SOME City investors fear that HBOS, provider of one in every four mortgages, will be the “last man in the market” just as the housing market tips over into a Nineties-style crash. Yesterday the bank showed it had lost none of its appetite for lending and even raised its growth forecast for property prices this year.
HBOS’s share of new mortgage business was 25 per cent in the first six months, two points ahead of its target and the group’s historical share of the nation’s loanbook. The growth in volume has not been at the expense of profitability, with the net interest margin remaining stable at a shade under 2 per cent.
The bank has had teams of economists poring over the data to see what could trigger a collapse in property prices and has concluded that the single biggest factor is unemployment. Gordon Brown’s jobcreation scheme in the public sector means that unemployment, at a generational low, is unlikely to rise soon.
Even if the economic recovery does hit a brick wall and unemployment rises, sparking a property collapse, HBOS argues that it is well-cushioned from any such bust. With the loan-to-value on its total mortgage book at 42 per cent, its lending is twice covered by the assets.
Viewing HBOS as solely a mortgage bank also ignores the other substantial parts of its business. Corporate banking is showing equally strong growth, again without any harm to margins and with only a slight impairment to credit quality.
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Meanwhile, HBOS aims to increase its market share in at least three other areas. In business banking, total lending jumped by a third from a very low base and risk-weighted assets grew 13 per cent in the past six months. In investment products, HBOS already claims to be the third biggest player and wants to be number one. And it has stepped up the assault on the big clearers, opening 600,000 new current accounts in the first half.
HBOS needs capital to finance this expansion. A 5 per cent rise in the interim dividend enabled the bank to retain more than 40 per cent of profits. This puts it well on the way to achieving dividend cover of 2.5 times, just as the 21 per cent increase in pre-tax profits gets HBOS closer to its target of 20 per cent return on equity by the end of 2004. If the housing market does crash, then HBOS will suffer. Conversely, if there is no collapse, then the stock may well fly. But without the comfort of a high yield, this is a “hold” or a “speculative buy” at best.
ICI
ONE analyst summed up well the response to yesterday’s results from ICI: instead of being awful, they were just bad. This company, once one of the bluest chips on the London market, has lurched from crisis to crisis and there was much relief not to hear of another disaster.
Quest, the fragrances and flavourings business, had been the jewel in ICI’s tarnished crown but is now its biggest liability after an information systems debacle and a loss of confidence among customers. Investors took heart, both from the news that customer numbers had stabilised and from the management’s obvious determination to act.
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The picture painted in most of the other ICI divisions was not any prettier. Uniqema, the specialist chemicals unit, has suffered a sharp rise in costs, coupled with a corresponding reduction in margins, but it still needs to increase its prices. The business has made some progress, but its report card would say “could do better”.
National Starch, the adhesives and food thickeners division that was also a disaster at one stage, also needs to increase prices without losing market share. It has worked hard to bring out new products, but now needs to stiffen its resolve and push them hard in the market.
Thank goodness for paints, the backbone of the company. Its results were in line with expectations and although the division could do with some product innovation, it should at least provide a sound base for the corporate restructuring. But risks there are aplenty. The management, led by John McAdam, makes all the right noises but no one pretends the turnaround will be easy. There is also a question mark over the pension fund. ICI has already had to set aside £36 million for this liability, but the figure could rise at the next triennial valuation.
At 8.5 times 2004 earnings, the stock is cheap compared with a sector average of about 13. But investors should wait for firmer evidence of stability.
Aviva
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AVIVA is the latest in a longish line of life insurers to claim that the sector has turned a corner since the stock market’s rally from the mid-March low. Maybe, but customers are hardly bashing down the door to get at its products.
The company, cobbled together from Norwich Union, Commercial Union and General Accident, thinks it has the answer: if British savers are not interested, then it will try Italy, France, even Poland, and all points east instead. More than half its sales during the first six months came from overseas.
While new business in the UK dropped 22 per cent to £531 million, it increased by almost exactly the same margin to £581 million in continental Europe. The company now claims to be the market leader in life insurance in Spain. Viva Aviva, as they say in Barcelona.
Yesterday’s results, down 13 per cent at the operating level, were also flattered by continued strength in its general insurance business. Although profits were down here, too, at £387 million they again accounted for almost half of the total.
Given that we are two years through an expected three-year cycle in general insurance premiums, Aviva may not be able to count on a similar contribution next time around. It hopes that life and pension sales will have recovered sufficiently by then to make up the shortfall.
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Investors were also cheered by the improvement in Aviva’s solvency, not to mention the 3 per cent rise in the dividend. If you want to be in the life insurance sector, then this has to be one of the better companies. The yield of 4.7 per cent provides some insurance. Buy — or compra, as they say in Madrid.