1. The Foolish Lunchbox
2. Morning Movers
The Foolish Lunchbox
Since last summer the banking sector has declined by 15%. That is a pretty miserable performance against a very healthy return from the FTSE All Share index. It is even more remarkable when we recall that the third largest bank in the UK, National Westminster (LSE: NWB), has just succumbed to a hostile bid from Royal Bank of Scotland (LSE: RBOS) after a fierce competition from Bank of Scotland (LSE: BSCT).
Yet more puzzling is that this weakness is set against an environment where the banks are making money hand over fist. Lloyds TSB (LSE: LLOY) today announced excellent results for 1999 showing an increase in almost every parameter except costs -- which went down.
This table highlights the big numbers:
1999 % Change
Total Income (£m) 7,872 11
Operating Expenses (£m) 3,373 -3
Trading Surplus (£m) 4,499 25
Profit Before Tax (£m) 3,621 20
Net Profit (£m) 2,514 19
Earning per Share (p) 46.2 18
Dividends per share (p) 26.6 20
And the ratio analysis points the same way
Post-tax return on average equity 30.5%
Post-tax return on average risk-weighted assets 3.02%
The only flies struggling in the ointment are the 11% increase in bad debts to £588m and the addition of another £102m to the pension misselling pot. Although a rise in bad debts while the economy was growing strongly last year -- GDP rose 2.7% -- is a little disturbing, the overall level of bad debts is still only 0.57%. The worry comes if and when the economy starts to contract and businesses start to fail on a larger scale.
This little table shows the contribution to profits by division
Division 1999 1998 % Change
UK Retail (£m) 761 684 11
Mortgages (£m) 903 740 22
Insurance & Investments (£m) 1006 948 6
UK Retail Financial Services (£m) 2670 2372 13
Wholesale Markets (£m) 799 729 10
International Banking (£m) 434 348 25
So really everything looks pretty hunkydory. In that case why have the shares fallen 60p to 626p? Therein lies the clue to stock market psychology. It is not the least bit interested in what has happened; all attention is focused on what is going to happen next. The problem is that the price of money, Lloyds' main product, has gone up by 20% in the last year. Interest rates have risen from 5% to 6% in the last twelve months and the market is figuring that Lloyds, and the other banks, will find it harder to sell money in this year.
Indeed, the part of the Chief Executive's statement that the city will focus on is the outlook section. While it is certainly true that the forthcoming purchase of Scottish Widows will add a large amount of business, there is genuine concern at the ferocious competition in the mortgage market. Moreover, the threat of low cost Internet banking from the likes of egg and Smile cannot be lightly dismissed. The level of losses these new competitors are prepared to tolerate to enter the business must be a worry for existing banks like Lloyds.
While few would question the pre-eminent position Lloyds holds in UK and global banking circles, there can be no doubt that it would suffer as much as the rest in a tougher business environment.
Morning Movers
Banks hogged the spotlight this morning. Lloyds TSB (LSE: LLOY) announced full year results. A 16% increase in profits before tax and earnings per share failed to impress the stock market. But the remark "competition for business increased dramatically during 1999 as traditional lenders and new entrants to the mortgage market competed aggressively for market share" gave some shareholders a worry over future profits. These concerns outweighed the figures and the shares dropped 65p (10%) to 621p.
The fall-out from Lloyds helped spread negative vibes throughout the sector, with Abbey National (LSE: ANL) shedding 38p (6%) to 646p, Alliance and Leicester (LSE: AL.) losing 22.5p (4%) to 497p and Halifax (LSE: HFX) declining 20p (4%) to 459p.
And still on the banking theme, the battle for the National Westminster Bank (LSE: NWB) is now finally over. NatWest announced this morning: "The Board considers that it would not be in shareholders' interests to remain as a minority in a company that was no longer independent. Accordingly, the Board now advises those shareholders who have not done so to accept the offer by The Royal Bank of Scotland."
After the formal capitulation, shares in NatWest edged 14p (1%) to 1161p, whereas shareholders in Royal Bank of Scotland (LSE: RBOS) suffered a 40p (4%) fall to 835p.Not to left out in the general sector malaise, the losing player in the bid, the Bank of Scotland (LSE: BSCT), fell in sympathy by 37p (5%) to 640p.
Wassall (LSE: WSSL) finally declared that it had received a bid this morning, after talks had started back in early December. The recommended cash offer from the US private equity firm KKR comes in at 400p per share. Wassall shares jumped 28.5p (8%) to 390p on the news.
Manchester United (LSE: MNU) and Vodafone AirTouch (LSE: VOD) today joined forces. The telecom firm is to splash its name over the shirts of Beckham, Giggs and company in four-year deal worth £30m. Fans of the Red Devils kicked their shares 13p (5%) onwards to 300p, while Vodafone edged 13p (4%) to 365p.
Business-to-business Internet software firm Infobank International Holdings (LSE: IBI) revealed an agreement with Requisite Technology this morning. Lots talk about e-commerce, e-hubs and e-procurement gave investors further reason for e-xcitement, Infobank shares soaring 482p (23%) to 2545p.
Upmarket furniture retailer Heal's (LSE: HAL) showed that there was some life in the retail sector over Christmas. Their AGM statement announced like-for-like sales over the festive period had risen 11%. Promising noises concerning a new Kingston-upon-Thames store and the obligatory e-commerce development helped push the shares 12.5p (6%) to 210p.
Another upmarket retailer found favour this morning, but for different reasons. Troubled Liberty (LSE: LBTY) announced that it had received proposals that could lead to a possible offer, boosting the shares 20p (9%) to 237p.
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