The pain is far from over yet for banks
What “teeth-clenchingly bad timing”, as Patrick Hosking put it in The Times. Only 48 hours after Qatar’s sovereign wealth fund piled into Credit Suisse, the Swiss bank’s shares plunged by as much as 9% due to a shock $2.8bn writedown on mortgage-based derivatives, blamed on asset mispricing by traders. The write-off is 50% higher than the 2007 total announced only last week.
Confidence in the sector had already been undermined by reports that UBS, which has already lost $18bn on mortgage-related securities, could be facing another $10bn in losses this year.
Meanwhile, Germany’s number-two bank Commerzbank’s 2007 subprime losses doubled to e583m in the fourth quarter.
Crédit Agricole, France’s biggest retail bank, is now thought likely to announce another writedown of around e650m, owing to its exposure to US bond insurers – on top of e2.5bn of losses so far.
Barclays is hardly out of the woods
Barclays, however, provided some much-needed cheer by reporting a 1% decrease in profits to £7bn for 2007 amid a credit crunch-induced hit of £1.6bn, only £300m more than estimated in November; it also signalled confidence by hiking its dividend by 10%. Barclays seems to have been “pretty nimble at quitting or hedging its riskiest positions”, said Mike Verdin on Breakingviews.
But while it has cut its subprime risk, its exposure to Alt-A mortgages (a step above subprime), monolines and commercial mortgages has risen, and is vulnerable if these areas keep softening. With various credit exposures totalling £36.4bn, losses could “quickly eat away” profits, added the Daily Mail’s Alex Brummer.
What next?
The G7 has pencilled in eventual subprime losses of up to $400bn, of which just $145bn or so have been disclosed; the complexity of valuing derivatives only adds to the uncertainty. Banks are also bracing themselves for losses that would follow from the downgrading of monolines, estimated at $20bn-150bn, while consumer debt and commercial property could wipe another $100bn-200bn off earnings. As a recent Barclays Capital report put it, “the write-downs and losses to date by no means represent the end of the story”.
