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Markets News Friday: Ulster Bank reports €97m loss in Q3 2009; Shares rise in Europe and Asia; BA reports loss
By Finfacts Team
Nov 6, 2009 - 11:39:37 AM
"Dr. Doom" Nouriel Roubini Professor of Economics, Stern School of Business, NYU, making a presentation at the ‘International Financial Services Summit,’ Thursday, Nov 05, 2009, at the Four Seasons Hotel in Dublin -- the economist who earned his nickname in the US for his gloomy forecasts, many of them which have been prescient, was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard.
He said in Dublin that mergers between US banks may create institutions that pose too great a risk to financial stability. “We had a too-big-to-fail problem in the past, but now- the-too-big-to-fail problem has become bigger,” he said. “We are creating a bigger monster.” Roubini said there’s been “massive consolidation” among U.S. banks after a series of mergers during the worst economic crisis since the Great Depression.
Ulster Bank today reported a €97 million in the third quarter of 2009, with bad debt charges in the period of €160.6 million.
The bank is owned by UK State-controlled Royal Bank of Scotland (RBS).
Ulster's operating profits before the bad debt charges were down 40% to £59 million sterling, with performance hit by the lower margin between loan and deposit rates.
The bank said total loans to customers were 2% lower compared with three months earlier, because of lower demand, while deposits rose by 5% in the quarter.
RBS reported third-quarter losses of £1.53 billion but there were some signals of improvement.
The operating loss for RBS was below Q2 losses of £3.53 billion.
Bad debt charges were £3.28 billion but about 30% below the April-June period, the bank said.
Chief executive Stephen Hester said: "We owe it to everyone to be realistic and transparent," and added that economic recovery was likely to be slow and the pain of economic adjustment would take years to subside.
The European Commission agreed the latest public bailout in return for the forced sale of RBS' Churchill and Direct Line insurance business, more than 300 branches and parts of its investment banking business. These businesses units generated around £1.1 billion in operating profits for RBS last year.
NAMA
The NAMA Bill on the establishment of the Irish State agency for toxic property loans, was approved by the Dáil on a 77 to 73 vote. It now goes to the Seanad.
Finance Minister Brian Lenihan proposed an amendment on lending guidelines, which provides that institutions covered by the State banking guarantee "shall comply" with.
"The guidelines will be used as a threat, but there will also be codes of practice," Lenihan said and expects to make an announcement in six weeks.
"We need to be clear that it is not in the interest of the banks, or the economy, to lend to businesses that are not in a position to repay,"he said.
The legislation would include a review of decisions to refuse credit facilities, with a designated pool of lending available to the review body, he added.
FG TD George Lee said the NAMA commitment was €150,000 for everyone in the workforce "and we each have to earn €300,000 to pay it."
NAMA was "nothing but a trick," he added.
The Minister opposed a Labour amendment which proposed a two-year moratorium on banks pursuing mortgage defaulters. But he said the Government would engage with the banks on the issue and discuss having part-equity arrangements, interest only payments and other mechanisms to ensure that basic security remained.
The mother of all carry trades faces an inevitable bust, "Dr Doom" Nouriel Roubini, chairman of RGEMonitor.com, told CNBC on Wednesday:
British Airways
British Airways announced today a loss of £292m for the six months to the end of September, compared with a £52m profit in the same period in 2008.
It is the first time that BA has recorded a first-half loss as period includes the summer holiday.
Revenue dipped 13.7% to £4.1 billion and costs fell 8.7%.
Chief executive Willie Walsh said the aviation industry remained in recession. He said BA's revenue was likely to fall by £1 billion in its full financial year, so further cost cuts were"essential."
BA reduced its workforce by 1,900 in the six-month period and cut flights and routes on its summer schedule by 3.5%.
Walsh said the airline was cutting its winter capacity by 6% and would axe another 3,000 jobs by March next year.
BA said passenger revenue fell 13.6% from the same period last year, as average fares fell 12.2%. The load factor, or percentage of seats filled, rose to 80.6%.
Ryanair, using BA's slogan - - the World’s favourite airline - - today said that it"carried four times the UK and Europe short-haul traffic of British Airways (once the World’s favourite airline) in October as 6.2 million passengers travelled throughout Europe on Ryanair’s guaranteed lowest fares (up 15%) while BA’s short haul (UK and Europe) traffic fell by 4% to just 1.6 million passengers.
European Central Bank makes exit more explicit than other central banks
Davy chief economist Rossa White comments: "Yesterday the European Central Bank (ECB) and Bank of England (BoE) followed the Fed with important meetings. This is a critical point in the cycle, and official communications are becoming hazardous. Trichet's noises were a case in point: in the statement he was explicit that liquidity measures will be gradually withdrawn, but he was reluctant to be a hostage to fortune on detail in the questions and answers session. Even though the ECB didn't engage in actual asset purchases (repos only), it is a step ahead of the Fed and BoE in exiting from emergency settings.
The ECB statement itself was pretty clear. It noted that "not all our liquidity measures will be needed to the same extent as in the past" and it "will make sure that the extraordinary liquidity measure taken are phased out in a timely and gradual fashion". Pushed on whether the next 12-month refinancing operation will be the last, he hinted strongly that it probably would be. But the three and six months operations will stay in place. Meanwhile, interest rate expectations did not really budge: the 3-month euribor for year-end 2010 nudged up only a basis point.
The BoE has not finished buying assets (it increased its planned outlay by £25 billion to £200 billion), so reversal of its policies will lag the ECB. Given the lack of unanimity on the Monetary Policy Committee in recent months, it was perhaps not surprising that the eventual amount was fudged somewhat (the market was looking for £50 billion). We still think that the UK Q3 GDP numbers will be revised up (when the expenditure-based estimates are released) and that underlying economic conditions are better than those numbers portrayed. Therefore, it looks like this will be the BoE's last foray into the bond market."
Group of 20 financial leaders head to Scotland to firm up a plan to rebalance the world economy. Bonuses may be a topic on their agenda. "The much more important thing is that we get the world economic upswing on more sustainable footing," Holger Schmieding from BofA Merrill Lynch Global Research said Friday:
US markets
In the New York Thursday, the Dow Jones Industrial Average surged 2.1%, the most since July - - to end at 10005.96.
The Labor Department reported on Thursday that initial joblessness claims dropped to 512,000 last week, the lowest level since January, and worker productivity climbed at a 9.5% annual rate in the third quarter, the fastest pace in six years. Labour costs also fell, signaling companies may start hiring again.
The S&P 500 rose 1.9% and the tech-dominant Nasdaq Composite advanced 2.4%
Asia
The MSCI Asia Pacific Index gained 1.1% Friday.
The index has risen 29% this year.
Japan’s Nikkei 225 Stock Average added 0.7%; China’s Shanghai Composite Index rose 0.3% and Australia’s S&P/ASX 200 Index climbed 1.9%.
In Europe Friday, the Dow Jones Stoxx 600 is up 0.26%.
In Dublin, the ISEQ is up 0.60%.
Aer Lingus is up 5.7%, after releasing its October traffic statistics - - see link in Box above.
AIB has risen 8.1% after announcing on Thursday a new bond issue - - see bottom of page.
BoI has risen 2.9%.
CRH is off 2% and Elan is up over 2%.
Irish listed financial services group IFG reported today that its performance so far this year is in line with expectations despite difficult economic conditions.
In a trading update for the four months to the end of October, IFG said profits in its international division would be lower in the second half after a very strong first-half.
This business provides trustee and corporate services, and IFG said it was "encouraged" by the level of new business.
IFG said the UK division was delivering a strong performance, with its pension trustee business particularly strong.
However, trading conditions in Ireland remained "very difficult," and it expected its mortgage business to be loss-making in the second half of the year.
Gold is trading at $1,093.90 up $4.40 from Thursday's spot price close in New York.
Gold held above $1,090 an ounce Friday ahead of the US October jobs report. Charlie Morris from HSBC Global Asset Management told CNBC he isn't "particularly excited" about gold in the short term, but is bullish in the long term. "This story is not over until a typical portfolio has 5-10% invested in gold," he said.
Goodbody economist Deirdre Ryan comments: Economic View; Low policy rates to remain - -"As more encouraging signs on economic activity continue to emerge the focus remains on when central banks will begin withdrawing the record amount of monetary stimulus currently in place. Judging by yesterday’s events, however, the answer would seem to be not anytime soon. At the ECB’s gathering yesterday, given that the recession officially ended in Q2 and the economy is on a somewhat stronger footing, some indication of how the liquidity measures in place would be unwound might have been expected. Indeed, the first, albeit baby steps, were taken towards the exit door, with the statement highlighting for the first time that given the improvement in financial markets, “not all the liquidity measures will be needed to the same extent as in the past”. It was repeated that the policy measures would be withdrawn in a timely and gradual manner, although no timeline or idea of how this would be carried out was provided. The ECB continues to see the level of monetary policy as appropriate although they did acknowledge the improvement in the economic data and hinted that upgrades to their projections may be in the offing.
These will be provided next month when staff forecasts are updated. Their current forecasts expect a GDP decline of -4.1% this year and a further decline of -0.7% in 2010. In any case, it appears record low interest rates will continue to prevail well into 2010, with our forecasts having tightening beginning in Q3. We also had the latest MPC gathering yesterday, who announced, as expected, an extension of their asset purchase program, from £175bn to £200bn as well as extending the extent of its duration. The program is now expected to last for a further three months (previously had been expected to end this month). This indicates a slowing in the pace of purchases although the door has been left open for additional intervention if needed. Next week’s Inflation Report will be key in providing further insight into the MPC’s views."
Goodbody analyst Anna Lalor comments: Irish Financials; AIB 5 year unguaranteed issue, Fitch action on bank guaranteed debt - - "AIB yesterday completed its second bond issue outside the Government guarantee in six weeks. The previous issue was a 3 year senior unsecured bond that paid 250bps over mid-swaps rates. Yesterday’s 5 year issue was priced 285bps over mid-swap rates and was oversubscribed 1.8 times and involved 150 international investors. The higher pricing and lower oversubscription than the previous unguaranteed issue may reflect the longer maturity on the bond. The high cost of terming out funding for the Irish banks, alongside competition for deposits will continue to put pressure on margins at a time when the level of new lending at improved spreads is anaemic. However, once NAMA is up and running, the banks’ higher quality balance sheets (with increased liquidity) could see competition for deposits and the relative cost of wholesale funding for Irish banks ease.
Separately yesterday, as would be expected following its downgrade of the Irish sovereign from AA+ to AA- on Wednesday, Fitch downgraded the ratings on senior unsecured debt of the five covered institutions that comes under the Government’s guarantee scheme from AA+ to AA-. The support rating floors and long-term issuer default ratings of the five banks were re-affirmed. In its note on the Sovereign, Fitch commented that the Government’s action in dealing with the crisis here (from a financial system and fiscal perspective) have been “timely, effective and transparent”. It expects NAMA “will go a long way toward restoring the banking sector to health over the next few years”, while it also helps offset the threat of deleveraging by the banks further harming the economy (in that it reduces loan to deposit ratios). In relation to NAMA, the legislation to create the agency and its workings was passed in the Dáil (Irish parliament) last night and will now go to the Seanad (senate), before coming before the Dáil again next Thursday and then on to the President to sign."
