Banks end the week on positive note despite market fall

Banking shares have enjoyed their best week for months. They moved higher again today despite an overall fall in the market, as hopes grew that the bailout plans on both sides of the Atlantic will ease the current financial strains and avoid the need for a full nationalisation of the sector.

Even analyst Sandy Chen of Panmure Gordon, one of the severest critics of the banks, seemed less negative today. In a note he said:

"Following the recent 50% swings [both up and down] in share prices, it seems farcical that UK bank shares have only rebounded to about where they were a fortnight ago. Bank shares have surged worldwide on hope that the new rounds of bailout packages would be priced favourably for the banks and their current shareholders, on the view (probably correct) that neither the US nor the UK wants to nationalise more banks."

Barclays ended 5.8p better at 106.1p, Royal Bank of Scotland rose 1p to 22p, and Lloyds Banking Group was lifted 1.7p to 90.7p. The exception was HSBC, down 9.75p at 543.25p.

Property groups - hit recently by worries about falling asset values and possible rights issues - rallied after an upbeat note on the sector from Morgan Stanley. Land Securities climbed 56p to 689.5p, Hammerson was 17.5p higher at 405.75p and Liberty International closed 13.5p higher at 372.75p.

But economic concerns and commodities companies undermined the market. Xstrata fell 76p to 569.5p on further consideration of yesterday's £4.1bn cash call, while hedge fund Davidson Kempner International revealed it held a 0.45% short position in the miner (something which now has to be disclosed when a company has a rights issue.) BHP Billiton lost 95p to £11.81 on worries about its half year figures due out next week. Rio Tinto - which admitted earlier in the week it might tap shareholders for cash to reduce its debt by $10bn - reversed earlier gains to close 44p lower at £15.06. The company has sold potash and iron ore assets to Brazil's Vale for $1.6bn to help cut borrowings. Cazenove's David Butler said:

"This move provides, in our view, further evidence that Rio is trying to avoid coming to the market for cash if it possibly can."

So, despite the optimism in the banking sector, the FTSE 100 ended 40.47 points lower at 4149.64. Wall Street did not help, with the Dow Jones Industrial Average down more than 100 points by the time London closed. US GDP fell by less than expected in the fourth quarter - down 3.8% as opposed to forecasts of a 5.4% decline - but it was still the weakest performance for 26 years. Earlier came poor employment and output figures from Japan.

Travel groups fell back on profit taking, with Tui Travel down 6.75p at 224p and Thomas Cook 9.2p lower at 190.8p. British Airways fell 10.8p to 120.1p as Citigroup issued a negative note on the sector.

Marks & Spencer dipped 1p to 231p despite a buy note from Collins Stewart which set a 375p target price. Analyst Rob Mann said:

"M&S has been a soft target, partly through its own weak execution. This has again given the critics the opportunity to label as structural challenges which we perceive to be the result of poor execution. M&S is a strange concept, but no more so than in 2000, or 2005, the most recent occasions upon which the shares have rallied hard. Since Kingfisher cut its dividend almost a year ago, its shares have been major outperformers. M&S could follow suit.

"M&S is probably going to be with us for some time to come. Its clothing market share will not just disappear overnight, although some of its competitors have done. It has no covenant issues, no imminent refinancing needs and the probability of being cash neutral in 2009-10. In a market looking for beaten up early cyclicals with low financial risk, M&S seems to fit the bill."

IT group Misys added 2p to 116.5p as half year profits came in above expectations, and the company said it expected to meet full year targets, confounding market talk of a profit warning. The company expects its healthcare business to receive a boost from President Barack Obama's stimulus package. But not everyone was convinced. Analysts at Teathers said:

"We would be less sanguine [than the company] about the ability to hit guidance for the full year. We still believe the tight credit market in the US will cause [healthcare subsidiary] Allscripts to miss and that this will hit its stock price. We suspect that the climate for banking and [financial products] will worsen too. With still very low cash conversion to boot, we struggle to do anything other than continue with the reduce recommendation and 80p price target."

Russian oil group Sibir Energy jumped 54.5p to 188p as it pulled out of a controversial deal to buy property assets from its major shareholder Chalva Tchigirinski.

Leisure group Rank slipped 1p to 59.25p even though the House of Lords passed a motion this week allowing an increased number of gaming machines in bingo clubs. KBC Peel Hunt estimated this could add between £3m and £5m to Rank's revenues, with around 70% of this flowing through to profits.

KBC was also positive on online gambling group PartyGaming - down 6p at 167.25p - saying a deal with the US Department of Justice now seemed increasingly likely. It said:

"This should prove the catalyst for industry consolidation and remove a significant uncertainty. We would therefore expect both an improved earnings outlook and a significant re-rating."

Nor would failure to reach a deal be a disaster, according to KBC. It said:

"Although we have little doubt that sentiment would be significantly damaged if a deal with the DoJ were not forthcoming, this too could prove to be an important catalyst. While management has instigated numerous organic growth strategies, these are unlikely to have a meaningful impact in the short term. In order to address the competitive issues, industry consolidation is a must. Other online operators will be in the same position and therefore we see no reason why consolidation should not occur.

"Our base valuation, assuming no DoJ settlement, gives a fair value of 162p. In the event of a successful conclusion with the DoJ, we see a price target of 228p as achievable. If the opportunity arises to re-enter the US market, then our fair value target would rise to 380p."