Royal Bank of Scotland led the banking sector higher last night, strengthening by more than 12 per cent on hopes that losses, which have been on an upward trend since the start of the financial crisis, may be narrowing.
Morgan Stanley sparked the optimism, upgrading forecasts to reflect the gains accrued via the bank's recent debt buyback move and growing evidence of improved performance at fixed income, currencies and commodities (FICC) divisions across the industry.
Earlier this week, RBS said it expected to book a £4.5bn pre-tax gain as a result of a tender offer, which Morgan Stanley estimates could push up tangible book values by 4.8p per share, and bolster the lender's regulatory capital ratios – its capital cushion – by about 100 basis points to 11.1 per cent at the end of this year.
At the same time, results from US peers Goldman Sachs, JP Morgan and Citigroup included evidence of a positive shift in FICC revenues, which plays to RBS's traditional strengths in flow credit, rates and foreign exchange.
"As a result, we have reduced our net loss expectations to £8.5bn (was £15.8bn) and £11.2bn (was £12.1bn) in 2009 and 2010, which increases our trough tangible book value [estimate] materially to 32p, from 23p previously," Morgan Stanley's analyst Michael Helsby said in a note to clients.
The assessment was accompanied by news of better than forecast results from Santander, the Spanish banking group behind Abbey, Alliance & Leicester and Bradford & Bingley, and from Nordea, the Nordic region's biggest bank by value, which lured investors and helped take the RBS share price to 36.8p, up 12.5 per cent, or 4.1p.
The wider sector rallied alongside RBS, with Lloyds Banking Group, which was upgraded to "overweight" from "neutral" at HSBC, gaining 8.3 per cent, or 7.9p, to 103.5p and Barclays, which was also moved to "overweight", climbing to 256.5p, up 10.4 per cent, or 24.25p.
Overall, the FTSE 100 advanced to 4,189.59, up 93.19 points, while the FTSE 250 rose to 7,357.98, up 202.8 points, its highest level since October, as the negative impact of news that the US economy had shrunk at a faster than forecast annual rate of 6.1 per cent in the first quarter of this year was offset by official data showing that consumer spending in the world's largest economy, which was down in the fourth quarter of last year, had increased by 2.2 per cent in the first three months of this year.
British Airways recovered to 148.6p, up 3.8 per cent, or 5.5p, as investors moved to capitalise on the recent swine flu-inspired weakness in travel and tourism-related stocks. Similar factors were at play around Carnival, the cruise operator which climbed to 1,839p, up 77p, and TUI Travel, which gained 3.5p to 256.75p.
Elsewhere, Icap climbed to 363.75p, up 3.7 per cent or 13p, on the back of recent reports indicating that the consortium led by the inter-dealer broker, Deutsche Bank and JP Morgan was preparing to table a bid for LCH.Clearnet by end the of next month.
At the same time, it emerged that the Depository Trust & Clearing Corp. of the United States, had abandoned its efforts to acquire LCH, boosting the Icap consortium's chances.
On the downside, Home Retail Group fell to 263.75p, down 2.3 per cent, or 6.25p, after the Homebase-owner posted a cautious outlook alongside a disappointing annual earnings report.
On the second tier, Punch Taverns posted its half-yearly report, saying it was making good progress with its debt-reduction schedule. The update sparked a short squeeze as investors moved in, sending Punch's share price to 117.75p, up a healthy 38.5 per cent, or 32.75p. Panmure Gordon, which said the update was in line with its expectations, nonetheless remained bearish on the group's longer-term outlook, sticking to its forecasts and its "sell" stance on the stock.
Also on the upside, Debenhams climbed to 91.5p, up 9.6 per cent, or 8p, thanks to Morgan Stanley, which moved the stock to "overweight" from "equal-weight".
Among smaller companies, Oxford BioMedica strengthened to 10.75p, up 16.2 per cent, or 1.5p, after revealing that Sanofi Aventis, the French pharma group, had handed back rights to the TroVax therapeutic cancer vaccine, while at the same time entering into a new deal to develop gene-based treatments for eye diseases.
Cazenove said that while the return of the TroVax rights was very disappointing, it was well flagged as part of Sanofi's portfolio review.
Offering some consolation to shareholders, Panmure Gordon highlighted the fact that the new collaboration includes an upfront payment of £18m from Sanofi, which strengthens Oxford Biomedia's balance sheet.
"The ocular disease deal is interesting, but other than the (very welcome) cash contribution, we are reluctant to add this project to our [sum of the parts valuation estimates], because it is still at the pre-clinical stage, so ascribing any value to it would be difficult to justify at this stage," Panmure added, retaining its "hold" recommendation on the stock.Reuse content