Markets live chat transcript for the chat ending at 12:10 on 26 Oct 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ) Paul Murphy (PM)
NH:
hello there
NH:
It’s 11.02
NH:
surprise
NH:
and time for Markets Live
NH:
FT Alphaville’s daily markets discussion
NH:
an hour or thereabouts
NH:
or top quality markets discussion
NH:
on what is apparently the most unproductive day of the year
MJ:
eh?
NH:
yep, today is the most unproductive day of the year
NH:
have a look at this
NH:
http://www.telegraph.co.uk/news/newstopics/howaboutthat/6432078/
Monday-Oct-26-is-most-unproductive-day.html
Monday-Oct-26-is-most-unproductive-day.html
MJ:
well its been a bit of an unproductive morning here
MJ:
very unproductive
MJ:
Bit of confusion after the big move
MJ:
my Reuters machine still not working
MJ:
and the Blackberry server was only switched on around 9.00am
MJ:
etc
NH:
well
NH:
I hate to say I told you so
NH:
but I told you so
NH:
the desk move was bound to be an unmitigated disaster
NH:
and it was
NH:
you should have seen my desk when I arrived
NH:
no power, cables everywhere
NH:
and when I finally managed to power everything up
NH:
no network connection
MJ:
still
MJ:
the view is better here
NH:
I know
MJ:
and we are closer to the main news desk
MJ:
and you and Tracy are opposite Gillian Tett
MJ:
I am sure we settle in just fine
MJ:
after the initial hick ups
NH:
yes, apologies for the lack of content this morning. It really did
NH:
take almost two hours to get everything up and running
NH:
actually
NH:
my Reuters still does not have an archive
NH:
anyway
NH:
Alpha has joined the markets desk
11:07AM
NH:
Okay
NH:
Miles what’s the market doing??
MJ:
Um
MJ:
well…
MJ:
you might have to tell me actually
MJ:
can’t get a FTSE quote
NH:
oh yeah
NH:
sorry
NH:
so
NH:
the FTSE 100 is up 10 points at 5,252
NH:
which given the big fall on Wall Street Friday
NH:
is surprising
MJ:
Dow fell below 10,000
NH:
not really clear why the market is up
NH:
lots of defensive stocks pushing higher
NH:
and some miners on the back of a note of HSBC
MJ:
do you have it?
MJ:
might be an idea to put the summary up
MJ:
Lorcan would appreciate it
NH:
yep
NH:
can do
NH:
pasting
NH:
We are initiating coverage of the
global mining majors with Anglo American as our top pick
We see sector-wide valuations as uncompelling, and see stock picking
as increasingly important We are bullish in the long term on
metals, but expect supply to surprise on the upside in 2010
global mining majors with Anglo American as our top pick
We see sector-wide valuations as uncompelling, and see stock picking
as increasingly important We are bullish in the long term on
metals, but expect supply to surprise on the upside in 2010
We are initiating coverage of the global diversified miners, with an Overweight (V) rating on Anglo American, Neutral (V) ratings on BHP Billiton and Rio Tinto and an Underweight (V) rating on Xstrata. We are also upgrading Nyrstar
from Neutral (V) to Overweight (V). We are neutral overall on the majors and generally more cautious on miners than we are on steelmakers at
this point in the cycle.
NH:
Our caution reflects the strong recovery in the sector and generally stretched stock valuations. Consensus earnings expectations are now rising
and commodity-price forecasts are being raised. Some of this is valid in our view; the cycle has clearly improved, and we are raising some of our near-term forecasts and raising our long-term expectations for nickel and iron ore. But they key lesson of 2008 is that the tail should not wag the dog. We believe expectations for commodity prices should drive stock valuations, not vice versa. With metals prices no longer at
levels where supply is being choked off and the death of capex apparently short-lived, we see supply as surprising on the upside in 2010.
and commodity-price forecasts are being raised. Some of this is valid in our view; the cycle has clearly improved, and we are raising some of our near-term forecasts and raising our long-term expectations for nickel and iron ore. But they key lesson of 2008 is that the tail should not wag the dog. We believe expectations for commodity prices should drive stock valuations, not vice versa. With metals prices no longer at
levels where supply is being choked off and the death of capex apparently short-lived, we see supply as surprising on the upside in 2010.
NH:
Now that metals prices have recovered from distressed levels, we see further gains as being held back by rising inventories. Further dollar weakness may help prices but will be more neutral to equities because of the impact on production costs. That being said, we do not recommend an underweight strategy across the sector – mining stocks remain high beta and, in the absence of a second leg to the economic downturn, are unlikely to perform poorly as a group in our view. We do advocate intra-sector stock picking, and we introduce a new comparative framework for base metals stocks in this report.
We recommend avoiding purer copper and aluminium exposure (Underweight (V): KGHM, Norsk Hydro, Xstrata and Antofagasta). We see better value in more diversified names (Neutral (V): BHP Billiton, Rio Tinto, Vedanta), and those
with commodities more linked to the steel cycle (Neutral (V): Boliden, ENRC, Overweight (V) Nyrstar). Our top mining pick is Anglo American
(Overweight (V)), which we view as an underpriced restructuring story.
NH:
If there’s interest
NH:
the rest could appear in the usual place
11:10AM
MJ:
Some flashes coming up from the FSA
NH:
there are
NH:
RTRS-FSA – THE MAJOR UK-HEADQUARTERED BANKS HAVE AGREED TO IMPLEMENT A TOUGH NEW CODE FOR FINANCI AL REPORTING DISCLOSURE
11:04 26Oct09 RTRS-FSA ANNOUNCES TOUGH NEW CODE FOR FINANCIAL REPORTING DISCLOSURE
11:04 26Oct09 RTRS-FSA ANNOUNCES TOUGH NEW CODE FOR FINANCIAL REPORTING DISCLOSURE
MJ:
Any more on that Neil?
NH:
yes
NH:
The Financial Services Authority (FSA) has announced today that the major UK-headquartered banks have agreed to implement a tough new code for financial reporting disclosure.
The code forms part of proposals designed to enhance investors’ confidence in financial reporting and to aid their ability to compare and contrast banks’ performance. It is based on an overarching principle that UK banks are “committed to providing high quality, meaningful and decision-useful disclosures to users to help them understand the financial position, performance and changes in the financial position of their businesses”.
The code forms part of proposals designed to enhance investors’ confidence in financial reporting and to aid their ability to compare and contrast banks’ performance. It is based on an overarching principle that UK banks are “committed to providing high quality, meaningful and decision-useful disclosures to users to help them understand the financial position, performance and changes in the financial position of their businesses”.
NH:
The FSA is inviting views on the application of this code to banks and other credit institutions. In the meantime, the major banks, at the FSA’s request, have agreed to implement the code in their 2009 year end annual reports.
If the banks are unable to sufficiently improve the quality and comparability of their disclosures in their 2009 annual reports, the FSA is also seeking views as to whether the code needs to be supplanted by more detailed disclosure templates.
If the banks are unable to sufficiently improve the quality and comparability of their disclosures in their 2009 annual reports, the FSA is also seeking views as to whether the code needs to be supplanted by more detailed disclosure templates.
NH:
Paul Sharma, FSA director, prudential policy, said:
“In the Turner Review we set out our view that the financial crisis had raised questions as to the adequacy of financial disclosure by banks throughout all major economies and the level of confidence that investors could place in their financial reports.
“The tough disclosure code published today puts UK banks further ahead of the game internationally in addressing these concerns. But when applying this code to their 2009 year end accounts, the FSA expects firms to achieve significant improvement in the quality and comparability of disclosures.”
The code is being launched to the industry by the British Bankers Association (BBA) today.
“In the Turner Review we set out our view that the financial crisis had raised questions as to the adequacy of financial disclosure by banks throughout all major economies and the level of confidence that investors could place in their financial reports.
“The tough disclosure code published today puts UK banks further ahead of the game internationally in addressing these concerns. But when applying this code to their 2009 year end accounts, the FSA expects firms to achieve significant improvement in the quality and comparability of disclosures.”
The code is being launched to the industry by the British Bankers Association (BBA) today.
MJ:
Hmm
MJ:
Usually, when you have to call somthing “tough” then it isn’t
NH:
indeed
11:12AM
NH:
Okay
NH:
times for some
NH:
stock specific stuff
NH:
Miles
NH:
what’s moving?
MJ:
Look Neil, there is no need to rub it in
NH:
sorry
NH:
you don’t have any prices do you
NH:
ha ha
NH:
well, British Airways a weak
British Airways (BAY:LSE): Last: 202.00, down 7.8 (-3.72%), High: 207.60, Low: 201.30, Volume: 7.43m
MJ:
I saw that
MJ:
on the back of the FT story this morning
NH:
good story that
NH:
looks the regiulators are going to extract some real concessions
NH:
on top of that
NH:
BA has also been hit by a downgrade from Deutsche Bank
NH:
they are telling clients to sell BA this morning
MJ:
I can imagine
NH:
just looking at the note again
NH:
bascially says
NH:
all the positives are at risk
NH:
merger with Iberia
NH:
anti-trust with American Airlines
MJ:
So basically there is no good news
NH:
not much
NH:
and results are looming too
NH:
here’s the piece
NH:
we believe that the main positive catalysts for the stock (merger with
Iberia and anti-trust immunity with American) are at risk. Given the significant
uncertainty facing British Airways we believe that investors who want to play the
sector should buy either Lufthansa (Buy, E11.60) or easyJet (Buy, 378p), both of which
have strong balance sheets and a clear strategic direction.
Iberia and anti-trust immunity with American) are at risk. Given the significant
uncertainty facing British Airways we believe that investors who want to play the
sector should buy either Lufthansa (Buy, E11.60) or easyJet (Buy, 378p), both of which
have strong balance sheets and a clear strategic direction.
NH:
We forecast Q2 operating loss of £58m (Q2 08-09: £105m profit). British Airways will
report Q2 results on Friday 6 November. Traditionally the strongest quarter of the year,
we forecast an operating loss of £58m compared to £105m profit in Q2 08-09,
negatively impacted by a severe decline in yields. We see passenger yields down 14%
due to a tough trading environment and the fact that we are cycling against summer
2008 when yields were strongly supported by fuel surcharges. Yields were down
9.6% in Q1.
report Q2 results on Friday 6 November. Traditionally the strongest quarter of the year,
we forecast an operating loss of £58m compared to £105m profit in Q2 08-09,
negatively impacted by a severe decline in yields. We see passenger yields down 14%
due to a tough trading environment and the fact that we are cycling against summer
2008 when yields were strongly supported by fuel surcharges. Yields were down
9.6% in Q1.
NH:
Iberia looks at Plan B. Iberia’s (Hold, E2.13) announcement of a profit warning was
evidence that the trading environment for European network airlines remains very
tough. Furthermore, the new restructuring plan is, in our view, an indication that Iberia
is planning for the possibility that a merger with British Airways might not happen.
evidence that the trading environment for European network airlines remains very
tough. Furthermore, the new restructuring plan is, in our view, an indication that Iberia
is planning for the possibility that a merger with British Airways might not happen.
NH:
Valuation/Risk/Reward headline. Our target price of 175p is based on a mid-cycle
EV/EBITDAR multiple of 5.2x FY10-11E earnings. The major risk to our SELL
recommendation is that a merger with Iberia is concluded quickly and the European
Commission drop any objections to American Airlines / British Airways anti-trust
immunity application.
EV/EBITDAR multiple of 5.2x FY10-11E earnings. The major risk to our SELL
recommendation is that a merger with Iberia is concluded quickly and the European
Commission drop any objections to American Airlines / British Airways anti-trust
immunity application.
MJ:
What price for BA now then?
NH:
200p
NH:
and Tracy also made a good point today
NH:
she was asking when Goldman Sachs
NH:
turned “Conviction Buy” on BA
MJ:
Ah yes – the exact same day the shares peaked no?
NH:
yes
NH:
I think so
NH:
(SilverFox 
)
)MJ:
I hope they use BA as a case study in business school. It must be one of the hardest companies in the world to do anything with
MJ:
Whethe ryou are a board member or one of their bankers
NH:
I think IT at the FT could be used as a case study too
NH:
anyway
NH:
BA aren’t the biggest faller in the FTSE 100 this morning
NH:
are they Miles?
11:20AM
MJ:
ha ha, very funny
NH:
well, they are
NH:
down 4.14p at 92.1p
NH:
I reckon that’s profit taking
NH:
after the stock squeezed up at the end of last week
NH:
because there’s nothing new on the cash call
NH:
is there?
MJ:
No, nothing really in the weekend press
MJ:
That massive refinancing which was rumoured never came
MJ:
Just a relitavly small convert
NH:
sorry we are talking about Lloyds here
NH:
they are biggest the fallers in the FTSE 100 Miles
NH:
we really must get this Reuters machine fixed
NH:
Miles you there?
MJ:
Man over here right now
NH:
ah good
NH:
get it fixed
MJ:
A bit squished
NH:
I was just chatting about Lloyds
NH:
and how
NH:
there was nothing fresh in the weekend press
MJ:
They appear tostill be thrashing things out
NH:
although I guess
NH:
RBS looking to cut their involvement in the APS was new
MJ:
This was in the Mail last night
MJ:
Which provides some insight
MJ:
Lloyds Banking Group remains a long way from securing government approval for its £23billion proposal to avoid the Treasury’s toxic debt insurance plan by launching a rights issue.
Talks continued over the weekend but any deal is understood to be many days off, as the bank attempts to convince officials its new plan is viable.
As a result a Treasury announcement on the state’s Asset Protection Scheme, expected this week, has been delayed until the beginning of next month sources told the Mail.
That will include the final terms of Royal Bank of Scotland’s participation in the APS, as well as Lloyds’s revised plans.
Read more: http://www.dailymail.co.uk/money/article-1222896/Further-delays-23bn-Lloyds-rights-issue-government-talks-continue.html#ixzz0V2YUnJXF
NH:
hmmm
NH:
so the wait goes on
NH:
actually
NH:
Jonathon Pierce at Credit Suisse
NH:
has just sent his thoughts over
MJ:
One of the best analysts in the sector
NH:
indeed
NH:
and this is what he makes of it all
NH:
In March, it all seemed so simple – LBG and RBS would assend into APS, probably by early Summer, and have enough capital to withstand a serious downturn. Late October, and the situation remains unresolved, with investors reliant on the media for news of developments. This is far from satisfactory, particularly in light of the scale and complexity of the transactions involved but, finally, it seems as though things are coming to a head. We expect announcements on both LBG and RBS in the next couple of weeks, and outline here our views on the most likely scenarios.
NH:
APS outcome still unclear: On balance, we expect LBG (Underperform) to fully extricate itself from APS, although it is still a close call. The press suggests that RBS (Underperform) will modestly reduce its participation also.
Fully in, partly in, fully out – it doesn’t significantly affect the direct valuation, in our view: In the absence of APS we believe both LBG and RBS would have to raise around £25bn of capital. LBG seems most likely to go down this route, leading to dilution in normalised EPS of about 10% on our estimates, but this would be more than offset by a boost to its equity position.
NH:
Contingent capital to play a major role: We suspect contingent reverse convertibles will feature heavily in any new Lloyds plan. An obvious question is whether investors fully dilute for these or not. We don’t think it makes a big difference. We expect the convertibles to offer very attractive coupons, leaving the PE on such instruments at around 8-10 times, similar to where we’d see the fair value of the equity. Put another way, a higher number of shares would be largely offset by a markedly reduced coupon assuming conversion.
Contingent capital to play a major role: We suspect contingent reverse convertibles will feature heavily in any new Lloyds plan. An obvious question is whether investors fully dilute for these or not. We don’t think it makes a big difference. We expect the convertibles to offer very attractive coupons, leaving the PE on such instruments at around 8-10 times, similar to where we’d see the fair value of the equity. Put another way, a higher number of shares would be largely offset by a markedly reduced coupon assuming conversion.
NH:
On most scenarios, RBS looks the most expensive of the three domestic banks to us: We see “normalised” 2013E EPS at RBS at around 5p and at LBG around 10p on the “new” potential plans, albeit LBG would arguably have too much capital in due course. On this basis RBS would trade on around 14 times the present value of 2013E EPS and LBG on around 12.5 times on the same basis. Barclays is nearer 10 times, on our estimates.
Our advice is to watch LBG from the sidelines, be positioned most cautiously on RBS, and own Barclays in preference to both given a combination of less uncertainty, less overhang, better funding position, and cheaper valuation, in our view. For now, we would also be modestly underweight the sector.
NH:
sound advice
NH:
save for the Barclays stuff
NH:
can’t help feeling more stock will come out from the middle east
MJ:
There is certainly the risk that LBG shareholders will come out worse than if it had stayed in the APS
NH:
yep
NH:
but that is Eric Daniels’ call
NH:
he seems to think bad debts have peaked
NH:
so it’s on his head – again
MJ:
But back to BARC, would its shareholders stand for that treatment again?
NH:
right
NH:
while we are on the banks
NH:
another note
NH:
a few share prices
NH:
and then we can have a look at ING
NH:
which is lower
NH:
after their break up news
NH:
so
NH:
share prices
Lloyds Banking Group (LLOY:LSE): Last: 92.60, down 3.63 (-3.77%), High: 97.88, Low: 92.39, Volume: 47.01m
Royal Bank of Scotland Group (RBS:LSE): Last: 45.81, down 1.27 (-2.70%), High: 47.50, Low: 45.54, Volume: 25.74m
Barclays PLC (BARC:LSE): Last: 356.25, down 5.2 (-1.44%), High: 365.00, Low: 355.95, Volume: 11.49m
NH:
and
HSBC Hldgs (HSBA:LSE): Last: 696.10, down 2.5 (-0.36%), High: 698.80, Low: 691.10, Volume: 8.73m
NH:
now
NH:
HSBC have been downgraded by Citi
NH:
in this note
NH:
Peak Market Values — The European bank sector is about half its Peak market
capitalisation. But a select group of banks are currently at their Peak market
capitalisations. Standard Chartered, HSBC and Santander lead the way. All
three are internationally active retail and commercial banks.
Buy BBVA — Unlike its peers, BBVA is only at two-thirds of its previous Peak
market capitalisation. But its earnings have been stable for the past couple of
years and we expect a Lat Am-driven recovery. Also its previously weak capital
position has improved materially. We reiterate our Buy rating and raise our
target price to €15.
capitalisation. But a select group of banks are currently at their Peak market
capitalisations. Standard Chartered, HSBC and Santander lead the way. All
three are internationally active retail and commercial banks.
Buy BBVA — Unlike its peers, BBVA is only at two-thirds of its previous Peak
market capitalisation. But its earnings have been stable for the past couple of
years and we expect a Lat Am-driven recovery. Also its previously weak capital
position has improved materially. We reiterate our Buy rating and raise our
target price to €15.
NH:
Latin Recovery — We expect 4-5% 2010 GDP growth in Brazil and Mexico.
Lower loan penetration compared to emerging Asia should further help drive
credit growth – with Brazil leading the way at 20% plus and Mexico following in
the teens. Spanish banks’ extensive branch networks leave them well placed to
benefit from “bancarisation”.
Asian Growth — Standard Chartered’s upcoming trading statement should
confirm strong Asian results. The shares trade at close to its warranted SOTP
peer group P/E multiples, hence our Hold rating. Continued Wholesale Banking
growth could drive upgrades; ditto a recovery in depressed Korean earnings.
Lower loan penetration compared to emerging Asia should further help drive
credit growth – with Brazil leading the way at 20% plus and Mexico following in
the teens. Spanish banks’ extensive branch networks leave them well placed to
benefit from “bancarisation”.
Asian Growth — Standard Chartered’s upcoming trading statement should
confirm strong Asian results. The shares trade at close to its warranted SOTP
peer group P/E multiples, hence our Hold rating. Continued Wholesale Banking
growth could drive upgrades; ditto a recovery in depressed Korean earnings.
NH:
Hold HSBC — We update our estimates following recent team reorganisation.
We downgrade our rating to Hold with a new TP of 700p. HSBC has an
excellent HK franchise and its GBM performance has been very strong. But its
earning performance has lagged peers and it has seen its previous capital
advantage erode.
We downgrade our rating to Hold with a new TP of 700p. HSBC has an
excellent HK franchise and its GBM performance has been very strong. But its
earning performance has lagged peers and it has seen its previous capital
advantage erode.
11:30AM
NH:
Okay
NH:
Miles has been looking at ING
NH:
what do you make of it?
NH:
shares are off 9% at EUR10.6
MJ:
Well, I think the EU settlement looks harsher than many had expected
NH:
so this is all about State aid
NH:
clearly a read across for Lloyds
NH:
perhaps that’s why they are so weak
MJ:
Could be. The EUR7.5bn rights issue was also more than the market was expecting from ING
MJ:
They have had a hard time compared to other financial institutions in Europe in a better shape
NH:
so in summary
NH:
the EU
NH:
are making them sell all their insurances businesses
NH:
because of the state aid they received
MJ:
ING also have to sell ING Direct in the US
MJ:
And the EU also say they cannot be the price leader in retail banking in any EU country unitl the Dutch gov have been repayed
NH:
wow
NH:
so what will Lloyds have to sell
NH:
they have had £200bn of dodgy assets insured by the govt since Jan
NH:
Scottish Widows?
NH:
Clerical Medical?
NH:
this is very significant I think
MJ:
I agree
MJ:
I think many banks have been trying to move ahead of this sort of thing,
MJ:
but not all will be able to escape painful restructurings like the ING one
NH:
right do we have some comment on this. I have a good note from KBW on this
NH:
EU plays hard ball
ING’s settlement with the EU competition commission looks less favourable than
we had hoped, with the requirement to sell its insurance business, further Dutch
retail banking assets and ING Direct USA. It will also need to pay €1.3bn more
for the Alt-A guarantee. Furthermore, the discount for early redemption of part
of its Dutch state capital injection is less generous than we had hoped. While a
deal does reduce the uncertainty and the 3Q09 results look solid, an immediate
capital raising of €7.5bn, €2bn more than we had calculated, and more radical
surgery on the ongoing business mean our target price is under review.
ING’s settlement with the EU competition commission looks less favourable than
we had hoped, with the requirement to sell its insurance business, further Dutch
retail banking assets and ING Direct USA. It will also need to pay €1.3bn more
for the Alt-A guarantee. Furthermore, the discount for early redemption of part
of its Dutch state capital injection is less generous than we had hoped. While a
deal does reduce the uncertainty and the 3Q09 results look solid, an immediate
capital raising of €7.5bn, €2bn more than we had calculated, and more radical
surgery on the ongoing business mean our target price is under review.
NH:
Settlement with EU. As a result of the EU competition commission’s review of ING’s
restructuring plan, ING has determined that it will sell all of its insurance and
investment management businesses, the business of ING Direct in the USA and
certain retain banking, mortgage and consumer landing units in the Netherlands (with
overall assets of €37bn). ING must also not be a price leader in any EU country for
retail and SME banking until the Dutch state capital has been repaid. Overall, ING
estimates these measures will reduce gross assets by €600mn (c45%). ING must also
pay a fair price for the Alt-A guarantee agreed with the Dutch state in January 2009.
The net fee will rise by 133bps, with an estimated present value of €1.3bn (€1.0bn
post tax), which will be charged in 4Q09.
restructuring plan, ING has determined that it will sell all of its insurance and
investment management businesses, the business of ING Direct in the USA and
certain retain banking, mortgage and consumer landing units in the Netherlands (with
overall assets of €37bn). ING must also not be a price leader in any EU country for
retail and SME banking until the Dutch state capital has been repaid. Overall, ING
estimates these measures will reduce gross assets by €600mn (c45%). ING must also
pay a fair price for the Alt-A guarantee agreed with the Dutch state in January 2009.
The net fee will rise by 133bps, with an estimated present value of €1.3bn (€1.0bn
post tax), which will be charged in 4Q09.
MJ:
here is Sal Oppenheim
MJ:
ASSESSMENT • ING announced that it will separate banking and insurance operations and subsequently divest all insurance and investment management activities. Divestments are planned through IPOs, sales or combinations thereof. Negotiations with the EC are finalized and formal approval is expected before the EGM on November 25, 2009. • ING reached an agreement with the Dutch State on an early repayment option for part of the core Tier 1 securities issued last year in November. Under this agreement ING can repurchase €5bn Core Tier 1 securities until December 2009, including a coupon of €260m and a premium of around €700m maximum. The original agreement entailed a much longer duration but a 50% pay-back premium. • After complaints by the EC, the Illiquid Asset Back-up Facility (IABF) will be supported by an additional payment of €1.3bn by ING, to be booked as a one-off in Q4/2009.
MJ:
ING will make a €7.5bn rights issue in order to finance the early repayment of parts of the Core Tier 1 securities and the additional payment to the IABF. The issue is planned after an extraordinary GM on November 25. • ING also announced preliminary Q3 figures. Shareholders’ equity increased by 19% to €26.5bn. The T1 ratio improved to 9.7% (9.4%) and core T1 to 7.6% (7.3%). The Banking division reported an underlying profit of €250m, insurance as much as €500m. However, the results were again burdened by negative market impacts of €850m relating to debt securities and real estate investments. The Group net result after divestments and special items reached €500m. For the time being, we have no explicit forecasts for Q3, but we expected €2bn for H2/09. In this context the €500m for Q3 looks rather weak. The negative surprise is only caused by the again strongly negative market value adjustments on debt securities and real estate. • CC at 9.00. CONCLUSION Overall the announcements today are more positive than negative, especially with regard to the upcoming further structural developments. However, the huge upcoming capital increase will have a strongly dilutive effect and the remaining risks are still substantial. Given that the share-price development over the last 6 months has already anticipated a considerable part of the restructuring story, we remain Neutral on the stock.
NH:
and I have something from Citi
NH:
Breaking-up. ING has announced that it will divest all of its insurance & asset
management activities, that its group & insurance co leverage (worth c€10bn) will
be eliminated, it is to reduce its balance sheet by 45% from 3Q08 levels (€1.4
trillion to €0.7 trillion), the effective cost of the ALT A back-up facility is
increasing (c€1bn post tax), it will be divesting ING Direct USA & carving out c1/3
of its Dutch mortgage business into a separate entity. It has also announced a
€7.5bn rights issue to redeem 50% of the Dutch government capital (redemption
cost €5.6-6bn) & fund the additional cost of the ALT facility.
management activities, that its group & insurance co leverage (worth c€10bn) will
be eliminated, it is to reduce its balance sheet by 45% from 3Q08 levels (€1.4
trillion to €0.7 trillion), the effective cost of the ALT A back-up facility is
increasing (c€1bn post tax), it will be divesting ING Direct USA & carving out c1/3
of its Dutch mortgage business into a separate entity. It has also announced a
€7.5bn rights issue to redeem 50% of the Dutch government capital (redemption
cost €5.6-6bn) & fund the additional cost of the ALT facility.
NH:
Hard to do. This creates significant uncertainty & is probably towards the worstend
of market expectations with the leverage elimination creating an effective
additional equity capital requirement of c€10bn, the additional cost of the ALT A
& the uncertainty of an enormous divestment sale process. Note that ING
Insurance is effectively ‘in-the books’ for €22bn; we estimate through-cycle
earnings of c€1.355bn for this business1, whether this ends up crystallizing as a
gain or loss remains to be seen.
of market expectations with the leverage elimination creating an effective
additional equity capital requirement of c€10bn, the additional cost of the ALT A
& the uncertainty of an enormous divestment sale process. Note that ING
Insurance is effectively ‘in-the books’ for €22bn; we estimate through-cycle
earnings of c€1.355bn for this business1, whether this ends up crystallizing as a
gain or loss remains to be seen.
NH:
3Q09 Earnings. Underlying net profit was €0.5bn, significantly ahead of our €25m
forecast due: 1) to a somewhat strong banking result at a commercial level, 2)
favourable mark-to-market accounting effects within the insurance company –
insurance ‘underlying’ looks in-line, 3) reported equity was €26.5bn vs our €28bn
estimate. Core ratios (bank tier 1 equity 7.6%, group double leverage 13%) look
in-line.
forecast due: 1) to a somewhat strong banking result at a commercial level, 2)
favourable mark-to-market accounting effects within the insurance company –
insurance ‘underlying’ looks in-line, 3) reported equity was €26.5bn vs our €28bn
estimate. Core ratios (bank tier 1 equity 7.6%, group double leverage 13%) look
in-line.
11:38AM
MJ:
Right -moving on. What is the Great British Krona doing this morning?
NH:
up I think
NH:
or it was
NH:
cable is $1.6347
MJ:
After Friday’s GDP-induced swoon
NH:
while a euro buys 0.9199p
NH:
the new chancellor has been talking this morning
NH:
Geroge Osborne
MJ:
What, is that what you are now calling him?
MJ:
Anyway, what did he have to say?
NH:
hang on
NH:
RTRS-UK CONSERVATIVES’ OSBORNE- BOE’S KING MADE PERSUASIVE CASE TO SPLIT RETAIL AND INVESTMENT BANKING
11:30 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – WOULD NEED INTL AGREEMENT TO PURSUE RETAIL/INVESTMENT BANKING SPLIT
11:30 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – WOULD NEED INTL AGREEMENT TO PURSUE RETAIL/INVESTMENT BANKING SPLIT
NH:
RTRS-UK OPPOSITION CONSERVATIVES’ OSBORNE – UK CREDIT IS BEING RATIONED, MARGINS ARE TOO HIGH
11:06 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – NOT ENOUGH COMPETITION IN UK BANKING SYSTEM, CREDIT TOO TIGHT
11:08 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – RESPONSIBLE BANK BONUS CULTURE NOW LOOKS MORE REMOTE THAN EVER
11:08 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE- INVESTMENT BANKING ARMS OF RETAIL BANKS SHOULD NOT PAY LARGE CASH BONUSES
11:14 26Oct09 RTRS-UK’S OSBORNE – GREATEST SINGLE RISK TO RECOVERY IS FAILING TO PROVIDE CREDIBLE FISCAL PLAN
11:06 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – NOT ENOUGH COMPETITION IN UK BANKING SYSTEM, CREDIT TOO TIGHT
11:08 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE – RESPONSIBLE BANK BONUS CULTURE NOW LOOKS MORE REMOTE THAN EVER
11:08 26Oct09 RTRS-UK CONSERVATIVES’ OSBORNE- INVESTMENT BANKING ARMS OF RETAIL BANKS SHOULD NOT PAY LARGE CASH BONUSES
11:14 26Oct09 RTRS-UK’S OSBORNE – GREATEST SINGLE RISK TO RECOVERY IS FAILING TO PROVIDE CREDIBLE FISCAL PLAN
MJ:
Hmmm, not really sticking his neck out is he
NH:
no
NH:
but obviously he likes Merv
MJ:
Certainly seems to like him more than the FSA, judging from previous comments
NH:
indeed
NH:
going back to sterling for a moment
NH:
the economists are
NH:
trying to dig themselves out of the hole
NH:
they made on Friday
NH:
when they got the GDP numbers massively wrong
MJ:
Friday was a bit of a PR gaff for the dismal scientists
NH:
indeed
NH:
but Howard Archer has come out fighting
NH:
message seems to be
NH:
wait for the revision
NH:
we will be proved correct
NH:
Archer is at IHS Global Insight
NH:
In view of all the criticism thrown at economists for getting our forecasts for the Q3 UK GDP data so apparently wrong, I feel it is only fair that I am allowed to put forward some defence – even if I suspect we will still be found guilty!
Thank you in advance for hearing the case for the defence – even if you still find us guilty
NH:
In trying to offer some defence on why economists – including myself – were so wrong-footed on the UK GDP data for Q3, I fully realize that I am opening myself up to two observations that are often made on economists:
NH:
1) There are two kinds of economists – those who don’t know and those who don’t know they don’t know (J.K. Galbraith)
2) An economist is someone who can tell you tomorrow why what he forecast yesterday, didn’t come true today (My apologies to who came up with is remark as I have forgotten who it was)
2) An economist is someone who can tell you tomorrow why what he forecast yesterday, didn’t come true today (My apologies to who came up with is remark as I have forgotten who it was)
NH:
In a poll of 33 economists by Bloomberg, not one person forecast the UK economy to have contracted in Q3. The consensus was for the economy to have grown by 0.2%, with the range of forecasts being 0.0% to +0.7%. Exactly the same results came from a ThomsonReuters poll of 29 economists – presumably most if not all of these 29 economists were in the Bloomberg poll.
NH:
IHS Global Insight was included in both polls, with our forecast being for expansion of 0.1%.
NH:
Right at the outset, I will put my hand up and admit that over the years I have got a number of forecasts pretty horribly wrong. For example, it is certainly true – especially at the outset – that I substantially underestimated the extent of the current recession, and I can only take very limited comfort from the fact that we have been consistently been among the more pessimistic forecasters over the past 12-18 months. It may also well be right that my wife and daughter are fully justified in considering me to be lacking in brain power and sense!
NH:
But the fact is that 33 out of 33 economists got it wrong on UK GDP in Q3, and I think it is fair to say that there are some very bright and experienced people among my 32 colleagues. So even allowing for my own deficiencies, for all 33 of us to be wrong suggests that there is something strange going on that needs consideration and explanation.
In addition, the minutes of the October meeting of the Bank of England’s Monetary Policy Committee indicated that the MPC expected the economy to have grown in the third quarter. Specifically, the minutes commented that “domestically, the combination of the latest official data and the most recent surveys suggested that the level of output in the third quarter was likely to be close to the central projection in the August Inflation Report.”. This central projection put GDP at -4.6% year-on-year in the third quarter, which was significantly higher than the actual outturn of -5.2%. Without allowing for revisions to the back data, this implied growth of 0.2% quarter-on-quarter in the second quarter.
NH:
do you want me to go on?
MJ:
Why not?
NH:
hang on
NH:
Lotus Notes having a wobble
NH:
bit wobble
NH:
fallen over
NH:
by the looks of it
MJ:
Paul is here – hi Paul
PM:
Hi there
PM:
Things all right
NH:
Notes crashed
PM:
?
PM:
By the clock change
PM:
And the desk moe
PM:
and the …
NH:
Tuna – RAW is a rare commodity these days
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:
and it is half term
NH:
there’s no one around
NH:
no one
MJ:
And the….?
NH:
and you can tell how quiet it has been from the Sunday’s
NH:
they have nothing
PM:
Good to see UK generally shambolic
PM:
What is going on with Lloyds????
NH:
the only RAW we get these days
NH:
are second third line oil and miners
PM:
Sorry Neil, go on
NH:
the big explosion post Cadbury in M&A
NH:
has not happened
MJ:
On Lloyds – its not yet clear that anyone of the various actors in that drama know what will happen
MJ:
But at least we get some RAW on that
MJ:
if not on juicy M&A
NH:
but Taxloss is right
NH:
Levene has surfaced
NH:
(LYO – come on, you know who dull it is. There are not stories out there).
PM:
No return of M&A
PM:
Banks are still broken
MJ:
And I have a Reuters technicain under my desk
PM:
Politicians still have not clear policy re the financial sector
PM:
IT still…
PM:
Clock changes still cause carnage
PM:
It’s like I never left
MJ:
Like the Millenium bug
PM:
London
11:52AM
NH:
Right
NH:
bored of trying to explain why there is no RAW
NH:
to readers who don’t want to listen
NH:
so let’s move on
NH:
can we take a look at Autonomy
MJ:
Why so?
NH:
well, another analyst has been looking at their accounting
NH:
and, well
NH:
he says there are more questions than answers
MJ:
So who is putting the knife in today?
MJ:
Don’t they know the risks involved?
NH:
Daud Khan of Cazenove
MJ:
Oh. he’s laready been banned by Lynch
NH:
yep
NH:
that’s him
NH:
persona non gratis at Autonomy
MJ:
I guess he’s going over the usual ground
NH:
yes and no
NH:
his starting point is last week’s awful Q3 numbers
NH:
and this question: Are there legitimate reasons for the unusual P&L, balance sheet and cash flow movements at Q3?
MJ:
and the answer is?
NH:
well, he does not really form a conclusion
NH:
just takes one topic at a time
NH:
have a look at this
NH:
As the dust settles after a turbulent quarterly release, we examine the issues and provide some possible answers. At the dawn of a new era of communication and under the stewardship of the new non executive chairman, Robert Webb QC, the company has committed to improve disclosure. We believe that the proposals for additional disclosure should be about quality and accuracy and not quantity. Our analysis suggests that both quality and accuracy need to be tightened up.
NH:
Are there legitimate reasons for the unusual P&L, balance sheet and cash flow movements at Q3? Consensus EPS (source: company) was 19.8c before the trading update and the company reported 20.0c. However, this was boosted by higher R&D capitalisation (+2.5c) and a lower tax rate (+1.3c) vs. last year. In addition unexpected revenue recognised on the last day of the
quarter probably contributed to an earnings boost of 12c. So we estimate underlying earnings could have been as weak as 14c.
quarter probably contributed to an earnings boost of 12c. So we estimate underlying earnings could have been as weak as 14c.
NH:
The offsetting factor is additional marketing spend and start up costs for its IDOL SPE product
launch of c. $24m ($20m in OpEx and $4m in COGS) which would have been a 7.5c drag on
earnings vs implied guidance of a drag of 4.4c. So with a net incremental earnings drag of c. 3c,
EPS would have fallen short of underlying expectations. Yet, the positive preannouncement in
early October appears to paint a much rosier picture. Even the IDOL SPE related costs were not
fully flagged in the trading statement. “During the period the company incurred oneoff new
product related costs slightly above the top end of the $10m$15m range discussed”. In fact it
was 60% above the top end of the range. Investors should remember that Autonomy intended to
launch this product in Q4 2008/Q1 2009 and at that time there was no mention of additional
costs.
launch of c. $24m ($20m in OpEx and $4m in COGS) which would have been a 7.5c drag on
earnings vs implied guidance of a drag of 4.4c. So with a net incremental earnings drag of c. 3c,
EPS would have fallen short of underlying expectations. Yet, the positive preannouncement in
early October appears to paint a much rosier picture. Even the IDOL SPE related costs were not
fully flagged in the trading statement. “During the period the company incurred oneoff new
product related costs slightly above the top end of the $10m$15m range discussed”. In fact it
was 60% above the top end of the range. Investors should remember that Autonomy intended to
launch this product in Q4 2008/Q1 2009 and at that time there was no mention of additional
costs.
NH:
R&D Capitalisation
In general, software companies tend to avoid R&D capitalisation as the criteria are difficult to pass. Aside from the argument of whether these costs should be capitalised it is our firm belief that the management would have had visibility on a material increase in R&D capitalisation having been confident of a Q3 product launch. This is the second quarter in a row where information material to the understanding of reported figures was not referred to in prerelease guidance and
became apparent only with the reported figures. In Q2 the market had been expecting a material increase in deferred revenue following poor maintenance renewals in Q1. Despite the knowledge of the market’s expectations, the company explained poor sequential growth in deferred revenue on c. $10m related to services which were transferred out to a third party.
In general, software companies tend to avoid R&D capitalisation as the criteria are difficult to pass. Aside from the argument of whether these costs should be capitalised it is our firm belief that the management would have had visibility on a material increase in R&D capitalisation having been confident of a Q3 product launch. This is the second quarter in a row where information material to the understanding of reported figures was not referred to in prerelease guidance and
became apparent only with the reported figures. In Q2 the market had been expecting a material increase in deferred revenue following poor maintenance renewals in Q1. Despite the knowledge of the market’s expectations, the company explained poor sequential growth in deferred revenue on c. $10m related to services which were transferred out to a third party.
NH:
there’s quite a bit a more on this
NH:
from Khan
NH:
if people are interesting
NH:
can appear in the usual place
MJ:
So, whats the shareprice doing?
NH:
Autonomy is a bit weaker this morning
NH:
off 19p at £14.25
11:56AM
MJ:
Anything else we should look at? What has been the reaction to the ICAP news on Friday?
NH:
shares are weak
NH:
but not by that much
NH:
down 6.5p at 447p
MJ:
They tried to bury that one it seems, and maybe it has worked
NH:
well, it came out very, very late in the day
NH:
I have some comment on it
NH:
here’s Panmure
NH:
An RNS came out after the close of business on Friday indicating that the
subsidiary ICAP Securities USA had received a formal Wells notice relating to
possible violations of federal securities law. This follows an investigation
which has been ongoing since 2005 into ICAP’s activities in certain fixed
income securities.
subsidiary ICAP Securities USA had received a formal Wells notice relating to
possible violations of federal securities law. This follows an investigation
which has been ongoing since 2005 into ICAP’s activities in certain fixed
income securities.
NH:
ICAP Securities USA subsidiary has received a Wells notice stating that “SEC Staff intends to recommend that the SEC brings enforcement actions for possible violations of federal securities law”. This relates to an investigation into ICAP’s fixed income business which has been ongoing since 2005. In February 2006, the SEC issued a formal order of investigation to ICAP’s US subsidiary and other IDBs active in government and
other fixed income securities. The SEC has since issued several requests for information relating to ICAP’s Voice MBS dealing desk.
other fixed income securities. The SEC has since issued several requests for information relating to ICAP’s Voice MBS dealing desk.
NH:
A Well notice displays the SEC’s intention that it is considering bringing a civil action
against an individual or a company. It is not a formal allegation nor a finding of
wrongdoing. It gives the recipient a final opportunity to argue why the SEC shouldn’t
proceed with enforcement action. According to the Wall Street Journal, the SEC typically
approves only about half of all actions recommended by its staff. ICAP “has discussed
these matters with the SEC, has substantial disagreements with the SEC … and will
vigorously put forth its position if and when any such charges are brought”. According
to ICAP’s latest annual report, the potential penalties available to the SEC include:
financial penalties, disgorgement, fines, actions against individuals and injunctive and
other remedial relief.
against an individual or a company. It is not a formal allegation nor a finding of
wrongdoing. It gives the recipient a final opportunity to argue why the SEC shouldn’t
proceed with enforcement action. According to the Wall Street Journal, the SEC typically
approves only about half of all actions recommended by its staff. ICAP “has discussed
these matters with the SEC, has substantial disagreements with the SEC … and will
vigorously put forth its position if and when any such charges are brought”. According
to ICAP’s latest annual report, the potential penalties available to the SEC include:
financial penalties, disgorgement, fines, actions against individuals and injunctive and
other remedial relief.
MJ:
Paul – has there been much on the ICAP stuff stateside?
MJ:
I hope he is still there
NH:
think he has gone
NH:
upset by Large Yatch Owner
NH:
who is being nasty this morning
11:59AM
NH:
anyway
NH:
let’s finsih up in small cap corner
MJ:
My favourite
PM:
Sorry — am here
PM:
Just trying to read thru stuff
NH:
Earthport
NH:
weak again
NH:
at a record low
NH:
off another 3p at 23p
PM:
ICAP — polite radio silence from them in NY
NH:
and
NH:
that’s because Evil Knievil
PM:
This has clearly been going on for some time
NH:
aka Simon Cawkwell has gone after them
NH:
I had not realised just how bad things are at Earthport (EPO), now 30p. The balance sheet is very thin (perhaps a couple of months’ overheads) as against a capitalisation of 88m shares giving, say, GBP25m. Earthport was a great white hope some years ago. But I am told that its fundamental trade is deteriorating relentlessly. It is hard to see anything much left for shareholders in the not too distant future. Astonishingly the principal basis of the buy recommendation offered by a broker in support of Earthport is the value of the tax losses. But, as anybody remotely acquainted with tax losses in practice will confirm, the losses in Earthport, although enormous, would not achieve much in reality. Further, Earthport’s corporate governance is much to be doubted. For instance, it took nine months to advise the market that a GBP2m loan expected to be received in January 2009 had not in fact been received. This is highly material to any assessment of Earthport. I sold at 33p. I expect to bank virtually the lot.
12:01PM
NH:
let’s go back to Paul on Icap
PM:
Sorry neil
PM:
I dont have much to add on ICAP
PM:
Other than the fact that this investigation has been going on for some time
PM:
Important also to note that it has not just been fixed income
NH:
and it was disclosed in the annual report
PM:
Also involves the workings of the MBS market
PM:
And, not just involving ICAP
PM:
But anyway, back to Earthport
NH:
No
NH:
I am done with that
PM:
Actually — LYO on the right
PM:
I’ve got to ask, openly. ….
PM:
What do some readers expect?
12:03PM
NH:
Right
PM:
But I will try and stop being bad tempered
NH:
time to bring things to a close
NH:
but before we do
NH:
Yell
PM:
Didnt get to bed till very later cos of tech issues
NH:
stock weak today
NH:
off 2.25p at 55.7p
NH:
and that’s because
NH:
we still have not heard anything about the refinancing vote
NH:
and the last statement was a month ago
NH:
sorry
NH:
week ago
NH:
also
NH:
HMV
NH:
off 2.7p at 114.3p
NH:
if I could get into Notes
NH:
I could tell you all about another DSG type spat
MJ:
Is someone questioning their stock levels?
NH:
yes i think so. Altium
NH:
but other analysts are shooting it down
HMV Group (HMV:LSE): Last: 114.70, down 2.3 (-1.97%), High: 116.90, Low: 110.40, Volume: 1.47m
NH:
but I can’t share the details with you
NH:
anyway
NH:
let’s end things now
NH:
we are all tetchy this morning
NH:
because of the move and IT issues
NH:
sorry for over-reacting LYO
NH:
we should be on the ball tomorrow
NH:
and might have some time to call people
NH:
and get some stories
NH:
and yes BlueSky
NH:
Aero Inventory have been suspended
NH:
and there are quite a lot of annoyed people here in the newsroom about that
NH:
because we had this very story a couple of weeks back
NH:
and now look
NH:
On the 30th September 2009 the Company announced a delay in publishing the Group’s audited accounts for the financial year ended 30th June 2009 in order to prepare for a proposed move to the Official List.
In the course of these preparations, new systems have been introduced to reconcile and value inventory. These systems have raised certain issues regarding the valuation of a parcel of inventory acquired in the 2008 financial year. The directors believe these issues may have a material impact on the 2008 audited accounts and the 2009 accounts, although the precise impact is still being evaluated.
Whatever the outcome, the directors believe there will be no impact on either the physical amount of inventory held or upon the Group’s cash flows. The issues raised are not believed to be a result of either fraud or theft.
The Company is unlikely to be able to deliver to its bank lenders the 2009 audited accounts within the time permitted in the Group’s bank facility agreements. This will result in a breach of a non-financial covenant in those agreements. The Company is now commencing discussions with its bank lenders.
NH:
Pending clarification of the impact of the above on the Group’s historic and forthcoming results, the Company’s shares will be suspended.
MJ:
oh dear
MJ:
Not good form that
NH:
no
NH:
they said it was not correct
NH:
and look now
NH:
anyway
PM:
Not very good at all
NH:
that’s all part of the game
PM:
fell down the gap between AIM and a full listing
PM:
o dear
NH:
right
NH:
I think we are done
NH:
Miles
NH:
thanks
NH:
and thanks for all the comments
PM:
Cheers Neil and Miles
MJ:
Thanks everyone
NH:
speak later Paul
PM:
yep
MJ:
ta ta
NH:
cya