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City Republic: Trouble brewing for the banks?

LONDON - The markets could be in for a turbulent times as reporting season begins, writes Stephen Foster, while the big airlines look to consolidation in these uncertain times.

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Oh dear, it's those bankers again
Today sees the start of the UK bank reporting season and Lloyds TSB has kicked off with a sharp fall in first-half profits.

Profit before tax was down from £2bn to £599m, a 70% drop. Bizarrely it chose to raise the already high dividend payout.

Lloyds was thought to have avoided the worst of the credit crunch. While it made some writedowns, it's blaming the poor figures on a fall in value of "stock market-related" assets.

It says its core UK retail banking operation is still performing well although bank analysts are now fretting that its high exposure to UK loans will lead to higher bad debts as the economy slows.

For years Lloyds has been pilloried for its conservative approach, including avoiding toxic US mortgage packages, and the main support for the share price has been its high dividends.

Then, a few weeks ago, when it was rumoured to eyeing a big acquisition in Germany, the shares fell because the market wanted it to concentrate on the UK.

It's possible the Lloyds board is gambling that bank shares are so blown out at the moment that it can write down everything it can without too much further damage, then put it all back later to give the shares a much-need boost.

Dealers seemed pretty sanguine about it in early trading, marking the shares down a little, albeit in a rising market.

More important than Lloyds' results will be the numbers from Royal Bank of Scotland, Barclays and HBOS.

RBS has just raised £12bn in extra capital from its shareholders, Barclays £4.5bn and HBOS, after a struggle, £4bn.

If any of these are forced to make further big writedowns the shares will plummet again, although they're just about at book (asset) value already.

If the writedowns appear over-modest the market will think they're concealing the bad news and the shares will also plummet.

There could yet be more consolidation in the banking sector following Santander's (the owner of Abbey) agreed bid for Alliance and Leicester.

HBOS (Halifax Bank of Scotland), until recently the biggest mortgage lender (Abbey has overtaken it this year), looks the most vulnerable.

But RBS might just be tempted to explore a tie-up with its old ally Santander.

BA and Iberia get together
Consolidation there certainly is among airlines, with BA announcing it plans to merge with Iberia.

The plan is to keep the two brands but cooperate more on routes (the two airlines are already part of the Oneworld alliance).

BA's most profitable routes are to the Middle East and Far East while Iberia is the leading European carrier to South America.

Everywhere you look (see story above) there seem to be more alliances between British and Spanish companies.

This may or may not be a good thing, as both economies are being hammered by massive property crashes.

But it's a good time for companies to get together.

The dreaded regulators are likely to take a more benign view of tie-ups (which might lead to cartels in all but name) when even big companies are struggling to survive.

Virgin, for one, has already started to moan about the BA/ Iberia plans (a merged airline would have just over half the landing slots at Heathrow).

But Virgin is 49% owned by Singapore Airlines, so even Richard Branson's time-honoured ability to thwart BA will be tested this time.

Guardian newspapers struggle
Guardian Media Group is expected to announce today that its newspapers made a £28m loss in the year to March although its business-to-business titles, acquired from Emap, and remaining half stake in Auto Trader will keep the company in profit.

The company's regional papers are suffering, although they still make money, but it's the dear old Guardian, as usual, that is burning the cash.

In part, this is because of heavy investment in the Guardian Unlimited web operation, resolutely unprofitable but once again the top UK paper website in terms of audience, against the Mail and the Telegraph.

Whoever did the Auto Trader deal back in the mists of time should be awarded a statue outside Guardian HQ.

New bidder stalks Informa
Business-to-business is indeed a resilient business, helping Lloyds List publisher Informa post £104m of half-year profits yesterday and flushing out another bidder for the company.

Informa is still talking to a trio of US buyout firms about a takeover and now its opened its books to another (unnamed) bidder.

Informa's problem is its £1.2bn of debt, much of it acquired when it bought Datamonitor in 2007.

At the same time United Business Media has announced a rise in half-year profits to £76m.

A planned all-share merger between UBM and Informa was pulled when the US private equity boys entered the scene.

A shame, because the two companies would have made a good fit.

I wonder if UBM could be coming back for a second bite, maybe with private equity support?

City traders under the cosh
Eight London-based workers at UBS and JP Morgan Cazenove were arrested for alleged insider dealing yesterday as the Financial Services Authority finally begins to show that it really does have teeth.

The alleged offences are thought to involve leaks from printing plants of price-sensitive information.

Reassuring, in a way, that good old ink on paper can still cause ructions in this electronic era.

City Republic is going on holiday for the next two weeks. We will be following events from somewhere in the Rocky Mountains and look forward to being with you again on Monday, August 18.

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