EARNINGS PREVIEW: UK Banks: More Write-Downs, But No Shocks
Wednesday February 6th, 2008 / 18h35
By Ragnhild Kjetland Of DOW JONES NEWSWIRES LONDON -(Dow Jones)- U.K. banks will announce more write-downs as they disclose fourth-quarter results on further deterioration in capital markets, but they should still be able to pay out dividends for the second half, analysts said. Investors are still shying away from the complex structured products that banks hold on their books, meaning the value of these is likely to have deteriorated since the last trading updates. In addition, a slew of downgrades and negative rating comments on bond insurers that act as counterparties on hedges have caused banks such as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) to make additional charges. This problem can be read across to U.K. banks, as most of their disclosed exposure was net after hedging. "It is safe to assume...that both Barclays PLC (BCS) and Royal Bank of Scotland Group PLC (RBS) do hold significant hedges across their portfolios and their gross exposure to ABS CDO will be somewhat larger than the net exposures in November and December," Credit Suisse said in note. The write-downs shouldn't amount to more than "a few hundred millions of pounds," but the indirect impact of a broad downgrade of the bond insurers could be more material. Investors also fear that banks might have to beef up their balance sheets by launching rights issues, following in the footsteps of banks across the pond and in Europe. But Dresdner Kleinwort said it doesn't expect this to happen. With the exception of RBS, the capital bases of banks look "reasonably comfortable...only a severe shortage of capital would necessitate a dividend cut," it said. As for the liquidity question, DKW said that this is a "very outside risk" and that big banks are still able to raise cash, although at a higher price than a year ago. The prospect of dividend payments, expected reassurances from management teams and increased clarity over write-downs should boost the sectors' stocks in the short term, according to Keefe, Bruyette & Woods analysts. Longer term, however, there is more risk for earnings outlook than at any time in the last 10 years, KBW said. Write-offs and increased risk-weighted assets will put pressure on banks' earnings while a slowdown in lending growth as a result of tightened credit criteria and limited funding availability will result in declining revenue. DKW said banks that have benefited from very strong wholesale revenue growth till now are going to have a tough time replacing it with other revenue sources. COMPANIES TO WATCH: ---Bradford & Bingley PLC (BB.LN) --- (Feb. 13) B&B is likely to make further write-downs, but DKW said these will be taken against equity as the assets are classified as "available for sale," and so there will be no profit impact. KBW noted that back-book funding at B&B is secured through 2008, but stressed that any new lending growth would be reliant on deposits. DKW is looking for an update on the bank's funding position, and on the upside, even thinks B&B might announce share buybacks. ---Barclays PLC (BCS) --- (Feb. 19) Barclays has said it would write down net GBP1.3 billion, as estimated on its exposures at end-October. Recently, Robert Diamond, the head of the investment banking unit, said the position is no different than already disclosed and that he doesn't expect any further write-offs. But both KBW and DKW say there is potential for further write-offs, although it might be limited since the bank has suggested that its hedges are with more robust counterparties. ---Alliance & Leicester PLC (AL.LN) --- (Feb. 20) A&L, whose business model is similar to that of B&B, said at the end of January that it had taken a bigger write-down than projected in November. It also said it has secured funding through the third quarter this year. Before impairment losses, A&L forecasts operating profit above GBP598 million, up from GBP585 million. KBW said revenue at A&L remains "anemic," but that cost and credit control is "exemplary." Despite further write-downs, the bank is frequently subject to takeover speculation, which would support the share price. --- Lloyds TSB Group PLC (LYG) --- (Feb. 22) Lloyds TSB receives praise for cost control and improved credit quality in retail, with "modest" impairments in wholesale, but KBW notes that liquidity strains have slowed the wholesale business and that write-downs on investments dent earnings. Nevertheless, both wholesale and retail should push the group pretax profit up 6% over last year. DKW said a key driver ahead will be retail revenue growth and any upbeat statements on this will be positive for the share price. Cost control to continues to be a "big positive," it added. ---HBOS Group PLC (HBOOY) --- (Feb. 27) For HBOS Group PLC, Deutsche Bank named a possible "earnings drag" from risky lending assets, such as commercial property lending in the U.K. as a main concern. DKW said that as the U.K.'s biggest mortgage lender, HBOS' comments on the market in general will be closely watched. "Further write-down risks remains, but key to the debate is the extent to which deteriorating metrics within retail are offset by investment gains in corporate," KBW said. ---Royal Bank of Scotland Group PLC (RBS) --- (Feb. 28) For RBS, this set of results will be a "crucial plank in rebuilding some confidence in the stock," KBW said. It identifies the tight capital position and the effect additional write-downs could have on it as the immediate risk. Nevertheless it doesn't believe capital raising is necessary at this stage. DKW is looking for more clarity on the ABN Amro integration and on previous hints that synergies from the deal could be higher than anticipated. -By Ragnhild Kjetland; Dow Jones Newswires; +44 207 842 9268; ragnhild.kjetland@dowjones.com
