Market Report: Northern Rock heads south on arrears jitters

No sector in the UK market has been the subject of more corporate activity speculation than the banking sector, with HSBC, the world's third-largest bank by market capitalisation, being almost the only stock not to attract takeover talk. However, most brokers feel the likelihood of multiple bank bids is extremely low.

The broker Collins Stewart put the skids under Northern Rock yesterday, urging its clients to sell the stock on valuation grounds. Recent takeover rumours have driven the stock to 1,184p in recent sessions, but the Collins Stewart analyst Sandy Chen has a valuation of 933p for its shares, almost 20 per cent lower than the current price.

Mr Chen said there is "an under-recognition of mortgage arrears at Northern Rock, or, at least, a difference in recognition methodologies that leads to sharply lower arrears levels. The implication of this is that if arrears recognition methodologies were normalised, Northern Rock's required provisions thus its impairment charges, would rise significantly."

Northern Rock fell 30p to 1,097p, while the rival mortgage bank Alliance & Leicester was also unloved, shedding 33p to 1122p.

Scottish & Newcastle disappointed bulls by announcing a £210m fund raising to pay for the £309m purchase of the Foster's name in Europe and Russia, sending S&N shares down 25p to 506.5p. For some traders the chances of a full bid for the brewerlook remote, in the short term at least. One said: "S&N has been top of my list of potential takeover targets in the past few months but the chances of a deal with this going on are slim. If anything, this deal will act as a poison pill for either Carling or Anheuser-Busch, two of the most likely bidders."

Bears had the upper hand all day with the FTSE 100 giving back 50.5 of its recent gains to close at 6,016.5, with the financial, property and telecoms sectors among the worst hit. Only 13 stocks in the blue-chip index ended in positive territory.

Land Securities led the fallers in the property sector, 58p lower at 1,853p, as traders booked more profits on the back of the REITs run since the Budget in March. A trader at a major London broker said: "The entire sector looks a bit expensive, with the only real sign of yield increases coming in West End. REIT status will be good news for the sector in the long run but for now these stocks look as if they have run as far as they ought to."

Hammerson, down 32p at 1,183p, British Land, 39p lower at 1,200p and Liberty International, 24p weaker at 1,176p all slumped in Land Securities' wake.

Colt Telecom, one of the few UK telecommunications companies not involved in supplying broadband to retail customers, was the lone climber in the sector as the impact of Carphone Warehouse's free broadband offering was assessed by analysts. Market makers said Colt was benefiting as investors took money out of broadband stocks. Colt shares were bid 3p higher to 70.5p, while Carphone attracted some selling as it dropped 3.5p to 310p.

Plusnet again bore the brunt of the selling in broadband stocks, at one point declining a further 33p to 269p before some tentative retail buying saw the stock improve to close 5.5p lower at 296.5p. The selling was not restricted to the smaller stocks, with BT Group 5.25p worse at 213p and Vodafone 2.75p weaker at 123.5p.

Mining stocks were one of the few bright spots in an otherwise forgettable day for leading shares, with Antofagasta 35p better at 2,364p, Xstrata up 31p at 2,005p and BHP Billiton 13.5p firmer at 1,155.5p. The heavyweight brokers Merrill Lynch, Deutsche Bank and Citigroup published bullish notes on the sector yesterday as gold futures hit a 25-year high.

Among smaller companies the oil producer Dragon Oil was in demand as the company announced that production had been restored at all five wells on the LAM 22 platform in offshore Turkmenistan, after a blockage in early March suspended production. Nearly 4 million shares changed hands as the stock rallied 12.5p to 197.25p.

The recent new issue 2Way Traffic added 8p to 129.5p after having been placed at 116p on Friday as excitement among retail investors over its interactive television production increased. Another new issue, the scar prevention pharmaceuticals group Renovo, improved further to close at 108p, a rise of 4p.

Finally, Debtmatters Group added 24.5p to 310p on strong demand as the Individual Voluntary Arrangements group provided the market with an upbeat trading statement. Traders believe the amount of people running into credit and store card debt problems is unlikely to drop in the near future, and Debtmatters has moved into "significantly" larger premises to cope with the anticipated increase in demand for its services.