. Ultimately, a nationalising government will be more constrained by its desire to keep fixed income markets functioning than any legal issues.
BE:
Prudential and Legal & General both have significant shareholder exposure to hybrid debt in their UK businesses at £2.2bn and an estimated £1.5-2bn respectively. Aviva’s focus on commercial mortgages means that they are only facing £0.3bn of exposure, while Standard Life has virtually no shareholder funded investment risk in the UK. While the numbers at Prudential and Legal & General do look fairly high, we would point out that this is likely to be a diversified international portfolio, with the three troubled banks discussed in this piece unlikely to be much above 10% of sterling denominated Tier 1 capital outstanding. Even assuming that the three banks combine for 15% of the hybrid exposure leaves a fairly manageable total of around £300m at Prudential.
BE:
The issue around bank hybrids is a symptom of the more general, and understandable, concern about insurers fixed income exposures, given that investment grade corporate bonds have spreads of 400bp+ over treasuries. We argue that any future losses from defaults are likely to be far lower than implied by the spreads, and that the UK regulator is unlikely to take too harsh a stance in determining the credit allowance to be deducted from the fixed income yields. A move to deducting 100bp on UK fixed income could hit the IGD surplus by around £300m at Prudential and £700m at Legal & General, still leaving comfortable surpluses. Aviva will be less affected due to its dependence on commercial mortgages.
NH:
(LOL BBB – we like that. Lex quality headline).
NH:
actually just looking at share prices in the insurance sector
NH:
all pretty good
Aviva (AV:LSE): Last: 285.50, up 21.5 (+8.14%), High: 286.25, Low: 258.75, Volume: 4.99m
Old Mutual (OML:LSE): Last: 53.70, up 4.2 (+8.48%), High: 54.40, Low: 51.00, Volume: 10.74m
Prudential (PRU:LSE): Last: 304.50, up 16 (+5.55%), High: 309.25, Low: 283.00, Volume: 5.05m
Legal and General Group (LGEN:LSE): Last: 57.90, up 2.5 (+4.51%), High: 58.50, Low: 54.80, Volume: 6.59m
11:45AM
11:45AM
BE:
Anything in the way of raw this morning?
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:
well, this cash call story in Liberty International won’t go away
NH:
rumours swept the market late Friday that they were looking to raise
NH:
£1bn
NH:
but the company played it all down
NH:
not that they are ruling anything in or out
BE:
Indeed. We did, of course, do our best to check out the Liberty gossip on Friday
BE:
When there was a lot of shorting
NH:
there was and the bears don’t appear to be closing their positions this morning
NH:
off 2p at 383.75p
BE:
Anyway, there’s a big – and negative – note out of HSBC this morning
BE:
that’s not exactly going to dampen the fears.
BE:
Basically concludes that the sector’s broken
NH:
nice
BE:
Forecasting another 17% stock downside on average
BE:
The outturn of our rental value forecasts would shatter the REITs’ foundations for profit and dividend growth and leave the over-rented REITs suffering a decline in rental income over the period of lease maturity of up to ten years.
We forecast adjusted PBT for the REITs under our coverage to fall an average 11% from the 2008 peak to 2010, which results from our revised forecasts for increased vacancy in investment portfolios, unlet developments exacerbating the increase in voids and the ill-timed increase in empty buildings business rates.
Our profit forecasts leave reported dividends uncovered for 60% of our coverage. We expect those REITs to cut their dividends by 20-30% or to minimum levels required under Property Income Distribution (PID) rules in 2009-10, in order to re-establish a base from which progressive dividends can be paid at lower levels of prospective rental income.
BE:
And here’s what they say on balance sheets.
BE:
We expect most REITs to breach their debt covenants on our 50% peak-to-trough fall in prime property values. Almost all our coverage REITs have disposal programmes underway to alleviate the necessity for earnings and asset-dilutive rights issues. We calculate that our coverage would need to make GBP3.7bn property sales to avoid a breach of their most onerous covenants, which looks a remote prospect to us given that most buyers in the market are fishing for distressed assets.
BE:
The spectre of rights issues is weighing on the sector and we calculate that GBP1.8bn would need to be raised without further property disposals to keep the most onerous debt covenants compliant. We expect the banks to offer pragmatic solutions to curing covenants on improved margins. Moreover, the banks most exposed are part-Government owned and they are unlikely to perpetuate the downward spiral in prices that would follow distressed sales and require further Government investment. We calculate that the banking sector’s negative equity exposure to commercial property will be GBP97bn by the end of 2009 on the basis of our peak-to-trough fall in values.
BE:
We recognise that rights issues would dilute earnings and assets by up to 15% depending on issue prices. However, our DCF valuations and target prices would be unchanged in the event of equity raisings, as our beta estimates and discount rates would fall to reflect lower financial risk.
BE:
… and
BE:
Dividend yields set for a correction
BE:
Our 20-30% forecast dividend cuts in 2009-10e reduce our forecast sector average dividend yields from 7.4% in the current year to 6.1% at the trough. Although this yield is higher than the 2009 5.5% consensus estimate for the wider stock market, we believe the REITs will need to offer a yield premium to compensate for weak growth prospects as some portfolio rental incomes seem set to remain in reverse gear for up to 15 years.
BE:
… and
BE:
Balance sheet weakness preventing earnings recovery
Balance sheet weakness preventing earnings recovery
BE:
The UK REITs do not have the balance sheet flexibility to purchase distressed assets currently available at yields that would enhance earnings and revive dividend growth prospects. On the contrary, the disposal programmes are likely to further dilute earnings with income yields prevailing in the market of at least 6.5% versus the REITs current cost of debt averaging around 5.5%.
BE:
There’s loads more, which I can Longroom if anyone’s interested.
BE:
Also heard some heated discussion on Friday about whether Land Sec’s divi is covered by earnings at the moment.
NH:
really
BE:
Something to pick up on later though, I suspect.
11:51AM
NH:
right
NH:
back to the banks for a moment
NH:
just want to pick on this goldman note
NH:
which says banks are the new utilities
NH:
safe, boring, cash generative and pay regular dividends
BE:
Right.
NH:
I think Goldman might be stretching things here
BE:
Hm.
NH:
but anyway
NH:
worth having a look at the note
NH:
so here goes
BE:
By “regular” do they mean “never”?
NH:
Re-launching Large Banks at Cautious
We re-launch on large banks at Cautious, and add
JPM vs. USB as a Conviction List pair trade.
We reinstate JPM at CL-Buy as it can earn
through credit issues while at 1X tangible book, it
leaves upside as the cycle turns. We downgrade
USB to Sell – this is a good bank, but valuation vs.
peers puts risk to the downside. We reinstate C at
Sell. Investors should avoid the stock given no
core earnings power clarity. We downgrade BAC
to Neutral, and reinstate PNC, WFC, and MS at
Neutral as risk/reward is more balanced.
We re-launch on large banks at Cautious, and add
JPM vs. USB as a Conviction List pair trade.
We reinstate JPM at CL-Buy as it can earn
through credit issues while at 1X tangible book, it
leaves upside as the cycle turns. We downgrade
USB to Sell – this is a good bank, but valuation vs.
peers puts risk to the downside. We reinstate C at
Sell. Investors should avoid the stock given no
core earnings power clarity. We downgrade BAC
to Neutral, and reinstate PNC, WFC, and MS at
Neutral as risk/reward is more balanced.
NH:
Capital + credit outweigh valuation + gov’t
Capital and credit downside outweighs low
valuation and government intervention upside as:
(1) Capital strain is higher at larger banks: Despite
double digit Tier 1 ratios, tangible common equity
(TCE) remains the limiting factor for the banks as
TCE + reserves + pre-provision profit is the first
loss cushion for shareholders. The biggest banks
have materially lower TCEs at 3.1% vs 5.9% for
regionals, increasing the risk of capital strain.
Capital and credit downside outweighs low
valuation and government intervention upside as:
(1) Capital strain is higher at larger banks: Despite
double digit Tier 1 ratios, tangible common equity
(TCE) remains the limiting factor for the banks as
TCE + reserves + pre-provision profit is the first
loss cushion for shareholders. The biggest banks
have materially lower TCEs at 3.1% vs 5.9% for
regionals, increasing the risk of capital strain.
NH:
(2) Geographic diversity offers limited benefit: We
believe we are half way through home price
declines (HPD) and loss recognition. Critically,
losses appear to grow exponentially when HPD
exceeds 15%, which we expect on a national basis
in 2009. Large cap banks, with national footprints,
should see continued NPA growth as new
problem geographies arise (i.e. the Northeast).
(3) Consumer and CRE hurts the larger banks: As
unemployment rises, consumer and commercial
real estate problems are set to accelerate. The
average large cap bank has 39% of loans in CRE
and consumer loans vs 25% for regional banks.
believe we are half way through home price
declines (HPD) and loss recognition. Critically,
losses appear to grow exponentially when HPD
exceeds 15%, which we expect on a national basis
in 2009. Large cap banks, with national footprints,
should see continued NPA growth as new
problem geographies arise (i.e. the Northeast).
(3) Consumer and CRE hurts the larger banks: As
unemployment rises, consumer and commercial
real estate problems are set to accelerate. The
average large cap bank has 39% of loans in CRE
and consumer loans vs 25% for regional banks.
NH:
and here is the utility bit
NH:
(4) Utility risk from government intervention: Big
banks are converging to 1X tangible book.
Historically this is a floor; however, it is a moving
target as tangible book values shrank 15% in 4Q
alone. Longer term, we expect more regulatory
control and higher capital ratios, and thus lower
ROEs. Big banks are at risk of becoming the “new
utilities” as the government is now one of the
largest stakeholders in the industry.
banks are converging to 1X tangible book.
Historically this is a floor; however, it is a moving
target as tangible book values shrank 15% in 4Q
alone. Longer term, we expect more regulatory
control and higher capital ratios, and thus lower
ROEs. Big banks are at risk of becoming the “new
utilities” as the government is now one of the
largest stakeholders in the industry.
NH:
We expect five measures may be required in order to plug the systemic capital hole:
1. More capital raises, but focused on stronger banks: Capital raises will continue in 2009 although we think the theme will be
stronger banks raising capital to execute take-unders of weaker banks, akin to the most recent round of capital raises in 2H2008.
2. Common dividend cuts: US commercial banks still paid $11 billion in common dividends in 3Q2008 and $9 billion in 4Q2008.
This number will continue to decline as banks conserve capital (e.g., BAC recently cut its dividend to $0.01). We think the next
round of dividend cuts will come in 1H 2009 with even safer havens looking to reduce dividends as USB and JPM will have
dividend payouts greater than 100% on our estimates without a cut, and as WFC and PNC will need to rebuild capital following
recent acquisitions.
3. Divestitures, where and if possible: Banks may look to monetize higher-value divisions, although in the current environment
this is likely to be a distant third in terms of sources of capital.
4. Loss sharing and/or “aggregator bank”: Government loss sharing arrangements are likely to continue in order to provide a
floor for assets on balance sheets. We think loss sharing will come before asset purchases despite the fact that the “bad” or
“aggregator” bank idea is clearly dominant at the moment. In fact, there may be a temptation to guarantee assets rather than buy
them, given that a guarantee does not require borrowing and a large upfront capital commitment.
1. More capital raises, but focused on stronger banks: Capital raises will continue in 2009 although we think the theme will be
stronger banks raising capital to execute take-unders of weaker banks, akin to the most recent round of capital raises in 2H2008.
2. Common dividend cuts: US commercial banks still paid $11 billion in common dividends in 3Q2008 and $9 billion in 4Q2008.
This number will continue to decline as banks conserve capital (e.g., BAC recently cut its dividend to $0.01). We think the next
round of dividend cuts will come in 1H 2009 with even safer havens looking to reduce dividends as USB and JPM will have
dividend payouts greater than 100% on our estimates without a cut, and as WFC and PNC will need to rebuild capital following
recent acquisitions.
3. Divestitures, where and if possible: Banks may look to monetize higher-value divisions, although in the current environment
this is likely to be a distant third in terms of sources of capital.
4. Loss sharing and/or “aggregator bank”: Government loss sharing arrangements are likely to continue in order to provide a
floor for assets on balance sheets. We think loss sharing will come before asset purchases despite the fact that the “bad” or
“aggregator” bank idea is clearly dominant at the moment. In fact, there may be a temptation to guarantee assets rather than buy
them, given that a guarantee does not require borrowing and a large upfront capital commitment.
NH:
The two loss sharing agreements to date are clearly beneficial for Citigroup and Bank of America. However, the agreements are
unlikely to solve problems at these banks (e.g., the first loss on the insured assets is 65% of Citigroup’s TCE while BAC still has
about $500 billion of “problem” assets that are not covered – see Exhibit 9). Moreover, the Japanese banking industry’s experience
in the late 1990s demonstrates that asset purchases and capital injections coincided with a short-term rally but did not mark a
permanent turn in bank stocks (see Exhibit 10)
unlikely to solve problems at these banks (e.g., the first loss on the insured assets is 65% of Citigroup’s TCE while BAC still has
about $500 billion of “problem” assets that are not covered – see Exhibit 9). Moreover, the Japanese banking industry’s experience
in the late 1990s demonstrates that asset purchases and capital injections coincided with a short-term rally but did not mark a
permanent turn in bank stocks (see Exhibit 10)
NH:
5. Fixing the A = L+E equation: If banks cannot meet their capital needs through the four sources above, there will be an increased
focus on reducing liabilities to create capital. This could include: (1) cancelling non-cumulative preferred dividends in order to
generate greater retained earnings (big banks are paying 10%-20%+ of pre-provision, pre-write down earnings to preferred
dividends (see Exhibit 11), (2) converting preferred stock into common stock, and (3) buying back preferreds or debt below par.
Cancellation of dividends, or debt exchanges would be controversial. However, consider the size of the A = L+E equations – the big
banks (C, BAC, JPM, WFC, USB, PNC, MS) have $8.9 trillion of tangible assets, $0.3 trillion of tangible common equity, and $8.6
trillion of preferred, debt, and deposits. If the value of assets continues to decline one cannot simply raise capital to double the
tangible common base – at some point, the liabilities would need to be reduced in recognition of the problem (see Exhibit 12).
However, the TARP injections and other preferreds almost equal the current amount of tangible common equity.
focus on reducing liabilities to create capital. This could include: (1) cancelling non-cumulative preferred dividends in order to
generate greater retained earnings (big banks are paying 10%-20%+ of pre-provision, pre-write down earnings to preferred
dividends (see Exhibit 11), (2) converting preferred stock into common stock, and (3) buying back preferreds or debt below par.
Cancellation of dividends, or debt exchanges would be controversial. However, consider the size of the A = L+E equations – the big
banks (C, BAC, JPM, WFC, USB, PNC, MS) have $8.9 trillion of tangible assets, $0.3 trillion of tangible common equity, and $8.6
trillion of preferred, debt, and deposits. If the value of assets continues to decline one cannot simply raise capital to double the
tangible common base – at some point, the liabilities would need to be reduced in recognition of the problem (see Exhibit 12).
However, the TARP injections and other preferreds almost equal the current amount of tangible common equity.
BE:
Hm. Looks like a bit of a think piece that one.
NH:
Very funny Lemmy – but BE did manage to sell itself for a decent price
11:54AM
NH:
right were asked about the miners below and Xstrata
BE:
(BE as in British Energy — I’ve never sold myself for a decent price.)
NH:
in particular
BE:
Yup – taken a bit of a whack this morning.
BE:
XTA down 45p at 635p.
NH:
now there are downgrades
NH:
but i am note sire that it driving the price
NH:
I think it is down to this
NH:
the latest ferrochrome pricing rounds
NH:
now, late Friday as the benchmark price for ferrochrome was set at $0.79 a pound, down from $1.85 for the previous three months.
NH:
according to Matt Hasson at Arbuthnot Securities points out that Xstrata manages the world larges ferrochrome mine in a JV with Merafe in South Africa.
NH:
So this is not good news for XTA
NH:
and it is not much good for ENRC either
Eurasian Natural Resources Corp (ENRC:LSE): Last: 310.00, down 9.5 (-2.97%), High: 321.25, Low: 309.25, Volume: 873.93k
NH:
at those new levels, its ferrochrome biz won’t be making too much money
NH:
and Hasson also points out that there has been a profits warning from a company called International Ferro Metals this morning
BE:
ah yes
International Ferro Metals (IFL:LSE): Last: 14.00, down 3 (-17.65%), High: 15.00, Low: 13.25, Volume: 2.25m
BE:
that thing spent a bit of time in the FTSE 250
NH:
here’s some more comment from Arbuthnot
NH:
International Ferro Metals have announced that due to the weakness of current demand for ferrochrome and the lack of transparency for the remainder of the financial year the Company believes that, despite the observed recent increase in Chinese demand, the financial performance of the Company for the year to 30 June 2009 is likely to be materially below current market expectations. Obviously the pain continues in the ferrochrome market following reports of a 57% price reduction last week to $0.79/lb.
NH:
and a bit on Vedanta
NH:
which has had some gloomy news out this morning
NH:
Vedanta’s KCM division which produces copper from Zambia had a sharp drop in revenue compared with the corresponding quarter last year. Revenue fell from $232.1m to $121.9. The fall was due to a weak copper price.
NH:
however, it is not all doom and gloom in the mining world
NH:
gold was trading through $900 an ounce late Friday
NH:
which should be good news for Randgold Resources
NH:
and one more thing on the miners
NH:
A cyclone in Australia’s northwest region of Western Australia has forced Rio Tinto to suspend Iron ore exports and BHP Billiton to suspend the Griffin oil field.
11:58AM
NH:
right, anything to finish up on?
BE:
Libor?
NH:
hang on
NH:
DJ 3-Month USD Libor Fixed At 1.18375%, Vs 1.16938% Friday
NH:
DJ 3-Month Sterling Libor Fixed At 2.175%, Vs 2.19313% Friday
NH:
*DJ 3-Month Euro Libor Fixed At 2.1425%, Vs 2.19% Friday
NH:
Jan. 26 (Bloomberg) — The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars rose for a fourth day, the longest series of gains in more than three months, the British Bankers’ Association said.
The rate climbed one basis point to 1.18 percent today, the BBA said. It hasn’t advanced for four days since Oct. 10. The overnight rate slipped half a basis point to 0.23 percent.
The Libor-OIS spread, a gauge of bank reluctance to lend, widened two basis points to 94 basis points.
The rate climbed one basis point to 1.18 percent today, the BBA said. It hasn’t advanced for four days since Oct. 10. The overnight rate slipped half a basis point to 0.23 percent.
The Libor-OIS spread, a gauge of bank reluctance to lend, widened two basis points to 94 basis points.
BE:
Cheers for that.
NH:
right, I think we are done
NH:
I must dash have a lunch
NH:
well more of a quick coffee with a banker
NH:
and you Bryce?
NH:
delights of the vending machine?
BE:
Yup.
BE:
Another catfood sandwich awaits.
NH:
well, enjoy that.
NH:
and we will see you all tomorrow
NH:
for another Murphyless sessin of market’s live
NH:
and remember
NH:
mo money, mo problems folks
BE:
L8rs.
NH:
we outta here