By Sarah Turner, Marketwatch | 19 January 2009
FTSE 100 Index Down 0.9%; Lloyds Banking Group, HSBC Holdings Slide
LONDON (MarketWatch)— The U.K. banking sector slumped on Monday, with shares of Royal Bank of Scotland falling nearly 67%, as a government plan to support the financial sector failed to reassure sector investors. Shares of Royal Bank of Scotland (UK:RBS) fell 66.7% to 12 pence in London's top index. On Monday the lender said that it could report a massive loss of up to 28 billion pounds ($41.6 billion) in 2008 while also announcing that it has restructured its recent rescue package, giving the government an even bigger stake. See full story.
Although investors initially welcomed the measures, doubts soon set in. "I'm not convinced that it's the kind of policy that's actually going to achieve its stated aim of boosting lending because what the government is doing is guaranteeing mortgage debt which is a positive thing but it's not really forcing banks to take the junk off the balance sheet," said Peter Dixon, strategist at Commerzbank. "I think that what we've done today is postpone the inevitable and I think if I was an investor in banking stocks I would be very skeptical that this is 'the end of the line' for government intervention," he added.
Dixon also pointed out that the government scheme to support the mortgage market doesn't come into effect until April and said: "There's an awful lot of bad news that can happen between now and then." Elsewhere in the sector, shares of newly-created Lloyds Banking Group (LYG) (UK:LLOY) plunged 33.9%. The lender also updated on trading, saying that Lloyds TSB traded satisfactorily since November and that there hasn't been a significant change in the trading position of HBOS. Lloyds TSB and HBOS agreed to merge last year.
"Given that mortgage and business banking impairments were horrendous in the third quarter and the trend was getting much worse in October and November, we're not sure that is going to satisfy the market," said analysts at Davy Stockbrokers. Barclays (BCS) (UK:BARC) gave up early gains to close down 10.2%. Shares in the firm plunged 25% on Friday, the day a short-selling ban on financial stocks was lifted. Barclays said late Friday that it didn't know why its shares dropped and also stated that profit for 2008 will likely exceed most analyst forecasts.
Asia-focused banks trading in London weren't immune from losses, with HSBC Holdings (HBC) (UK:HSBA) down 6.5% and Standard Chartered (UK:STAN) down 8.1%.
FTSE 100 Lower
Overall, the U.K FTSE 100 index (UK:UKX) closed down 0.9% to 4,108.47.. Other European shares also fell. U.S. shares closed higher on Friday ahead of Martin Luther King Jr. day. See Europe Markets.
Away from banks, shares of building materials supplier Wolseley (UK:WOS) fell 9.1%. The Sunday Telegraph newspaper reported that the firm is in talks to raise between 200 million pounds and 400 million pounds in equity. "Any equity issue would be dilutive for existing equity holders. Fresh equity would probably be issued at a chunky discount to the current share value," said analysts at Davy Stockbrokers.
Still, Pearson (PSO) shares advanced 4.5%. The media group said it expects to report headline earnings growth of around 20% for 2008, which would be ahead of consensus expectations. It said trading conditions were more difficult in some markets for the fourth quarter, but all businesses "achieved or exceeded" 2008 guidance. Pearson also said the strength of the U.S. dollar against sterling and a lower tax rate helped.
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