Market Report: SocGen advises clients to sell StanChart
Friday 13 March 2009
Standard Chartered was in focus yesterday after Société Générale advised investors to move out of the stock, arguing that a combination of falling revenues, rising bad loans and high costs weighed on the investment case.
The lender is often singled out for its strength relative to other London-listed banks. But the broker said it may face all three challenges at the same time as slowing growth in its key geographies impact trade finance, and in turn hit volumes and margins in its wholesale banking division, consumer loans turn sour, and costs in the wholesale and consumer banking divisions fail to fall quickly enough.
The last factor may prove to be the bank's Achilles heel, the broker argued, highlighting the fact that in 1999, StanChart's revenues fell by 2 per cent but costs were up 10 per cent – "a significant negative jaw".
"Summarising our investment thesis, our central case assume[s] core revenues falling by 5 per cent, flat costs, and impairments [or bad loans] rising by 93 per cent," Société Générale said, initiating coverage with a "sell" rating. The assessment took the share price to an intra-day low of 761p, down 37.5p. It recovered to 811.5p, up 13p, by the close.
Overall, the FTSE 100 was 18.2 points stronger at 3,712 while the FTSE 250 gained 35.1 points to 6,061.8. Although weak in early trading, investor sentiment improved as Wall Street opened, with both the S&P 500 and the Dow Jones Industrial Average cheered by a better-than-expected US retail sales report, holding firm as London closed.
Aviva was among the weakest of the blue chips, sliding by more than 10 per cent or 22.5p to 191p, after Citigroup reignited the capital-strength fears that first came to the fore around the stock last week. Moving its recommendation to "sell" with a 160p target from "hold" with a 450p target, the broker said it saw the company as one of the "riskier names" in the life insurance sector.
"Given the level of asset leverage, the solvency looks thin," Citi said, arguing that, if the dividend policy (the company last week decided to preserve the payout) is maintained, "the balance sheet will not regenerate from future operating earnings".
"This leaves it in the hands of markets: already equities have fallen materially and real estate values are still dropping. If markets recover, Aviva's solvency should be able to cope. But further market falls would increase the pressure," the broker added.
Traders were more impressed with Standard Life, which was 7.1 per cent or 11.5p stronger at 172.8p after posting full-year results.
Elsewhere, Antofagasta, the Chilean copper miner, fell to 511p, down 4.5 per cent or 24.5p, as copper prices eased. The stock was also hit by a Royal Bank of Scotland report, in which the broker switched its stance to "sell" from "hold".
Weaker copper prices also bore on BHP Billiton, down 1.5 per cent or 21p at 1,309p. Like Antofagasta, BHP too faced a broker downgrade – Goldman Sachs weighed in, moving the stock to "neutral" from "conviction buy".
Yell, the directories group which will move down from the FTSE 250 to the FTSE Small Cap index later this month, was the weakest of the mid-caps, losing 13 per cent or 2.25p to 15p.
Meggitt gained 7.3 per cent or 8.25p to 121.25p after Goldman moved the engineering group's stock to "buy" from "neutral". The broker said: "We believe Meggitt will not breach its covenants and that a capital increase can be avoided. Despite taking a more negative view on civil aerospace earnings, we have raised our estimates to better reflect [foreign exchange movements], new cost reduction measures, and better-than-expected performance in 2008."
In other broker-driven news, the oil services group Petrofac was up 4.2 per cent or 20.7p at 515p after Royal Bank of Scotland and UBS moved the stock to "buy".
RBS said recent contract wins "clearly [showed] projects of strategic importance to countries in North Africa and the Middle East are still going ahead, despite uncertainty in oil and gas markets, and the global economy generally". The broker added: "It also highlights Petrofac's competitive offering in an environment where operators are looking to drive down costs."
Among smaller companies, the housebuilder Taylor Wimpey lost 5.1 per cent or 1p to 18.25p after new data from the Council of Mortgage Lenders confirmed that activity in the housing market remained subdued.
The stock was also said to be subject to profit-taking, as investors cashed out following confirmation of the company's promotion from the FTSE Small Cap to the FTSE 250 index.
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