FTSE preview: Banks and insurers in the spotlight

Aug 3 2008

Banks and insurers will come under the spotlight again this week as the half-year results season continues apace.

The last of the “big five” banking giants report interim figures, with HSBC the first to kick off proceedings on Monday.

Having had direct exposure to America’s crisis-hit sub-prime mortgage sector via its US consumer lending arm, HFC, HSBC has suffered more than its peers amid the market woes.

Britain’s biggest bank wrote-down 17.2 billion US dollars (£8.7bn) last year on bad debts and losses on investments hit by the credit crunch, which was more than expected.

HSBC then in May revealed a further 5.8 billion dollars (£2.9bn) in credit squeeze losses.

The bank said it had increased pre-tax profits in all major emerging markets, but analysts believe this may not have been enough to prevent a significant half-year profits slide.

The market is reportedly pencilling a slump of between 18% and 37% in interim pre-tax profits, with forecasts ranging from 8.95 billion dollars to 11.68 billion dollars (£4.53bn to £5.91bn). Such a fall would be small in comparison to the sharp declines in profits reported by Lloyds TSB, Halifax Bank of Scotland and Alliance & Leicester.

Citigroup analysts believe that writedowns may not have accelerated much since the first quarter, although they predict worsening arrears at its US arm HFC. If so, HSBC is likely to come under pressure once more by activist investor Knight Vinke to offload struggling HFC.

Barclays follows on Thursday with its results, which is set to show “significantly depleted earnings” at its investment banking arm, according to Citi.

Barclays said in April that the division has suffered a reversal of fortunes in the face of hefty writedowns and stock market turmoil.

The bank, which recently completed a £4.5 billion fundraising move, has so far revealed £2.6 billion in credit crunch related writedowns, with £1 billion already announced this year.

Citi is expecting Barclays’ impairment losses to total £1.6 billion in the first half, with predictions for pre-tax profits to have shrunk by just under a third - 32% down - to £2.8 billion.

On Friday, NatWest parent Royal Bank of Scotland is the last of the top five banks to report.

Now with its mammoth £12 billion rights issue under it belt, it is likely to stress the strength of its capital ratio following the balance sheet boost. But US bank Merrill Lynch recently raised fears that there could be more fundraising to come, as it made a multi-billion dollar cash-call to investors.

RBS is diligently offloading non-core assets to further bolster its finances, only days ago announcing the sale of its the stake in Tesco Personal Finance for £950 million back to the supermarket.

But it has had need to, having seen its reserves knocked by significant writedowns and the cost of the near £50 billion RBS-led takeover of Dutch bank ABN Amro last year. RBS took a £2.5 billion hit from the credit crunch last year and revealed a further £5.9 billion of investment writedowns from risky US property-related assets earlier this year.

RBS insisted in April that its underlying performance had remained satisfactory and analysts are expecting underlying pre-tax profits - stripping out write-downs - of £4.9 billion for the first six months of the year.

Statutory results, however, are thought to have sunk to a loss after this year’s writedowns, with reports suggesting RBS may post a loss of £1.2 billion compared with a £5 billion profit in the first half of 2007.

Life and pensions giant Standard Life cheered the market with better-than-expected first quarter new business figures at the end of April, but sales at the half-year stage may not be so rosy.

Where worldwide sales of life and pensions saw an 8% hike to £4.48 billion in the first three months, the consensus forecast in the market is for a reversal into negative territory in the half-year.

Analysts are forecasting Standard Life to reveal on Wednesday that worldwide life and pensions sales fell 1% to £8.5 billion.

However, this is not expected to have held profits back, with the market predicting a 39% rise in operating profits before tax, on an embedded value basis, to £489 million.

UK performance was a key surprise in the first quarter, with savings and investments sales up a very healthy 43%.

The only real cause for concern in the otherwise robust set of results was a 14% fall in self-invested personal pensions (SIPPs), said Nic Clarke, analyst at Charles Stanley.

He said: “Standard Life’s first quarter 2008 sales beat market expectations due to stronger than expected growth in UK savings and investment sales, Asian sales and a recovery in the Canadian sales performance. However, the tougher conditions in the UK market were reflected in the weakening SIPP sales.”

Standard Life assured that it remained confident of outperforming the market, yet analysts will be watching for further evidence of the challenging trading environment.

Broadcaster ITV is expected to reveal a sharp fall in half-year profits on Wednesday amid weakening prospects for advertising revenues in a slowing economy.

At its first-quarter update in May, executive chairman Michael Grade said the group was likely to outperform the UK advertising market for the first time in eight years - but the accelerating pace of the slowdown is putting media companies under pressure.

Charles Stanley analyst Sam Hart predicts a 36% slide in pre-tax profits to £82 million for the six months to June 30.

“ITV is expected to report another weak set of results, reflecting a tough TV advertising market, increased expenditure on programming and investment in on-line,” he said.

While revenues at flagship channel ITV1 are expected to fall by some 2.5%, this should be compensated by a stronger performance from the group’s digital channels, the analyst adds, amid broadly flat ad revenues.

But revenue visibility is likely to be poor heading into the second half of the year as companies under pressure take a hard look at their advertising budgets.

While the wider environment is difficult, bid talk has sparked recent interest in the shares. Big Brother producer Endemol has refused to rule out a possible takeover bid for the company, while the German parent of Five, RTL, and Italy’s Mediaset are also mooted.

The rumours have been fuelled by an Appeal Court ruling due shortly which could force BSkyB to sell down its controversial 17.9% stake in ITV to less than 7.5%.

“We feel takeover speculation is likely to provide some support around current levels. ITV still has a unique ability to regularly deliver mass audiences to advertisers, a world-class production business and a valuable programme archive,” Mr Hart added.

Power station operator Drax, which posts half-year figures on Tuesday, is benefiting from a trading environment where power prices are rising even more quickly that the coal it needs to generate it.

The group, which operates Europe’s largest coal-fired station at Selby in North Yorkshire, said in June that full-year results would be “modestly ahead” of the £400 million expected by the market.

Figures for the six months to June 30 are unlikely to reflect this at first glance. House broker Deutsche Bank is expecting underlying earnings down 20% to £190 million, because the spread between its power and coal costs was even wider in the first half of 2007, before shrinking back later in the year.

But the spread is expected to grow further still later this year as Drax’s forward contracts reflect the higher power prices.

“As the year has progressed, wholesale power price rises have outstripped coal & carbon, driving spreads markedly wider,” Deutsche Bank’s Iain Turner said.

Other factors are also in play which helped the group in the first half.

British Energy’s power stations at Heysham and Hartlepool have been off line, while other competitors have been installing the flue gas desulphurisation (FGD) equipment required under environmental rules, affecting production.

This means that Drax has been able to generate more power in what have been historically lower margin periods - such as weekends and overnight throughout the summer - making a modest profit due to the commodity market conditions.

“This all means that Drax will produce more output than expected at the beginning of the year, at better margins,” Mr Turner added.

Ladbrokes will give its own interim figures on Thursday after what is likely to have been a mixed half for the UK’s biggest bookmaker.

In its last update in May, it said football turnover was boosted by the English dominance of the Uefa Champions League - with three teams in the semi-finals - while Manchester United and Chelsea fought out the tightest Premier League race in years.

The improvement coincided with the company’s first television advertising campaign, featuring ex-players Ian Wright, Ally McCoist and Lee Dixon.

But horseracing suffered from strong prior-year comparatives as well as the impact of joint-favourite Comply or Die’s win in the Grand National.

William Hill’s results last Thursday, however, reported a “relatively poor” Royal Ascot meeting and below expectation Euro 2008 football tournament, as first half profits fell 17%.

According to the company - excluding more volatile high-roller telephone income - analysts are expecting earnings before interest and tax of between £127 million and £134 million, broadly flat compared to last year.

Revenues from gaming machines should be up as Ladbrokes benefits from the roll-out of new dual screen machines in March last year, while its shops gain from extended evening opening hours.

But Evolution Securities’ Nigel Parson said: “Strong growth in UK retail revenue will have been eaten up by a related growth in costs and EBIT will be down slightly.”

Ladbrokes, whose origins date back to 1886, employs 14,000 people in five countries. It is the leading bookmaker in the UK, Ireland and Belgium with over 2,600 owned and operated betting shops.

European property group Hammerson’s half-year results due on Thursday arrive amid a difficult backdrop for the commercial property sector.

Prices have been on the slide this year as the credit crunch hits the market, although chairman John Nelson said in April that Hammerson’s strong balance sheet put it in a “good position to weather the current market uncertainties” - as well as take advantage of any possible acquisition opportunities which emerge.

Hammerson operates mainly in the UK and France, investing in and developing shopping centres, retail parks and offices.

Its portfolio of properties includes shopping centres such as the Oracle in Reading, the Ravenhead Retail Park in St Helens and the Shires in Leicester.

A heavy exposure to weakening consumer spending seems hardly ideal in the current climate, although the firm said in April that it continued to attract retailers. The vacancy rate within its shopping centre and retail parks remained relatively low at 2.6%.

The firm was however dealt a minor blow last Friday after investment bank JP Morgan Chase pulled out of discussions over a new European headquarters in London, forcing it to write off £17 million in costs.

But Citi analyst Harry Stokes said this was “more a reflection of JP Morgan than of the market” because the bank has just inherited a new building in Canary Wharf with its acquisition of troubled Bear Stearns.