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The recent strong run by the banks is showing signs of coming apart at the seams. News yesterday of £9 billion of write-offs at Bank of America cast a cloud over prospects for banking here and in the US and provided investors with the opportunity to cut and run.
The banks have suffered a pinch of reality, a market-maker said.
Until yesterday's sell-off, financials had rebounded by almost 50% from the market's low point early last month. Mike Lenhof, chief strategist at Brewin Dolphin said: The banks alone were up by 60% and the real estate sector by almost 40%. These sectors gained a lot in a short space of time. But then, having fallen to distressed levels, they had also lost a lot.
Early attempts at a rally by the banks quickly fizzled out. Barclays dropped back below 200p with a fall of 12.4p to 196.6p. State-owned Lloyds Banking Group shed 4.3p at 100p and Royal Bank of Scotland 1.7p at 30.8p.
The rest of the market extended yesterday's sell-off as the earth moved for investors in reaction to Caterpillar's profit warning in the US this afternoon. The FTSE 100 index tumbled a further 70.21 points to 3920.65 stretching its two-day deficit to 172 points while the FTSE 250 index shed 108.1 to 6908.58.
Elsewhere in financials, Aviva dropped 23p to 251p while rival Prudential lost 32¾p at 347¾p amid signs that its US life business Jackson National Life will be unable to pay a dividend for the next two years. This led to a downgrade of the Pru by Morgan Stanley. But HSBC raised the Pru from neutral to overweight, urging clients to hedge their positions, however.
Mounting speculation about a rights issue in the sector continued to take a toll. Old Mutual, which abandoned dividend payments this year, fell 3.8p at 56p while Legal & General, which halved its final payout, lost 3.1p at 46p. Friends Provident was 2.6p adrift at 63.4p. HSBC rates Legal & General at overweight and Friends at neutral.
On the plus side, investors gave the thumbs-up to record profits from Tesco, up 12.9p at 345p, while first-half results from Associated British Foods, 35½p ahead at 689½p, were also well-received.
Three cheers! AIM-listed Sterling Energy, 0.17p dearer at 2.1p, has reached agreement with its banks to a waiver on the scheduled repayments on its outstanding loans facility of $76 million (£52.1 million) until mid-August. The independent oil and gas exploration and production company can continue with exploration in exotic areas such as Kurdistan and offshore Madagascar.
UBS has repeated its neutral rating on Debenhams, 0.5p better at 58.5p, but raised its target from 38p to 60p after a re-rating of the whole sector. Shares in the department stores operator have rallied strongly, having come up from a low of 26p since the end of January, and this may provide the opportunity for a rights issue or other fundraising exercise.
UBS reckons Debenhams will be able to repay loan instalments of £100 million, due this year, and of £150 million next year. But it may, at some stage, choose to raise £200 million to repay part of the final instalment of £750 million due in 2011 while rolling over the remainder of the term loan for another five years.
It was the last day of trading for Inchcape, 1¼p dearer at 16¼p, in the nil-paid shares, up 1.26p at 10.25p. Last month, the car dealer launched a deeply discounted rights issue at 6p a share to raise £232 million. The money was needed to help pay off debts totalling £408 million.
Alphameric, provider of end-to-end solutions for the leisure and hospitality industry, ran into profit-taking, losing 0.75p at 22p. Its joint venture, Amalgamated Racing, has agreed to show Turf TV in BetFred's betting shops as part of a five-year deal, which will broadcast exclusive coverage from 31 racecourses across the UK. BetFred and Turf TV have settled legal proceedings between them. The Alphameric share price has raced up from the 16.75p level during the past month in anticipation of the deal.
