WEEK AHEAD: Bank season comes to a close

Mar 3 2008

The annual results season for the banking sector will draw to a close this week, while figures from ITV and Premier Foods will also be closely watched.

Banking giant HSBC will be the last of the UK’s “big five” banks to report annual results, with all eyes again on the impact of the credit crunch.

Citigroup expects the all-important write-down figure from its US operation to almost double during the second half of last year to 6.9 billion US dollars (£3.5bn), up from the 3.8 billion US dollars (£1.9bn) hit in the first six months.

The broker said it forecast a total impairment charge of 16 billion US dollars (£8.1bn) for 2007, compared to £10.6 billion (£5.4bn) for the previous year.

City estimates for tomorrow’s group pre-tax profits range between 23.4 billion US dollars (£11.8bn) and 26.4 billion US dollars (£13.3bn).

In its third quarter figures, HSBC said profits were ahead of the same period last year.

And revenues were up on the first half-year and were helping combat the bad debt losses, according to the group.

HSBC added that its exposure to the sub-prime mortgage-backed financial instruments that have led to significant losses in other banks - so-called collateralised debt obligations (CDOs) - was minimal.

The group also gave an upbeat view on trading in the UK, which it said was driving a strong performance in its European arm, and UK lending was seeing signs of improvement in the third quarter.

Last week saw a mixed bag of results from Halifax Bank of Scotland and Royal Bank of Scotland.

HBOS, the UK’s biggest mortgage lender, reported underlying pre-tax profits of £5.71 billion, 3% ahead of the previous year but short of City hopes.

And RBS unveiled a £2.5 billion hit from the credit crunch - but still hiked annual profits to more than £10 billion.

ITV executive chairman Michael Grade is likely to face some tough questions when he unveils his second set of annual results on Wednesday.

The commercial broadcaster has seen its shares come under significant pressure over the past year, hitting all-time record lows in January and February as a difficult advertising market takes its toll. The recent saga with BSkyB’s controversial 17.9% stake in ITV has also done nothing for the share price, with the Government’s decision to force Sky to sell-down the holding dampening the stock further.

ITV’s shares have weakened to such an extent that rumours have resurfaced about takeover interest from private equity firms Apax, Kohlberg Kravis Roberts and Provident.

Meanwhile, recent press reports have been critical of the new ITV1 shows, suggesting they have so far received a cool reception among viewers. This throws the spotlight on Mr Grade’s recently announced “content-led” overhaul.

In a surprise move last week, Mr Grade announced the departure of television director Simon Shaps and the appointment of former BBC1 controller Peter Fincham. Mr Grade, who will remain as executive chairman for a year longer than planned, said the changes had nothing to do with ITV’s share price or ratings.

While the moves will take time to filter through to the bottom-line, the group is potentially in line to benefit from a review of the broadcaster’s onerous advertising regime, which has until now hindered its recovery.

The Contract Rights Renewal scheme allows advertisers to cut spending on ITV1 if ratings decline, originally put in place to protect advertisers from the company’s potential dominance following the 2003 merger of Carlton and Granada. If overturned by Ofcom and the Office for Fair Trading it could help provide a much-needed boost for advertising revenues.

Mr Grade said there were already encouraging signs for ad revenues, up 2% for ITV1 during November, with an upturn in its audience share also indicating it may not be all gloom for the group.

Analysts at Citigroup are expecting revenues of £2.09 billion in 2007 against £2.17 billion in 2006, with pre-tax profits pencilled in to have dropped by a quarter to £270.7 million. But more key to markets will be news of any further progress at the year-end and the current outlook for ratings and revenues.

Insurance firm Admiral is “unlikely to disappoint” with its full year figures on Tuesday, according to analysts at Numis Securities.

The Elephant and Diamond insurer produced a better-than-expected 26% leap in pre-tax profits at the half-year stage. And Numis experts said they would not be surprised if annual results also beat forecasts, which are looking for pre-tax profits of £172.4 million, up 17% on 2006.

Swansea and Cardiff-based Admiral is predicted to have benefited from continued growth at its price comparison arm Confused.com, which may see top line profits growth of 86% to £72 million, said Numis.

Admiral opted against the sale of a minority stake in Confused.com last July after saying private equity suitors were demanding too much control. The results may suggest they were right to keep control of the division and therefore all the potential gains.

The figures will also provide the first real insight into performance at Admiral’s Spanish venture, car insurer Balumba.es, which was launched in October 2006. Numis said: “We are optimistic that positive data from Spain might prompt the market to ascribe greater value to Admiral’s European growth potential, which currently represents a small part of the overall valuation and could therefore drive significant upside.”

Pub group JD Wetherspoon has seen sales slide since the introduction of the smoking ban across England last summer and interim figures on Friday are expected to reflect the impact.

The group reported a 1% fall in like-for-like sales in the first quarter immediately after the July introduction, with sales declining further in the second quarter, down 3.2%, as the wintery weather put smokers off.

Evolution analysts are forecasting an 11% drop in interim pre-tax profits, to £29.2 million from £32.9 million the previous year. The group has tough comparisons to beat from the first half of the previous year, when like-for-like sales in the first three months soared 9.2%. And it has already braced the market for difficult 2008 trading after the smoking bans, with margins also under pressure with less profitable food sales taking centre stage.

Analyst expectations for the full-year are for a drop in pre-tax profits to around £59 million, from £62 million. But Wetherspoon is not guilty of poor planning ahead of the smoking ban, according to Evolution.

It said the group’s preparation had been “exemplary”, with some £8 million invested on outside facilities and improved kitchen equipment to cope with the increased focus on food sales.

A raft of rivals reported subdued trading over the Christmas period, including Punch Taverns and Enterprise Inns, suggesting the sector as a whole has been suffering.

Wetherspoon has maintained that the effects of the smoking ban will be good in the long run, but realistic that bar sale declines are likely to knock performance in the short-term.

Evolution said there was “good value” to be had with Wetherspoon, but predicts the pick up in like-for-like sales may not happen for six to 12 months.

Sunderland-based transport group Arriva should post higher full-year profits on Thursday although the firm has seen higher costs at its rail business.

The company won the CrossCountry intercity rail franchise from Sir Richard Branson’s Virgin Trains last July, but said in December that rail numbers would be impacted by bidding costs on three separate deals. It also runs the Arriva Trains Wales franchise, which has seen strong demand.

Consensus forecasts put the overall group’s pre-tax profits at £114.6 million, 4% ahead of the previous year.

Arriva is confident of further growth in 2008 with limited exposure to rising fuel costs in its bus business, where the group has increased services and seen encouraging growth in passenger numbers. It runs 6,500 buses in cities including Liverpool and Leeds.

The company has boosted its bus operation with a recent £10.3 million move for Tellings Golden Miller, a bus and coach operator providing crew and air-side transport for airlines at Heathrow as well as private hire services from other UK bases in Hampshire, East Anglia, County Durham and Tyne and Wear.

It also spent £34 million last month in buying a further 10% stake in Portuguese passenger transport operator Barraqueiro, taking its share in the business to 31.5%.

Deutsche Bank analyst Chris Reid said: “Arriva is fully hedged for 2008 and we think UK Bus is trading well. It should be able to make further progress in Europe as it has balance sheet capacity, competition for acquisitions should fall back, and recent euro-sterling exchange rate trends also provide a mild tailwind.”

Hovis bread maker Premier Foods saw shares tumble to all time lows last week amid concerns over the impact of record wheat prices. Speculation that the group will announce a dividend cut when it unveils full-year results on Tuesday added to the share price misery, with Premier shedding more than 10% last week.

The group has been at the centre of a swirl of negative rumours, with reports of a major share sale by an unnamed investor also leading to fears surrounding the company’s performance.

The group, which also makes Mr Kipling cakes, Branston Pickle and Quorn, was recently forced to issue a statement saying it was not contemplating an emergency rights issue and did not expect to breach financial covenants.

But a flurry of analyst downgrades last week suggest that the market is concerned. Panmure Gordon said soaring costs were likely to put further pressure on the company’s balance sheet and slashed earnings forecasts for 2008 and 2009.

There have also been concerns over the information provided by the business, with calls for more clarity.

Management will face a grilling from the City when it reports, with questions set to focus on the rumours doing the rounds, as well as its strategy to cope with ever increasing debts. Its debts stand at around £1.75 billion following its £1.2 billion acquisition of Mr Kipling firm RHM last year, and its £450 million deal for the UK arm of Oxo and Homepride company Campbell’s Soup in 2006.

Analysts are looking for pre-tax profits of £167 million for the full year, but are likely to be more interested in its outlook and plans to counteract pressures facing the business, such as the hike in wheat costs.