Banks reel after alerts at HSBC and Deutsche

More market turmoil as previously secure banking giants run into trouble
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The Independent Online

Fresh turmoil hit the banking sector as Deutsche Bank issued a profits warning and analysts suggested that HSBC could need a massive injection of fresh capital.

Deutsche Bank, Germany's biggest lender, said it would post a net loss of about €3.9bn (£3.5bn) for 2008, compared with net profit of €6.5bn a year earlier – its first annual loss for five decades. The bank suffered a record €4.8bn loss in the fourth quarter as the financial crisis battered its debt and equity trading operations.

The news alarmed the market about the prospects for other big banks as Deutsche had been relatively unscathed by the credit crunch. Josef Ackermann, the chief executive, said he was "very disappointed" by the loss, adding that the bank had "scaled back or exited trading strategies most affected by market turbulence".

The bank said its credit trading business and own-account dealing in bonds and shares suffered from "exceptional market conditions". It joins Goldman Sachs, Morgan Stanley and Credit Suisse in reporting fourth-quarter losses after September's bankruptcy of Lehman Brothers shattered confidence in financial markets.

Deutsche Bank shares fell 8 per cent, taking this year's fall to 21 per cent. The news hit shares in Royal Bank of Scotland, which fell nearly 15 per cent and was the worst performer in the FTSE 100, closely followed by Barclays. Both UK banks are heavily exposed to the debt markets that helped trigger the shock loss at Deutsche Bank. Confidence in Barclays was also hit by a second day of massive job losses. Barclays said it would slash 2,000 jobs in its retail and commercial banking operations, following Tuesday's announcement of 2,100 redundancies in its investment banking and wealth management businesses. The shares were also hit by speculation that a boardroom row over valuing toxic assets drove the resignation of the bank's deputy chairman, Nigel Rudd.

HSBC shares fell 8 per cent to a near 10-year low of 588.75p after Morgan Stanley analysts said Britain's biggest bank's profit would fall "sharply" this year and would not recover until 2011 at the earliest. They said the bank, which is the only UK lender not to raise fresh capital, could need up to $30bn (£20.6bn) to shore up its reserves against losses.

"Recent recapitalisations by UK and European banks mean the capital premium afforded to HSBC is being diluted. In addition, accounting and capital measurement issues mean that, in our view, HSBC's 7.3 per cent core capital is overstated relative to peers," the analysts said.

HSBC was the first bank to warn of rising defaults on sub-prime loans in the US and has written off billions of dollars of those assets. But it was the best-performing UK bank stock last year because of its limited exposure to toxic credit investments, its strong balance sheet and liquidity. Concerns about its capital position have grown as the economy has worsened and others have boosted their buffers. HSBC declined to comment but UBS analysts came to the bank's defence, criticising Morgan Stanley's arguments and predicting about $10bn of capital raising by HSBC from existing shareholders.

Britain's banks were also hit by disappointment over the Government's plans to shore up lending to businesses by providing £20bn of loan guarantees. Traders said the market wanted the Government to come up with a "bad bank" plan that would allow lenders to park their toxic assets and clean up their balance sheets.

Adding to jitters was tonight's end to the ban on short-selling financial stocks. The Financial Services Authority insisted it would press ahead, saying: "The FSA will allow the ban on short selling stocks in UK financial sector companies to lapse on Friday. These changes will take effect at 00:00:01 on 16 January 2009, permitting short selling of these stocks on Friday."