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Markets News Wednesday: UK bank lending rose in August; Shares rise in Europe; Sterling slightly strengthens against euro
By Finfacts Team
Sep 23, 2009 - 10:51:04 AM
Chancellor Angela Merkel of Germany with Federal Finance Minister Peer Steinbrück at the G-20 summit in April 2009 - - Both politicians from Germany's two biggest parties face a General Election on Sunday, September 27th but they will be in Pittsburgh on Wednesday for the latest G-20 summit. "Our aim remains the same,” declared Chancellor Merkel unequivocally after a meeting on Mondaywith the Expert Group "New Financial Architecture”, and added, "Every product, every actor on the market and every location must be regulated.”
McAfee
McAfee, one of the big names in security software, is to create 120 jobs at its Cork operations.
The new positions are in sales.
The company established its operation in Cork in 2004 and has an existing workforce of 180.ay's announcement will double McAfee's sales team on this side of the Atlantic.
McAfee has revenues of about $1.6 billion.
The New York Times reported last month that founder John McAfee, whose fortune has dwindled to about $4 million, from more than $100 million, sold the last of his major real estate holdings: a 157-acre spread in Rodeo, New Mexico, where he and his friends flew lightweight airplanes. The property was sold at auction for $1.15 million.
In a telephone interview, McAfee said he was relieved that the auction was behind him so that he could get back to his life in Belize.
McAfee had agreed to sell the property to the highest bidder, no matter how low the price, as he needed cash to pay his bills amid the downturn in real estate and stocks. He said the final sale price was roughly in line with what he had expected.
UK mortgage lending
UK bank lending accelerated in August as new mortgage increased and lending to non-financial companies rose at its fastest rate since February, the British Bankers' Association said Wednesday.
Seasonally-adjusted net mortgage lending grew £2.8 billion in August -- its highest level since March -- compared with an upwardly revised £1.9 billion increase in July. On a year-to-year basis, lending grew £2.4 billion, the BBA said. Net mortgage lending in July was originally reported as rising £1.6 billion.
The BBA also said that bank lending to nonfinancial firms recovered £0.7 billion in August, compared with a record £4.1 billion dip in July.
While the rise in lending to nonfinancial firms was the biggest since February. the BBA said demand for lending had fallen with some of the larger firms increasingly entering the bond market as an alternative funding source.
Davy analyst Flor O'Donoghue commented today that the quarterly run-rate of UK housing transactions in positive territory for first time in two years - - "Data relating to the UK housing sector continue to point to a market that is in much better shape than this time last year.
According to HM Revenue & Customs, seasonally adjusted basis UK housing transactions (with a value of £40,000 and over) were 74,000 in August – 19% higher than August 2008 and well clear of last November's low of 53,000.
Taking the quarterly run-rate as a better gauge of underlying trends, transactions in the June to August quarter were up 7% on the same quarter in 2008. This is the first time in two years that the quarterly run-rate is up year-on-year.
Housing transaction activity is an important lead indicator for the RMI market and, by extension, for the builders merchants. Intuitively, there is probably a lag of a few months before the builders merchanting sector is impacted by what is happening in housing transactions. Hence while the sector may still be reeling from a 25% drop in H1 2009 transactions compared with the first half of 2008, the improving trends point to significantly more benign operating conditions in 2010.
Travis Perkins, with 100% of its business in the UK, is the purest play on the UK housing recovery theme. This is why it is our top pick in the European lightside building materials sector. But Grafton, SIG, Wolseley and Saint-Gobain (in that order) will also benefit."
The Confederation of British Industry said the UK has now come out of recession as it upgraded its growth forecast for the fourth quarter. Richard Lambert, director-general of the CBI, told CNBC what was behind the improved outlook:
US foreclosures stalling housing market
The Wall Street Journal says that legal snarls, bureaucracy and well-meaning efforts to keep families in their homes are slowing the flow of properties headed toward foreclosure sales, even when borrowers are in deep distress. While that buys time for families to work out their problems, some analysts believe the delays are prolonging the mortgage crisis and creating a growing "shadow" inventory of pent-up supply that will eventually hit the market.
The size of this shadow inventory is a source of concern and debate among real-estate agents and analysts who worry that when the supply is unleashed, it could interrupt the budding housing recovery and ignite a new wave of stress in the housing market.
With real estate down, the number of foreclosed-upon properties growing and buyers looking for deals, are foreclosures a smart purchase?
US markets
In New York Tuesday, the Dow Jones Industrial Average rose 51.01 points, or 0.5%, to 9829.87.
The Nasdaq Composite Index gained 0.4% and the S&P 500 added 0.7%,
Asia
The MSCI Asia Pacific excluding Japan Index rose 0.4% Wednesday and is up 69% from its 5-year low on March 9th last.
Australia’s benchmark S&P/ASX 200 Index advanced 1.5% and New Zealand’s NZX 50 Index rose 0.2% after a government report showed that the economy had emerged from recession in Q2 2009 - - see link to story in Box below.
The Flash Eurozone Composite Output Index, produced by Markit Economics, and based on around 85% of normal monthly PMI (Purchasing Managers' Index) survey replies, edged up from 50.4 in August to 50.8 in September, signalling a marginal increase in private sector output for the second successive month. The return to growth has followed a 14- month period of declining output, during which the rate of deterioration peaked in February. In September, the output rise spread to services - - see link to story in Box above.
The Eurozone service sector grew for the first time in 16 months in September, data showed Wednesday, while the composite employment index continued to fall. “The consumer figures remain extremely weak, and that’s a key point,” Francois Mallot from Kepler Capital Markets told CNBC Monday. He also said “the figures are likely to deteriorate with the unemployment rate moving up towards the end of the year.” Lorrain Tan from S&P Equity Research joined the discussion:
The pan-European Dow Jones Stoxx 600 is up 0.79% Wednesday.
In Dublin, the ISEQ is up 0.2%.
CRH is down 2.2%; AIB is up 2.6%.
INM has gained 8.6%.
Zamano
Mobile phone services company Zamano today reported revenues of €13.3m for the six months to the end of June compared with €23.7m in the same period in 2008, due to drops in the Irish, UK and Australian markets.
Profit before tax was €607K compared with €623K in 2008.
The group's EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) declined by 7% to €2.3m, while administrative expenses were reduced by 47% to €2.1m.
During the six month period, the company noted strong growth in the US and Spanish operations and also entered the South African market.
Zamano said that revenues fell in the UK and Ireland due to the planned shift to lower volume, higher margin revenue and the impact of external factors such as the new regulations in the UK and Ireland, while the lower levels of consumer confidence was more severe than expected.
Gold is trading at $1,012.60 up $9.60 from Monday's spot price close in New York.
Davy chief economist Rossa White comments: Irish migration flows turn full circle - - "Ireland's investment boom (bubble) of 2003-2007 relied heavily on immigrant labour. Rapid population growth was the result. Construction has been in freefall for three years and, with a lag, migration has come almost full circle. There are now more workers from the EU-12 accession countries leaving than arriving. That net outflow will accelerate in the next six months, limiting further rises in unemployment.
The numbers are clear. In the year to April 2008, net inward migration of nationals of the EU-12 accession countries totalled 14,900. That reversed to a net outflow of 16,600 in the 12 months to April 2009 (according to data released yesterday). The swing in the space of a year is 31,500, accounting for almost 70% of the reversal from total net inward migration of 38,500 to outward migration of 7,800.
It takes time for workers to become disillusioned with the labour force, especially if they have developed ties to the country. But the unemployment rate among those from the EU-12 has leaped from 6.8% to 19% in the last year. Many have surely resigned themselves to the fact that construction won't pick up any time soon. Interestingly, the data suggest that the majority are heading home. A total of 22,900 of all emigrants were destined for the EU-12: we know that 30,100 EU-12 nationals emigrated. The balance seems to have gone to the UK, where 11,900 of total emigrants were destined. Yet only 2,900 UK nationals left these shores in the year to April, so the implication is compelling."
Goodbody chief economist: Dermot O’Leary comments: Economic View; Irish unemployment rate peak now likely to be lower than originally envisaged - -"On the back of yesterday’s employment and population data, we are making positive revisions to our labour market forecasts. Specifically, we are adjusting our peak unemployment rate forecast downwards from 17.5% to 14.5%, to be reached in the final quarter of 2010. Employment is expected to decline by 8% this year (no change), while declines of a further 5% (previously -6%) and 1% (previously -2%) is anticipated in 2010 and 2011, respectively. While these forecasts still imply significant further weakening in the labour market, the forecast changes are in recognition of underlying trends occurring in the economy of late. In particular, it is now clear that recently arrived economic migrants are returning to their home countries in bigger numbers as the job market has deteriorated in Ireland.
This is evident from the fact that the number of people in the labour force emanating from the Accession States fell by 25% yoy in Q2. Our forecast changes for the unemployment rate thus encompass a larger outflow from the workforce than we originally suspected. In terms of employment itself, there was a further 1.8% qoq (seasonally-adjusted) fall in Q2, although this was substantially lower than the 3.5% qoq seen in Q1. From the peak, employment levels have fallen by 10%, with construction, manufacturing and retail and wholesale accounting for the lion’s share of the job losses. There is probably more to go in these sectors. Lessons from past recessions show that the labour market is always the lagging indicator. However, after over two years of downgrades, an upgrade, even a modest one, is welcome."
Goodbody economist Deirdre Ryan comments; Economic View; Population dynamics changing shape - - "Along with the latest employment trends, population and migration estimates for the year to April 2009 were also released yesterday. They indicate a 0.8% annual rate of growth in the population in the year to April 2009, well down on the 1.9% growth rate recorded last year. Population dynamics in Ireland have always been strongly influenced by migration flows and that trend is once again coming to the fore, with the resumption of net outward migration for the first time since 1995.
Since peaking at close to 110,000 in 2007, the numbers of immigrants eased sharply and totalled 57,300 in the year to April 2009. On the other side, emigration flows have picked up, with 65,000 persons emigrating in the year to April 2009, up from 45,000 the previous year. As such, net migration (-7,800) subtracted from population growth last year, with the healthy natural increase in the population (+45,100) being the sole contributor to growth in the twelve months to April 2009. There is likely to be further significant outward flows in the quarter ahead also given the breakdown by nationality of emigrants in the year to April. Almost half of those emigrating hailed from the EU Accession states. Scope for significant further outward flows from this source exists, given that a net 130,000 immigrants hailed from the Accession states between 2004 and 2008.
Although just 28% of emigrants were of Irish nationality in the year to April 2009, we are likely to see increased outward flows from this source in the quarters ahead given the outlook for the domestic labour market. In the 1980s, net outward migration peaked at 45,000 in 1989. Should this scale of net outflow be repeated, and allowing for a natural increase similar to that seen in the year to April 2009, this implies no growth in the population in the year ahead. However, there is potential for outflows to be significantly higher in the current environment given the vastly different makeup of the population than in the 1980s, in terms of the proportion that are foreign nationals. Ireland’s population dynamics are rapidly changing shape."
Goodbody's Eamonn Hughes comments: Irish Financials; Lower unemployment peak implies lower mortgage loan losses - -"Our economists above look at the latest quarterly employment statistics for Ireland published yesterday. Of relevance to the banks is that our economists are lowering their unemployment rate in 2010 and 2011 from 17.5% to 14.5% in 2010 and 13.9% in 2011. Employment growth forecasts also improve, but the change is much more modest than in the unemployment rate. These adjustments obviously have implication for our mortgage and consumer finance loan loss assumptions, with particularly relevance for BOI and IL&P. We have also taken the opportunity to pare back our UK mortgage loan loss assumptions given the improving datasets there for the past few weeks. As our thoughts develop on the credit cycle as well, we think the mortgage cycle will peak at lower levels, but stay elevated for longer, given current forbearance and the fact that the unemployment rate is likely to remain in double digit territory for a number of years.
In the case of BOI, we previously had a 3.7% mortgage loan loss assumption “over the cycle”. This was broken down as to 240bps prime mortgages, 450bps in Buy to Let and 825bps in Self-Cert mortgages. Taking on board yesterday’s data, current securitisation trends (giving some insight into the relativities between each asset class) and the UK data, we are paring our figures back to 200bps, 400bps and 600bps, driving a weighted average 3% figure. This broadly translates into a €400m reduction in our BOI mortgage and consumer loan loss assumptions over the cycle (from €11.3bn to €10.9bn). In order to give a comparison to BOI’s guided figure of €6.9bn of credit losses in the 3 years to March 2011 (“mid teens increase” on the previously €6bn guided figure), the €7.9bn of group losses we have pencilled in over these 3 years eases back to c€7.6bn. The adjustment in our TNAV per share is €0.1 onto our previous €1.5 TNAV level at the bottom of the cycle. We are looking at c€1bn in equity required to keep the core equity ratio above 4% at the bottom (€1.3bn previously). Our fair value per share nudges up c5% to €2.3.
In the case of AIB, the adjustments are actually quite modest in the context of the overall group, so only knock about 4% off our over the cycle credit charge. Helpful, but not really material to effect a change to our c€3 TNAV estimate, given that the share price is also off since end last week and equity issuance impacts our valuations.
In the case of IL&P’s bank, we had originally pencilled in losses of 3.7%, similar to BOI (though bearing in mind we have commercial and consumer losses in our IL&P figure, so not strictly like-for-like with the BOI figure). This comes back to 3.2%. This equates to about €115m in terms of a lower credit charge over the period 2009-11, so after tax, reduces our estimated capital shortfall at the bottom of the cycle by c€100m to €350m. This adds about €0.4. However, with the share price up strongly since we last struck our fair value, the level of dilution on a likely capital issue to disengage from the bank is materially less. Also, last week post-NAMA, we have moved to value the large banks at TNAV from a discount previously. We still believe IL&P will be structurally less profitable, but valuing it on a recapped basis at 0.75x (from 0.6x previously) drives an updated fair value closer to €6, just modestly ahead of where the stock resides. For the record, valuing the bank at 1x would imply €6.8 (we already value the life business and associate at 1x statutory NAV - - net asset value)."
