Wednesday October 8, 12:47 PM
Banks welcome UK bailout but investors still jumpy
LONDON, Oct 8 (Reuters) - Investors gave a mixed reaction to a 50 billion pound ($88 billion) government bailout of Britain's banks that drew a sigh of relief from the industry itself.
Shares in HBOS (LSE: HBOS.L
- news) jumped 65 percent on Wednesday as analysts said it was best placed to benefit from the bailout and after the bank said it had no plans to pull out of a state-backed takeover by local rival Lloyds unveiled last month.
'HBOS has most to gain from such funding guarantees and is cheapest,' analysts at Collins Stewart (LSE: CLST.L - news) wrote in a research note, adding that they continued to attach a high-risk 'buy' rating to the stock.
Coordinated interest rate cuts in the United States and Europe gave shares an additional boost.
Shares in Barclays (LSE: BARC.L - news) and Lloyds traded broadly in line with the broader market for much of the morning, however, as the global credit malaise overshadowed the deal.
Standard Chartered (LSE: STAN.L - news) was the biggest loser amid worries over prospects for some of its key Asian markets.
HBOS said the package, which includes a pledge to inject 200 billion pounds ($351 billion) into money markets, was good for shareholders and customers and showed a 'very real and serious intention' to restore stability to the banking system.
'Our proposed acquisition by Lloyds TSB remains very much on track,' an HBOS spokesman said. 'Work on the deal is going well. The integration planning process is making good progress.'
Lloyds, whose shares were up 5.5 percent at 1113 GMT versus a flat London market, also welcomed the government's measures and said it was working with HBOS on the acquisition.
Shares in Barclays also showed a relatively muted response to the deal and were 4.0 percent higher having already lost about a quarter of their value earlier this week.
'It's far too early to say that nerves have been completely settled, but these steps should help reduce the perceived risk of imminent bank failures in the UK and thus support share prices,' said Leigh Goodwin, analyst at Fox-Pitt Kelton.
'Markets are likely to remain volatile, though.'
ASIA WORRIES HIT HSBC
Analysts at Collins Stewart said the government's plan to pump funds into money markets was likely to lead to short-term stability with the recapitalisation providing longer-term benefits and could lead to short-term share price rises.
'However, the government is insisting on tighter control of capital, dividends and executive pay,' they added.
'We feel that dividend payouts for the main four UK domestic banks will be severely impacted with the possibility of no cash payout until 2010 or later.'
Analysts at J.P. Morgan (MGHL.PK - news) said the package should 'remove systemic risk and create a more resilient banking system, but not necessarily one that is more profitable'.
British banking shares had already fallen sharply on Monday and Tuesday amid uncertainty over what format any bailout would take.
Royal Bank of Scotland (LSE: RBS.L - news) , which had been hardest hit after losing half its value since the end of last week, recovered some ground to trade 21 percent higher at 109 pence.
As expected HSBC (LSE: HSBA.L - news) and Standard Chartered said that while they would participate in the scheme they did not need to make use of the government's offer to boost capital.
Standard Chartered said it was already well capitalised and highly liquid while HSBC said it would use its own resources to ensure its UK unit meets new requirements on capital strength.
'HSBC and StanChart will participate but, we believe, mainly to remove the stigma of participation,' Collins Stewart said. 'We see little/no dividend impact for these two banks.'
Shares in both fell however as traders pointed to increased concerns over the impact of the credit crisis in Asia which is a key market for both banks.
'The South Korean won has hit new lows, weakening short-term liquidity,' said one equities analyst who asked not to be named. 'It is not the contagion of 1997, but it is one to keep an eye on.'
Standard Chartered was still trading down 4.3 percent even after the interest rate cuts while HSBC was down 1.8 percent.
(Writing by Paul Hoskins) ($1=.5692 Pound) Keywords: FINANCIAL/BRITAIN SHARES
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