Markets live chat transcript for the chat ending at 12:21 on 5 Mar 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Morning
PM:
Welcome to Markets Live
NH:
morning all
PM:
This is FT Alphaville’s daily markets related chat.
NH:
sorry bit late logging in
PM:
We’re a bit behind for achange
NH:
a fair bit going on this morning
NH:
and we are much more engaged because the market is down
PM:
PM:
And yes, this is rate day in the UK
PM:
I, of course, will not be making a prediction. Retired from the ranks of financial forecasters.
NH:
retired to the pavillion hurt
PM:
Lot of heavy things to get thru this morning.
PM:
Unfortunately a number have a financial theme. No avoiding it..
PM:
Will very quickly chuck up some rate stuff for you to read
PM:
Then we will be visiting a certain building supplier
NH:
insurer
NH:
and one of our favourite banks
NH:
all coming in the next hour
NH:
here on ML!
PM:
But first, some rate thoughts.
PM:
Here’s Marc Ostwald from Monument
PM:
UK – MPC 50 bps rate cut seen **
- Despite some very heavy hints from numerous MPC member that the efficacy
of further rate cuts is being debated very heavily, particularly given the
complex relationships between Base Rate and wholesale/Retail rates, and that
the MPC’s focus for this meeting will be on the size, process and
methodology for quantitative easing, the market consensus is still looking
for a 50 bps cut. We believe that while a 50 bps cut is possible, no cut or
a 25bps are the more likely outcomes. Stephen Lewis’ Economic Insights
preview of today’s meeting is attached. As far as the details of QE may go,
it seems likely that the current mechanism for the BoE’s Open Market
Operations (in respect of its Gilts “book”) offers plenty of clues on the
overarching principles of its QE operations with respect to Gilts. It is
interesting to note that market and media speculation about the size of QE
varies from around £10Bn to £150Bn, we would humbly suggest that if the BoE
is looking at sizing QE relative to the expected drag on the economy then
something in the region of £30-40Bn, but this is no more than an educated
guess.
- Despite some very heavy hints from numerous MPC member that the efficacy
of further rate cuts is being debated very heavily, particularly given the
complex relationships between Base Rate and wholesale/Retail rates, and that
the MPC’s focus for this meeting will be on the size, process and
methodology for quantitative easing, the market consensus is still looking
for a 50 bps cut. We believe that while a 50 bps cut is possible, no cut or
a 25bps are the more likely outcomes. Stephen Lewis’ Economic Insights
preview of today’s meeting is attached. As far as the details of QE may go,
it seems likely that the current mechanism for the BoE’s Open Market
Operations (in respect of its Gilts “book”) offers plenty of clues on the
overarching principles of its QE operations with respect to Gilts. It is
interesting to note that market and media speculation about the size of QE
varies from around £10Bn to £150Bn, we would humbly suggest that if the BoE
is looking at sizing QE relative to the expected drag on the economy then
something in the region of £30-40Bn, but this is no more than an educated
guess.
PM:
d) ECB – 50 bps is discounted and the ECB is unlikely to disappoint given
the likelihood of some very sharp downward revisions to their staff
forecasts, which will also be announced. The questions on everyone’s lips
will be: a) are they willing to cut further, and b) how far have their
discussion progressed on further extraordinary, QE type measures,
particularly given the ostensible complexity of implementing such measures.
In this context, the story run by Market News earlier in the week that the
ECB is preparing an asset purchase programme to enable it to start lending
directly to euro area businesses, and that This would be very similar to
steps taken by the Fed and the BoE to purchase ABS and corporate debt, was
of some interest. The more so given that there was no mention of purchasing
government debt. A single source was also quoted as saying that the
Governing Council would agree to cut interest rates by 50 bps on Thursday.
The key points appeared to be that the plan was still being considered, and
that one among other options would be for national central banks to make the
purchases rather than the ECB. Being the ECB, they will not opt for a
Geithner-esque promise of ‘jam tomorrow’, but either say nothing or lay out
a more concrete plan, or at the very least tell the market when details will
be announced.
the likelihood of some very sharp downward revisions to their staff
forecasts, which will also be announced. The questions on everyone’s lips
will be: a) are they willing to cut further, and b) how far have their
discussion progressed on further extraordinary, QE type measures,
particularly given the ostensible complexity of implementing such measures.
In this context, the story run by Market News earlier in the week that the
ECB is preparing an asset purchase programme to enable it to start lending
directly to euro area businesses, and that This would be very similar to
steps taken by the Fed and the BoE to purchase ABS and corporate debt, was
of some interest. The more so given that there was no mention of purchasing
government debt. A single source was also quoted as saying that the
Governing Council would agree to cut interest rates by 50 bps on Thursday.
The key points appeared to be that the plan was still being considered, and
that one among other options would be for national central banks to make the
purchases rather than the ECB. Being the ECB, they will not opt for a
Geithner-esque promise of ‘jam tomorrow’, but either say nothing or lay out
a more concrete plan, or at the very least tell the market when details will
be announced.
NH:
Okay – sow Ostwald is going for zero/25bp in the UK – and 50bp for euorpe
NH:
Well have you got the note from Stephen Pope mentioned in that?
PM:
Er, yeah
PM:
The Monetary Policy Committee (MPC) of the Bank of England is due to meet on 4-5 March to assess the state of the economy and to consider what the next steps in monetary policy should be. Indications are that the committee will be discussing measures beyond the usual Bank Rate decision. The minutes of the MPC’s last meeting, on 4-5 February, presented a strong case against taking the key policy rate below the current 1.00%. Banks and building societies generally set their deposit rates below Bank Rate. As these deposit rates approach zero, the effect of a Bank Rate cut, matched by a reduction in lending rates, will merely be to squeeze lenders’ margins. With narrower margins, banks and building societies will likely lend less, not more. To cut Bank Rate below 1.00%, as Prof Blanchflower wanted, could, therefore, be counter-productive in relation to the MPC’s primary aim of freeing up credit flows. The argument against a sub-1.00% Bank Rate is as sound this week as it was a month ago. If the committee is to follow this logic, it will vote against any further rate reduction. However, the MPC does not always follow a consistent line. Since the last MPC meeting, members have probably been surprised that inflation has not fallen more than it has. Dr Sentance observed last week that there was evidence the weak sterling exchange rate was feeding through to affect UK prices. This militates against a rate cut. On the other hand, indicators of economic activity, both domestic and
global, have been extremely soft. Even if committee-members harbour anxieties that another rate cut might do more harm than good, they may feel that they have to make a gesture on interest rates to show the media they empathise with the nation’s pain. After all, with the Government entering into agreements with some leading lenders to insure their assets in exchange for firm pledges on their part to increase the flow of credit, lending margins could well be less important determinants of the banks’ behaviour, in aggregate, than seemed likely at the MPC’s February meeting.
global, have been extremely soft. Even if committee-members harbour anxieties that another rate cut might do more harm than good, they may feel that they have to make a gesture on interest rates to show the media they empathise with the nation’s pain. After all, with the Government entering into agreements with some leading lenders to insure their assets in exchange for firm pledges on their part to increase the flow of credit, lending margins could well be less important determinants of the banks’ behaviour, in aggregate, than seemed likely at the MPC’s February meeting.
PM:
Whatever the decision on Bank Rate, it is liable to seem almost irrelevant, alongside any news the committee has to impart on quantitative easing (QE). The financial markets are expecting that the exchange of letters between the Governor of the Bank and the Chancellor, laying down the principles on which QE is to proceed, will be available to MPC members in time for their meeting. The suspicion must be that one concern exercising Treasury minds is how to make the QE scheme appear so far different from the Bank’s Asset Purchase Facility (APF) as to stand credibly as a momentous departure from previous monetary strategy. The last set of MPC minutes sought to draw a distinction between the APF and QE on the grounds that the Bank finances its APF purchases with funds raised through the issuance of Treasury bills, whereas its QE-related purchases would be financed by the creation of central bank money. What this seems to mean is that the Bank of England, as it buys assets, will credit the accounts that the sellers’ banks hold with it. There will be, on the asset side of the Bank’s balance sheet, the securities it buys while on the liabilities side will be the deposits credited to banks. The mere fact that banks are holding more balances with the Bank of England will not necessarily impel them to lend more to their customers. As the Bank of Japan found, with its QE experiment in 2001-06, risk-averse lenders may still be reluctant to extend credit while allowing funds to pile
up in their central bank accounts. In the UK context, a direct impact of QE on monetary conditions would come from the rise in sellers’ deposits with banks consequent on the Bank’s asset purchases. This boost to the non-monetary private sector’s bank deposits would be incorporated in M4 money supply. However, the Bank’s purchases under the APF similarly boost M4, provided that the Treasury bill issuance financing them is taken up by monetary institutions rather than non-monetary purchasers. The practical differences between the APF and QE are not as large as the UK authorities might like to paint them.
up in their central bank accounts. In the UK context, a direct impact of QE on monetary conditions would come from the rise in sellers’ deposits with banks consequent on the Bank’s asset purchases. This boost to the non-monetary private sector’s bank deposits would be incorporated in M4 money supply. However, the Bank’s purchases under the APF similarly boost M4, provided that the Treasury bill issuance financing them is taken up by monetary institutions rather than non-monetary purchasers. The practical differences between the APF and QE are not as large as the UK authorities might like to paint them.
PM:
The MPC will have to decide how extensive QE operations are to be and somehow it will have to provide a rationale for its decision. One way might be to relate the targeted amount to its likely direct impact on M4. The Bank estimated the outstanding volume of M4 at end-January to be £1.99trn. Thus, to make a 1% difference to M4 would take almost £20bn of QE The Bank of England’s February projection seemed to indicate, at the forecast-horizon, a shortfall in nominal GDP growth of 1.5-2.0 percentage points from what might be deemed the desired rate. On the assumption that the velocity of circulation of M4 money does not change, a 1.5-2.0% boost to M4 might be judged appropriate to correct this prospective under-shoot. That could be achieved through £30-40bn of QE. The MPC might reckon the M4 velocity of circulation would fall. On the other hand, it could also assume there would be a shift, within the credit counterparts of M4, from loans to financial institutions towards lending to non-financial companies and households. Such a swing would be supportive of future economic demand. As a rough approximation, it might be reasonable to suppose the velocity and the credit composition effects balance out.
The last MPC minutes noted it would be crucial to ensure the Government’s debt management policy would be consistent with the Bank’s QE-related operations. The exchange of letters should lay down how this will be achieved. If, in the year ahead, the DMO is to sell £150bn-plus of gilt-edged securities and the Bank is to buy, say, £40bn of gilts, it might seem simpler to have the DMO issue £110bn and to finance the remaining public sector cash requirement through Bank of England lending. By purchasing in the market, however, the Bank may take the opportunity to direct its purchases to parts of the maturity-spectrum where demand for gilts is weak. It will, in theory, be able to co-operate with the DMO to maintain an orderly yield-curve.
NH:
crikey, that goes on a bit
PM:
You asked for it
NH:
not that much
PM:
okay
PM:
And here’s Howard Wheeldon on the matter
PM:
The Shadow MPC may have voted 5:4 against a further cut in UK rates but the message from markets is fairly loud and clear – later today both UK and ECB rates will be cut by approximately 0.5% to 0.5% and 1.5% respectively. Important for Euroland though far less important for the UK, except for savers who get little more than a further kick in the teeth. If I was to be facetious it would be to suggest that at this rate it won’t be long before some banks start charging savers for daring to have anything in their account! Will the halving of the existing UK rate achieve anything? NO. Will a period of ‘quantitative easing’ details of which are also likely to be given by the Bank of England today help to unfreeze moribund credit markets? It may though if reconciliation with similar ‘quantitative easing actions by Japan in more recent years are anything to go by and that followed almost a decade of near zero interest rates, perhaps not by as much as the UK authorities probably hope. Will a cut in Euro rates help? The answer is that either it will or more likely, that it will do no harm.
NH:
pack in Murph. that’s way too much stuff
PM:
Together with ‘quantitative easing’ details, the likely halving of UK rates today will be seen by sceptics as the last throw of the dice. True, this is kitchen sink stuff and all the evidence one needs to confirm that nothing the authorities have so far done has been able to stop the GDP rot. The expected cut in UK rates today will be the sixth over the last six months. Savers apart, most seem to take such cuts for granted though I find it amazing that the headlines today will actually say interest rates halved and few will bother to notice! Clearly, large numbers of mortgage holders, particularly those on standard variable and tracker rates have benefited from previous cuts if and when these have been passed on. So, in theory, have companies that have overdrafts or agreed borrowing facilities provided that lenders have passed the benefit on. Cuts have helped some in these difficult times then but the much anticipated last gasp of monetarist policy is hardly likely to change the underlying lack of credit availability. Indeed and arguably, had it not been that the Bank of England was also announcing details of ‘quantitative easing’ plans today it might actually have made credit related matters even worse. Certainly sterling is unlikely to have a good day. Nevertheless and for a brief moment, let’s think about the positives of what fairly swift monetary action from the MPC has achieved. Taken together with the unrelated cuts in the price of fuel and other related goods over the past few months, consumers that have managed to retain a job have had more money to spend. And if retail sales data is to be believed, spend they have. The ‘interbank’ rate has also come hurtling down. Even so, it seems that consumers probably restricted spending to the High Street rather than buying expensive goods such as furniture and cars. Industry and commerce have done the opposite battening down the hatches cutting investment and paying down debt.
NH:
and all from Cantor’s
PM:
PM:
sorry
PM:
messing around
PM:
What’s your prediction on rates, anyway?
NH:
don’t do predictions
NH:
but since you ask
NH:
0.5%
NH:
Monkey, I did make a prediction yesterday. I said the dead cat would last a day and…
11:12AM
PM:
Okay — let’s turn to the wider market briefly
PM:
How’s the Foosie doing Neil
NH:
down
NH:
off 75 points at 3,570
PM:
goodness
NH:
a large chunk of yesterday’s advance returned
NH:
and that’s down to a number of factors
NH:
no extra Chinese stimulus package
NH:
shocking results and share price plunge from Aviva
NH:
Barclays getting beaten up
11:13AM
NH:
and some more woeful UK house price data
PM:
Dreadful halifax numbers
PM:
No sign of a bottom as yet, me thinks
NH:
here’s some reaction from Darren Winder at Cazenove
NH:
which has the numbers
NH:
On the Halifax measure, house prices fell by 2.3% in February. This more than offset the 2% rise reported for January and left the level of house prices around 18% lower than a year earlier.
PM:
So the odd Jan numbers are confirmed as “odd”
NH:
yep
PM:
18% year on year — id like to see peak to trough-to-date
NH:
Since peaking in the summer of 2007, house prices have fallen by a cumulative 20% on the Halifax measure. As highlighted in the chart below, this represents a much faster rate of decline than experienced in the early 1990s recession, when house prices fell by a cumulative 13%. In large part, this reflects the impact of a much larger, and more synchronised, decline in house prices in the major northern regions than experienced previously.
PM:
ah
PM:
so we are maybe 60% of the way there
NH:
there you go again Mystic Murph. gazing into the crystal ball.
PM:
oops
PM:
NH:
house price crash half way done according to MM
PM:
60%
NH:
Our house price arithmetic, which is based on an assumed lending multiple and an assumed loan-to-value ratio of 80%, suggests that house prices are now only slightly overvalued at current levels.
Applying a 15% discount to our fair-value estimate (in line with that experienced in the early 1990s) implies a ‘target’ house price of around £135,000. Consistent with this, we expect house prices to fall by a further 15% from current levels over the next 6-12 months.
However, mirroring the experience in the early 1990s, we expect dramatically improved levels of first-time buyer affordability (reflecting the combined impact of falling house prices and lower borrowing costs) to result in a material strengthening in housing turnover over the next 12-18 months.
Applying a 15% discount to our fair-value estimate (in line with that experienced in the early 1990s) implies a ‘target’ house price of around £135,000. Consistent with this, we expect house prices to fall by a further 15% from current levels over the next 6-12 months.
However, mirroring the experience in the early 1990s, we expect dramatically improved levels of first-time buyer affordability (reflecting the combined impact of falling house prices and lower borrowing costs) to result in a material strengthening in housing turnover over the next 12-18 months.
NH:
It seems Mr Winder disagrees with you
PM:
Yeah, well that’s probably because he is under 40 andhas never seen a British house price slump
NH:
he’s going for another 15% fall
PM:
oh well actually — take it back
PM:
15% from here and…
PM:
Anyway – let’s mvoe on from houses
NH:
we must look at the new banking sector
NH:
INSURERS
PM:
yeah
NH:
carnage this morning.
PM:
Inevitable really
PM:
In fact ive never understood why the insurers we not included in the crunch sector from day one
PM:
After all the whole shadow banking system involved transfering risk from old banks to sectors like insurance
PM:
so when the structures fell apart, the insurers we bound to cop it
PM:
In my simplistic view
NH:
anyway the rout caused by figures from Aviva
NH:
which looked good on the surface
NH:
numbers in line, dividend paid, confident comments from the CEO
NH:
and then
PM:
wallop
NH:
down 81.5p at 203.5p
PM:
NH:
that’s a slump of 29%
PM:
You did a post on this earlier
NH:
and the more people have picked over the figures – the release runs to 160 pages – the more people have found to worry about
PM:
So the devil is in the detail at Aviva
NH:
it is
NH:
here’s a few of the things the City just hates
NH:
the IFRS NAV, which ex goodwill (we have backed out goodwill and acquired life in force) is 162p (DB forecast 233p) – the shares are at 1.6x (compare AXA now at 1x on the same basis).
NH:
The NAV is significantly lower than expected IFRS. Ex goodwill this appears to be c162p vs our expectation of 233p (£11,052m less goodwill of £3.6bn and VOBA of £3.2bn). This puts the shares at 1.6x versus a sector average at 1.35x and stocks like AXA now at 1.0x.
NH:
The assumptions they use for calculating MCEV are more generous than we had assumed – at 250bps to 300bps above risk-free in the US and 150bps (as expected) elsewhere. The benefit to EV from this is 229p, meaning that MCEV per share on a ‘clean’ basis is 122p. Here again, the average elsewhere is a little over 1x. For book value reasons, therefore, Aviva is likely to fall sharply today as AXA did two weeks ago… even if underlying earnings are actually quite reasonable.
NH:
The market will remain concerned about the commercial loan exposure, particularly in the UK book where £6bn of the £9bn book has a loan to value of above 100% with a further £1bn between 95-100% LTV. Interest cover remains above 1x across all loans (almost £5bn has interest cover above 1.2x) but nonethless defaul risk is a concern here.
PM:
Yes — that last par is the one to focus on, in my view
NH:
interesting isn’t it
PM:
How can they have 6bn of LTV 95/100% ??????
NH:
goodness knows
PM:
That part of the loan book must be WAY under water
NH:
one would assume so
NH:
but there are other things the City is worried about
PM:
default risk must be very serious indeed
PM:
What else?
NH:
Capital surplus
NH:
confirmed at £2bn, as per recent trading update
NH:
but
NH:
this looks to be pre-dividend
NH:
which will cost £500m
NH:
and pre- recent market moves
NH:
which could take off another £300m
NH:
so the capital surplus is nearer £1.2bn
NH:
and one has to ask why they are still paying this dividend
NH:
surplus is falling very sharply
NH:
and here’s another fact on the divi
NH:
Company iterated this morning, that it absorbs all cash earnings
PM:
Actually — avviva is being destroyed now
PM:
34%
PM:
Stock at 190
PM:
Almost lost a quid
PM:
Goodness this market is unforgiving
NH:
mind you, the FTSE 100 is almost down a 100 points now
PM:
Look at the rest of the insurers!!!!
NH:
yeah look at this
NH:
Pru off 20%
PM:
Friends prov down 20%
NH:
Old Mut down 17%
NH:
Legal & General
NH:
of 13%
NH:
now just 32.5p!
NH:
NH:
this is real carnage
PM:
Aviva now down 35%
PM:
184p
NH:
I don’t think Aviva saw this one coming
NH:
CEO rolled out on the Beeb this morning
NH:
had no inkling this was coming
NH:
just none at all
NH:
I think we can safely kiss goodbye to the 2009 dividend after this moring’s results
PM:
Okay — so Canto have just sent me a link to a video with Andy Moss
PM:
http://w3.cantos.com/cantos/dyn/org.php?o=290&s=57921449&psid=cantos&u=N_31432&e=paul.murphy@ft.com&uid=&CantosSID=07823937e97af9a06a756c269ca6d068_C
PM:
I think this was recorded before the price fell 35%
NH:
PM:
Maybe should do a new one with his mouth hanging open
NH:
or this
NH:
right. some analyst comment on the numbers
NH:
Merrill Lynch
NH:
IFRS operating profits were £2.3bn vs our slightly higher than consensus £2.4bn
estimate. MCEV operating profits were £3.4bn, around 10% above our slightly
below consensus estimate of £2.8bn.
Within the mix, the p-c division posted a combined ratio of 98% vs our 97.6%
forecast; profits were slightly ahead of forecast at £1.2bn. Reserve releases
continue to run at a high level – £840m equates to 7.6 combined ratio points.
Note that Aviva has also taken an exceptional £304m asbestos provision, mostly
offset by the introduction of reserve discounting. Profits from the life business
were slightly below forecast on an IFRS basis and above on an EV basis.
Aviva will pay a dividend of 33p for 2008 (flat YoY) vs our forecast of 34.6p and
consensus of 33.9p. This implies a final dividend of 19.9p (-6% YoY).
Interestingly, the company is re-introducing the scrip dividend option having
scrapped it in 2007.
estimate. MCEV operating profits were £3.4bn, around 10% above our slightly
below consensus estimate of £2.8bn.
Within the mix, the p-c division posted a combined ratio of 98% vs our 97.6%
forecast; profits were slightly ahead of forecast at £1.2bn. Reserve releases
continue to run at a high level – £840m equates to 7.6 combined ratio points.
Note that Aviva has also taken an exceptional £304m asbestos provision, mostly
offset by the introduction of reserve discounting. Profits from the life business
were slightly below forecast on an IFRS basis and above on an EV basis.
Aviva will pay a dividend of 33p for 2008 (flat YoY) vs our forecast of 34.6p and
consensus of 33.9p. This implies a final dividend of 19.9p (-6% YoY).
Interestingly, the company is re-introducing the scrip dividend option having
scrapped it in 2007.
NH:
Balance sheet figures mixed
The embedded value itself came in at 486p, splitting our 499p forecast and
consensus of 479p. The re-stated H1 08 figure on an MCEV basis was 654p, so
that’s a 25% fall in H2. Deducting goodwill (-120p) we arrive at a net embedded
value of 366p. We will need to assess the degree of judgement Aviva has
exercised in the liquidity adjustment it has used – we suspect this will be
significant.
The headline IFRS SH equity figure was 416p per share, -16% YoY. To get to a
tangible IFRS book value, you should roughly half this figure – so just over 200p.
The embedded value itself came in at 486p, splitting our 499p forecast and
consensus of 479p. The re-stated H1 08 figure on an MCEV basis was 654p, so
that’s a 25% fall in H2. Deducting goodwill (-120p) we arrive at a net embedded
value of 366p. We will need to assess the degree of judgement Aviva has
exercised in the liquidity adjustment it has used – we suspect this will be
significant.
The headline IFRS SH equity figure was 416p per share, -16% YoY. To get to a
tangible IFRS book value, you should roughly half this figure – so just over 200p.
NH:
IGD – need to adjust for dividend and market moves
The IGD at the end of the year was confirmed at £2.0bn. We think this is pre the
final dividend cost, which takes around £500m off. Adjusting for market moves
YTD gives a pro-forma figure of around £1.2bn, which will need to be run by the
company later this morning. The company has taken an additional £300m credit
loss provision, moving into line with peers.
The IGD at the end of the year was confirmed at £2.0bn. We think this is pre the
final dividend cost, which takes around £500m off. Adjusting for market moves
YTD gives a pro-forma figure of around £1.2bn, which will need to be run by the
company later this morning. The company has taken an additional £300m credit
loss provision, moving into line with peers.
NH:
Commercial mortgage book update
Looking at the £10bn shareholder exposed commercial real estate book, we note
that 65% of this now has a loan to value of more than 100%. The £250m loan
loss provision is unlikely to satisfy investors, in our view. The company
commented that it has ‘resolved’ the Dawnay Day situation without loss – we will
seek clarity on what ‘resolved’ means. We know the company was trying to sell
the properties, but in the statement it talks about a restructuring of the loan.
Looking at the £10bn shareholder exposed commercial real estate book, we note
that 65% of this now has a loan to value of more than 100%. The £250m loan
loss provision is unlikely to satisfy investors, in our view. The company
commented that it has ‘resolved’ the Dawnay Day situation without loss – we will
seek clarity on what ‘resolved’ means. We know the company was trying to sell
the properties, but in the statement it talks about a restructuring of the loan.
NH:
Cazenove
NH:
Aviva – prelims [AV.L, AV/ LN, 275p] IN LINE, sector – neutral
Aviva goes ex a final dividend per share of 19.91p on 25th March, an immediate yield of over 7%. The dividend has been declared on the back of better than expected operating results, driven by both life and non-life. The outlook for the substantial non-life operation is improving even if times are tougher for life. Long tail non-life reserves were actually strengthened this year. “One Aviva” is delivering real savings, and the solvency position is in line with previous guidance. IN LINE
Aviva goes ex a final dividend per share of 19.91p on 25th March, an immediate yield of over 7%. The dividend has been declared on the back of better than expected operating results, driven by both life and non-life. The outlook for the substantial non-life operation is improving even if times are tougher for life. Long tail non-life reserves were actually strengthened this year. “One Aviva” is delivering real savings, and the solvency position is in line with previous guidance. IN LINE
NH:
NH:
NH:
Morgan Stanley
NH:
they are house broker
NH:
Lots of moving parts, but overall reassuring: Despite
the positive news on solvency already having been
released, we think the 19.91p final dividend – a 7.0%
yield to the ex-div date – should be enough to give the
shares short-term support. However, with significant
asset leverage and volatility in capital markets we think
investors will remain cautious on the insurers for now.
the positive news on solvency already having been
released, we think the 19.91p final dividend – a 7.0%
yield to the ex-div date – should be enough to give the
shares short-term support. However, with significant
asset leverage and volatility in capital markets we think
investors will remain cautious on the insurers for now.
NH:
‘Dividend policy remains unchanged’, but with
reintroduction of voluntary scrip option: No change
is indicated, but we believe the ultimate level of the FY09
dividend will depend on investment returns for the year.
reintroduction of voluntary scrip option: No change
is indicated, but we believe the ultimate level of the FY09
dividend will depend on investment returns for the year.
NH:
£2.0 billion IGD surplus as expected: Aviva has
added £300mn to its UK default provision for corporate
bonds and £250mn for its commercial mortgage portfolio
– in total the provision now equates to 86 bps p.a.
(similar to that established by Prudential). Asset quality
looks good, with FY08 defaults of only 20 bps (lower
than L&G, Old Mutual and Prudential).
added £300mn to its UK default provision for corporate
bonds and £250mn for its commercial mortgage portfolio
– in total the provision now equates to 86 bps p.a.
(similar to that established by Prudential). Asset quality
looks good, with FY08 defaults of only 20 bps (lower
than L&G, Old Mutual and Prudential).
NH:
UK commercial mortgages – no loss from Dawnay
Day: Aviva has exchanged on the sale of the underlying
properties and expects no loss. Additional disclosure
has been given on the loan portfolio – separately
analysing the UK commercial mortgage portfolio for the
first time. While the interest servicing looks reasonable
and arrears are very low, some 76% of the shareholder
proportion now has a LTV of greater than 95%.
Day: Aviva has exchanged on the sale of the underlying
properties and expects no loss. Additional disclosure
has been given on the loan portfolio – separately
analysing the UK commercial mortgage portfolio for the
first time. While the interest servicing looks reasonable
and arrears are very low, some 76% of the shareholder
proportion now has a LTV of greater than 95%.
NH:
General insurance results look robust: Even after
taking a net reserve charge of £304mn for asbestos
liabilities the reported combined ratio was 98%.
As expected the MCEV numbers have been hit by
volatility in 2H08: Aviva’s MCEV of 486p (inc. goodwill)
was 1.4% ahead of consensus. A liquidity premium of
300 bps has been used for US immediate annuities, 250
bps for deferred and 150 bps in the UK / Netherlands
taking a net reserve charge of £304mn for asbestos
liabilities the reported combined ratio was 98%.
As expected the MCEV numbers have been hit by
volatility in 2H08: Aviva’s MCEV of 486p (inc. goodwill)
was 1.4% ahead of consensus. A liquidity premium of
300 bps has been used for US immediate annuities, 250
bps for deferred and 150 bps in the UK / Netherlands
PM:
Thanks for that Neil
PM:
Andrea Felsted has just appeared at our shoulder
PM:
She’s our excellent insurance corr
PM:
Although she’s about to mvoe over to retail
PM:
In the meantime, she’s talking about the Aviva divi
PM:
Can they afford it??
NH:
(sorry Lemmy, mix up. but you get the idea)
NH:
will try and get the MOST note on Aviva now
PM:
Morgan Stanley were expecting Aviva to guide lower on the divi — which they havent
PM:
Said policy is unchagned — we think — needs checking
PM:
Sorry, Andrea also talking about property
PM:
Seemingly has loads of doctors surgeries
PM:
bizarrely
NH:
right, apologies. I had an arriva note up earlier from MOST
NH:
and here is the MOST note on AVIVA
NH:
Reassuring results, total
FY08 dividend flat YoY
FY08 dividend flat YoY
NH:
they are house broker BTW
NH:
Lots of moving parts, but overall reassuring: Despite
the positive news on solvency already having been
released, we think the 19.91p final dividend – a 7.0%
yield to the ex-div date – should be enough to give the
shares short-term support. However, with significant
asset leverage and volatility in capital markets we think
investors will remain cautious on the insurers for now.
‘Dividend policy remains unchanged’, but with
reintroduction of voluntary scrip option: No change
is indicated, but we believe the ultimate level of the FY09
dividend will depend on investment returns for the year.
£2.0 billion IGD surplus as expected: Aviva has
added £300mn to its UK default provision for corporate
bonds and £250mn for its commercial mortgage portfolio
– in total the provision now equates to 86 bps p.a.
(similar to that established by Prudential). Asset quality
looks good, with FY08 defaults of only 20 bps (lower
than L&G, Old Mutual and Prudential).
UK commercial mortgages – no loss from Dawnay
Day: Aviva has exchanged on the sale of the underlying
properties and expects no loss. Additional disclosure
has been given on the loan portfolio – separately
analysing the UK commercial mortgage portfolio for the
first time. While the interest servicing looks reasonable
and arrears are very low, some 76% of the shareholder
proportion now has a LTV of greater than 95%.
General insurance results look robust: Even after
taking a net reserve charge of £304mn for asbestos
liabilities the reported combined ratio was 98%.
As expected the MCEV numbers have been hit by
volatility in 2H08: Aviva’s MCEV of 486p (inc. goodwill)
was 1.4% ahead of consensus. A liquidity premium of
300 bps has been used for US immediate annuities, 250
bps for deferred and 150 bps in the UK / Netherlands
the positive news on solvency already having been
released, we think the 19.91p final dividend – a 7.0%
yield to the ex-div date – should be enough to give the
shares short-term support. However, with significant
asset leverage and volatility in capital markets we think
investors will remain cautious on the insurers for now.
‘Dividend policy remains unchanged’, but with
reintroduction of voluntary scrip option: No change
is indicated, but we believe the ultimate level of the FY09
dividend will depend on investment returns for the year.
£2.0 billion IGD surplus as expected: Aviva has
added £300mn to its UK default provision for corporate
bonds and £250mn for its commercial mortgage portfolio
– in total the provision now equates to 86 bps p.a.
(similar to that established by Prudential). Asset quality
looks good, with FY08 defaults of only 20 bps (lower
than L&G, Old Mutual and Prudential).
UK commercial mortgages – no loss from Dawnay
Day: Aviva has exchanged on the sale of the underlying
properties and expects no loss. Additional disclosure
has been given on the loan portfolio – separately
analysing the UK commercial mortgage portfolio for the
first time. While the interest servicing looks reasonable
and arrears are very low, some 76% of the shareholder
proportion now has a LTV of greater than 95%.
General insurance results look robust: Even after
taking a net reserve charge of £304mn for asbestos
liabilities the reported combined ratio was 98%.
As expected the MCEV numbers have been hit by
volatility in 2H08: Aviva’s MCEV of 486p (inc. goodwill)
was 1.4% ahead of consensus. A liquidity premium of
300 bps has been used for US immediate annuities, 250
bps for deferred and 150 bps in the UK / Netherlands
NH:
right, are we done
PM:
Important thing to draw attention to
PM:
Below
PM:
rare thing
PM:
taxloss has been nice about Sam
PM:
taxloss Mar 5 11:34
Any one remember Sam’s sell note on insurers? he may look like a 13 year old doctor, but he gives good copy…
Moderation options
Any one remember Sam’s sell note on insurers? he may look like a 13 year old doctor, but he gives good copy…
Moderation options
PM:
Sam’s away, so not here to fall off his chair
NH:
what was the note called?
PM:
Sell Insurers
PM:
it was an appeal to AV readers
PM:
And it was very timely indeed
11:39AM
PM:
Okay — where now — Aviva sis recoverying somewhat
NH:
in line with the wider market – FTSE now down just 90
NH:
I think we should have a look at Barclays
PM:
ooooh
NH:
price being hit hard
PM:
Well Francesco gave it them in the neck this morning
NH:
he certainly did
NH:
and the piece has reignited concerns about the opacity of Barc’s numbers
NH:
I mean this Lehman gain always looked odd
PM:
Negative goodwill
PM:
Now it seems to have been negative goodwill — along with a chunk of bonus money
NH:
here’s the original piece in case you missed it
NH:
and Tracy’s follow up
NH:
sorry can’t get link at the mo
NH:
internet connection v slow
NH:
and on top of all that
NH:
Sandy Chen
NH:
the bearish banking analyst at Panmure Gordon
NH:
has published a detailed review of Barclays’ monoline exposure
PM:
that’s Neil’s AV post on the matter
PM:
But there’s also lots more in the Long Room 
NH:
and his discoveries has led him to put a 50p target price on barc
NH:
and advise clients to sell
NH:
here’s the executive summary
NH:
If corporate defaults jump and structured credits undergo another
wave of downgrades, we think that the structure of swaps with
monolines and other counterparties that BARC put in place to limit
losses could buckle – leading to further impairments and/or writedowns.
We expect BARC will record major losses in 2009 and 2010.
wave of downgrades, we think that the structure of swaps with
monolines and other counterparties that BARC put in place to limit
losses could buckle – leading to further impairments and/or writedowns.
We expect BARC will record major losses in 2009 and 2010.
NH:
We have looked more closely at the movements in Level 3-type (market
unobservable) assets and derivatives exposures that had puzzled us in BARC’s
2008 results – specifically, the £20bn increase in Level 3-type (valuations
based on unobservable inputs) and the doubling of net derivatives exposures
(even after counterparty netting and collateral).
unobservable) assets and derivatives exposures that had puzzled us in BARC’s
2008 results – specifically, the £20bn increase in Level 3-type (valuations
based on unobservable inputs) and the doubling of net derivatives exposures
(even after counterparty netting and collateral).
NH:
Although part of this growth can be explained by currency movements, we
also think that gains on derivatives contracts with monolines, CDPCs and
other counterparties accounted for much of these movements.
For example, in the £21bn of monoline derivatives contracts covering CLOs
(collateralised debt obligations), it appears that the value of the contracts grew
from £408m as at end-2007 to £4,939m as at end-2008. In our opinion, if the
monoline contracts hadn’t existed, we think BARC would have had to
recognise corresponding mark-to-market write-downs on its CLOs.
also think that gains on derivatives contracts with monolines, CDPCs and
other counterparties accounted for much of these movements.
For example, in the £21bn of monoline derivatives contracts covering CLOs
(collateralised debt obligations), it appears that the value of the contracts grew
from £408m as at end-2007 to £4,939m as at end-2008. In our opinion, if the
monoline contracts hadn’t existed, we think BARC would have had to
recognise corresponding mark-to-market write-downs on its CLOs.
NH:
BARC point out that impairment charges on these contracts would only be
crystallised in the event of a “double default” – i.e. not only would the
underlying CLO have to default, the monoline would also have to default on
its derivative contract. However, given the rating agencies’ recent warnings on
CLOs as well as the recent downgrades on monolines, we think the
probability of such double defaults has risen significantly.
These and other risks have led us to forecast impairment charges of circa
£13bn in 2009 and 2010, versus management guidance of £7-8bn. We expect
this to push BARC into major losses in both 2009 and 2010; if BARC decides
not to participate in the government APS, we see additional capital/dilution
risk as well. We cut our share price target from 55p to 40p, and maintain Sell.
crystallised in the event of a “double default” – i.e. not only would the
underlying CLO have to default, the monoline would also have to default on
its derivative contract. However, given the rating agencies’ recent warnings on
CLOs as well as the recent downgrades on monolines, we think the
probability of such double defaults has risen significantly.
These and other risks have led us to forecast impairment charges of circa
£13bn in 2009 and 2010, versus management guidance of £7-8bn. We expect
this to push BARC into major losses in both 2009 and 2010; if BARC decides
not to participate in the government APS, we see additional capital/dilution
risk as well. We cut our share price target from 55p to 40p, and maintain Sell.
PM:
a very good note — and well worth wading through
PM:
in our view
PM:
Anyway barclays stock is off 11.1p at 75p
PM:
13% fall
NH:
not the biggest decliner in the banking sector
PM:
Oh no — it’s not
PM:
LOLLoyds
PM:
Lloyds down 7p at 40.6
NH:
is that a record low?
PM:
traded as low as 33 back at the end of Jan
NH:
obviously, Lloyds have a large insurance biz in the shapre of Scottish Widows
PM:
But closing low was 44p i think
NH:
also I think the shares are being hit hard by concerns about what it will cost to join the APS
11:48AM
NH:
right, just getting some breaking news on GE
NH:
apparently the wires have been flashing this
NH:
getting this from the WSJ
NH:
GM says in its annual report that its auditors have raised substantial doubts about its ability to continue as a going concern, citing recurring losses from operations, stockholders’ deficit and an inability to generate enough cash to meet its obligations.
GM has received $13.4 billion in federal loans, and the company is seeking a total of $30 billion from the government. During the past three years it has piled up $82 billion in losses, including $30.9 billion in 2008.
NH:
here’s the link
NH:
http://online.wsj.com/article/SB123625134434838921.html?mod=djemalertNEWS
PM:
GM not GE
PM:
PM:
Fact that General Motors might not be a going concern is pretty well known
PM:
If it had been GE it might be the time to….
NH:
yeah that would have been time to head for the hills
11:50AM
PM:
Okay, time for a quick gag.
PM:
Tracy found this at Option Armageddon and thought it worth sharing.
PM:
Introductory question is: Would you quit drinking?
NH:
I thought you were going to tiny url all your links from now on – using that firefox gizmo?
PM:
Oh yeah
11:51AM
PM:
And for humour,,,, to intrigue
PM:
where’s this Wolseley rights issue?
NH:
er, there’s been a hitch, apparently
PM:
PM:
really?
NH:
yep
NH:
we are trying to work out what it might be
NH:
whether it is something to do with the listing authorities not signing off because of a recent heavy workload
NH:
or something else
PM:
(taxloss — you bettter watch it)
PM:
Neil — such as?
NH:
well one theory was that it could be down to construction loans
NH:
Wolseley has £237m of outstanding loans which it has made to
individuals and small corporations to build houses in the US.
individuals and small corporations to build houses in the US.
NH:
there has been some talk in the market that a large provision might be needed
NH:
however, we can’t see this as being big enough to delay the cash call
PM:
so what it is then
NH:
well, there is another suggestion
NH:
and it is all to do with credit insurance
NH:
it seems that the company or shareholders are seeking some sort of indemnity or guarantee that supplies will be covered by insurance
NH:
or that Wolseley’s balance sheet post a £1.2bn rights issue
NH:
will be seen favourably by the credit insurers
PM:
interesting theory
PM:
There has been a huge stink about credit insurnance
PM:
Wasnt Mandy getting it in the neck for the failure to get a gov scheme running?
PM:
Dont know the situation in the US, where much of the Wolseley biz is of course
NH:
anyway
NH:
we have some more detail on the structure of the cash call which we are checking through at the moment
NH:
size
NH:
breakdown
NH:
hopefully we might be in position to publish a little later
NH:
Wolseley shares off 4.7p at 176.4p
PM:
Tears for Tier 1 — youy are so right — a boring company with no profile and suddenly decided to get exciting…
11:55AM
NH:
Right, before the rate decision
NH:
a few bits of RAW
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:
Tullow Oil – more bid rumours. the Chinese apparently
NH:
ING down 17% on nationalisation fears
NH:
some spurious about Nike bidding for Adidas
NH:
can’t see that one getting past the regulators
NH:
Macquarie looking to take a sizeable stake in Tullett Prebon
NH:
that’s what we have been hearing this morning
Tullow Oil (TLW:LSE): Last: 709.00, down 6.5 (-0.91%), High: 720.00, Low: 702.00, Volume: 825.29k
Tullett Prebon (TLPR:LSE): Last: 131.25, up 0.5 (+0.38%), High: 132.50, Low: 126.00, Volume: 476.12k
NH:
Right I think we are done
NH:
just the rates decision to wait for
NH:
and apologies for all the errors this morning
NH:
this really has been live this morning
NH:
not much scripted stuff
NH:
seat of the pants time
NH:
been busy with Wolseley, Aviva and Barc
NH:
OK, let’s get ready
NH:
here it comes
12:00PM
NH:
50bps cut
PM:
50bps cut
NH:
to 0.50%
NH:
£75bn asset purchase programme announced
NH:
looking for statement
NH:
market not interested by the cut
NH:
FTSE 100 off 92 points at the moment
NH:
Tracy’s putting the statement on the homepage
NH:
Tracy’s putting the statement on the homepage
NH:
but in the meantime
NH:
The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 0.5%, and to undertake a programme of asset purchases of £75 billion financed by the issuance of central bank reserves.
World activity continued to weaken, reflecting both depressed confidence and the persistent problems in international credit markets. In the United Kingdom, output dropped sharply in the fourth quarter of 2008. That reflected lower consumer spending, a further fall in business investment and a rapid run-down in stocks, in part offset by stronger net exports as the past depreciation of sterling began to take effect. Business surveys continue to point to a similar rate of contraction in the early part of this year. Unemployment has risen markedly. Credit conditions faced by companies and households remain tight.
NH:
in order to meet the Committee’s objective of total purchases of £75 billion, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.
At its future meetings, the Committee will monitor the effectiveness of this purchase programme in boosting the supply of money and credit and in due course raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate.
NH:
that’s the bit on the asset purchases
NH:
targeting gilts
PM:
Tracy’s quick post
NH:
we are in QE land now
NH:
Darling making some comments as well
NH:
we should check on gilt prices
PM:
The long gilt future has rocketed
PM:
78 poits i think
NH:
10-year is +1.66
NH:
30-year + 3.5
NH:
yield
NH:
186 lower on the 10-year
NH:
gilt bubble
NH:
market – FTSE 100 off 86 points
NH:
Reuters saying Aviva shares hit a record low earlier this morning
12:11PM
NH:
Wolseley statement out
NH:
sayinig they have held conversations to consider the merits of a cash call
NH:
yeah, too right they have had loads and loads and loads of conversations
NH:
god, this is the most uncommunicative company in the world
PM:
I think we know who the external PR on this
PM:
Won’t publicly name and shame him here
PM:
But one little story…
NH:
but one that has plenty of previous
NH:
of publishing statements like this after being called by hacks
PM:
About 20 years ago when I got my very first little scoop on the Daily telegaph — little acquisition — got the info from a stray fax
PM:
I rang this guy up to check the story and he said
PM:
Look Paul, they deal isn’t ready yet — please dont publish that cos you will kill the deal. How about if I give you the nod next week when it’s ready and you can publish then.
PM:
To which I said — “fine”
PM:
One hour later a statement was out on the old Topic system…
PM:
Just screwed me — straight
NH:
and the same thing has happened again
NH:
today
PM:
hmm
NH:
anyway, Wolseley being hit now
NH:
down 8.8p at 172.2p
NH:
a fall of 5%
NH:
anyway enough moaning from us
NH:
PR is a pretty tough job
NH:
they get it from all sides
PM:
Of course they do
PM:
Wolseley now being crushed btw
PM:
hey ho
NH:
off 8%
NH:
right, that’s is it for today
NH:
thanks for joining us
NH:
see you all tomorrow
PM:
Seeya -!