Market Report: HBOS banks gains on hopes of Australian deal

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HBOS recovered from recent lows and claimed first place on the FTSE 100 yesterday after market rumours mooted the possibility of an asset sale.

The bank, which is raising £4bn via a rights issue to shore up its balance sheet, was said to be close to selling its BankWest subsidiary in Australia in a bid to raise its Equity Tier 1 ratio by up to 100 basis points. The speculation drove investors into the stock and by the close HBOS was up almost 7 per cent, or 18.25p, at 279.25p, well clear of the 275p per share rights issue offer price.

Sandy Chen, a banking analyst at Panmure Gordon, estimated that a sale of BankWest and the other assets that make up HBOS Australia for £2bn could generate an improvement of around 30-40 basis points. "Obviously, if they sell BankWest plus the other assets which make up HBOS Australia for a higher price, they can generate more basis points," he said.

The wider banking was also buoyant. Standard Chartered rose 51p to 1,446p, Royal Bank of Scotland was up 9p at 213p and Barclays gained 6.75p to 292p. Elsewhere, International Ferro Metals lost more than 7 per cent, or 7.75p, to 97p as Liberum Capital highlighted the "growing evidence of a slowdown in the steel segment". "Spot ferrochrome prices are sliding and we worry that the disappointing ferrochrome contract of Monday may turn out to be this cycle's peak," the broker said. "With ferrochrome still trading at two times marginal cost, earnings per share downgrades in a correction scenario for ENRC and IFL could be dramatic. Continue to avoid these names."

By close, ENRC had bounced back from earlier lows to 1079p, up 14p, despite Liberum's advice.

In the wider mining sector, Xstrata, which was up 61p at 3710p, and Anglo American, which rose by 18p to 3270p, were firm after Cazenove said it viewed recent weakness as a "compelling entry" point into the two stocks.

Overall, the FTSE 100 closed up 50.3 points at 5,476.6. The London benchmark hit an early low of 5358.5p, down more than 20 per cent from its June 2007 high of 6732.4, and briefly entered bear market territory. A strong start on Wall Street, where Dow Jones Industrial Average was up 93.1 points at London's close, helped the FTSE 100 break in to the black. The FTSE 250 was down 1.8 points at 8,656.4

On the FTSE 100, the fallout from Marks & Spencer's profit warning continued and J Sainsbury was down 10p at 280p, at first place on the loser board. M&S was down 4p at 236p as brokers weighed in on the company's prospects. Nick Bubb, a retail analyst at Pali International, said that, depending on the management situation, the balance and the dividend, things may yet get worse. "The AGM next week on his [Sir Stuart Rose's] re-election as executive chairman could be ugly and there is probably a 40 per cent chance that in due course he will be forced to step down or resign," he said. "That will leave M&S in even more of a mess than it is currently... In terms of balance sheet, because of the somewhat reckless expansion programme, with cap ex still committed to be as much as £850m this year, net debt could be as much as £3.4bn by year-end, even if they don't do the rest of the share buy-back (saving £100m)."

The bad sentiment hit the FTSE 250-listed Premier Foods the hardest. The company, which supplies food to M&S, saw its stock slump by more than 11 per cent, or 9.5p, to 73.75p.

Carphone Warehouse remained weak and lost 4.8p to 182p after Merrill Lynch removed the retailer form its list of most-preferred European telecoms stocks. Vodafone, which bought a 70 per cent stake in Ghana Telecom yesterday and rose by 0.3p to 152.7p, kept its place in the list. "We remain convinced that a mobile termination 'worst case' is very unlikely and that its mobile data and wireless broadband opportunities are underestimated," said Merrill.

On the FTSE 250, Barratt Developments rose by 1.25p to 41.5p after reports of possible job cuts at the troubled housebuilder. Earlier in the day, traders cited speculation that Barratt may bring forward its trading update, which is due next week.

Also on the upside, the directories group Yell touched an intra-day low of 57.5p after ABN Amro moved the stock to "hold" from "buy". "If Yell breached banking coven-ants, we believe the banks may require a less aggressive balance sheet structure as the price for refinancing the bulk of Yell's debt," the broker said. "This could mean a material rights issue is needed." ABN Amro added that its recent scenario envisages Yell raising £760m of new equity in a right issue. By close, Yell had recovered to 61.75p, up 1.25p.

On AIM, the specialist software group Financial Objects soared by 82.54 per cent, or 26p, to 57.5p after Temenos, the Swiss banking software specialist, made a 60p per share recommended cash offer for the company.