Leading shares hit by eurozone crisis, while Barclays’ analysts turn negative on rival Lloyds
It was another bad week for the banking industry, with the continuing libor-fixing scandal, accusations of money laundering for drugs barons and new fears of further eurozone bailouts.
All that helped drag markets sharply lower, after the FTSE 100 had looked set to record its seventh successive week of gains. The pressure intensified once Spain’s bond yields soared to new highs after its heavily endebted Valencia region asked for financial help from central government. At the same time Spain cut its economic forecast for 2013 from 0.2% growth to a 0.5% decline, amid continuing protests against its austerity programme.
So the leading index ended the day 62.42 points lower at 5651.77, a 15 point fall on the week.
Barclays, down 5p at 159.25p, continued to be in the firing line over libor, but the bank’s analysts decided to pick on rival Lloyds Banking Group as the UK’s weakest link. In a new note which avoided mentioning the interest rate investigation, they put an underweight rating and 27p price target on Lloyds, which on Thursday agreed to sell 632 branches at a knock-down price to the Co-op. Barclays said:
With leading market shares in UK retail banking, Lloyds is often perceived as a structurally higher-return business, particularly when compared to its domestic peers. However, we believe that large loss-making or low-return non-core and wholesale divisions and a shrinking higher-return retail business will lead to continued disappointment on returns at the group level.
In addition, Lloyds is the most weakly capitalised UK bank on a Basel III basis, which leads to lower capital-adjusted returns and makes the resumption of dividends look unlikely. Reflecting this as well as increased regulatory risk and ongoing Eurozone concerns, we reinstate an underweight rating.
As it happened Lloyds performed better than Barclays, although it closed 0.295p lower at 29.94p. Meanwhile HSBC, implicated in money laundering in Mexico, fell 16.2p to 533.2p. Royal Bank of Scotland lost 7.6p to 204.7p while Standard Chartered dropped 26.5p to 1492.5p.
Insurer Resolution lost 12.4p to 215.5p after it cancelled a proposed £250m cash return to shareholders because of current market uncertainty. Smaller rival Phoenix, tipped as a possible bid target for Resolution, fell 15p to 490.5p on the basis that was now less likely
Following the Olympic security guard fiasco, G4S failed to convince investors the problems were under control, not helped by an uninspiring performance by chief executive Nick Buckles at a select committee hearing. The company’s shares closed 1.7p lower at 241.8p, down 36.9p from the start of the week. It has lost nearly £700m from its market value since the problems first emerged.
Rival outsourcing group Capita closed 4p lower at 689p ahead of first half results next week, despite a buy note from UBS. The bank said:
G4S’s well-documented Olympics contract issues have shown outsourcing in a negative light. Police outsourcing is a key new market for Capita (albeit less than 5% of its £4.6bn current pipeline) and has come under further scrutiny, with the West Midlands/Surrey contract in some doubt. An update on likelihood, changes to and timing of larger current bids will be important, less for 2012 where we see organic growth as well underpinned but for 2013 and beyond.
UBS also said it hoped for news on possible acquisitions:
Capita has indicated the April equity placing, raising £274m, was almost all to fund future M&A. Two smaller acquisitions have since been completed but we hope for an update on where/when the rest of this capital will be spent.
Vodafone fell 3.05p to 180p after the mobile phone group issued a disappointing trading statement, a day after its hopes of a dividend payment from its US joint venture Verizon Wireless were seemingly dashed.
BG dipped 0.5p to 1289.5p despite the gases group and its partners signing $4.5bn worth of deals for the construction of platforms to develop their projects in the Santos Basin in Brazil. Andrew Whittock at Liberum Capital said the news showed the projects were making good progress:
The awards, along with a tender process for an additional [floating production, storage and offloading unit], demonstrate the intent of the partners to deliver the fast-track development of the massive resources. Progress also continues in Australia and BG appears on-track to ramp-up near-term production and meet longer term volume targets.
The shares have bounced off their lows but are still below our value for BG’s current assets (1507p) which we see as a floor for the price. The shares may look relatively expensive but we still believe this is justified by the long-term growth profile. We retain our positive view and buy recommendation.
BG’s shares flared up early in the week after analysts at Barclays talked up the potential for its liquefied natural gas business. But they were soon deflated after Credit Suisse cast doubt on its Brazilian and Australian operations, with analyst Thomas Adolff saying the market had not fully appreciated the transitional challenges the company faced. He said the company’s new chief executive, to be unveiled next February, should consider a partial sale of the Australian and Brazilian businesses to unlock value for shareholders.
Shares in International Airlines Group lost 5.3p to 154.8p after a bond issue for its British Airways subsidiary failed to take off.
Early in July the group said it hoped to raise £250m with its first secured bond, to be backed by its take-off and landing slots at Heathrow and its routes between London City Airport and New York.
But it has now said it would not proceed with the issue:
There was a lack of demand for this bond at a price which would compare with other financing alternatives.
CRH, the FTSE 100 building materials group, closed 25p lower at £11.79 in the wake of reports earlier in the week that it was interested in a £1bn deal to buy cement plants in India, but pumps group Weir rose 6p to £15.31, benefitting from positive trading news from US peers Baker Hughes and Gardner Denver.
A couple of days after denying it was in takeover talks, troubled insurance and repairs group Homeserve issued a soothing annual meeting statement.
In its latest update Homeserve said it was making progress in simplifying and refocusing its business, although the investigation into its past actions by the Financial Services Authority are likely to hang over it for months. Even so, the shares added 6.6p to 195p following the statement.
After recent gloomy news from the high street, Dixons Retail proved a bright spark.
Its shares added 1.6% to 16.52p in the wake of a positive weekly update from John Lewis and reports of strong sales of white goods such as tumble driers.
John Lewis reported overall sales at its department stores were up 17.3% year on year, with electrical goods up 37%, the best figure since early June. Analyst Richard Cathcart at Espirito Santo said this was positive news for Dixons, given its move towards more high tech and service led premium lines.
Meanwhile Adam Woolf at Indesit, the Hotpoint manufacturer, has said it saw an 8.5% increase in shipments to retailers in May, with sales of tumble driers up 38% in the past two months as consumers have been prevented from hanging their washing out to dry because of the wet weather. That should also be good news for Dixons.
Lower down the market, insulation specialist Superglass dropped 4p to 5.25p after it warned trading since its last update in February had been disappointing, with construction activity hampered by the bad weather. On top of that, there are concerns that insulation sales could fall in 2013 after the government changes its home improvement scheme from a carbon emission reduction target to its new Green Deal. The company said:
[This must] be contrary to the desired outcome. The board continues to make representations to the UK government to encourage initiatives to ensure an effective transition.
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