LONDON MARKETS

As widely predicted, the BoE Monetary Policy Committee elected not to change UK interest rates today. However, in a surprise move the BoE decided to extend quantitative easing by 50bn to 175bn, giving a boost to the banking sector.

Banks drove the main index higher, with Lloyds the best blue chip of the session, up 11.5p at 104.7p. Royal Bank of Scotland added 4.75p at 53.45p, ahead of its interim results tomorrow, and Barclays climbed 17.5p at 354p.

Lloyds Group Bounces on Brighter Future (LLOY)
Posted by TradingHelpDesk August 6, 2009

I have a great belief in the exciting prospects for the Group going forward. We are very strongly positioned for long-term success with a highly experienced management team focused on delivering the significant potential of the new business. Sir Victor Blank, Chairman of Lloyds Group.

The above quote kicked off the Lloyds Group interim report released on August 5th. Its a surprisingly bullish statement considering the volume of bad debts the group acquired, unknowingly, in the HBOS acquisition. Admittedly the comments from the CEO, J. Eric Daniels, which followed did highlight the weak economy, high levels of impairment and other short term issues but it was clearly a conscious decision by the management to commence the review of the 1st half of 2009 with an optimistic forward looking statement rather than dive into HBOS related sulking.

With the benefit of hindsight, it is impossible to imagine Lloyds would have finalised the HBOS deal in the manner it did - without thorough due-diligence and in such haste, in the absence of government pressure. Lloyds had enjoyed decades of prudent growth and a secure balance sheet until late 2008. The bank, like all financial institutions was suffering during the crisis but it was bad debts of HBOS which changed the scenario for Lloyds from challenging to potentially terminal.

Now with the banking crisis dust settling and with a half years worth of experience to draw on the group has clarified what sector analysts suspected the significant majority of Lloyds Groups impairments can be attributed to HBOS lending. Around 13.4 billion of loans deteriorated in H1 2009 and needed to be classified as impaired of which 9.7 billion related to HBOS corporate loans. This compares to a like-for-like bad debt figure of 2.5 billion in the first six months of 2008. Earnings per share crashed to -18.4p (loss) from 24.1p (profit). Total profit/loss attributable to shareholders for H1 2009 was -3,124 million (H1 2008 1,954 million).

Unfortunately for tax-payers even if the latest half year impairments represent the peak of the bad debt cycle Lloyds Group is likely to fully utilise its 25 billion ceiling on losses agreed in the government asset protection scheme. Thereafter, in line with the terms of the rescue the tax-payer is due to pick up the tab for impairments in excess of Lloyds liability. In return the UK government owns 43% of Lloyds Group shares.

LLOY shares appreciated strongly on release of the H1 report with speculators betting on a brighter future for the group. Risks remain, not least 20% of the retail mortgage book still in negative equity, but with the banks potential liability capped and the economy recovering shareholders can be confident the worst is behind for them.

Sold my holdings here now from last year, have nearly made back my money from my stupid trading last year. May have sold too soon, but happy to be out, large caps aren't my thing, never have been really.

Lets see what happens nxt stop is 120p

Or may be 90p

maybe - think RBS dragging this down

my short at 105p doing well already

I think this will turn around as quickly as it went down ,,i traded BARC earlier this year and wish now i'd just held it , if you can time your shorts you can probably do ok .I'd rather be long over the next 6 months

The bank stocks have recently out-performed the market by 10% they are not making money on loans not lendingcredit default is still lagging and normal banking practice would result in under-performing the marketthey are still only making money on risk/investmentnot with my hard earnedI would have cut and run long ago

Seems to me they now pay negligible interest on my deposits and those borrowers I know are all seeing lending margin increased at review. Basic banking must be doing very well apart from bad debt issues and these will unwind over time. Investment banking made most of the money in first half, but encouraging to see size of derivative exposures falling (very sharply for BARC, my largest holding). Bound to be a bit volatile in the short term, but in medium term I think the sector will continue to outperform.Always DYOR

Partridgeyou may well be rightAll vibes around are sounding intuitively of another large dip in the marketsI have heard this too many times over the last week or so
The Status Quo will soon be Down Down.Deeper and DownThe Banks are a lotterywith similar business modelsthe sp reflects on those with the best bullshitI happen to believe BARC have a Gold Medal in that disciplinebut good luck to all Bank holders over the coming monthsI have no motives in this sectorso all comments imhoat this moment in time FTSE4649 BARC3-46 LLOY98.8

I agree in part tabasco but the market as you know is irrational and some have ridden the banks up nicely.

yes they were ridden up briefly by god knows who......city noses in trough with gov prob.
if u made money take kit before it falls again as it will decline after this brief period

MASTER RSI. SOLD LLOY, RBS @ BARC YESTERDAY. JUST BOUGHT RBS AGAIN 46.8P. LOAD OF CASH LEFT WHATS NEXT, CHEERS.

Is someone LYING?

-marni - said I short at 105p

The shares hardly reach 105p yesterday, and managed to short at the real top.
It stayed at 105p during 10 seconds twice at 13.28pm, and then move down fast.

-marni - posted at 13.56 pm as the shares were trading at 103.30p

I had to say that as the shares are recovering fast now 102p, so most likely now >>>>>>>>>>> I close this morning

What a FARSE

Highest price yesterday was 105.5 - a buy!

-skinny- we are not talking about the highest price of the day, but high at time or before posting - shorting

look at the chart 13.56pm or check the trades

Saying the worst could be over for the Banks >>>>>>>>>>>>

Yesterday's ----- 06-08-09

How are the UK banks holding up thus far?

The sector's reporting season has been predominantly positive so far this week--can Royal Bank of Scotland uphold the trend tomorrow?

So far this week, weve had interim earnings from four of the five main London-listed banks, each of which has for one reason or another surprised on the upside and sent shares in their respective stocks rallying higher, with the sole exception of Standard Chartered, which added a further element of surprise in announcing a share issue.

Barclays
Barclays and HSBC kicked off the banks earnings season on Monday morning and set the tone for the week. Both groups, neither of which succumbed to propping up its balance sheet with taxpayers money earlier in the year, reported profits for the first half of 2009. The subsequent increase in the two firms share prices helped push the FTSE 100 index to its highest close this year.

Barclays revealed soaring bad debtan issue that proved to be something of a feature as the week progressed, which hampered its profit growth over the six months to end-June. But a particularly strong performance from its investment banking division helped push first-half profits up 8% year-on-year to 3 billion.

HSBC
On the same day, Asia-facing HSBC announced group profits of $3.7 billion (2.2 billion)a severe drop from the $8.3 billion announced over the same period a year ago but still higher than the market had expected as global banking and markets revenue more than doubled.

In stark contrast to most global banks, HSBCs loan/deposit ratio was only 79.5% at the end of the first half affording the bank substantial firepower to redeploy assets from securities into loans and take advantage of organic growth opportunities as we move through (and eventually out of) this nasty credit cycle Morningstar associate director Matthew Warren commented.

Despite its ongoing run-off portfolio of $91.2 billion troubled US consumer loans, which continues to be a drag on the bank, Warren feels that overall HSBC is much better positioned to chase down opportunities than many of its global peers.

Standard Chartered
Standard Chartered, another UK-listed bank with a strong presence in Asia, also topped consensus forecasts when it unveiled interim numbers on Tuesday. Standards group net profit rose to $1.9 billion in the first half of 2009 from $1.8 billion in the year-ago period, fuelled by its wholesale banking division, which reported a 36% increase in pretax operating profit. Taken alone, or even in conjunction with the groups 10% interim dividend hike, these numbers should ordinarily have sent the share price rising but the bank accompanied its figures with news of a 1 billion fund-raising.

The funds will be used to take advantage of potential opportunities in emerging market, though management was quick to assure it had no intention of going on a spending spree. Still, while the decision to both raise equity and pay out more in dividends implied the group has confidence in both its business model and the economic prospects going forward, investors were spooked by the 1 billion book build and sold off the stock immediately following the announcements.

Lloyds Banking Group
Surprising as this move was from Standard, it was Lloyds Banking Group that raised most eyebrows on Wednesday and triggered the most dramatic of share price moves this week.

At first glance the banks pro forma loss of 4 billionin stark contrast to the profits of its peerslooked rather horrific but in fact analysts had been predicting losses closer to 5 billion. By Morningstars calculations, taking away a 11.2 billion non-cash goodwill credit (arising from the difference between HBOS' fair value and the low price Lloyds paid for it), the firm lost 5.2 billion before taxes in the first half.

The numbers, however, were largely irrelevant given the magnitude of the HBOS acquisition, which closed in January of this year. Plus, it wasnt the better-than-feared losses that sent the shares surging more than 14% higher during Wednesdays trading session. Instead, it was managements claim that impairments appear to have peaked that brought investors rushing to buy the stock.

The bank, which was forced to relinquish 43% of its shareholdings to the UK government mere weeks after the HBOS acquisition in order to secure a 17 billion bailout, today said it expects bad debts will dissipate from the second half of 2009 onwards. This assumption behind this assertion, however, is a tad dubious. Lloyds said impairments on retail and corporate assets would normally be expected to peak between one to two years after the trough in the recession, yet the jury are still out on whether we have yet passed this trough, let alone whether it was passed two years ago.

Royal Bank of Scotland
All eyes will be on Royal Bank of Scotland on Friday to see if the other bank that signed up for the government's asset protection scheme can outdo analyst expectations and fuel the rising trend in financial sector valuations.

Improving sentiment
Overall, market reactions to each companys results imply that it is less about numbers and more about sentiment. After two years of financial sector strife, investors appear keen to move on and focus on building a more stable and profitable future. By no means are we saying that the banking difficulties are over: theres no financial fairy godmother here to wave her wand, but it appears that the worst could be over for several sector players.

A bit busy lately but here is some Sunday papers news.

TIMES

Lloyds Banking Group is weighing up plans for a multi-billion pound share issue to cut its dependency on the taxpayer

From The Sunday Times -- August 9, 2009

Lloyds plots share sale to cut state tie.

Eric Daniels pressed to stage rights issue to reduce 16bn government insurance fees.

LLOYDS BANKING GROUP is weighing up plans for a multi-billion pound share issue to cut its dependency on the taxpayer.

The bank is considering a partial withdrawal from the governments asset protection scheme a taxpayer-backed insurance policy designed to shelter banks from the worst losses on their bad loans.

Eric Daniels, the chief executive of Lloyds, is said to believe the fees attached to the scheme 16 billion are too high, and pass too much control to the government. Its 43% stake in Lloyds would rise to more than 60% if the deal went ahead as originally drafted.

Lloyds agreed to put 260 billion of troubled loans into the scheme when it was outlined in March. It is understood that the bank and some of its largest shareholders are considering a substantial reduction in its participation. Bankers believe the final value of assets placed into the scheme could fall by as much as half.

If the government agreed to the move, Lloyds would instead shore up its balance sheet by raising substantial sums from the sale of new shares. Analysts estimate it would have to raise 10 billion to 15 billion if it pulled out of the scheme altogether. Some analysts believe shareholders would be better off to agree to this than pay the government fees.

A City rebellion is emerging over the issue, with a number of hedge funds now threatening to vote against Lloyds participation in the asset protection scheme. It needs to be approved by a shareholders meeting, likely to be held later this year. Much of the recent activity on Lloyds share register has been fuelled by hedge funds, say market sources.

Many of Lloyds traditional investors, however, feel it would be foolish to vote against the scheme while the economic outlook remains uncertain.

Daniels said last week that bad debts at Lloyds had already peaked, after unveiling 13.4 billion of impairments for the first six months of the year. Based on Lloyds new forecasts, the asset protection scheme may no longer represent good value for the banks shareholders.

More than 150 billion-worth of assets headed for the scheme are commercial property loans, where Lloyds has already taken huge losses. Paying the government to insure against further falls in value seems illogical, according to some investors.

One analyst said: The government is charging 16 billion for the scheme and, based on what Lloyds are now saying, it looks like they will only be able to claim back about 10 billion on the insurance. So, at the moment, it looks like they will lose 6 billion.