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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Banking Stocks - Is It Time To Buy?

Companies / Banking Stocks Nov 19, 2007 - 02:27 AM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleHaving warned of the problems facing UK banks back in August and specifically that by Northern Rock Bank, followed by subsequent commentary warning of the continuing crash in the finance sector. Now the sell off of all and sundry may present long-term opportunities in the hard hit sector.


Last Friday's action saw UK banking stocks take another pounding, as more rumors flew around the expectation of large multi-billion pound bad debt provisions. Globally trillions have been wiped off the financial sector, on the basis of a worst case scenario of some $400 billions of bad debt, to date some $45 billions of which has actually been reported. Even though the banks are not out of the woods yet with undoubtedly much more provisions for bad debts as the total losses are expected to pass $100 billion, and may even pass $200 billions over a 2 year period. However the degree of mark down has been particularly deep with banks now trading on ultra low P/E's of 8 or less and dividend yields approaching 5%. Therefore opportunities exist to pick up exposure to International Banks with sound business and managements for the long-run at rock bottom prices.

Therefore this analysis aims to identify the strongest banks, offcourse all of this analysis should be viewed in terms of a long-term basis as there is a great deal of short-term uncertainty volatility and risk, and anyone reading this article should definetly do their own research before coming to their own conclusions.

When considering banks to invest in, there are three clear indicators that I would look for.

1. Limited exposure to the UK housing market

2. Diversified International Business, especially with the far east interests.

3. Limited Exposure to US Subprime toxic waste.

Barclays - Rate 8/10

P/E 7.29, Yield 4.52, Share Price Down 36% From High, Last price 509

The bank reported bad debt losses of just £800 million, much less than speculation that ranged as high as £10 billions. The bank has an international exposure and represents good long-term value. Additionally its failure to take over ABN Ambro has resulted in immediate term strength given the tightening in the credit markets. It also offers the possibility that Barclays itself may be the target of a bid at some time, especially if the financial sector continues to tumble. Even if a bid does not materialize, the speculation of a bid could result in an overnight re-rating of this banks stock price. I would definitely view this bank as having strong long-term prospects.

Charts courtesy of bigcharts.com

Technical Analysis

The price chart implies support at £4.50, though if that failed to hold then the trend would target £3. The MACD is heavily oversold which implies the stock is due an sustained uptrend.

HSBC - Rating 7/10

P/E 12.33, Yield 3.9%, Share Price Down 16% From High - Last price 844

This is by far the strongest bank of this article and despite exposure to the US subprime mortgage market and bad debt provisions of $3.4billion, HSBC managed to report an increase in profits for the third quarter over last year. The US losses are far out weighed by profits from the asian markets with HSBC primed to benefit from $ hundreds of billions of chinese funds that is expected to flow into foreign investments.The bank is definitely a strong long-term play. The P/E on 12.33 is to large part discounting the relative strength of the bank, so its not exactly going cheap when compared to the likes of Barclays, hence the lower rating.

Technical Analysis

The share price is not exactly exciting, given the four year range of £8 to £10. Therefore does not imply an aggressive upward trend, but on the other side implies that there is little downside, with strong support along £8.

Royal Bank of Scotland (RBS) - Rating 7/10

P/E 6.57, Yield 4.74, Share Price Down 41% From High - Last price 426

It may take the bank considerable time to fully digest the ABN Ambro takeover, and therefore risks are associated with problems in that regard as it is unknown what subprime exposure ABN is bringing with it. Rumors are flying of bad debt provisions of as much as £10 billions, similar to those associated with Barclays and pressure is mounting for the bank to bring the statement forward. But the long-term prospects are strong for RBS as the takeover of ABN gives the bank a greater international exposure.

Technical Analysis

The share price has crashed, on the back of expectations of large bad debt provisions which implies the stock is due an sustained uptrend that could easily see the stock rally towards £5.50 in the near term.

HBOS - Rating 5/10

P/E 7.56, Yield 4.34%, Share Price Down 35% From High - Last price 759

HBOS is Britian's biggest mortgage bank. The bank has been in the process of diversifying its lending with a view to reducing exposure to the UK housing mortgage market. This is clearly in advance of a deterioration in the UK housing market which will lead to subsequent bad debt provisions and impact the bank's earnings over the next few years. A lot depends on how well the management will be able to diversify the banks business and how hard the UK housing market is hit.

Technical Analysis

The bank is in a clear downtrend, with the next support area of £7. The stock is extremely oversold and is due a rally towards £9. The subsequent action depends on whether the stock makes a base, over the last low, though at this point the best scenario would be a trading range of between £9 and £7 for this bank stock.

Bradford and Bingley- 3/10

P/E 7.22, Yield 4.87%, Share Price Down 44% From High - Last price 275

This bank most closely resembles the Northern Rock in that reliance on the money markets and high degree of exposure to the UK's speculative buy to let mortgage market, infact Bradford and Bingley is Britain's biggest buy to let mortgage bank. Therefore the bank is expected to experience extremely difficult trading during the next 2 years in the light of a declining UK housing market with higher perceived defaults amongst buy to let investors than home owners.

Technical Analysis

Bradford and Bingley has fallen to extreme multi-year support of £2.40. The impression is that the support is holding and therefore implies the stock is due a bounce or at the least make a base above £2.40. The longer-term prospects suggests a trading range of between £3.60 and £2.40. A higher target than £3.60 would require a change in fundamentals.

Alliance and Leicester - 2/10

P/E 6.30, Yield 6.19%, Share Price Down 50% From High - Last price 607

A&L has a high level of exposure to the US subprime mortgage backed securities market, as well as a specialized lender in the UK mortgage market opens up the bank to a double hit in the face of declining UK house prices. The bank has tried to diversify out of the mortgage business, i.e. into corporate banking but high exposure means profits will take a hit. The bank could follow the same path as northern Rock, but so far has denied rumors that it has been forced to go to the Bank of England for emergency funding. The risks associated with Alliance and Leicester are far too great to consider buying this bank stock at this time.

Technical Analysis

The stock price has crashed to 5 year lows. Support was at £8, which was sliced through with ease. the share price chart looks very weak. I would not be surprised if this stock went the same way as Northern Rock.

Conclusion

Prior to today's market opening, I am seeking to commit to long-term investments as part of an overall diversified portfolio in firstly Barclays and then secondly HSBC. Though I do accept that buying at this time is tantamount to catching a falling knife. But considering long-term investments of several years, the risks of further subsequent declines are acceptable for me.

By Nadeem Walayat
Copyright (c) 2005-07
Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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