A Bad Day For The Banks

Published in Investing on 18 July 2011

UK bank shares tumble on debt fears and stress test worries.

UK banking shares have been in a bit of a hole of late, and the hole deepened on Monday in response to growing worries about the financial shape of Europe.

At the time of writing, Royal Bank of Scotland Group (LSE: RBS) shares were down 4.5%, after a dreadful 2-week spell that has seen the price fall 15%. And Lloyds Banking Group (LSE: LLOY) is down 3.5%, after it saw a promising rise at the start of the month turn tail.

And even Barclays (LSE: BARC), considered by many to be the UK's strongest high street bank, saw a 3.3% drop, on top of a similarly bad month.

But not all the FTSE-100 banks suffered on the day, as HSBC Holdings (LSE: HSBA) and Standard Chartered (LSE: STAN) both saw their share prices pretty much holding steady.

Why so glum?

Why the gloom? Well, it's all down to worries that the banks of Europe are in a worse state than earlier feared, after stress tests failed to bolster confidence. Fears of a Greek debt default are growing, and the market is not convinced of the banks' abilities to handle it or of governments to bail things out.

The European banking Authority announced on Friday, after Europe's stock markets had closed, that 8 banks out of 90 had failed its stress tests, with a total combined capital shortfall of €2.5bn, and a further 16 were said to be close to danger.

However, while that €2.5bn is less than people were fearing, a JPMorgan Chase (NYSE: JPM.US) report published the day after suggests that there are 20 banks needing to shore up their capital, and they may need to raise as much as €80bn in total. Ouch.

The FTSE 100 has continued last week's 2.5% slide, with another 1% lopped off its value on Monday -- that's a 5% fall since early February, as European debt contagion appears to be spreading.

Going to the wall?

And as another sign that investors are fleeing shares and cash, the price of gold topped $1,600 an ounce for the first time -- that's a lot of money for a little bit of essentially useless metal.

With some measures suggesting that institutional investors are acting as if there's a 90% chance of a Greek default, there will be some people who would prefer to see an end to the lingering and get it over and done with as soon as possible.

What do you think? Will the Greeks pull it off, or is the worst now inevitable? Please share your thoughts, below.

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AleisterCrowley 18 Jul 2011 , 3:57pm

Hmm, could be a buying opportunity. But which one, which one....?
Care to stick your neck out ? Gut feel says is BARC is the best bet

drfuzz 18 Jul 2011 , 4:28pm

My gut would agree with you Aleister, BARC the best bet. IF you want to buy in to this mess. It was just Friday that I compared the PSRs of RBS, Lloyds and Barclays (how else can you compare RBS and Lloyds to other banks considering the messes they're in)? RBS is at roughly a 25% discount to Barclays (historical and forwards); Lloyds is at 25% historical discount but going forwards its revenue is predicted to drop off a cliff.

I wouldn't consider the 25% "discount" for RBS worth the risk, considering forecasts put it 2 years off making reasonable profits.

A third name I'll put out there, and is often overlooked is Santander. I hold the shares (and have taken a beating of late). You're gut will say its because its a spanish bank - true - but like HSBC, it makes most of it's money outside its domestic market. 50% from Latin America, 20-25% from other European countries (UK, Poland, Germany, Portugal). It's an interesting one - either it is ridiculously undervalued, or the market has priced the problems in its domestic market correctly (e.g. I guess as Spain's biggest bank it could be forced to take over some of the failing cajas).

shinygoldcar 18 Jul 2011 , 4:38pm

I personally would just use the general market weakness to buy a non-financial... or I would if I had spare cash.

Non-financials in the FTSE100 that have dropped significantly include GKN, BHP Billiton, Cairn Energy, ITV, Rexam, Smiths Group, Wolseley and Weir Group. I'm not specifically endorsing any of these, or the others I may have omitted, but if you're after a discount, you don't have to restrict yourself to financials (though they do give the biggest discounts admittedly).

TMFBoing 18 Jul 2011 , 4:39pm

Yep, my gut is with Barclays too - but I've got the timing badly wrong with them in the past, so I'm not listening to my nether regions this time.


AleisterCrowley 18 Jul 2011 , 4:48pm

Non-financials in the FTSE100 that have dropped significantly - most of the stuff I've bought this year (BA/UU/CWC etc) Bah !

Think I may sit on my cash for a while (but keep a weather eye on the banks)

ed1value 19 Jul 2011 , 12:42am

Bought BARC today and it fell another 3%, Falling Knives. There is opportunity and the banks are all in a lot stronger capital situation than 2009. Hopefully they have had time to hedge their southern european debt exposure!

richjfool 19 Jul 2011 , 2:56am

If I was going to buy banks, I would buy Standard Chartered or HSBC, though of course their share prices didn't fall.

As suggested I think I would use the general market weakness to buy a non banking stock.

DIYIncome 19 Jul 2011 , 5:14am

Wow - the yields keep going up: it's great being an income investor!

CunningCliff 19 Jul 2011 , 10:00am

"Wow - the yields keep going up: it's great being an income investor!"

True, but only if your increased yields offset the large capital losses!


AleisterCrowley 19 Jul 2011 , 11:36am

Mmmm, Missed out on a nice 4% overnight profit there...

I've actually just bought a smallish chunk of BARC for the speculative end of my CrowleyFolio which I shall studiously ignore for a few years

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