Beleaguered banks fight back on FTSE

The embattled banking sector fought back from hefty falls on the London market today as the US Federal Reserve sought to offer reassurance over America’s troubled financial sector.

Britain’s beleaguered banks narrowed losses seen earlier in the session, with the wider market also staging a turnaround as lower oil prices lent support.

Fears over exposure to the ailing US mortgage market and the prospects for multi-billion pound fundraising plans had hit UK banks hard, with Barclays shares dropping to a near-10 year low at one stage.

Fed boss Ben Bernanke helped calm investor nerves, assuring that troubled US mortgage giants Freddie Mac and Fannie Mae were not in danger of failing.

The comments dampened the growing hysteria surrounding collapsed US bank IndyMac and the prospects for Freddie and Fannie, after the US government’s support for the two firms at the weekend sparked fears over their future.

The FTSE 100 Index closed down 21.3 points at 5150.6, clawing back from an earlier drop of more than 100 points.

Oil prices falling for a second day – down another $5 a barrel at $133.64 – helped boost equities on both sides of the Atlantic.

The Dow Jones Industrial Average on Wall Street was nearly 90 points higher in early trade.

In London, Halifax Bank of Scotland shares closed down 5%, scaling back a 9% drop at one point.

With shares still significantly below the “discounted” rights issue price of 275p, investor take-up for its £4bn (€5bn) cash-call is threatened, with just two days to go before the deadline.

Underwriters for the bank’s rights issue could now be left with a swathe of unsold shares to offload unless the share price rallies.

The investors under Barclays’ £4.5bn (€5.7bn) move to bolster its finances are also facing potential hefty paper losses, despite turning around a 9% share price loss into a 2% gain today.

Its shares are now trading at 266.75p – below the 296p price that Japanese bank Sumitomo Mitsui Financial Group agreed to pay for its £500m (€631m) investment and under the 282p offered under the wider share placement.

Banks with exposure to the US financial sector also suffered a volatile session, with Royal Bank of Scotland down 9% as fears grew over potential trouble for its US subsidiary Citizens, although it later closed down just 1%.

Speculation that the group may be forced into yet more multi-billion pound write-downs dragged the stock lower, while market talk also suggested that its £12bn (€15bn) rights issue may now not be enough to strengthen its finances.

HBOS also has US exposure through some £40bn (€50.5bn) in asset-backed securities, which has compounded its stock market woes in recent days, according to analysts.

Meanwhile, the mortgage bank announced today that up to 650 jobs were being axed as it streamlines its business banking operation.

Sandy Chen, banks analyst at Panmure Gordon, said the worries over UK bank credit risk and investment exposure that have been looming over the sector for more than a year were now coming to the fore.

“Add to that the fact that they are under pressure to raise capital in unkind markets and the sector is clearly suffering,” he added.

Banks were also under fire from consumer watchdog the Office of Fair Trading over current account services and charges.

The OFT’s report ruled that the current account market was not working well for consumers, hitting out at their lack of transparency and complexity.