This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here:
Sign up for Money Morning
Shares in banking giant HBOS (HBOS) took a hammering yesterday.
Profits in its high street banking unit were down by 13%, dented by a lower share of the mortgage market, and higher funding costs. Its corporate unit also saw bad debts rise sharply.
Yet even though the results were weak, plenty of commentators lined up to say that the pounding of the shares was unjustified.
After all, on the upside, HBOS hiked its full-year dividend by 18%, and now yields more than 7% and trades on a tiny p/e. What could possibly go wrong?
HBOS is a buy, or at the very least a hold, so analysts seem to think. Despite weak results in both its retail and corporate units, all the talk is of how the credit crunch could be an opportunity. Chief executive Andy Hornby argues that the fall in profit margins should slow this year, as the bank will be able to charge more for its mortgages, given tighter lending conditions.
And as he says, “we believe that the
That kind of talk seems to have reassured many of the pundits. But is it just me, or does that sound like a man trying to dig his way out of a very big hole with a very tiny spade? “Responsible lenders need to keep lending… do what’s right” – what on earth is he talking about?
There is nothing remotely healthy about the
HBOS is the
Even if HBOS manages to increase the profitability of its mortgages, it’ll be writing fewer of them, and more and more of them will be going bad over the course of this year. Meanwhile, it also revealed a “surprise” exposure to £7bn worth of US ‘Alt-A’ mortgages. These are ostensibly not as risky as sub-prime mortgages, but plenty of them were written for people with no proof of income. So we can safely assume that if the
Why you can’t ignore record-breaking gold, oil and euros
The reality is that the world has changed. The mainstream papers are still in denial about it. I’m flicking through The Times this morning (not picking on them, just the nearest paper to hand), and a story about BP’s alternative energy unit is the main business piece. Relegated to single paragraphs on the news summary page, we find the following information:
Gold hit a new high of more than $964.70 an ounce. Oil hit a new record of $102.08 a barrel (and that’s a genuine record, the highest ever even when you take inflation into account). A euro will now fetch you more than $1.50 (well, in the wholesale markets at least) for the first time ever.
While equity analysts are messing about, dithering over whether banks are worth buying, the rest of the world’s asset markets are screaming about the end of the world. We’ve been living through a credit bubble – banks sell credit, and so they’ve prospered. But now the bubble has burst.
That means the hard times for the banks are just beginning. Just as when the tech bubble burst, people will have a hard time coming round to believing it’s all over, and will keep buying on the dips. But ignore those tasty dividend yields – if HBOS can still spring a £7bn surprise on investors, you can sure there’s a lot more where that came from throughout the rest of the sector.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
HBOS leads FTSE losers
In
On the Continent, the Paris CAC-40 closed just 4 points lower, at 4,968. And in
Across the
In
RBS writes down £2.5bn
Crude oil had dipped to $99.33 this morning. In
Spot gold had fallen to $955.40 this morning, off yesterday’s record high of $964.70. Silver, meanwhile, had fallen back to $19.12. And platinum had fallen back to $2,097 as investors took profits in the absence of any fresh news on South African supplies.
In the currency markets, sterling was trading at 1.9815 against the dollar and 1.3117 against the euro. And the dollar was at 0.6620 against the euro and 106.44 against the Japanese yen.
And in
Our recommended articles for today…
Can the
– The
Why you can’t afford to ignore the credit market
– Changes in a company’s credit quality can predict what will happen to its share price, so even if you’re an equity investor, credit analysis can help you keep an eye on the health of particular companies and sectors. Chris Mayer looks at what signals the credit market is sending now: Why you can’t afford to ignore the credit market