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MONEY MARKETING MARKETS: Selling the crown jewels?

Banks have once again dominated the newsflow this week as the reporting season got into full swing.


Dividend increases from Barclays and Lloyds TSB accompanied by fairly upbeat trading statements from the pair helped drive the FTSE up.

The reporting season has been anticipated with some trepidation and Bradford & Bingley’s dramatic crash last week highlighted the price of disappointing.

But, on Tuesday, Barclays revealed profits were only off 1 per cent at £7.08bn, despite a £1.6bn writedown from exposure to US mortgage securities.

That news, coupled with a 9.7 per cent dividend increase and Barclays Capital head Bob Diamond’s bullish statements on plans to muscle in on the US market, has seen the bank’s shares soar by 12 per cent this week.

Lloyds TSB said profits for the year came in at a healthy £4bn, down 6 per cent. However, excluding a number of exceptional items, including disposals, they actually rose 6 per cent to £3.9bn. The bank says its 5 per cent dividend increase, its first in five years, underlines the strength of its balance sheet. Lloyds had to writedown £280m linked to structured investment vehicles but having a far smaller investment banking arm, this figure was never going to be in the same league as Barclays’ sub-prime losses.

The market was clearly buoyed by the dividend rises with Lloyds TSB also up, by 15 per cent, on the week by mid-afternoon trading today. HBOS and Royal Bank of Scotland, both yet to report, were dragged up by 7.5 per cent each on the news.

The dividend increases may have been welcomed by the market but Neptune income fund manager Robin Geffen believes the banks are storing up trouble for the future.
“A responsible bank at this stage halves its dividend,” he says. “We are not even a third of the way through the write-offs in the UK. The UK was very late buying into sub-prime and there are another three layers with escalating delinquencies that are not even being talked about yet- credit card debt, student loans and auto loans.”
Geffen says none of this is priced in and the sector should be avoided- Neptune made this call at the start of last year and it proved a winner.

Not all of the newsflow from the banks has been positive this week. Alliance & Leicester, Britain’s seventh largest bank, took a pummeling on Wednesday after revealing profits will fall in 2008 not helped by its funding costs set to rise by £150m this year. A £185m writedown helped profits to slump 30 per cent to £399m. A&L said it will maintain its dividend at the current level and its share price fell 7 per cent on the news. Over the past year its share price has dropped from a 1066p peak to 498p.
Blue Planet worldwide financials manager warns investors to expect the situation to worsen.

He says: “There will still be large losses made before matters improve.”

Citigroup said last month that it believes Barclays will need a £6bn rights issue and RBS, £12.5bn, to reduce their borrowing.

Geffen agrees, pointing to increased dividends further straining balance sheets and their ability to finance higher margin business growth.

“They are selling off the crown jewels and it will wreck balance sheets and reduce their potential for turnaround,” he says. “Six to 12 months later when they are asking for rights issues, we should look to replace the management.”
Whether you agree with them or not, the dividend rises have been a fillip for the market this week.

The FTSE 100 rallied by 159 points on Monday to close at 5946.6 on the anticipation of Barclays and Lloyds TSB’s plans.

The banks alone contributed 43 points of the rise with Barclays, Lloyds TSB and HBOS all up by between 5-7.5 per cent. RAB Capital was a notable party pooper, slumping by 7 per cent following the Government’s weekend decision to nationalise Northern Rock. RAB is the second largest shareholder in the Rock, owning an 8 per cent stake worth £31m at the 90p suspension price.

The credit crunch is never far from the headlines, however, and Credit Suisse’s shock revelation of a £1.46bn writedown on Tuesday surprised all.

The Swiss giant suspended several traders, including its global head of CDOs, over losses incurred by “pricing errors” on some of its structured credit positions. The timing was curious, coming just a week after its results, which had appeared to indicate that the traditionally conservative bank was more or less out of the woods.

The news was not enough to rain on the sector’s parade though as seen with the strong performance this week.

Elsewhere, commodities were strong lifting miners and oil stocks as gold and oil prices touched new highs. Takeover talk was also back with rumours of a renewed bid for Xstrata by Brazilian giant Vale and speculation that Bank of China is looking to buy into a life insurer buoyed Aviva and Prudential. The Sainsbury’s family decision to offload some stock also led to renewed bid speculation.

All in all, the market was up at 5,952 by mid-afternoon Friday, from 5,787.6 at the start of the week.

All eyes will be on RBS and HBOS next week with both due to report. It will be interesting to see whether they heed Geffen’s warning or go for the short-term fix of a dividend increase. Either way expect further write-downs and volatility.

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