Capital deficit fears hit London’s banks

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The London market eventually closed sharply lower Wednesday after a data problem at the London Stock Exchange left dealers and investors without live prices for the final 30 minutes of trading.

By the official closing time of 4.35pm GMT, the FTSE100 was showing a rise of 36.5 points, or 0.6 per cent, to 6,512.4 – in spite of a weak opening on Wall Street and further jitters in the banking sector.

That gain was later revised to show a decline of 89.8 points, or 1.4 per cent, to 6,385.1 after the LSE extended the period used to calculate closing prices to 6pm GMT. By that time the LSE still did not have firm closing prices for some FTSE 250 shares. The prices used in this report are based on the latest available information.

Once again, banking stocks led the market lower, with Royal Bank of Scotland among the sector’s worst performers. It shares fell 3.9 per cent to 438p on fears that it may require a rights issue to shore up its balance sheet, which has been stretched by the recent acquisition of Dutch bank ABN Amro.

Those worries were heightened by a note from Citigroup. Analyst Simon Samuel said he had benchmarked the European banking sector against a number of standard capital measures with alarming results

“What unfolds is that Europeans banks have significant capital deficits that would require recapitalisation to the scale of 5-20 per cent of market capitalisation,” Mr Samuel said.

Elsewhere in the sector, Alliance & Leicester fell 5.2 per cent to 666½p, while Barclays lost 2 per cent to 513½p and Northern Rock lost 7.4 per cent to 152p.

British Energy was another big faller. Its shares dropped 7.2 per cent to 515p after discovering wiring problems at its Heysham 1 power station similar to ones found at its Hartlepool plant last month.

British Energy said it did not know when the two stations, which account for a quarter of its nuclear output, would be back on line.

However, that news boosted Drax Group, operator of the UK’s largest coal-fired power station. Its shares rose 2.6 per cent to 718p.

Elsewhere, ITV eased 4.7 per cent to 91.3p as its shares traded ex-dividend and the broadcaster told the competition authorities that BSkyB, off 2.4 per cent at 617½p, should be forced to sell its 17.9 per cent stake.

Next dropped 6.7 per cent to £19.14 on the back of a disappointing trading statement while J Sainsbury slipped 4.3 per cent to 426p after Credit Suisse resumed coverage with an “underweight” rating and 400p target price.

“Despite the substantial share price fall, the shares still do not represent particularly good value,” said the broker.

Rolls-Royce managed to buck the weak market trend, with its shares advancing 2.1 per cent to 527½p

Traders said the rise was not just down to an $800m order from International Lease Finance Corp for its Trent XWB engines; sector specialists also noted with interest that the US Congress had reinstated funding for an alternative engine for the Joint Strike Fighter being developed by the Rolls and General Electric.

“The engine programme is estimated to be worth $82bn over the life of the aircraft,” Merrill Lynch said.

“Assuming 40 years, 50 per cent market share and Rolls-Royce has 40 per cent of the engine, this breaks down to about £24m of profit per annum for Rolls-Royce, or about 3.5 per cent of group profits,” it continued.

Lower down the market, asset management companies came under pressure, unsettled by a bearish note from Oriel Securities. “The current environment of a frozen credit market, volatile and potentially weakening equity markets, a weak dollar, inflationary pressure and a slowing housing market means contracting margins, slower flows and higher arrears for many companies in the financial services industry,” the note said.

Those comments hit New Star Asset Management, down 7.4 per cent to 288¾p, Rathbone Brothers, off 9.1 per cent to £11.87, and St James Place Capital, 7.6 per cent cheaper at 330p.

In the same sector Hargreaves Lansdown lost 5.7 per cent to 225¼p after Citigroup downgraded from “buy” to “hold”.

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