Markets live chat transcript for the chat ending at 12:09 on 16 Feb 2009. Participants in this chat were: Paul Murphy, FT (PM) Bryce Elder (BE)
PM:
Okay – welcome everyone
PM:
Doomy pedant — the spam is annoying. We catch most , but that one has defeated us so far
PM:
This is of course Markets Live, the FT Alphaville’s daily markets chat.
PM:
Bryce is almost logged in
PM:
BE:
In now
PM:
Hi Bryce
PM:
Welcome
PM:
Not going to faff around this morning
BE:
Oh dear, that sounds ominous.
PM:
Bryce. Get your coat off.
PM:
We need to hit this.
BE:
Okay okay, I’m here im ready to go.
BE:
Where we off to? Insurers?
PM:
In one.
BE:
Which one? L&G
PM:
Yep – Legal & General
PM:
Let’s just run back through what has happened here.
PM:
On Friday towards the end of ML we noted the sharp weakness of L&G, which suddenly fell again having fallen some way the day before.
BE:
It all looked very odd.
PM:
When we were off air we had lots of chats with people and read of stuff – and then had some extensive chats with Andrea Felstead, who is the FT’s fearless insurance correspondent
BE:
Truly fearless.
PM:
Anyway, that result in Sam issuing this appeal to readers
BE:
(Although it’s Felstead, no A)
PM:
SELL: Insurers
BE:
Many of you responded – for which we are thankful.
BE:
But in the background Andrea was off having conversations with all sorts of people
BE:
including some rather testing one’s with L&G.
PM:
She eventually wrote this in the paper
PM:
Legal & General in talks with FSA on defaults
By Andrea Felsted
Published: February 13 2009 22:29 | Last updated: February 13 2009 22:29
By Andrea Felsted
Published: February 13 2009 22:29 | Last updated: February 13 2009 22:29
PM:
Published: February 13 2009 22:29 | Last updated: February 13 2009 22:29
Legal & General is in talks with the Financial Services Authority over the amount
of money that it should set aside for defaults in its bond portfolio.
The talks come ahead of onerous tests by the FSA of whether UK life assurers will be able to withstand further sharp falls in equity and bond portfolios.
L&G is set to increase the amount of money it puts aside for bond defaults when it reports its preliminary results next month, according to people familiar with the company.
The company denied that it was in “discussions” with the FSA over the valuation of any asset class.
L&G shares fell almost 10 per cent to a fresh low of 49½p on concern about the value of the bond portfolio. But the regulator has been taking a keen interest in the level of bond defaults that life assurers assume, particularly ahead of the stress tests.
L&G takes a less conservative approach to bond defaults than some rivals such as Friends Provident and Prudential, according to analysts. The company had a capital buffer of £2.9bn at September 30.
Analysts at JPMorgan have suggested that strengthening the reserves to a more conservative level could cost L&G as much as £2.4bn in capital. Some analysts consider that estimate excessive.
But a private report from Cazalet Consulting for one of its clients, seen by the Financial Times, also raised questions about L&G’s level of reserving.
It said: “We think that the approach to pricing new business and valuing in-force liabilities has been based around longevity and credit default assumptions that increasingly seem relatively lax and optimistic, which could have negative consequences for the group’s capital position, and possibly cause it to require raising fresh capital, which then could raise questions over the desirability of the contiunance of the current bulk annuity new business strategy.”
The expected reserve strengthening comes ahead of stress tests by the FSA.
As part of the stress tests, insurers will not only have to demonstrate a capital buffer to withstand an effective 60 per cent reduction in equity markets from current levels, but also will have to assume a substantial increase in defaults on corporate bonds.
Life assurers must complete the tests before they report their preliminary results, raising fears that they will be forced to cut their dividends, or raise fresh capital.
BE:
Hang on Murph, hang on
PM:
Wot?
BE:
As part of the stress tests, insurers will not only have to demonstrate a capital buffer to withstand an effective 60 per cent reduction in equity markets from current levels, but also will have to assume a substantial increase in defaults on corporate bonds.
Life assurers must complete the tests before they report their preliminary results, raising fears that they will be forced to cut their dividends, or raise fresh capital.
Additional reporting by Neil Hume and Paul Murphy
BE:
Additional reporting…and Paul Murphy
BE:
You left that bit off the bottom
BE:
Additional reporting…and Paul Murphy
PM:
Zzzzzzz
PM:
Everytime someone on the paper picks up on an AV story they think they have to give us a byline.
PM:
We say: “NO PLEASE! – DON’T NEED PAPER BYLINES”
PM:
Say if they want to give us any credit give us a link – not a byline.
PM:
It was well meant, of course, but I for one have reached an age where I don’t need it.
PM:
BE:
Anyway, back to L&G.
PM:
Andrea wrote that – and then this morning Ive had random people suggesting to me that we here on AV don’t know anything about insurance and that we are somehow being manipulated or something.
PM:
I’ll admit that I find insurance balance sheet’s baffling, but then so do most people involved in insurance.
PM:
But we can claim a bit of a track record when it comes to insurance stories.
PM:
Couple of examples
PM:
That led to Standard Life being demutualised
PM:
Also
PM:
Anyway – enough about that. Back to L&G
BE:
Stock opened sharply lower – as did all insurers across Europe.
BE:
Then there was this v strange comment from an L&G spokesman to retuers
BE:
There are no conversations with the FSA beyond the usual year-end process.
BE:
That led to an immediate rally in the stock – only for the selling to resume once more.
BE:
Price is currently off 3p at 46.5p, having touched 38p at one stage.
BE:
15 year low, I’d guess
PM:
All quite bemusing.
PM:
What the analysts saying?
BE:
This is from Greig Paterson at KBW
BE:
Capital event much more likely, in our view
We see an increased possibility of a capital event for L&G following discussions
with its competitors on the regulator’s attitude towards reserving for annuity
books. It appears likely that the regulator’s attitude is hardening on whether a
default assumption that is a multiple of historical averages is an acceptable
policy. If L&G moves to a basis more in line with the peer group, we calculate
that this could lead to a £1.3-1.9bn increase in reserves. Given that the statutory
(IGD) surplus is estimated at £2.0-2.5bn, this could lead management to consider
cutting the dividend or, less probably, a rights issue. Since the group has recently
been placed on negative watch at Standard & Poor’s, a rating downgrade,
negatively impacting its annuity franchise, may also be likely. We maintain our
Underperform recommendation.
We see an increased possibility of a capital event for L&G following discussions
with its competitors on the regulator’s attitude towards reserving for annuity
books. It appears likely that the regulator’s attitude is hardening on whether a
default assumption that is a multiple of historical averages is an acceptable
policy. If L&G moves to a basis more in line with the peer group, we calculate
that this could lead to a £1.3-1.9bn increase in reserves. Given that the statutory
(IGD) surplus is estimated at £2.0-2.5bn, this could lead management to consider
cutting the dividend or, less probably, a rights issue. Since the group has recently
been placed on negative watch at Standard & Poor’s, a rating downgrade,
negatively impacting its annuity franchise, may also be likely. We maintain our
Underperform recommendation.
BE:
L&G will likely have to increase its reserves, with a possible “capital event”
following. The key issue is the regulator’s view on the impact of higher corporate
spreads on reserving policy. It appears that L&G will have to increase its liabilities to
take into account the higher corporate spreads seen over 2H08. It currently has a
30bps default assumption, and this would have to increase 2-3x to be in line with what
the other players are doing, i.e. by 60-90bps. Given that the annuity book is c£18bn
and has a duration of c12 years, L&G would have to increase it liabilities by
£1.3-1.9bn versus a market cap of £2.9bn and an estimated statutory surplus of
£2-2.5bn (£2.9bn September 2008). This could lead to a dividend cut and, possibly, a
capital-raising exercise.
following. The key issue is the regulator’s view on the impact of higher corporate
spreads on reserving policy. It appears that L&G will have to increase its liabilities to
take into account the higher corporate spreads seen over 2H08. It currently has a
30bps default assumption, and this would have to increase 2-3x to be in line with what
the other players are doing, i.e. by 60-90bps. Given that the annuity book is c£18bn
and has a duration of c12 years, L&G would have to increase it liabilities by
£1.3-1.9bn versus a market cap of £2.9bn and an estimated statutory surplus of
£2-2.5bn (£2.9bn September 2008). This could lead to a dividend cut and, possibly, a
capital-raising exercise.
BE:
Prudential & Aviva appear fine, as assumptions already moved. Prudential has
already (September 2008) moved its assumption set by adding 25% of corporate bonds
spread movements to its default assumption – that is, passed onto shareholders. Aviva
has already disclosed its FY08 IGD surplus, which likely implies that it has reached an
agreement with the regulator on its default assumption for year end. It has not
officially said anything about the FY08 basis, but its 2007 assumption was 42bps of
defaults, which was higher than L&G’s.
already (September 2008) moved its assumption set by adding 25% of corporate bonds
spread movements to its default assumption – that is, passed onto shareholders. Aviva
has already disclosed its FY08 IGD surplus, which likely implies that it has reached an
agreement with the regulator on its default assumption for year end. It has not
officially said anything about the FY08 basis, but its 2007 assumption was 42bps of
defaults, which was higher than L&G’s.
BE:
Regulator’s current attitude. According to commentators, the regulator now appears
to believe that a reserving policy that assumes defaults are a multiple of historical
averages is unacceptable, and that assumptions must now be a function of the actual
level of corporate spreads. It appears that in September 2008, all the companies had
discussions with the FSA, and most – L&G being the notable exception – subsequently
moved their basis. It is likely that L&G avoided having to change its basis by arguing
that it has surplus capital to absorb any changes when they come. The FSA sent a
letter to the ABI last year saying that it would reassess the reserving basis “no earlier
than April 2009″, but industry commentators believe that, despite this, there are likely
to be intense conversations between the regulator and FSA in connection with the
2008 reserves.
to believe that a reserving policy that assumes defaults are a multiple of historical
averages is unacceptable, and that assumptions must now be a function of the actual
level of corporate spreads. It appears that in September 2008, all the companies had
discussions with the FSA, and most – L&G being the notable exception – subsequently
moved their basis. It is likely that L&G avoided having to change its basis by arguing
that it has surplus capital to absorb any changes when they come. The FSA sent a
letter to the ABI last year saying that it would reassess the reserving basis “no earlier
than April 2009″, but industry commentators believe that, despite this, there are likely
to be intense conversations between the regulator and FSA in connection with the
2008 reserves.
PM:
Okay
PM:
In the interests of openness here are two JP Morgan notes that we have been studying carefully.
PM:
The first is from the end of January – Andrew Hughes at JPM
PM:
No news could be bad news – where is the hybrid debt
disclosure? – ALERT
disclosure? – ALERT
PM:
L&G disclosed on the Annuity Investor Day in December that they had
£8.3bn of financial debt to which shareholders are exposed. Given the
very public issues last week and market value movements in these
securities (see our note, “UK Life: The RBS hybrid debt downgrade
impact”) over the last six months, today was arguably the perfect
opportunity to reassure shareholders, that is unless they have lots of
hybrid debt.
If management have invested in large amounts of hybrid (we can not tell
as L&G do not publish a regulatory filing), they may wish to delay this
disclosure until the full year results on 25th March. By delaying
disclosure management may hope that things improve over the next two
months. However, we retain our Underweight view as we expect
significant amounts of hybrid debt are owned by the group and that
the company needs to increase its provisions for credit risk
significantly (see our note, ‘Credit & hybrid impact on capital’, 26th
January).
Sales figures were 15% better than expected at £259m annual premium
equivalent (APE) against consensus of £238m and JPM £225m.
However, the lower/nil margin pensions represented the beat versus
consensus & JPM: £82m vs £70m consensus, JPM £74m.
Annuity business beat consensus but was inline with JPM; typically this
is seasonal around the end of the year with pension schemes looking to
secure benefits before the annual accounts are published. We believe
annuity business being written today is profitable (investor day guidance
receiving libor +350, paying libor +50). However, the back book of
£14bn in our opinion will need significant reserve strengthening and the
degree of credit risk within the portfolio will likely see L&G’s sales
under pressure in future from reduced capital buffers and peak exposures
to credit risk.
IGD position no number given “This will reflect market movements
over the fourth quarter, any impact of our normal year-end
reserving review [...]”
As usual there is no investor conference call, so no opportunity to clarify
hybrid debt exposures.
£8.3bn of financial debt to which shareholders are exposed. Given the
very public issues last week and market value movements in these
securities (see our note, “UK Life: The RBS hybrid debt downgrade
impact”) over the last six months, today was arguably the perfect
opportunity to reassure shareholders, that is unless they have lots of
hybrid debt.
If management have invested in large amounts of hybrid (we can not tell
as L&G do not publish a regulatory filing), they may wish to delay this
disclosure until the full year results on 25th March. By delaying
disclosure management may hope that things improve over the next two
months. However, we retain our Underweight view as we expect
significant amounts of hybrid debt are owned by the group and that
the company needs to increase its provisions for credit risk
significantly (see our note, ‘Credit & hybrid impact on capital’, 26th
January).
Sales figures were 15% better than expected at £259m annual premium
equivalent (APE) against consensus of £238m and JPM £225m.
However, the lower/nil margin pensions represented the beat versus
consensus & JPM: £82m vs £70m consensus, JPM £74m.
Annuity business beat consensus but was inline with JPM; typically this
is seasonal around the end of the year with pension schemes looking to
secure benefits before the annual accounts are published. We believe
annuity business being written today is profitable (investor day guidance
receiving libor +350, paying libor +50). However, the back book of
£14bn in our opinion will need significant reserve strengthening and the
degree of credit risk within the portfolio will likely see L&G’s sales
under pressure in future from reduced capital buffers and peak exposures
to credit risk.
IGD position no number given “This will reflect market movements
over the fourth quarter, any impact of our normal year-end
reserving review [...]”
As usual there is no investor conference call, so no opportunity to clarify
hybrid debt exposures.
PM:
The other one is from way back in November – again Andrew Hughes
PM:
L&G tried to put on a brave face in the investor day yesterday, in our
view, highlighting the strengths of the business with no mention of any
of the issues with expanding the business during the benign credit
markets we have seen in the last few years.
We believe L&G is the UK insurer most likely to issue a profit
warning. Our concern is that L&G are not confirming with the FSA
Risk and Capital Update guidance from the end of September and have
not changed their reserves despite higher expectations of defaults going
forward.
They still assume only 30 basis points for defaults within IFRS and
reserves compared to an estimated 90 basis points at Prudential. The
impact of moving the basis to be inline with Prudential would be an
estimated £864m (2007 operating profit was £658m). This means that
L&G are current assuming around 220 basis points of liquidity free lunch
on an overweight global banks and ABS portfolio.
Management claim there will be no action on this required until Q2
2009 following agreement between the industry body ABI and the
FSA that gives the industry six months – cooling off period – after
which market conditions and research will be considered.
view, highlighting the strengths of the business with no mention of any
of the issues with expanding the business during the benign credit
markets we have seen in the last few years.
We believe L&G is the UK insurer most likely to issue a profit
warning. Our concern is that L&G are not confirming with the FSA
Risk and Capital Update guidance from the end of September and have
not changed their reserves despite higher expectations of defaults going
forward.
They still assume only 30 basis points for defaults within IFRS and
reserves compared to an estimated 90 basis points at Prudential. The
impact of moving the basis to be inline with Prudential would be an
estimated £864m (2007 operating profit was £658m). This means that
L&G are current assuming around 220 basis points of liquidity free lunch
on an overweight global banks and ABS portfolio.
Management claim there will be no action on this required until Q2
2009 following agreement between the industry body ABI and the
FSA that gives the industry six months – cooling off period – after
which market conditions and research will be considered.
Our view is that the FSA could still challenge L&G’s assumptions
for the following reasons: 1. They are unchanged since 1999 despite
increasing credit risk in 2007 and H1 2008. 2. Market conditions are
clearly worse. 3. 21% of bonds are ABS (£1bn of MBS was purchased in
2007). 4. A further 37% is international financial debt.
We believe proper reserving for credit risk will reduce the bulk
annuity market as pension schemes calculate reserves assuming an AA
bond yield; whereas L&G are able to assume a higher yield currently in
their reserves due to the 30 basis point default assumption. If the basis is
corrected the capital strains should increase significantly and fewer deals
will be done, we believe.
PM:
Here’s some more
PM:
The reserving basis
L&G says their default experience in 2008 was inline with their 30 basis point
assumption and that the fund has only suffered minimal defaults over the last ten
years.
Given they have 37% in financial debt and this has been reduced compared to
previous levels, it is perhaps not a huge surprise they have had few defaults prior to
this year.
Prudential on the other hand take 25% of the credit spread widening through the P&L
and to capital. We estimate they will be using 90 basis points, 24 basis points plus
25% of the credit spread widening since 2006.
Our estimate of the potential impact on L&G (£864m) is 60 basis point (the
difference between L&G and our Pru estimate) times duration of 8 years times the
annuity assets £18bn.
We discussed the FSA end of September implications in detail in our note UK
Insurance: Capital safe dividends at risk of 27 October.
L&G says their default experience in 2008 was inline with their 30 basis point
assumption and that the fund has only suffered minimal defaults over the last ten
years.
Given they have 37% in financial debt and this has been reduced compared to
previous levels, it is perhaps not a huge surprise they have had few defaults prior to
this year.
Prudential on the other hand take 25% of the credit spread widening through the P&L
and to capital. We estimate they will be using 90 basis points, 24 basis points plus
25% of the credit spread widening since 2006.
Our estimate of the potential impact on L&G (£864m) is 60 basis point (the
difference between L&G and our Pru estimate) times duration of 8 years times the
annuity assets £18bn.
We discussed the FSA end of September implications in detail in our note UK
Insurance: Capital safe dividends at risk of 27 October.
PM:
The bond portfolio
Legal and General management claim the main reason to buy L&G share instead of
the underlying now very cheap bond assets is their skills in managing both longevity
and assets.
Management have been increasing the on balance sheet credit risk in 2007 and H1
2008. This looks to have involved buying global banks, as these are now 23% of the
bond portfolio.
Legal and General management claim the main reason to buy L&G share instead of
the underlying now very cheap bond assets is their skills in managing both longevity
and assets.
Management have been increasing the on balance sheet credit risk in 2007 and H1
2008. This looks to have involved buying global banks, as these are now 23% of the
bond portfolio.
L&G’s asset strategy to diversify internationally is clear
when we look at Figure 3 (left.)
We believe the international diversification is associated
with the investment in global bank debt, which is now
23% of the portfolio. Our expectation is the ABS and
government account for most of the AAA and AA,
suggesting this debt is probably A rated.
We expect this diversification was made at H1 2008,
when there was a noticeable deterioration in the average
credit quality of the portfolio.
Our view is that currency movements will have made the
problem worse, as the debt exposure has increased offset
by a risk free swap, which has now negative value.
There was no comment on the vintages of the MBS purchased in 2007; however, in
the context of our expected reserve strengthening and financial/ABS exposure this
has dropped down our list of concerns.
Our view remains that we would rather own the underlying assets which would offer
a greater return at a lower cost than L&G’s own share price.
PM:
The Q3 to H1 mark to market
If we look at the H1 exposure of £22.5bn and compare this to the Q3 figure of
£22.3bn it has hardly changed. L&G had Q3 inflows of £450m single premiums into
annuities, so perhaps the bond portfolio fell by around 3% over this period. This is
smaller than we expected despite the fact that a lot of the spread widening happened
after Q3.
We believe this should cause questions to be asked of the valuation bases used to
determine asset values.
The CDO asset class was valued at £1,040m as at H1, Q3 £1,092m we believe this is
marked to model using lower interest rate assumption from H1.
If we look at the H1 exposure of £22.5bn and compare this to the Q3 figure of
£22.3bn it has hardly changed. L&G had Q3 inflows of £450m single premiums into
annuities, so perhaps the bond portfolio fell by around 3% over this period. This is
smaller than we expected despite the fact that a lot of the spread widening happened
after Q3.
We believe this should cause questions to be asked of the valuation bases used to
determine asset values.
The CDO asset class was valued at £1,040m as at H1, Q3 £1,092m we believe this is
marked to model using lower interest rate assumption from H1.
Capacity for longevity risk
We believe L&G has finite capacity for longevity and credit risk. Particularly in the
current market conditions, where we believe it is quite possible L&G will need to
make large increases to their reserves either at the year end or 2009.
Management did not give guidance as to what the capacity was or indeed whether
they were managing the risk of reserve strengthening. The impact of Solvency II and
the associated discussions regarding annuities was not mentioned despite raising this
as key issue in the press following H1 results.
Our view is that L&G will not want to aggressively grow annuity business despite
the seemingly best conditions for liquidity for many years. We believe management
will be concerned about the impact of further spread widening and Solvency II on the
business.
PM:
Longevity risk presentation – from 2005?
L&G made claims that they are experts in longevity and that business written
historically had been profitable based on today’s assumptions. We feel this is hardly
a cause for celebration, as today’s share price trades at 50% of this EV basis and we
believe this is expensive.
We were expecting an analysis by cause, promised at the full year 2007 results
presentation, which explained why the insurer decided that we were wrong to suggest
a basis increase in 2006 results, only to see that basis change adopted in 2007.
Disappointingly, L&G failed to mention “Statins” or any medical development that
has happened in the last three years as they gave a presentation on the cohort and
smoking, which could easily have been given two years ago, using data to 2005.
L&G’s view is that improvement in treatment of heart attacks has driven
improvements above the level that can be explained by smoking trends.
L&G made claims that they are experts in longevity and that business written
historically had been profitable based on today’s assumptions. We feel this is hardly
a cause for celebration, as today’s share price trades at 50% of this EV basis and we
believe this is expensive.
We were expecting an analysis by cause, promised at the full year 2007 results
presentation, which explained why the insurer decided that we were wrong to suggest
a basis increase in 2006 results, only to see that basis change adopted in 2007.
Disappointingly, L&G failed to mention “Statins” or any medical development that
has happened in the last three years as they gave a presentation on the cohort and
smoking, which could easily have been given two years ago, using data to 2005.
L&G’s view is that improvement in treatment of heart attacks has driven
improvements above the level that can be explained by smoking trends.
We believe statins not only reduce heart attacks but also strokes, Astra Zeneca
published research last weekend showing the Crestor drug reduced death from
strokes as well as heart attacks. We expect statins to have a large near term impact on
life expectancy as most older people end up taking statins.
However, we agree that cancer is harder to cure than heart attacks and we also agree
that improvements are unlikely to continue at 4% a year for ever.
Valuation
We believe a large discount to EV for the UK business is merited as the business
contains large amounts of profits on spread business
BE:
Enough!
PM:
okay okay — just wanted people to know that we are v interested in L&G
11:17AM
BE:
On the (few) comments below …
BE:
Nothing specific on the CRH cash call
BE:
Although there’s what looks to be a well sourced story in one of the Irish papers that they’re looking at e1bn
BE:
Which, you have to think, will be bad news for Wolseley during this unseemly rush for cash
Wolseley (WOS:LSE): Last: 209.00, down 10.5 (-4.78%), High: 219.50, Low: 205.50, Volume: 1.21m
PM:
ta
11:20AM
PM:
Wider market?
BE:
FTSE down 28 points at 4161
BE:
Has been as low as 4150
BE:
European markets all in a holding pattern
BE:
All a touch weaker
BE:
Activity very light, for obvious reasons
PM:
sure
PM:
Right, let’s move away from financials
BE:
But we’ve got to do banks!
PM:
Oh yeah
PM:
PM:
Banks – -aint ya sick of em?????
PM:
How’s Lloyds?
BE:
Well, was rather sick itself earlier
BE:
As low as 48p after the opening, but something of a share support operation has kicked in.
PM:
Jokingly – attracted some bargain hunters – not actual share support ops.
PM:
BE:
Lloy up 3.3p at 65p
PM:
BE:
Very peculiar
PM:
Hmmm — some one is buying — and presumably in decent size
BE:
Ir(c)eland … that Paulson story was just a bit silly
BE:
Calculating the amount he COULD have made IF he held the position and closed it at the exact right moment
BE:
It’s the kind of thing the Daily Express write
PM:
Steady! 
BE:
Anyway, we should push on to some more measured comments about Lloyds …
PM:
Ah yes — any alayst comment??
PM:
analyst even
BE:
Loads
BE:
Starting with UBS
BE:
Timing or quantum?
Losses from the HBOS book are not surprising and we expect them to push the
combined group into a loss for ‘09. At this stage, we see no reason to adjust our
view of up to £35bn of cumulative losses on the combined group ‘problem
portfolios’, although the recognition of these losses may occur sooner than we
previously supposed.
A capital problem?
Our forecast is of a FY core equity Tier 1 ratio of 6.2% is likely to be unchanged:
with the benefit of fair valuing HBOS’s liabilities offsetting the earlier recognition
of these losses. However, if losses were to accelerate, there is a risk capital could
reduce to levels below which the market would have confidence in the group.
Losses from the HBOS book are not surprising and we expect them to push the
combined group into a loss for ‘09. At this stage, we see no reason to adjust our
view of up to £35bn of cumulative losses on the combined group ‘problem
portfolios’, although the recognition of these losses may occur sooner than we
previously supposed.
A capital problem?
Our forecast is of a FY core equity Tier 1 ratio of 6.2% is likely to be unchanged:
with the benefit of fair valuing HBOS’s liabilities offsetting the earlier recognition
of these losses. However, if losses were to accelerate, there is a risk capital could
reduce to levels below which the market would have confidence in the group.
BE:
Valuation
We will review our earnings forecasts following Lloyds’ results on 27 February. At
this stage, we still believe the group to be capable of 45p of normalised earnings
and the incremental loss will reduce tangible book value by around 22p. The stock
is therefore trading on 1½x normalised earnings and 1/3 of tangible book. We
continue to rate as a Buy, reflecting the cost saving and margin re-pricing story. By
discounting 2012 earnings and factoring in a probability of further capital raising
and risk of nationalization, we arrive at our PT of 140p
We will review our earnings forecasts following Lloyds’ results on 27 February. At
this stage, we still believe the group to be capable of 45p of normalised earnings
and the incremental loss will reduce tangible book value by around 22p. The stock
is therefore trading on 1½x normalised earnings and 1/3 of tangible book. We
continue to rate as a Buy, reflecting the cost saving and margin re-pricing story. By
discounting 2012 earnings and factoring in a probability of further capital raising
and risk of nationalization, we arrive at our PT of 140p
BE:
And something from JP Morgan …
BE:
Lloyds Banking Group has warned, two weeks ahead of scheduled
results, and alarmingly only one month after saying that trading has been
tracking inline with expectations. They pointed to an acceleration in the
deterioration of the economy, and are now indicating a core tier 1 ratio
at the bottom of the previously guided range which was 6-7%. Headline
results were given for Lloyds TSB and HBOS. We go through both in
turn (note numbers exclude the impact of policyholder interests volatility
charge, which is an item that reverses out through the tax line);
results, and alarmingly only one month after saying that trading has been
tracking inline with expectations. They pointed to an acceleration in the
deterioration of the economy, and are now indicating a core tier 1 ratio
at the bottom of the previously guided range which was 6-7%. Headline
results were given for Lloyds TSB and HBOS. We go through both in
turn (note numbers exclude the impact of policyholder interests volatility
charge, which is an item that reverses out through the tax line);
BE:
Lloyds TSB continuing PBT of £2.4bn, with reported PBT of £1.3bn
- this was inline with our estimates of £2.4bn and £1.4bn respectively.
We caution that we expect further deterioration in credit quality as 2009
progresses, and are concerned that management will be distracted by the
integration of the HBOS assets whilst this deterioration occurs.
- this was inline with our estimates of £2.4bn and £1.4bn respectively.
We caution that we expect further deterioration in credit quality as 2009
progresses, and are concerned that management will be distracted by the
integration of the HBOS assets whilst this deterioration occurs.
BE:
HBOS – Underlying loss before tax of £8.5bn, with a reported loss
before tax of £10bn – This is materially worse than our expectations of a
break-even performance in 2008 excluding the fair value of assets
exercise. We go through the components below;
before tax of £10bn – This is materially worse than our expectations of a
break-even performance in 2008 excluding the fair value of assets
exercise. We go through the components below;
BE:
£4bn impact of market dislocation – this compares to £2.2bn at the
11mon stage. Note in the December guidance HBOS management said
that £35.4bn of treasury assets would be reclassified as loans and
receivables from the AFS book, which compares to c.£57bn total book
size (post the move from the trading book in Q3 08 to the AFS book).
When transferred the assets being held to maturity are no longer subject
to fair value accounting, hence the results of this action are to reduce the
level of impairments, but at the same time lower the quality of the loan
book and lower transparency.
11mon stage. Note in the December guidance HBOS management said
that £35.4bn of treasury assets would be reclassified as loans and
receivables from the AFS book, which compares to c.£57bn total book
size (post the move from the trading book in Q3 08 to the AFS book).
When transferred the assets being held to maturity are no longer subject
to fair value accounting, hence the results of this action are to reduce the
level of impairments, but at the same time lower the quality of the loan
book and lower transparency.
BE:
£7bn of impairments in the corporate division – this compares to
£3.3bn at the 11mon stage and £1.7bn at the 9mon stage. This is
substantial, at H108 the total portfolio was £117bn, indicating a total
impairment of 600bps which compares to 54bps in 2007. The company
cite the following reasons for the jump;
£3.3bn at the 11mon stage and £1.7bn at the 9mon stage. This is
substantial, at H108 the total portfolio was £117bn, indicating a total
impairment of 600bps which compares to 54bps in 2007. The company
cite the following reasons for the jump;
BE:
(i) £1.6bn from greater economic deterioration than expected since
Q308 – this highlights the lack of visibility that management have, and
the pace of deterioration. Given the FSA stress tests were conducted in
October, we are concerned that the level of stress used was insufficient,
and doubt the company will be able to indefinitely avoid a replacement
of the government preference capital with common equity.
Q308 – this highlights the lack of visibility that management have, and
the pace of deterioration. Given the FSA stress tests were conducted in
October, we are concerned that the level of stress used was insufficient,
and doubt the company will be able to indefinitely avoid a replacement
of the government preference capital with common equity.
BE:
…. Foxx Pitttt
BE:
Disappointing trading statement and profit warning but reaction
overdone in our view. Lloyds Banking Group released a profit
warning on 13 February following worse-than-expected December
trading results. The warning is not good news but we believe the
market has overreacted.
• Impairments high but unlikely to persist. We believe it is unfair to
take the 2H08 loss run-rate as an indication for 2009. There were
several one-off items that contributed to the loss – notable examples
are the change to the provisioning methodology on HBOS books and
the tendency of HBOS corporate losses to being front-loaded.
• Capital should prove adequate. Despite a big earnings miss
compared with our forecast due to increased loan loss charges, the
equity Tier 1 ratio was between 6.0% and 6.5% at 31 December 2008.
Our understanding is that the final capital adjustment on HBOS’s
balance sheet will now be less than the GBP10bn previously indicated.
We note that the group would have to incur a bad debt charge in
excess of 280bp in both 2009 and 2010 for the equity Tier 1 ratio to go
down to the 4% regulatory minimum, which we believe is unlikely.
• We are revising down our forecasts for the enlarged group. We
have revised down our 2008 loss per share estimate from 5.4p to
37.0p and our forecasts for 2009 from EPS of 14.2p to a loss of 1.8p
and for 2010 from EPS of 16.5p to 13.6p, as a result of increased
bad debt charges.
overdone in our view. Lloyds Banking Group released a profit
warning on 13 February following worse-than-expected December
trading results. The warning is not good news but we believe the
market has overreacted.
• Impairments high but unlikely to persist. We believe it is unfair to
take the 2H08 loss run-rate as an indication for 2009. There were
several one-off items that contributed to the loss – notable examples
are the change to the provisioning methodology on HBOS books and
the tendency of HBOS corporate losses to being front-loaded.
• Capital should prove adequate. Despite a big earnings miss
compared with our forecast due to increased loan loss charges, the
equity Tier 1 ratio was between 6.0% and 6.5% at 31 December 2008.
Our understanding is that the final capital adjustment on HBOS’s
balance sheet will now be less than the GBP10bn previously indicated.
We note that the group would have to incur a bad debt charge in
excess of 280bp in both 2009 and 2010 for the equity Tier 1 ratio to go
down to the 4% regulatory minimum, which we believe is unlikely.
• We are revising down our forecasts for the enlarged group. We
have revised down our 2008 loss per share estimate from 5.4p to
37.0p and our forecasts for 2009 from EPS of 14.2p to a loss of 1.8p
and for 2010 from EPS of 16.5p to 13.6p, as a result of increased
bad debt charges.
BE:
And some stuff from Simon Pilkington at Caz
BE:
As we have discussed before we believe that the FSA’s new treatment of the gain on own debt is
lenient and reflects the times we are in. The trading statement of February 13 has had three
negative effects on our view of Lloyds’ capital position.
In line with Lloyds’ guidance we have reduced our estimate of equity tier 1 to c. 6.3%
More of the revised equity tier 1 is made from the fair value gain on HBOS debt, which by
definition is temporary and will unwind. We now estimate that the gain on HBOS debt, at £7bn,
represents over a fifth of Lloyds’ equity tier 1 or 136bp.
lenient and reflects the times we are in. The trading statement of February 13 has had three
negative effects on our view of Lloyds’ capital position.
In line with Lloyds’ guidance we have reduced our estimate of equity tier 1 to c. 6.3%
More of the revised equity tier 1 is made from the fair value gain on HBOS debt, which by
definition is temporary and will unwind. We now estimate that the gain on HBOS debt, at £7bn,
represents over a fifth of Lloyds’ equity tier 1 or 136bp.
BE:
We estimate that Lloyds has taken impairment against AFS assets that previously had
temporary markdowns; if we are correct, it undermines confidence in future reversal of the
£4bn AFS deficit charged against capital on acquisition.
In summary, Lloyds Banking has less capital than we expected and a poorer quality composition
of capital, with more capital from the temporary gain on HBOS debt. The hope is unconvincing
that as the HBOS debt matures, its declining contribution will be offset by rises in the value of AFS
assets. The capitalised AFS deficit is now smaller than the fair value gain on debt. Secondly we
believe Lloyds has impaired some of the assets which questions how much of the AFS deficit is
temporary and not permanent.
temporary markdowns; if we are correct, it undermines confidence in future reversal of the
£4bn AFS deficit charged against capital on acquisition.
In summary, Lloyds Banking has less capital than we expected and a poorer quality composition
of capital, with more capital from the temporary gain on HBOS debt. The hope is unconvincing
that as the HBOS debt matures, its declining contribution will be offset by rises in the value of AFS
assets. The capitalised AFS deficit is now smaller than the fair value gain on debt. Secondly we
believe Lloyds has impaired some of the assets which questions how much of the AFS deficit is
temporary and not permanent.
BE:
A key question for the final results is the maturity profile of the HBOS debt that is providing so
much of Lloyds Banking’s equity tier 1 capital.
much of Lloyds Banking’s equity tier 1 capital.
BE:
With over a fifth of equity tier 1 capital constituted from the timelimited gain on HBOS debt, it
raises the probability of the government converting its £4bn preference shares to equity, as it did
with RBS last month.
While it leaves total tier 1 capital unchanged, we estimate conversion would add 78bp to equity
tier 1 which would offset the effect of lower HBOS profits in 2008 (as shown in Figure 4).
We understand Lloyds’ management currently has no plans to pursue this option. Clearly it would
result in material dilution for private shareholders. Based on an issue price of 56p, an 8.5%
discount to Friday’s closing price which is the discount used in the two rounds of government
equity subscription since October, the conversion would take 40p off tangible book value to 147p
per share. Potentially the government stake would increase from 43.4% to 60.6%.
raises the probability of the government converting its £4bn preference shares to equity, as it did
with RBS last month.
While it leaves total tier 1 capital unchanged, we estimate conversion would add 78bp to equity
tier 1 which would offset the effect of lower HBOS profits in 2008 (as shown in Figure 4).
We understand Lloyds’ management currently has no plans to pursue this option. Clearly it would
result in material dilution for private shareholders. Based on an issue price of 56p, an 8.5%
discount to Friday’s closing price which is the discount used in the two rounds of government
equity subscription since October, the conversion would take 40p off tangible book value to 147p
per share. Potentially the government stake would increase from 43.4% to 60.6%.
PM:
Phew — thanks for all that
BE:
Brace yourself …
BE:
bickie
Reminder to readers – you can scroll up to read earlier parts of the chat and the window will stop scrolling automatically. When you’re ready to continue, scroll back down to the bottom or click resume.
BE:
It worked!
PM:
We need to up date the system msg for that
PM:
The bickie break is no more
PM:
You can scroll up to simply stop the autoscrolling — as everyone will know
PM:
But we do all miss the bickie
BE:
(And can people stop posting the lyrics to that Manics song? It’s getting tired.)
11:31AM
PM:
Discussion of W Euro banks exposure to CEE below
PM:
Neither Bryce or myself can pretend to be experts
PM:
But i can report that Izabella is back from holiday today
PM:
And she does have an interest in the CEE
PM:
So Carlo — send over some links or post — adn we’ll have a look
BE:
And on Chloride – it’s been the talk of bandits 
through 
through PM:
And there is Tracy’s post earlier — well worth a read
BE:
We have nothing new, or trustable, at the moment
BE:
I think it’s fair to suggest that, if there had been an approach, the company would have had to respond now
PM:
(And sorry — hadnt noticed that the Bickie script had been updated )
)BE:
But if Emerson are talking to advisors or investory about their options then that’s hardly going to be a surprise, or indeed a guarantee that anything’s going to be consummated
PM:
Cheers Bryce
11:34AM
PM:
Where to now?
BE:
Um … Thomson Reuters?
BE:
Story in the Financial News this morning saying both Bloomberg and Reuters could lose more than $500m revenue.
PM:
Ouch
BE:
Cites a report to be published this week by Burton-Taylor International Consulting
BE:
Saying global spending by the securities industry on data will shrink by 3% or $700m this year.
PM:
How have the shres reacted?
BE:
They haven’t. down 2p at 1439p.
BE:
That’s before results on Feb 24
BE:
Which should be okay, the theory goes …
BE:
because Reuters bills its UK customers in sterling while Bloomberg bills in dollars
BE:
Which, post the Bloomberg January price hike, makes a basic Reuters box about 42% cheaper at the moment.
BE:
There’s a big RBS note taking about the competition between the two
BE:
Which is interesting for those of us who worked at the wires, but is perhaps a bit dull for the general reader
BE:
They remain a seller, FWIW
BE:
Here’s the summary
BE:
TRIL Plc shareholders enjoy translational benefit from weaker pound
60% of TRIL revenues are in US$ and15% in €, meaning TRIL Plc shareholders enjoy
significant FX benefits. We update our currency forecasts, which increases our TP to £11.55.
60% of TRIL revenues are in US$ and15% in €, meaning TRIL Plc shareholders enjoy
significant FX benefits. We update our currency forecasts, which increases our TP to £11.55.
BE:
TRIL shareholders also reap operational benefit vs Bloomberg from currency
The Markets division bills customers in local currency, while Bloomberg bills in US$. We
estimate that Reuters 3000Xtra is 40% cheaper yoy versus Bloomberg (given currency and
pricing moves) for UK customers. This operational benefit is modest (the UK accounts for
around 10% of sales), and with market data budgets under pressure and Bloomberg still a
.sticky. product, Bloomberg.s higher prices may even see it take revenue share despite losing
volume share.
The Markets division bills customers in local currency, while Bloomberg bills in US$. We
estimate that Reuters 3000Xtra is 40% cheaper yoy versus Bloomberg (given currency and
pricing moves) for UK customers. This operational benefit is modest (the UK accounts for
around 10% of sales), and with market data budgets under pressure and Bloomberg still a
.sticky. product, Bloomberg.s higher prices may even see it take revenue share despite losing
volume share.
BE:
Will the TRIL story move decisively the way of bulls or bears at the FY results?
There has been a phoney war to date between bulls (who point to TRIL.s high-quality assets)
and bears (worried about a cyclical slowdown in Markets). The FY results on 24 February
could see the debate move decisively one way or the other. We expect management to
guide to flat underlying revenues in 2009, and 21-23% underlying margins.
There has been a phoney war to date between bulls (who point to TRIL.s high-quality assets)
and bears (worried about a cyclical slowdown in Markets). The FY results on 24 February
could see the debate move decisively one way or the other. We expect management to
guide to flat underlying revenues in 2009, and 21-23% underlying margins.
BE:
FY results preview
We forecast Markets division growth slowing to 2% in 4Q, continuing the deteriorating trend
(1Q 9%, 2Q 7%, 3Q 5%), and a solid 5% growth in the Professional division. We forecast FY
revenue of US$13,452m, underlying EBITA of US$2,803m (20.8% margin, vs guidance of
19-21%) and EPS of US$1.76 (implying $0.38 for 4Q). EPS is stated after restructuring
costs, so it will vary if spend scheduled for FY08 spills into FY09.
We forecast Markets division growth slowing to 2% in 4Q, continuing the deteriorating trend
(1Q 9%, 2Q 7%, 3Q 5%), and a solid 5% growth in the Professional division. We forecast FY
revenue of US$13,452m, underlying EBITA of US$2,803m (20.8% margin, vs guidance of
19-21%) and EPS of US$1.76 (implying $0.38 for 4Q). EPS is stated after restructuring
costs, so it will vary if spend scheduled for FY08 spills into FY09.
BE:
And while on the subject of broker calls
BE:
Schroders getting pushed a bit lower
BE:
On the back of a Singer downgrade to sell
BE:
Which is a slightly delayed response to its results last Thursday
BE:
Revenue margins will be impacted in 2009 following the substantial retail fund outflows during Q4 and volatility in markets will delay a turnaround in our view. In addition, returns on cash will decline. Some of this attrition will be offset by reduced costs but this will be limited. The shares trade on a premium to the sector and yield 3.8%. Downgrade to SELL.
BE:
Headline Profits Above Expectations but Higher Exceptionals
PBT before exceptionals of £290.5 beat estimates (of £248m) owing mostly to performance fees earned in Q4. However, realised and unrealised losses on group capital, redundancy costs and impairment of intangibles reduced overall reported PBT by £167.4m to £123.1m (vs £392.5m in 07).
PBT before exceptionals of £290.5 beat estimates (of £248m) owing mostly to performance fees earned in Q4. However, realised and unrealised losses on group capital, redundancy costs and impairment of intangibles reduced overall reported PBT by £167.4m to £123.1m (vs £392.5m in 07).
BE:
Sharp Reversal in Retail Flows
FUM at year end of £110.2bn were higher than forecast owing to an estimated £10bn positive FX move on non-sterling denominated assets as Sterling weakened in the latter part of December. Net outflows from Institutional funds were slightly worse than expected at £3.8bn although still on an improving trend from previous years. Retail fund net outflows were even worse than anticipated at £6.2bn of which £3.1bn was in Q4. This is a huge swing on the £8.8bn inflows in the previous year and this will impact management fees in 2009. Whilst retail flows in 2009 may show some signs of stabilising, we expect they will be in lower margin products rather than in more traditional higher margin equity funds, putting further pressure on group revenue margins.
FUM at year end of £110.2bn were higher than forecast owing to an estimated £10bn positive FX move on non-sterling denominated assets as Sterling weakened in the latter part of December. Net outflows from Institutional funds were slightly worse than expected at £3.8bn although still on an improving trend from previous years. Retail fund net outflows were even worse than anticipated at £6.2bn of which £3.1bn was in Q4. This is a huge swing on the £8.8bn inflows in the previous year and this will impact management fees in 2009. Whilst retail flows in 2009 may show some signs of stabilising, we expect they will be in lower margin products rather than in more traditional higher margin equity funds, putting further pressure on group revenue margins.
BE:
Limited Cost Reductions
Schroders has a longer term time horizon to managing the business and as such, costs will be reduced, but not aggressively, in 2009 (with the impact not being material until H2). By doing so, management is hoping that it will not damage the franchise or limit prospects for growth when markets recover.
Schroders has a longer term time horizon to managing the business and as such, costs will be reduced, but not aggressively, in 2009 (with the impact not being material until H2). By doing so, management is hoping that it will not damage the franchise or limit prospects for growth when markets recover.
BE:
Downgrade to SELL
We reduce our 2009 EPS estimates by 17% to 52.7p reflecting lower revenues and returns on cash giving a P/E of 15.3x 2009E EPS. Excluding excess cash, this falls to around 12x which is still a premium to the UK peer group. Whilst we believe the dividend will be maintained as a minimum whatever the circumstances, a 3.8% yield is not a huge attraction. We view Schroders as a strong business for the longer term but downgrade to SELL on valuation grounds. Our price target is reduced to 700p reflecting a target ex cash P/E of around 10x and yield of 4.5%.
We reduce our 2009 EPS estimates by 17% to 52.7p reflecting lower revenues and returns on cash giving a P/E of 15.3x 2009E EPS. Excluding excess cash, this falls to around 12x which is still a premium to the UK peer group. Whilst we believe the dividend will be maintained as a minimum whatever the circumstances, a 3.8% yield is not a huge attraction. We view Schroders as a strong business for the longer term but downgrade to SELL on valuation grounds. Our price target is reduced to 700p reflecting a target ex cash P/E of around 10x and yield of 4.5%.
BE:
Schroders down 24p at 787p at the moment
BE:
Volume rubbish though, so not sure we should read too much into that
PM:
Interesting — thanks for that
11:41AM
PM:
For those interested in CEE — this has just dropped in the inbox
PM:
Not on W euro exposure — simply on local banks
PM:
Ronit Ghose at Citi
PM:
Emerging Europe, Bank Stocks and Local Funding
More Deposits, Better Stocks — In 2008, if you only looked at one metric to divide
bank stock performance in emerging Europe, the loan-to-deposit ratio (LDR) was
usually sufficient. The bank systems with the highest LDR, such as Latvia (230%,
end 2007), Kazakhstan (186%) and Russia (146%), had bank stocks that
performed the worst last year. By contrast, banks with low LDRs, that is more
deposits, such as Czech Republic (75%), performed much better. The high LDR
banks were down between 80% (Russia) and close to 100% (Latvia), while the low
LDR banks declined between 33% (Czech) and c50% (Poland, Turkey).
More Deposits, Better Stocks — In 2008, if you only looked at one metric to divide
bank stock performance in emerging Europe, the loan-to-deposit ratio (LDR) was
usually sufficient. The bank systems with the highest LDR, such as Latvia (230%,
end 2007), Kazakhstan (186%) and Russia (146%), had bank stocks that
performed the worst last year. By contrast, banks with low LDRs, that is more
deposits, such as Czech Republic (75%), performed much better. The high LDR
banks were down between 80% (Russia) and close to 100% (Latvia), while the low
LDR banks declined between 33% (Czech) and c50% (Poland, Turkey).
PM:
The Easy Money Years — In the five years of easy money conditions leading up to
2008, we found no correlation at all between LDRs and bank stock performance.
In fact, the best bank stock performers over the five years to 2008 included banks
with the highest LDR (Russia) and also banks with the biggest increase in LDR
(Bulgaria). Of course, given the torrent of cross-border funds flows, it made sense
not to worry about domestic deposits. At the 2007 peak, emerging Europe was the
largest recipient of net private flows within global emerging markets ($393 billion
or c40% of the total).
The Drought Years — Cross-border liquidity has diminished. In 2008, net private
flows to global emerging markets halved yoy; in 2009, they are forecast to decline
by a further two-thirds. Emerging Europe, especially Russia, is set to be
particularly badly hit — net private financial flows are expected to decline almost
90% yoy. Commercial bank net flows to emerging Europe, which halved in 2008
yoy, are expected to turn negative in 2009. In this environment, the value of
domestic funding, in particular client deposits, should remain exceedingly high.
Investment Implications — Firstly, we would remain cautious on the high LDR
markets, such as Russia, Ukraine and the Baltic region. This is despite there
existing drop in stock prices and seemingly low multiples (eg price/book).
Secondly, while on fundamentals we would prefer the low LDR markets, we would
divide this group between the high multiple stocks (such as Czech) and the low
multiple stocks (Turkey). In a stressed market environment, premium ratings are
always vulnerable to gravity. For EU banks, the Nordics appear exposed to the
wrong region; for the Greeks and Austrians it is mixed (NBG, Erste better;
Eurobank, Raiffeisen worse).
2008, we found no correlation at all between LDRs and bank stock performance.
In fact, the best bank stock performers over the five years to 2008 included banks
with the highest LDR (Russia) and also banks with the biggest increase in LDR
(Bulgaria). Of course, given the torrent of cross-border funds flows, it made sense
not to worry about domestic deposits. At the 2007 peak, emerging Europe was the
largest recipient of net private flows within global emerging markets ($393 billion
or c40% of the total).
The Drought Years — Cross-border liquidity has diminished. In 2008, net private
flows to global emerging markets halved yoy; in 2009, they are forecast to decline
by a further two-thirds. Emerging Europe, especially Russia, is set to be
particularly badly hit — net private financial flows are expected to decline almost
90% yoy. Commercial bank net flows to emerging Europe, which halved in 2008
yoy, are expected to turn negative in 2009. In this environment, the value of
domestic funding, in particular client deposits, should remain exceedingly high.
Investment Implications — Firstly, we would remain cautious on the high LDR
markets, such as Russia, Ukraine and the Baltic region. This is despite there
existing drop in stock prices and seemingly low multiples (eg price/book).
Secondly, while on fundamentals we would prefer the low LDR markets, we would
divide this group between the high multiple stocks (such as Czech) and the low
multiple stocks (Turkey). In a stressed market environment, premium ratings are
always vulnerable to gravity. For EU banks, the Nordics appear exposed to the
wrong region; for the Greeks and Austrians it is mixed (NBG, Erste better;
Eurobank, Raiffeisen worse).
11:44AM
PM:
Right — on Stanford, I can report that Stacy-Marie is back in NY
PM:
After here little jaunt
PM:
Which was punctuated by here having lunch with all the UK cricket corrs
PM:
Am told it was a fun occasion
PM:
Tho SMI may be a little damaged by the experience
PM:
We will write more on Stanford if and when we can
PM:
I remain fascinated by the story –specifically the apparently inability of “Sir” Allen to stand up publicly and refute what is being said.
PM:
But enough of that — it is difficult to discuss in this live context
11:46AM
PM:
FKA — sorry for zapping, may or may not have been fair, but I can’t “unzap” comments…
PM:
11:47AM
BE:
Sorry – Murph’s on the phone
BE:
Doesn’t sound like RAW, to be honest …
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.
PM:
Was Lili — No2 kid
PM:
Doesnt have any stories at all.
PM:
Rubbish as a source
PM:
BE:
That’s very unfair – on Lili
BE:
Ten is much worse
11:50AM
PM:
Anything to finish up with?
BE:
Well, Land’s confirmed the rights issue story
PM:
STATEMENT ON RECENT PRESS COVERAGE
STATEMENT ON RECENT PRESS COVERAGE
Land Securities Group PLC (the “Company”) notes the recent press coverage in relation to a possible equity capital raising. The Board confirms that discussions have been held to consider the merits of a rights issue and any decisions will be communicated to shareholders through the proper channels at the proper time.
PM:
Land Securities works on £750m rights issue
By Dan Thomas
Published: February 15 2009 23:01 | Last updated: February 15 2009 23:01
Land Securities is working on plans for a discounted rights issue later this week in the latest demand for emergency funds from investors in the beleaguered property sector.
The issue is forecast to target as much as £750m ($1bn) and to be fully underwritten, although the details of the equity raising are still being worked on and the company has not given the issue the final green light.
PM:
And was in the Sunday Times also
BE:
So yet another prop stock goes for cash.
PM:
Thurs is the betting
PM:
For Land Secs
11:54AM
PM:
What else?
BE:
well, to wrap up …
BE:
I’m currently trying to get hold of a bit of academic research that apparently links bad air quality with increased risk appetite
BE:
But that hasn’t come through yet, so you’ll have to have this ..
PM:
sounds fun tho
BE:
Might make a post later, hopefully
BE:
In the meantime, I was reading a piece on Beverage Industry
BE:
On how its “2009 Bottler of the Year”, Pepsi Bottling Ventures, is trying to delay the inevitable
BE:
And was struck by this line …
BE:
In the middle of April, PBV also will begin distributing Pepsi Throwback and Mountain Dew Throwback, which features those brands formulated with sugar.
BE:
So that’ll be retro cola, 70′s style.
BE:
With real sugar, rather than high fructose corn syrup or Sucralose.
BE:
Now, frankly, I’m not sure how these kind of esoteric little niche markets affect Tate & Lyle.
BE:
But it’s still worth repeating a Numis note from Friday saying its US ingredients business is looking vulnerable
BE:
And for US ingredients business read CFDs
BE:
The valued added story of Tate and Lyle has been built on two main pillars:
sucralose and TALFIIA. Whilst we believe that market expectations for sucralose
have become much more reasonable (although they are still too high in our view)
we fear that TALFIIA is about to face a downturn, a scenario which is not reflected
in current valuation. In the last downturn profits of this division fell by a third in one
year. We only forecast an 8% reduction in TALFIIA profits in $ terms in FY11 but see
significant downside risk. We cut our target price to 240p. Sell.
sucralose and TALFIIA. Whilst we believe that market expectations for sucralose
have become much more reasonable (although they are still too high in our view)
we fear that TALFIIA is about to face a downturn, a scenario which is not reflected
in current valuation. In the last downturn profits of this division fell by a third in one
year. We only forecast an 8% reduction in TALFIIA profits in $ terms in FY11 but see
significant downside risk. We cut our target price to 240p. Sell.
BE:
A downturn of TALFIIA?: With falling demand, notably in HFCS and industrial starches,
and new front grind capacity coming on stream in the industry we fear that capacity
utilization will fall, putting prices and margins under pressure.
and new front grind capacity coming on stream in the industry we fear that capacity
utilization will fall, putting prices and margins under pressure.
BE:
Sucralose margins still at risk: Sucralose margins decreased by 1000bps in the last 18
months. We expect this to continue as volume growth is gained at the expense of
negative price/mix. We note that competition is getting tougher, with stevia gaining
momentum and Tate’s patents on sucralose under pressure.
months. We expect this to continue as volume growth is gained at the expense of
negative price/mix. We note that competition is getting tougher, with stevia gaining
momentum and Tate’s patents on sucralose under pressure.
BE:
Forecasts changes: We cut our FY09, FY10 and FY11 EPS forecasts by 9%, 23% and
31% respectively. This is almost entirely driven by our negative assumption on TALFIIA
margins evolution and the increased fixed cost base of the division as the new Fort
Dodge factory comes on stream.
31% respectively. This is almost entirely driven by our negative assumption on TALFIIA
margins evolution and the increased fixed cost base of the division as the new Fort
Dodge factory comes on stream.
BE:
Covenant breach unlikely: Following the strong increase in Tate’s net debt we review
their covenants and conclude that a breach is unlikely. However for FY09 the £/$
exchange rate at the end of March 2009 will be key and we estimate that at parity the
group would breach. This is not our core scenario.
their covenants and conclude that a breach is unlikely. However for FY09 the £/$
exchange rate at the end of March 2009 will be key and we estimate that at parity the
group would breach. This is not our core scenario.
BE:
Valuation: We cut our target price from 330p to 240p. This puts the stock on 4.7x
EV/Ebitda for the year to March 2010, a 15% discount to the sector. We believe that
this is justified by the low visibility on earnings and the downside risk to our forecasts.
EV/Ebitda for the year to March 2010, a 15% discount to the sector. We believe that
this is justified by the low visibility on earnings and the downside risk to our forecasts.
Tate and Lyle (TATE:LSE): Last: 322.00, down 0.5 (-0.16%), High: 324.50, Low: 317.25, Volume: 586.17k
BE:
That’s after a hefty fall on Friday tho.
PM:
Cheers for that
11:58AM
PM:
Interested in what might be coming down the Pestowire
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.
PM:
Assume that is a mention on News 24 — that’s the one channel i havent got on this box for some reason
BE:
And I don’t even get a telly. Cutbacks.
PM:
I could phone him – but im assuming he wil be a tad busy
BE:
And the first thing under his name on Google News is …
BE:
BBC’s Peston sets pulses racing
BE:
BBC business editor Robert Peston has made the top 10 in a poll of Britain’s Sexiest Brains.
Peston’s coverage of the economic downturn has seen his profile rocket – and also appears to have set pulses racing, being made a new entry at number seven.
More than 1,000 readers of Psychologies magazine were polled in the annual survey, to be published on Valentine’s Day.
BE:
So that’s not helpful.
PM:
PM:
Also — jsut to mention the Wincott awards
PM:
We won the Online award last year… so we cant/wont get it again this year
PM:
The Wincott judges, who are a prestigious lot, are looking for guidance on non-MSM digital journalism
PM:
So fell free to nominate people/blogs here
PM:
Cityunslick has a very good blog that I keep meaning to put in our blogroll
PM:
PM:
Lord Stansted — main stream media
PM:
And no need to be embarrassed
12:05PM
PM:
Right — we are done
PM:
Yes — Bappu — i need to spring clean the blogroll
PM:
Thanks for joining us today
PM:
And thank you Bryce for your stuff today
BE:
Ta. Not much around, sadly.
PM:
We will be re-Humed tomorrow at 11am
BE:
Just had a note from a trader saying “volume’s nonsense, going home.”
PM:
Until then…
PM:
ha!
BE:
Until then …
BE:
Bye
PM:
Breaking news — Stephen Kahn has quit the Express as City Editor
PM:
He’s been there since the War
BE:
The Boer War
BE:
Actually, only 30 years
BE:
stepping down from 20th February
PM:
That should be a good leaving do
PM:
Right — we are off
PM:
thanks — seeya tomorrow, all being well