Market Update: Banks in focus as FTSE climbs

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The Independent Online

The FTSE 100 was up 45.7 points at 4098.17 while the FTSE 250 climbed to 6111.88, up 23.75 points, at around noon.

The banks were in focus, with Barclays advancing to 80.2p, up 29p or 56.64 per cent after chairman Marcus Agius and chief executive John Varley published an open letter to shareholders, revealing £8bn in gross credit market write-downs but insisting that the group was "well funded" and profitable.



The move worked, reassuring investors and prompting a turnaround the bank's share price, which has more than halved over the last nine sessions.



Returning investors also boosted the wider sector, with HSBC swinging to 542.5p, up 5.24 per cent or 27p, after Evolution Securities weighed-in with a "buy" note.



"We expect the bank to maintain its dividend at 87 cents through 2009, but believe the market has already factored a 50 per cent dividend cut into the share price," analyst Brue Packard said, adding:



"HSBC has raised its dividend up more than 10 per cent per annum since 1993 - and even during the Asian crisis managed to avoid a dividend cut. Historically, large scrip take-up has reduced the cash cost of these dividends. Take-up peaked at more than 40 per cent in 2008, having [bottomed] at 12 per cent in 2002.



In 2001, HSBC paid out 89 per cent of its reported attributable profits (72 per cent on a cash basis). Moreover, payout as a percentage of tangible equity has ranged 9-14 per cent… By way of comparison, in 2002 Lloyds paid an uncovered dividend, at 36 per cent of tangible equity. None of the above guarantees that the dividend won't be cut, but we would infer that a cut is by no means inevitable."



Moving up...



On the second tier, Kesa Electricals rose to 98p, up 4.81 per cent or 5.25p, after UBS switched its stance on the stock to "buy" from "neutral", saying:



"Although there is a risk to further downside, earnings estimates have fallen sharply and also assume further downside. New venture losses distort the picture even more, despite some being close to value creating. As a result, we think it is right to look again at [the sum of the parts valuation] and also cut the discount from 25 per cent to 15 per cent. This gives a new target price of 120p (from 89p)."



Moving down...



Wolseley was the weakest on the FTSE 100, slumping to 200.5p, down 29.9 per cent or 85.5p after posting a worse than feared trading update. The construction materials group warned on half year profits and said its debt pile has increased due to adverse currency movements. Contrary to recent reports, the statement was not accompanied by a capital raising, prompting disappointment amongst analysts at Collins Stewart.



"Wolseley has missed an excellent chance to raise capital," they said,



"We have been advocating such a move for many months, and still believe it is inevitable. On our new estimates, Wolseley would breach its 3.5 times [debt to earnings] covenant by year end, with a ratio of 4.5 times [debt to earnings]... We calculate the group needs to raise circa £700m, which would represent a 1-for-2 rights [issue] and would be 23 per cent dilutive to earnings. The net debt to earnings [multiple] would fall to 3 times under this scenario."





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