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Thursday November 6 - afternoon update
Bank shares have never been cheaper, but Morgan Stanley warns it is still too early to start thinking of buying the sector.
The American broker made its comments as it downgraded Barclays from overweight to equalweight while slashing its target for the High Street lender's shares from 275p to 170p. It says the sector should be avoided, given the current move by the banks to reduce debt and increase funding while facing a weaker macroeconomic outlook and tougher regulation in the wake of the subprime meltdown.
Barclays recently rejected Government help in re-funding, choosing instead the support of sovereign wealth funds in Qatar and Abu Dhabi.
The funding may turn out to be more expensive than that offered by the Government but it enables the Barclays board to retain its independence and call the shots when it comes to how it runs the business, pays dividends and sets salary and bonus levels.
Barclays shares, which started the year at 554p, retreated 0.4p to 195.5p.
Credit Suisse warns that trading among UK banks had deteriorated at a much faster pace than expected. It reckons Royal Bank of Scotland, 1.3p easier at 67.7p, will make a loss this year and in 2009. The broker has cut its target for Lloyds TSB, down 9¼p at 199½p, which will also include HBOS, 1.3p firmer at 115p, its Government-inspired shotgun takeover.
Morgan Stanley is also sceptical about any imminent recovery in the commercial property market. It warns the banks will have to do much more about addressing their problem commercial-property loans before any sustained recovery can be achieved. It is also concerned about debt-gearing covenants. It has cut British Land, off 14p at 658p, from equalweight to underweight and dropped its target from 560p to 340p.
It has also downgraded Liberty International, 6p cheaper at 727p, from equalweight to underweight and reduced the target from 680p to 330p.
Brixton, 8¼p lower at 171¾p, and Land Securities, 20p down at 1160p, have been trimmed from overweight to equalweight, with Brixton's target dropped from 200p to 110p and that of Land from 1030p to 640p.
Morgan remains underweight in Great Portland, down 8½p at 292½p, and has cut its target from 230p to 150p. It stays equalweight in Hammerson, 4½p better at 794p (target down from 720p to 480p) and overweight in Segro, 6¼p dearer at 313½p, but has dropped its target from 360p to 250p.
Shares generally extended yesterday's losses as investors chose to focus on the poor state of the UK economy. The whopping one-and-a-half point interest-rate cut smacks of panic, and indicates just what a parlous state the UK economy is in. Down more than 200 points earlier in the session, the FTSE 100 managed to reduce the deficit to 166 points by the time the cut in rates was announced at midday. It then rallied by 82 points within seconds before settling 86.06 points down at 4444.67.
Sell-offs on Wall Street and in Asia had set the tone. City investors also had to contend with a plethora of profit warnings and poor results, which left Man Group, the UK's biggest hedge fund operator, down 122¼p at 270p and venture capitalist 3i off 40p at 551½p.
Builders were quick off the mark in response to the lurch towards cheaper money. Barratt rose 8½p to 92p, Persimmon 27¼p to 350p, Taylor Wimpey 1p to 16¼p, and Bellway 34p to 593½p. But dealers attributed the gains to a knee-jerk reaction. They said there was no evidence the rate cut would be passed on to borrowers, and no guarantee people looking to buy a house would be able to get a mortgage.
Cheaper money may also be good news for retailers. It sparked a rally in bombed-out shares such as Marks & Spencer, up 15¼p at 260p, and Kingfisher, 6.2p better at 133.6p.
