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FTSE 100 knocked by renewed rate worries, profits flat at Lloyds

Published 22/02/2023, 09:00
Updated 22/02/2023, 09:10
© Reuters.  FTSE 100 knocked by renewed rate worries, profits flat at Lloyds

© Reuters. FTSE 100 knocked by renewed rate worries, profits flat at Lloyds

Proactive Investors - FTSE 100 remained in the doldrums in early exchanges with weak mining stocks adding to the downbeat mood.

At 9.00am London's lead index was at 7,903.87, down 73.88 points, or 0.93%.

Neil Wilson at markets.com noted, “Treasury yields up + market expectations for the path of Fed interest rate hikes up = bad news for stocks. Stocks in Europe and Asia slipped Wednesday after US markets registered their worst day in two months.”

Rio Tinto Ltd was top of the fallers down 2.1%, followed by Anglo American, down 2.1% and Endeavour Mining, down 1.9%.

The fall in Rio Tinto’s shares came as the global miner slashed its annual dividend and reported a 38% drop in full-year 2022 profit impacted by weaker iron ore prices as demand from China slowed, as well as by higher labour and material costs.

The FTSE 100-listed miner posted underlying earnings of $13.3bn for the year to December 31, 2022, compared with a record $21.4bn in 2021, and below estimates of $13.8bn.

Victoria Scholar, Head of Investment, interactive investor said, “China’s draconian zero-tolerance to covid approach, which is finally being unwound, weighed on iron ore prices last year, negatively impacting Rio Tinto .”

“While’s China’s economic reopening looks set to provide a tailwind to Rio this year, the risk of further restrictions from Beijing and another spike in infections remain potential hurdles.”

“The inflationary backdrop is also adding to Rio Tinto’s cost burden with higher fuel and raw material costs as well as higher wage bills because of labour shortages.”

Just behind on the fallers list was high street lender, Lloyds Banking Group PLC following its annual results which included a £2bn buyback, an increased dividend but flat profits as rising bad debts took their toll.

The bank also announced enhanced guidance. Shore Capital’s Gary Greenwood suggested the market “may find this a little disappointing.”

He noted Lloyds is forecasting a return on total equity of around 13% in 2023, below rival NatWest’s target of 14-16%.

Net interest margin guidance of greater than 3.05% is a little worse than expected (consensus: 3.15%) while impairment ratio guidance of c.30bps is a little better (consensus 35bps).

Costs guidance of £9.1bn is in line with consensus but a little worse than Greenwood’s forecast of £8.9bn. Capital generation of c.175bps should support further significant shareholder distributions, he added.

Greenwood still sees good value in the stock and has a fair value of 60p.

“While the market may be a little disappointed today by the near-term RoTE guidance, the stock still looks good value relative to its target returns,” he added.

On the upside, and one of only five risers in the FTSE, was Rentokil Initial PLC, up 0.4%.

JP Morgan reiterated an ‘overweight’ rating. The broker has taken a further look at the Terminix deal.

While suggesting the will likely be lengthy the bank believes “the upside to both the cost base and the ongoing levels of organic growth is material.”

“We believe this is an opportune time to be looking at Rentokil, especially for investors with longer-term horizons, and reiterate the stock as a top pick for 2023,” JPM commented.

Wizz Air (LON:WIZZ) voted worst short-haul airline

Wizz Air Holdings PLC (AIM:WIZZ) has been voted the worst short-haul airline by UK passengers.

Passengers surveyed by consumer group Which? gave the Hungary-based carrier one star out of five for boarding experience, cabin environment and seat comfort.

The budget airline’s seat pitch, the difference between two rows in standard economy, is 28 inches, two inches smaller than rival Ryanair.

No more than two stars were awarded in any of the remaining categories, including value for money and cleanliness.

Wizz Air operates short-haul flights from eight UK airports including Birmingham, Edinburgh, Gatwick and Luton.

The airline’s overall customer score of 48% put it at the bottom of the ranking, below Ryanair (52%), Eurowings (53%) and British Airways (56%).

Footsie on the backfoot

FTSE 100 opened sharply lower on Wednesday following heavy falls in the US and Asia as renewed concerns that US interest rates may rise further knocked equities.

At 8.15am London’s blue chip index was at 7,929.23, down 48.52 points, or 0.61%, while the FTSE 250 was at 19,753.22, down 97.63 points, or 0.49%.

Susannah Streeter, head of money and markets, Hargreaves Lansdown said, “’Investors are waking up to a stark realisation that the Fed’s work is not done, and that interest rates may have to be hiked even higher to cool hot inflation.”

“Wave of exuberance, which have propelled equities higher since the start of the year, have turned into tides of disappointment and apprehension about the difficulties that still may lie ahead for the mighty US economy.”

“High hopes that the Federal Reserve could cut rates by the end of the year have been dashed, replaced by worries that up to three hikes in quick succession may be needed to tame the price spiral.”

“The decision by the Reserve Bank of New Zealand to hike rates to a 14-year high of 4.75%, with warnings of more to come, highlights the extent to which inflation is still a thorn in the side of many economies across the world,” she added.

Back in London and Lloyds Banking Group PLC’s shares fell reflecting the broader market as it closed the banking reporting season.

Annual profits were flat at £6.93bn while the lender launched a £2bn share buyback alongside an increased total dividend of 2.40p, up from 2.0p in 2021.

The lender forecast net interest margin of 305 basis points in 2023, below the 320 basis points forecast by rivals Barclays and NatWest in their numbers.

Richard Hunter, head of markets at interactive investor, commented, “Lloyds has brought the curtain down on the banks’ reporting season in some style, exhibiting its traditional strengths of efficiency, profits and generous levels of shareholder returns.”

John Moore, senior investment manager at RBC Brewin Dolphin, described the numbers as, “80% NatWest and 20% Barclays .”

“Profits have been flat year-on-year, with bad loan provisions adding extra costs, among other moving parts.”

“The bank has a history of prioritising its dividend, which is up 20% on last year, and acts as a good indicator of sentiment from management.”

“Alongside the dividend increase is a £2bn share buyback programme, underpinned by enhanced guidance for the years ahead – all of which suggests a relatively positive outlook for Lloyds.”

“The bigger question, though, is what Lloyds will do with its existing portfolio of businesses – while there are no answers on that front today, updates will likely be a feature of future statements.”

But the market was unimpressed with shares down 1.6% in early exchanges.

Future PLC was in focus after naming Jon Steinberg as its new chief executive.

The former Daily Mail will replace Zillah Byng-Thorne, who announced her intention to stand down last September.

Shares rose 0.8% to 1,449p.

But Rio Tinto Ltd dipped 0.5% as it lowered its dividend after profits fell more than expected, adding to a mixed earnings season for the world's commodity giants as demand wavers while costs creep higher.

Elsewhere and Intercontinental Hotels Group PLC fell 1.2 as Deutsche Bank downgraded to hold from buy following yesterday’s results. The German bank did however raise its price target from 5730p to 5850p.

Jobs going at British Steel - BBC

British Steel is expected to announce on Wednesday the closure of its coking ovens in Scunthorpe with the loss of 300 jobs, according to the BBC.

The timescale for the closure is unclear, as is how many compulsory redundancies it will involve.

Coking ovens are used to turn coal into coke which burns at the higher temperature needed for the two blast furnaces that remain in operation.

The closure means British Steel will import coke.

The closure of the coking ovens is seen as a worrying indicator about the health of the UK steel industry.

Union officials told the BBC that the industry "is on a knife edge".

Government sources described the decision as "disappointing" given that negotiations are still ongoing between British Steel's Chinese owners Jingye, Tata, and the Treasury about a support package worth £300m to each company.

A British Steel spokesman said: "Unfortunately, like many other businesses we are reluctantly having to consider cost cutting in light of the global recession and increased costs."

Flat profits at Lloyds, £2bn buyback

The last of the big banks has reported. Lloyds Banking Group PLC announced a £2bn share buyback alongside flat annual profits which were hit by rising bad debts.

The high street lender reported pre-tax for the year to December 31 of £6.93bn, little changed from £6.90bn in 2021, and broadly in line with City expectations.

Net income of £18.0bn, up 14%, supported by continued recovery in customer activity and UK Bank Rate changes, while underlying net interest income jumped 18%, primarily driven by a stronger banking net interest margin of 2.94% in the year (3.22% in the fourth quarter).

But the FTSE 100 listed bank booked a £1.5bn impairment charge for the year and £0.5bn in the fourth quarter reflecting a deteriorating economic outlook.

The pro forma CET1 ratio of 14.1% remained ahead of the ongoing target of 12.5% .

Shareholders were rewarded with a final dividend of 1.60p making a total dividend of 2.40p, up from 2p in 2021, while the strong capital position prompted the bank to announce a £2bn share buyback.

Lloyds intends to maintain a “progressive” dividend policy and expects to pay down to its target CET1 ratio by the end of 2024.

Looking ahead the lender forecast banking net interest margin to be greater than 305 basis points, below the 320 basis points forecast by rivals Barclays and NatWest, operating costs of around £9.1bn, an asset quality ratio of around 30 basis points and return on tangible equity of around 13%.

Lloyds said it has enhanced its enhanced its medium and longer-term guidance, with operating costs now expected to be £9.2bn in 2024, with a cost:income ratio of less than 50% by 2026.

Asset quality ratio now expected to be around 30 basis points in 2024 and return on tangible equity now expected to be c.13% in 2024 and greater than 15% by 2026.

Additional revenues from strategic initiatives of c.£0.7 billion by 2024 and c.£1.5 billion by 2026 were forecast.

FTSE set to fall further

FTSE 100 is expected to open lower following heavy falls in the US as fears that the Federal Reserve might increase interest rates further rattled investors.

Spread betting companies are calling the lead index down by around 31 points.

As Michael Hewson at CMC Markets put it, “Long story short, the market thought that the inflation job was done, or at least close to it, even though the recent non-farm payrolls report, and ISM services report muddied the waters in that regard.”

US stocks nursed heavy losses at the close on Tuesday as fears of higher interest took hold. Among individual stocks, eyes were on earnings from retailers Walmart and Home Depot. Railroad stocks struggled after the US government ordered Norfolk Southern to pay for the clean-up of toxic waste in the town of East Palestine, after a cargo train derailment in Ohio earlier in February.

On Wall Street, the Dow Jones Industrial Average closed down 697.10 points, or 2.1%, at 33,129.59. The S&P 500 fell 81.75 points, or 2%, to 3,997.34 and the Nasdaq Composite tumbled 294.97 points, or 2.5%, to 11,492.30.

Susannah Streeter, head of money and markets, Hargreaves Lansdown said, "Worries that disinflationary winds aren't blowing hard enough to cool hot inflation have seeped into trading, pushing stocks on Wall Street lower."

A further indication as to the Fed’s mindset will come with today with the publication of Federal Open Market Committee meeting minutes.

In Europe German CPI numbers will grab attention along with the Ifo business climate index.

In London, results from Lloyds Banking Group PLC and Rio Tinto PLC top the agenda.

Read more on Proactive Investors UK

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