Turkey of the week: banking stock to avoid
By
Tim Price Jul 17, 2009
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Should you buy bank stocks? It really depends on whether you think the banking crisis is closer to its end than its beginning. On that front, my fellow MoneyWeek writer James Ferguson has analysed prospects for the sector and his conclusions make for gloomy reading.
A Bank of England study of 33 systemic banking crises between 1977 and 2002 (and you thought bank crises were rare!) suggests that the average duration of a banking shock is around 4.3 years – so arguably we're not even halfway through yet.
Given that this crisis is global and much more severe than more localised outbreaks in the past, it seems reasonable to assume that the average figures will be trumped by the current debacle's severity.
Barclays plc (LSE: BARC), rated SELL by Panmure Gordon
Yet bank stocks have enjoyed a huge rally from their recent lows. Barclays' stock has jumped by well over 400% from its January low of just 51p. But is this justifiable? There has been no shortage of suspicion over whether Barclays has been entirely up-front about the extent of its liabilities. A number of analysts found its 2008 results a little baffling, including Panmure Gordon's Sandy Chen.
Trying to make sense of a still-opaque operating environment, Panmure believes Barclays will be vulnerable if corporate default rates rise and structured credits suffer another wave of downgrades, leaving the structure of Barclays' counterparty swaps vulnerable to unravelling.
Panmure highlights a £20bn rise in Level 3-type assets (those that can't be priced by the market, basically) and a doubling of net derivatives exposures. Since the credit ratings agencies have recently warned on collateralised loan obligations and have downgraded the 'monolines' (insurers focusing solely on guaranteeing bond repayments), the fundamental outlook for much of Barclays' debt exposure is not promising.
Sandy Chen expects impairment charges of around £13bn for the bank in 2009 and 2010, against management guidance of £7bn-8bn. He expects the bank as a whole to incur major losses for both years. And if Barclays decides not to participate in the government's asset protection scheme, Panmure foresees further dilution risk for equityholders.
My own concerns about the bank focus on the cost of this independence – the sale of its crown jewels, notably its BGI investment management unit for $13.5bn to rival BlackRock. Barclays may have secured its freedom, but at what price to future earnings – given that its (more cyclical and risky) capital markets activities are now even more concentrated?
In short, I think the market is in denial about British banks' growth prospects, particularly about Barclays'. Thirteen brokers rate the stock a 'buy' and eight give it a 'hold'. Five, including Panmure's Sandy Chen, believe it is a 'sell'.
Recommendation: the banking crisis is not over – AVOID at 313p
• Tim Price is director of investment at PFP Wealth Management. He also edits the Price Report investment newsletter.
• Paul Hill is away
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