MORTGAGE banks proved a drag on a faltering FTSE 100 as analysts advised caution on HBOS and Northern Rock ahead of first-half results.
Although Credit Suisse First Boston raised its 2005 and 2006 profit forecasts for Northern Rock by 3 per cent, it suggested that next month’s interims would provide meat for the bears in highlighting the pressure on its funding costs. The Swiss broker believes that additional costs relating to regulation and accounting standards and pressure on funding from higher inter-bank interest rates mean first-half profits, due on July 20, will fall below last year’s.
CSFB thinks funding costs will have an impact at HBOS, which reports on July 28. That view is echoed by UBS, which thinks the Edinburgh-based lender “offers the most credible medium-term revenue growth story of the UK banks”. But it cautions that HBOS’s high loan/deposit ratio means it suffers more from the current difference between base and inter-bank rates. The Swiss broker also points out that pricing for mortgages, personal unsecured and corporate loans, to which HBOS is exposed more than its peers, has deteriorated this year. Further, corporate loan volumes are below those of last year, with a slowdown in property and construction yet to be offset by a pick-up in other areas of the economy. Northern Rock weakened 14½p at 729½p, with HBOS down 5p at 714p. The FTSE 100 fell 50.8 at 4,433.2.
A worsening security situation in Saudi Arabia, underlined by the Foreign Office’s order for the departure of junior and non-essential staff, left BAE Systems 4¾p lower at 208p. The contractor has 3,000 staff in the kingdom, from where it draws 30 per cent of profits. Aside from the political and commercial difficulties in Riyadh, BAE is expected to suffer from a shift in spending on conventional defence to fighting terrorism.
A 7 per cent cut in 2005 and 2006 earnings per share forecasts from Goldman Sachs saw Rolls-Royce lose 4½p at 231p. The revision, to 15p and 16.1p respectively, was triggered by the US broker’s estimate of the possible development costs of its new Trent 1000 engine to power Boeing’s 7E7 Dreamliner. However, Goldman said those costs would be partly offset by £450 million of receipts for risk-sharing partners.
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Marks & Spencer shed 6¼p at 359¾p, despite views that Philip Green will raise the cash element of his 290-310p indicative offer this week. Dresdner Kleinwort Wasserstein believes the “balance of risk is now on the downside”. It says last week’s interest rate rise, and the prospect of more to come, will put pressure on Mr Green’s bid, and thinks the possibility of an all-cash offer above the current level looks slim. SABMiller dipped 6 ½p at 676p as Graham Mackay, chief executive, offloaded 29,428 shares at 671p, trimming his interest to 48,524.