Which banks will survive the slump?
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Associate Editor
David Stevenson Jan 16, 2009
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This has been a terrible week for the world's banks – even by recent poor standards.
Record losses, fears over new capital needs, warnings about dividend slashing, nationalisations, job cuts… just about everything that could go wrong, has gone wrong. Apart from another bank going bust, of course, but don't bet on that not happening either.
So despite the calamitous collapse in the sector's share prices, it still looks way too early to dip a toe into the water. But when the time to buy banks comes round again - and it will - who should you be watching out for?
The outlook for UK banks is awful
This week has provided plenty more ammunition - as if it were needed - for banking sector bears.
In Europe, Wednesday alone saw a whole series of nasties, starting with a record quarterly loss at Deutsche Bank. Morgan Stanley warned that HSBC might need to raise more money from its shareholders - up to $30bn in extra capital, the broker reckoned - and that it could also halve its dividend. Meanwhile Barclays announced another 2,100 job losses.
Over on Wall Street, jitters grew that Citigroup and Bank of America would also require urgent capital boosts – and in fact, the latter got a $138bn government bailout last night. Then yesterday, the Irish government was forced to nationalize Anglo Irish Bank.
As you'd expect, it's all had a devastating effect on share prices in the sector. In the US, the KBW bank index plummeted to its lowest point since 1995, while over here, the longer-term picture looks awful, too. Since mid-October 2007, when the UK stock market clocked that the credit crisis was about to get really serious, the FTSE 350 bank index has crumbled by more than two-thirds, undershooting the FTSE All-Share index by almost 50%.
Economies around the world are heading over a cliff
Those stock price plunges all point to a lot more trouble ahead for lenders. Economies round the word are heading over a cliff, with Britain in the vanguard. As Capital Economics said last week, "our forecast that by the end of 2010 UK manufacturing output will have fallen by 12% is looking increasingly optimistic".
It means many more companies will be running into trouble over the coming months. This week Moody's warned that the speculative grade – i.e. companies that are slightly less than top quality - default rate will surge in 2009. And "as global economic conditions are now substantially weaker and more perilous than they were in the two previous credit cycles of 1990/91 and 2001/02, it's likely that the global speculative grade default rate will exceed those year's peaks".
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In other words, it's going to be a lot worse this time round. And, of course, more bust businesses means bank balance sheets face even bigger batterings as the bad debts keep piling up.
No wonder the banks don't want to lend right now, and are trying to hunker down by hoarding as much cash as they can. And as for the reported "bad bank" proposal, again to be paid for by us taxpayers, to mop up some of the spilt toxic debt waste – that just shows "the scale of the losses", says The Telegraph. "It isn't yet clear to the public quite how irresponsible some of the bankers' decisions have been".
What does this all mean for bank shares?
In short, there are still far too many risks to make buying bank shares a good idea right now.
That said, at some future point, when the sector's stock prices have taken another pounding, it will be worth investing in some of the survivors. So it's still worth keeping an eye on the potential recovery candidates. And this week provided an interesting contrast.
There was HSBC, despite those warnings, still pledging to double 2007's mortgage lending to £15bn. Sure, that may earn the bank a few Brownie points with the Government. But HSBC has already written off $33bn – so lending yet more money on still-depreciating assets doesn't seem like the most sensible thing to be doing.
Then there's Barclays. Last month Chairman John Varley had the courage to predict a peak-to-slump drop of 30% in UK house prices (they'll almost certainly fall more, but at least it's a start). Further, he actually had the grace, unusual for a banker, to apologise for the mistakes his industry had made, and even urged humility by lenders.
So far Barclays has refused to be press-ganged into taking Gordon Brown's shilling – unlike RBS and the HBOS/Lloyds combo - preferring to raise the extra money it needed by itself. And the bank's been a bit shrewder than average. Having in 2007 dodged the disastrous ABN Amro deal for which RBS fell, it snapped up the North American operations of Lehman Brothers for a song when the US investment bank collapsed last year.
Further, Barclays is cutting its coat according to its cloth. Those job cuts followed a similar headcount cut the previous day and bring the 2009 total to over 4,500. No one likes to see redundancies, but realism is good. For investors, hard-nosed is even better.
Let's be clear here – we wouldn't touch any of them with a ten-foot bargepole right now. But when the day to buy bank shares finally arrives, Barclays could be a contender. We'll be watching closely.
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