Credit crunch forces writedowns from Deutsche, HBOS and Allianz

Major players in banking and insurance are still feeling the heat of the financial meltdown

BLEEDING IN the financial sector continued apace yesterday as Deutsche Bank, Halifax Bank of Scotland (HBOS) and insurance giant Allianz all announced further writedowns as the credit crunch continues to induce corporate angst.

Deutsche Bank's €2.7 billion writedown resulted in the firm's first quarterly loss in five years. Its pretax loss of €254 million was in stark contrast to pretax profits of €3.2 billion in the same quarter last year.

It would have been uglier still had the firm not offloaded shareholdings in German groups Daimler, Allianz and Linde, which contributed almost €1 billion to the coffers. Net revenues more than halved, plunging to €4.6 billion from €9.6 billion in the first quarter of 2007.

The bank effectively abandoned its prior target of €8.4 billion pretax profits for 2008, with financial director Anthony di Lorio telling analysts that "these are very uncertain times, the markets are unpredictable".

Chief executive officer Josef Ackermann added that pressure on the banking sector in March was "more intense than at any time since the current credit downturn began".

There have been "encouraging developments", he said, with financial markets showing "signs of stabilising" in April. Nevertheless, Ackermann admitted that the "near-term outlook is highly uncertain".

The €2.7 billion writedown exceeded analyst estimates. The share price, however, which has dropped by one- third over the last year, was little changed on the day.

Markets were similarly gentle on beleaguered British bank HBOS, which fell slightly after announcing writedowns of £2.84 billion (€3.6 billion).

In announcing a £4 billion rights issue, the bank is following the begging bowl example set last week by Royal Bank of Scotland, which plans to raise £12 billion in an effort to shore up its finances. Britain's deteriorating property market - prices in March fell by 2.5 per cent, the biggest monthly fall since 1992 - is taking its toll on HBOS, Britain's biggest mortgage lender.

It said it expects house prices to fall by less than 10 per cent in both 2008 and 2009 and is "planning for a more challenging environment".

The rights issue, coupled with a cut in its dividend payout, is designed to achieve a core Tier 1 ratio of between 6-7 per cent. "We've taken the firm view that, for the next four to five years, given the more uncertain macroeconomic environment, we want to have an even higher target ratio," CEO Andy Hornby said.

Investors took the view the share price, down by 32 per cent this year, had largely discounted the news.

Further share sales in the banking sector are expected, with many eyes focused on Barclays, which said last week that a rights issue was an "option".

Further writedowns were seen at Allianz, Europe's biggest insurer, which saw first-quarter profits decline by 66 per cent. The damage was done by Dresdner Bank, the Allianz subsidiary forced to write off €900 million as a result of the turmoil in the subprime mortgage market.

This was more than double the €400 million in first-quarter writedownsthe firm had estimated in February and brings its total bill from the subprime meltdown to €2.5 billion.

Financial firms have now written off more than $310 billion over the last year. Some 48,000 jobs have been cut and chief executive officers at Citigroup, UBS, ETrade and Merrill Lynch have been forced to walk the plank.

Despite the grim headlines, however, markets have taken an increasingly optimistic view of late.

The aforementioned firms did not see their share prices punished yesterday, continuing a recent trend that has seen poor news greeted with indifference or even some cheer.

The Eurostoxx 600 has risen by 5.5 per cent in April, breaking a five-month losing streak. Similar gains have been seen on Wall Street, with the Philadelphia Bank Index up 11 per cent since the Bear Stearns-induced panic in mid-March.

Chief executive officers at Goldman Sachs, Citigroup, and Lehman Brothers have all told shareholders the credit crisis is closer to the end than the beginning, with Morgan Stanley's John Mack chiming in that the subprime woes are in the "eighth or ninth inning".

As for European banks, a recent JP Morgan report said "the worst of the markdowns seem to be over".

Not everyone is as sanguine, however.

Morgan Stanley analyst Betsy Graseck disagrees with her boss, writing this week that "we are only in the third inning of the credit cycle and expect this credit cycle will be worse than 1990-1991." She recommended selling financial shares and lowered her estimates for 2008 earnings at the biggest banks by 26 per cent.

Warren Buffett is also wary, predicting this week an American recession that will be "longer and deeper" than what people expect.

The overall sense of uncertainty was captured last week by Brady Dougan, of Swiss banking giant Credit Suisse.

"A number of times people have seen a light at the end of the tunnel, and it has ended up being a train coming down the tracks."