Market Report: Dividend warning spooks HSBC investors

The prospect of a substantial dividend cut unsettled HSBC, the banking group, which fell back with the rest of the sector yesterday. Dresdner Kleinwort sparked the concern in a note to clients, arguing that, with a global recession now almost certain, some of HSBC’s Asian enterprises might suffer “very substantially”, hitting earnings by an average of 35 per cent.

“We expect a similar adjustment in the dividend,” the broker said. “Hence we now expect the dividend to fall by 39 per cent between 2007 and 2009, to 74 cents in 2008 and 55 cents in 2009.”

Dresdner also downgraded the stock – which was down 2.27 per cent, or 17p, at 733p last night – from “buy” with an 1,100p target price to “hold” with an 800p target price.

The banking sector was depressed by HBOS, which fell by 22.95 per cent, or 20.1p, to 67.5p, after it unveiled more bad debts in a trading update. The admission led many to conclude that the takeover by Lloyds TSB, approved by HBOS shareholders at a meeting in Birmingham yesterday, remained the best option for the group. Analysts at Charles Stanley remarked that “life on its own looks distinctly uncomfortable for HBOS”.

The read-across hit Lloyds, which was down 17.78 per cent, or 28.1p, at 129.9p. Royal Bank of Scotland lost 15.13 per cent, or 10p, to close at 56.1p and Barclays eased back to 148p, a fall of 8.13 per cent, or 13.1p.

Overall, the FTSE 100 was down 108.34 points at 4,280.35, while the FTSE 250 fell 147.41 points to 6,172.98.

Sentiment took a beating following overnight news that Republicans in the US Senate had refused to support the Bush administration’s plan to bail out General Motors and Chrysler because of disagreements about the timing of cuts in auto workers’ wages. The news from the banking sector further dampened investors’ spirits.

“Everyone is turning their backs on the equity markets today and saying ‘we’ll see how it shapes up next year’ instead,” said one trader, summing up the mood in the markets.

Oil stocks were on the back foot after Goldman Sachs, the broker which once said that oil prices could rise to $200 a barrel this year, further reduced its oil price outlook for 2009. It forecast an average price of $45 per barrel, compared with its earlier prediction of $75 per barrel.

Although Goldman added that its lower oil price forecast did not imply that it was suddenly more bearish about energy equities, the assessment weakened sentiment across the sector, sending BP down 21p to 516.25p. Royal Dutch Shell fell 49p to 1750p following reports that the turmoil in the financial markets had caused its pension fund to fall into deficit.

Man, the London-based hedge fund group, dropped by 45p to 245.75p after Moody’s, the ratings agency, revised its outlook on the group’s ratings from “stable” to “negative”.

Among the insurers, Prudential was down 19.5p at 345.5p after Morgan Stanley reduced its target price for the stock from 665p to 554p.

Aviva, which was downgraded to “equal weight” with a 561p target price from “overweight” with a 671p target, was down 21p at 378p. Standard Life, cut from “equal weight” with a 239p target price to “underweight” with a 236p target, lost 13p to close at 255p. Elsewhere on the FTSE 250, the financial services group Cattles retreated by another 23.33 per cent, or 7p, to 23p after Citigroup switched its stance on the stock from “buy” to “hold”. It followed news that Cattles’ application for a banking licence is making slow progress because regulators at the Financial Services Authority are applying more stringent tests on |capital and liquidity requirements.

“New questions which occur to us at this short notice include how much capital will Cattles now need to gain banking licence and, if it needs more, how will it obtain it?” Citigroup said. It expects little support for the share price from next week’s trading statement.

Morgan Stanley weighed in on Debenhams, which was down 3.13 per cent, or 0.75p, at 23.25p. Labelling the retailer a “call option” on the depressed UK consumer, the broker said the stock was cheap and offered an “extreme” upside for those willing to live with the risk of an equally sharp downside in the event of a more severe recession.

Among smaller companies, JJB Sports slumped 16 per cent, or 1.49p, to 7.75p after Citigroup slashed its target price for the stock from 20p to 1p, saying that, despite a likely disposal of JJB’s fitness clubs business, it would need further financial support to meet its obligations to suppliers.

“JJB’s fate seems to be in the hands of its lending banks, a predicament that could leave shareholders with little equity value,” Citi added, reiterating its “sell” rating.