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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.
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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 UKeconomy and housing market are in fundamentally healthy shape Responsible lenders need to keep lending, stay in the market, do what's right and that's what will underpin the market."
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 UKeconomy or the housing market. It's clear that house prices are flat or falling, which is only set to continue, while the latest GDP figures show that "household spending all but ground to a standstill in the final quarter of last year," reports The Times. For an economy built on consumer spending, that's dreadful news.
HBOS is the UK's biggest mortgage lender. Saying that it will be just fine in the midst of a housing slump is like trying to argue that the country's biggest beef supplier will thrive on an outbreak of BSE it just isn't going to happen.
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 UShousing market continues to deteriorate, there will be write-downs coming from that direction too.
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...
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HBOS leads FTSE losers
In London, blue-chip shares closed in the red yesterday, despite a late rally and the fact that overall there were more risers than fallers. The FTSE 100 was down 10 points, at 6,076, at the close, with mortgage bank HBOS the biggest faller of the day. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 closed just 4 points lower, at 4,968. And in Frankfurt, the DAX-30 was 11 points higher, at 6,997.
Across the Atlantic, stocks closed mixed yesterday as investors digested the latest comments from Federal Reserve chairman Ben Bernanke pointing to concerns over record commodities prices but suggesting futher rate cuts could be on the cards. The Dow Jones added 9 points to close at 12,694. The tech-rich Nasdaq was 8 points higher, at 2,353. However, the broader S&P 500 was down one point, at 1,380.
In Asia, the Japanese Nikkei fell 105 points to 13,925, whilst the Hang Seng was up 107 points at 24,591.
RBS writes down £2.5bn
Crude oil had dipped to $99.33 this morning. In London, Brent spot was also lower, at $97.84.
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 Londonthis morning, the Royal Bank of Scotlandbecame the latest bank to reveal the scale of its subprime-related losses. The bank posted an 18% rise in profit - to £7.3bn - for 2007. It also wrote down £2.5bn in bad loans and losses related to credit-market securities.
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