Market Report: HSBC firms up as Footsie bounces back

HSBC rose with the wider market last night, rallying after a leading broker highlighted the scope for a recovery at HSBC Finance Corporation, the banking group's American arm.

Goldman Sachs said HFC's "conservative provisions and proactive steps to limit losses" offered a "powerful backdrop for a turnaround in the business". Specifically, the broker said credit losses in absolute dollar terms appeared to have peaked in the second quarter of last year, and HFC should increasingly charge off loan losses against balance sheet provisions.

Taken together, growing stability in credit costs and the reliance on existing provisions should boost HFC's earnings, the broker explained. Indeed, when compared to Goldman's estimates, the market appears to be underestimating the scope for an upside. "Recent data points suggest that HFC's core credit-card business had the near-term potential to surprise positively given three trends, each of which represent upside-risk to our base case estimates," the broker said, noting that credit quality was stabilising, card yields were rising and receivables were shrinking.

"Under an 'upside scenario', HFC's aggregate 2009-11 provisions would decline by $2.4bn and it would return to profitability in 2011, while group net income would rise four per cent, on average, during 2009-11," it added. Under Goldman's base case, the business would return to profitability in 2012. The assessment helped HSBC rise by 8.5p to 698.6p.

In the wider sector, Lloyds Banking Group, which remained the subject of rumours regarding a possible capital raising, was once again in focus, climbing 1.43p to 96.23p after Société Générale issued a "buy" note. The rising appetite for risk also boosted Barclays, which was 2.45p stronger at 361.45p, and the Royal Bank of Scotland, which rallied by 1.57p, to 47.08p.

Overall, the FTSE 100 mounted a comeback, rising to 5,242.57, up 35.21 points, while the FTSE 250 was broadly unchanged, up 4.74 points at 9,323.65. Investors bought in despite news that the British economy contracted by 0.4 per cent in the third quarter of the year, surprising City analysts, who had pencilled in a rise in GDP. Traders said the data, while grim, suggested that key equity market catalysts such as low interest rates and the Government's and the Bank of England's stimulus measures were likely to remain in place for the time being. Howard Archer, the chief UK economist at forecaster IHS Global Insight, said the weak GDP figure "puts serious pressure on the Bank of England to extend its quantitative easing programme" at the November Monetary Policy Committee meeting.

Miners dominated the upside, with Anglo American, the target price for which was raised from 2,520p to 2,550p at Deutsche Bank, rising by more than four per cent, or 95p, to 2,380p and Kazakhmys gaining 3.4 per cent, or 42p, to 1294p. Credit Suisse analysts did their bit to lift investor sentiment by switching their stance on the sector to "benchmark", citing, among other factors, the fact that the Chinese economy should grow by 9 to 10 per cent until 2001. Vedanta Resources, up 72p at 2,358p, received additional support from Morgan Stanley, which reiterated its positive stance on the stock, saying the price was on track to gain ground even without a commodity price rally.

Elsewhere, the satellite communications group Inmarsat touched a session high of 600.647p, up about 6 per cent, amid renewed chatter regarding bid interest from US hedge fund, and Inmarsat shareholder, Harbinger. The rumours died down by the end of play, with the stock closing well off its highs at 577.5p, up 10.5p.

Halma, the safety equipment group, saw its shares climb to 229.9p, up 5.5p, after UBS upped its target price for the stock from 195p to 240p in an engineering sector round-up. The broker maintained its "neutral" stance on the stock, and on Rotork, which rose 16p to 1175p. Spirax-Sarco Engineering, which was downgraded to "neutral", was 11p weaker at 1,120p, while Renishaw, which was rated "buy" at UBS, eased back 4p to 576p. "We believe the four companies have the highest inherent 'quality'," UBS said. "Compared to the rest of the sector they have generated an additional 400 basis points of organic growth every year over the past 10 years. Margins have been more than 900 basis points better every year too, and balance sheet structures more conservative."

On the downside, the housing sector continued to underperform, with Redrow declining by about 6 per cent, or 9.4p, to 147p and Bovis Homes losing 7.7p to close at 432.9p. Bellway was 8p weaker at 793.5p and Taylor Wimpey fell back 0.6p to 41.76p.

The staffing group Hays failed to make any headway, closing broadly unchanged at 103p, down 0.1p, after KBC Peel Hunt initiated coverage on the stock with a "sell" rating, saying that while the group was well placed to grow in the long term, concerns about trading in the short term weighed against the investment case. "Short-term concerns surrounding public sector recruitment, the recovery of the private sector and risks to the dividend are the three key hurdles Hays needs to jump before we can take a more positive view of the stock," the broker said.