UK banks opened higher for the third consecutive session on Wednesday as sentiment surrounding the sector appeared to have done a u-turn since Barclays issued a reassuring open letter on Monday.
Shares in banks—indeed financials in general—last week suffered huge losses amid rising fears over the health of the UK economy, the Government’s latest bail-out plan, individual companies’ attempts to raise capital, and the risk of nationalisation. But Monday morning saw the turning point for the sector after Barclays chairman Marcus Agius and chief executive John Varley moved to reassure investors in an open letter that said the group is well funded and profitable.
By Friday Barclays's market value had halved in the space of a week but Monday’s release helped the shares recoup this loss in a single session, and they have remained among the top blue-chip performers since, leading the way for other banking issues.
The banks also received a fillip on Wednesday as Citigroup resumed coverage of Lloyds with an upgraded Buy recommendation and 120p price target. The broker told clients in a note published this morning that although nationalisation remains a possibility it believes the risk is more than adequately discounted in the current valuation.
Citigroup said the shares are trading at a 47% discount to its worst-case ‘stress-test’ scenario, seemingly reflecting fears of full nationalisation, which is something the broker views as unnecessary and inconsistent with the stated aims of the Government.
At 9.30am, Lloyds had surged 30%, up 19.8p at 86.9p, while Barclays added at 9% at 98.2p, Royal Bank of Scotland was 8% ahead at 17.0p, and shares in the broader financials sector also rallied. Sector gains helped fuel a 65.5-point rise in the FTSE 100 index to 4,259.91.
“The story today is in the banks,” a London-based trader said. “There has been a complete change of sentiment since the Barclays statement and a Citigroup upgrade in Lloyds today put it 30% higher this morning.” He added with excitement that “the hedgies are being beaten for once!”
The FTSE 100’s rise on the back of the sector masked a handful of poor performances elsewhere, with the mining sector in the doldrums after Rio Tinto said it is mulling an equity raising as one way to help reduce its £27 billion pounds of debt and Vedanta Resources revealed third quarter earnings fell 99% under pressure from falling commodity prices. Vedanta lost 7% to 562.0p and Rio slipped 4% at 1,569.0p, but Xstrata was the main casualty, down 8% at 628.5p.
The only private equity firm in the blue-chip index, 3i Group, was also back-peddling, down 2.5% at 248.5p after announcing it has written down the value of its 50 biggest investments by 21% on the back of the economic downturn. The shares were also hit by news that VNU, the Dutch media group it bought in 2006, is close to breaching its bank covenants.
