YOU’VE ALL BEEN LOOKING AT MINING & ENERGY! WHAT ABOUT THE BANKS?

BANK Share price 1/1/16 Share price 4/2/16 % loss
HSBC 542p 459p -15.3%
BARCLAYS 220p 172.2p -21.8%
LLOYDS 73.07p 62.48p -14.5%
RBS 302.3p 238.1p -21.2%
STANDARD CHARTERED 578.4p 434.05p -24.9%
JP MORGAN $67.04 $57.41 -17.8%
CITIGROUP $50.75 $40.36 -21.9%
BANK OF AMERICA $17.03 $13.03 -23.5%
WELLS FARGO $54.51 $47.60 -12.7%
DEUTSCHE BANK €23.01 €15.05 -39.6%
UBS CHF19.53 CHF15.14 -22.5%
CREDIT SUISSE CHF 21.80 CHF14.73 -32.4%
BNP PARIBAS €51.78 €40.06 -22.6%
SOCIETE GENERALE €41.88 €31.35 -25.1%
CREDIT AGRICOLE €10.75 €8.46 -21.3%
SANTANDER €4.55 €3.57 -21.5%
BBVA €6.60 €5.57 -15.1%
UNICREDIT €5.05 €3.21 -36.4%
ING €12.20 €10.71 -12.4%
GOLDMAN SACHS     

MORGAN STANLEY

$181.16

$30.07

$152.68

$24.32

-15.7%

-19.1%

 

 The banking sector has had a really torrid five weeks in terms of surrendered values.  Most investors have focused on the energy and mining sectors for their lost causes. The banking sector is not far off the pace. Why is this happening?

 

Since the financial crisis capital requirements for banks have become increasingly onerous. With the relative collapse of emerging market economies and the quality of their respective debts, these have put added pressure on banks’ balance sheets. There is also a school of thought that believes many banks may not be able to maintain dividends as a result of ‘on-going’ impairments and the requirement of further capital. Also the fact that bond yields have fallen sharply could eat in to earnings.  There has always been some correlation between low bond yields and the falling value of bank shares. There now seems little prospect of interest rates going up in the US, UK or Europe in the foreseeable future, though M/S Yellen is attempting to keep a hike on the agenda.

 

In regards to the UK banks there is also a huge over-hang of banking stock.  £ Billions of Lloyds Banking Group shares were eased out by Morgan Stanley last year and there is still another 9% to go – postponed pro-tem. Also the UKFI has billions of taxpayers shares in RBS (73% if the bank) to go when the climate improves.  Then add to that Williams & Glyn Bank and Metro Bank IPO in March, which come in the wake of a successful Clydesdale IPO.  So there will be a degree of indigestion. To make money investing in bank shares you need patience and timing is of the essence.

Panmure’s chief Economist Simon French makes some very valid comments and adds some supporting data.

Stress tests: 5/7 of the UK banks passed these:

 http://www.bankofengland.co.uk/financialstability/Documents/fpc/results011215.pdf  Standard Chartered and RBS did not hit its capital guidance but have since taken actions to ameliorate their situation. Striking from Table 1 (below) is how Dividend cuts and Tax Relief (collectively adding +1.7% to Capital Ratios) are the reasons that the 6% threshold is still achieved under the stress test scenario – which was a sustained economic downturn in Emerging Markets.

 

It would seem to me that one of the material impacts of the regulation changes since the Financial Crisis has been to make Bank dividends more vulnerable going forward – management conviction to protect pay-outs would be limited (compared to previous cycles) given what we are learning from the regulators stress tests.

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