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Money Marketing Markets: Banks tank after ‘mini-rally’

What goes up must come down, so the saying goes, and that has certainly proven the case this week.

With Royal Bank of Scotland and HBOS due to report, the financials were always going to be a keenly watched sector and it certainly hasn’t disappointed in terms of newsflow.

The bank’s two day mini-rally at the start of the week helped push the FTSE 100 briefly through the 6,000 barrier on Monday before it slipped back. But further strong gains of 87.9 points on Tuesday saw it close at 6,087.4 ahead of HBOS’s results on Wednesday.

Strong bid speculation linking Lloyds TSB with a takeover of Alliance & Leicester lifted A&L by 8.82 per cent on Monday and a further 8.11 per cent on Tuesday. Standard Chartered’s bumper 27 per cent profit growth helped keep the sector buoyant on Tuesday- it rose by almost 8 per cent- while HBOS and Barclays also both rallied ahead of the former’s results.

However, HBOS’s results and rumours that the Bank of England had provided another bank with emergency funding stopped the sector’s rally dead in its tracks on Wednesday.

Broker JP Morgan said HBOS’s results were “passable” with pre-tax profits up 3 per cent to £5.71bn and good news on the dividend front. On the flipside, retail banking profits fell by 13 per cent although its corporate division was a stronger performer. Its sub-prime losses at £227m were the lowest of the big five banks but HBOS still has £9.5bn of exposure to US mortgage-backed securities. Although not sub-prime, the market fears some of the near prime exposure could come unstuck if the US tanks.

The market reacted badly to the news and chief executive Andy Hornby’s warning that the days of cheap loans were over and growth would slow sent its shares into a 6.8 per cent tailspin.

Ken Murray, manager of the Blue Planets financials growth & income trust, says HBOS is less exposed to any slowdown in the capital markets than the likes of Barclays but despite its attractive yield, its low growth prospects dampens his interest.

“The UK is a mature market and HBOS’s growth prospects do not look exciting as they batten down the hatches. At least HBOS and Lloyds TSB have focused on markets they know and their US sub-prime losses have been lower,” he adds.

Citigroup was also uninspired, downgrading HBOS from a hold to a sell on Thursday and the bank had slumped by more than 8 per cent further by midday trading on Friday.

RBS was next up, reporting on Thursday. Its share price had already nudged down 3.5p to 410p the following day after large block buying of both it and Lloyds TSB’s shares, believed to be by Middle Eastern funds.

RBS fell by a further 8p after it revealed worse than expected sub-prime losses of £2.9bn. These acted to offset strong profit growth of 9 per cent, a 10 per cent dividend rise backed by a bullish statement from chief executive Sir Fred Goodwin about the “real opportunities” and enhanced cost saving potential for the enlarged group following its ABN Amro takeover.

Murray believes the extra provisions RBS had to set aside for ABN’s US mortgage-backed assets and instruments related to monoline insurers could still be the tip of the iceberg.

“Looking at RBS and Barclays, I do not feel comfortable holding them because I feel there is more to come. The banking market is full of superficial people who never look beyond now,” he says.

T Bailey fund manager Jason Britton echoes this sentiment. He says: “We are through the banks’ reporting season now but we are not convinced we have found all of the write-offs. We have seen several estimates that there is still another £100bn to go.”

Another few hundred million of that turned up late on Thursday after it emerged high-profile hedge fund Peloton Partners had put its flagship £1bn asset-backed securities fund’s assets up for sale because it was unable to meet loan payments related to its gearing.

This surprised markets because the hedge fund invests in higher quality mortgages, raising fears of contagion. RBS, Barclays and HBOS dropped by over 3.5 per cent today on the concerns.

Elsewhere in the market, continued strong commodity prices saw the miners carve out solid gains- Xstrata being the notable exception as news that takeover talks with Vale led to it dropping by 4 per cent on Wednesday.

Housebuilders were also able to recover some of their recent losses as Hammerson’s results showed its net asset value was up 3 per cent and Barratt reported a 10 per cent rise in half-year profits.

By mid-afternoon Friday, the FTSE was trading at 5,924.3, proving that the 6,000 barrier is continuing to be a tough hurdle to overcome.

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