Stock Market Week: Spotlight turns on to high street banks

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The Independent Online
HIGH STREET bankers take centre stage in the stock market this week. With four members set to unveil interim results - Halifax, Abbey National, Woolwich and Lloyds TSB - the spotlight will be firmly trained on what has become the biggest sector in the FTSE 100.

Banks make up nearly 20 per cent of all blue chips and their movements have the power to swing the leading index one way or another.

In the recent past, the banks' impact on blue chips has been largely beneficial and the sector's good performance has contributed to the great bull run of the last decade.

Given its dominant weight, the sector is a bellwether of the FTSE 100 and can be a useful indicator of the index's future performance.

Investors trying to predict the next move in financial stocks should keep an eye on gilts. A recent study by Robert Buckland and Jonathan Stubbs, UK market strategists at Salomon Smith Barney, shows that during the past 10 years, financials and UK bonds have moved in harmony, with increases in gilts prices mirrored in rising bank share prices.

Both banks and bonds love a steady-growth, low-inflation economy. This is because it reduces the risk of bad debts and keeps rates down. The 1990s proved to be just the thing.

However, the relationship broke down during the emerging market crisis in the third quarter of last year, when good news for bonds became bad news for financial stocks.

As fears of meltdowns and recessions gripped global equity markets, investors took fright at the banks' trading losses and bad debts and headed for the exit. At the same time, bonds rallied, boosted by their traditional safe-haven qualities.

At the start of the year, however, the pendulum begun to swing in the other direction. As predictions of financial apocalypse gave way to signs of economic recovery in emerging markets, concerns about bad debt write- offs eased and banks caught up with bonds.

The best example of the new-found harmony between the two came after the recent hike in US interest rates, when banks led the UK market higher as global bonds rallied. If this "recoupling" continues and experts are right in predicting a steady year for gilts, investors in financial stocks will have plenty to smile about over the next few months.

In the short-term, their mood will be determined by this week's results bonanza. Halifax, the leading mortgage lender, is on the block tomorrow. The results will be uninspiring. Margins remained under pressure during the period and pre-tax profits are set to come in only modestly ahead of last year, say pounds 858m compared with pounds 844m.

The arrival of Birmingham Midshires - bought some eight months ago for pounds 750m - should help top-line growth. However, the cost of integrating the former mutual will account for the bulk of a pounds 170m-plus exceptional charge.

Analysts will want to know whether the Halifax is planning further cashbacks, following last year's pounds 1.5bn special dividend. They will also quiz the management on the much-rumoured takeover of a rival bank or insurer.

Talking of big deals, the sector's favourite consolidator, Lloyds TSB, reports figures on Friday. After splashing out pounds 7bn on the life group Scottish Widows, Lloyds chairman Sir Brian Pitman hinted that the bank was still on the hunt for a bigger acquisitions.

An array of potential targets, including Legal & General and Norwich Union has been mooted, but so far Lloyds has remained on the sidelines. The market wants Sir Brian to use his pounds 2.6bn cash mountain as soon as possible and will be seeking reassurances that Lloyds is still keen on a deal.

As for the figures, Lloyds is one of the UK's most profitable banks and should post a solid rise in interims profits to around pounds 1.7bn from pounds 1.28bn. Good volume growth, a tight grip on costs and robust margins will be the main drivers of the increase.

Woolwich, interims on Thursday, has suffered from price competition and margin erosion in its core mortgage business. The double whammy should restrict the former mutual's profit growth to around pounds 255m, compared with pounds 240m in 1998.

Of more interest to the market will be Woolwich's attempts to buck the tough mortgage market trends. The bank recently set up a joint venture with Countrywide Credit, the largest independent US lender, to process its mortgage requests.

The next step is to offer the service to other parties and there are whispers that several UK and European banks are looking at outsourcing their mortgage books to the Woolwich-Countrywide partnership.

Rumours of a takeover - the latest mooted predator was the Bank of Ireland - and a continuation of the share buyback will add spice to the results' meeting.

Another target of bid whispers, Abbey National, unveils interims on Wednesday. Profits will be around pounds 790m, up from pounds 739m, thanks to a strong first quarter in its mortgage business.

The results' list is beefed up by three other big hitters: Cadbury Schweppes, Glaxo Wellcome and BT.

Cadbury's interims, out on Wednesday, should have been hit by poor sales of its confectionery products in the European markets. The sluggish pace of Europe's leading economies is expected to have reduced demand for chocolate and sweets, leading to a 7 per cent fall in profits to around pounds 250m.

The company's update on the progress of its $1.1bn sale of its non-US soft drinks to Coca-Cola, as well as comments on recent whispers of a deal with a foreign rival, will be the other talking points.

Thursday's figures from BT will be good, with first quarter profit set to rise some 10 per cent to around pounds 800m, but the market will pay little attention to the numbers.

The real question is how BT plans to spend its cash pile. The telecom giant's balance sheet has been recently swollen by a pounds 4.1bn from the sale of its 20 per cent stake in MCI and expenditure options include an overseas buy, further investment in the UK, the buyout of Securicor' stake in mobile phone operator Cellnet, or even a share buyback. The performance of BT's international joint venture with US partner AT & T will also be scrutinised.

Glaxo Wellcome interims, on Thursday, should show an increase to around pounds 1.3bn from pounds 1.2bn a year ago. Most of the attention will focus on the performance of the new drugs which have the awesome task of replacing the falling sales of the off-patent blockbusters Zantac, an anti-ulcer drug, and Zovirax, the herpes treatment. Attention will also focus on whether the group gets US clearance for its revolutionary new flu treatment.