Market Report: Banks finish in the red over ring-fencing fears

Investors withdrew from the banks last night, as analysts warned that the market was not taking into account the damage that could be caused by plans to force the sector to ring-fence its high street operations.

Barclays, Lloyds Banking Group and Royal Bank of Scotland shifted back 6.6p to 252.3p, 0.31p to 47p and 0.27p to 38.65p respectively following HSBC's decision to downgrade its advice on all three to "neutral" after calculating that the proposals from the Independent Commission on Banking (ICB) could cost them over £10bn.

Saying that the plans, which were backed by George Osborne last week, "could be the biggest structural change to the UK banking sector for decades", the broker warned it expected "much of the cost of the ring-fencing [to] be borne by shareholders".

"So far the equity and credit markets have treated the ICB ring-fencing proposal with remarkable equanimity," said HSBC's analysts. "Maybe that is because it is not seen as a credible proposal, or maybe it is because the initial reaction to the report was a positive one. We are not so sanguine."

The main concern, they said, is the loss of sovereign support for the bank's activities outside the ring-fence, "a very important consideration for credit markets globally". Warning that "rating agency downgrades [are] on their way", the analysts predicted the banks will face a large increase in funding costs as a result.

The FTSE 100 spent most of the session deep in the red, but managed to limit its losses, closing just 2.32 points behind at 5,772.99. The economic situation in Greece was still in focus, while there was also caution as traders waited for the US Federal Reserve's interest rate decision and the subsequent press conference by its chairman, Ben Bernanke, both due after the bell.

The beneficiary of renewed bid speculation on Tuesday, Man Group continued its positive week, advancing 11.2p to 241.8p as brokers rushed to pledge their support for the world's largest listed hedge fund manager. Credit Suisse, its house broker, was one, upgrading its advice to "outperform" and saying "the improving relative performance at [its AHL fund] and signs of improved fund raising... should underpin a return to growth".

Another positive voice was Goldman Sachs, which initiated coverage with a "buy" rating and said the synergies from its recent acquisition of GLG were "underappreciated". Meanwhile Citi chose Man as one of its top picks in the asset management sector, while it also named Henderson as among its favourites, as it ticked up 2.7p to 145.1p

Elsewhere, vague takeover chatter involving Centrica was doing the rounds yet again, helping the utility company surge forwards 5.6p to 327.2p.

The electrical retailers were in focus on the FTSE 250, with Kesa Electricals touching a high of 147.9p after revealing that it was considering selling its loss-making Comet chain. However, the group – which released its full-year results – ended up edging forwards just 0.1p to 134p.

Dixons Retail benefited from the prospect of its rival exiting the UK, while it also received a boost from vague speculation suggesting it could be a target for the US chain Best Buy. The group moved 1.18p higher to 16.53p, despite disbelief from Arden Partners' Nick Bubb, who said such a move would be "hard to square with [Best Buy's] new interest" in smaller stores.

Investors waiting for Heritage Oil to start drilling at its Malta prospect were informed by UBS that a border dispute between the country and Libya meant activity was unlikely in the next year. The broker also played down Heritage's takeover credentials, saying that the explorer is unlikely to be a target until it "has proved up more of its gas reserves and has a better estimate of recoverability and further exploration potential", although the group still creeped forwards 0.5p to 216.5p.

Imagination Technologies was driven back 18.5p to 414.5p after releasing its final results, as investors in the chip designer reacted with disappointment to the news that revenues at its Pure radio business had fallen, despite the group seeing an 80 per cent overall increase in its pre-tax profit.

Investors had a number of new companies to gamble their money on, including Vallares, the investment firm led by Nathaniel Rothschild and the former BP head Tony Hayward which gained 5.5p to 993.5p on its first day of unconditional trading.

Ubisense's debut saw the Cambridge-based group, whose real-time location system helps keep track of components on production lines, power up to 217p from its placing price of 180p. However, Jellybook failed to move forwards on the Alternative Investment Market, with the social media group closing at 9.75p after starting its first day at 10p.

On the small-cap index, Sportingbet was lifted 2p to 42.5p on rumours the gambling group could receive a 70p-a-share approach from Ladbrokes, which fell 1.2p to 146.5p.

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