How low can bank shares go?

How low can bank shares go?

By Conrad de Aenlle Published: January 25, 2008

Shares of global banks continue to hit new lows as announcements of their exposure to losses in the credit markets continue to hit new highs.

The latest run occurred this month when Citigroup and Merrill Lynch each reported fourth-quarter shortfalls of $9.8 billion. The news left the two stocks, along with those of such big-name institutions as UBS, Deutsche Bank and Barclays, trading at, or within pennies of, their lowest levels of the last year. Citigroup, which had been weaker than its peers before the credit crisis struck, reached a nine-year low.

The pounding reflects not only losses just recorded but also those widely believed to be on the way. Fresh selling occurred after concerns emerged that companies that insure bonds might be unable to meet their own ever mounting obligations; that would leave banks, or anyone else holding the paper, further out of pocket.

Market bottoms often coincide with or shortly follow spikes in investor fear. Could the latest panic hint that a bottom for bank stocks is approaching?

The sector seems bereft at the moment, but there are several points in its favor, supporters say. For starters, the declines have left the stocks trading at very low valuations, even after accounting for huge losses this year.

Today in Your Money
The death of the 'decoupling' theory?Two cheers for stocksHow low can bank shares go?Citigroup and Merrill trade at barely eight times analysts' consensus estimate of earnings for 2008. The same goes for Deutsche, UBS, Credit Suisse and Banco Santander, while the forward price/earnings ratio at Barclays - estimated earnings per share divided by the current share price - is just over six.

Banks also have friends in high places: central banks that have been lowering interest rates to try to forestall recession. The most recent move was a three-quarters-percentage-point reduction on Tuesday by the Federal Reserve. The European Central Bank has been less eager to ease, but it has sent signals to the markets lately that it is closer to cutting rates than before.

Lower rates help banks by helping the economy and also by causing the yield curve to steepen. Because banks borrow short term and lend long term, their financing costs drop, and profitability improves, when short-term rates controlled by central banks come down.

Banks are held in such low regard that even when investment advisers express praise for them, it can come across more like scorn. Tim Guinness, chief investment officer of Guinness Atkinson Asset Management, holds Citigroup in part because "I think it's a bank that's far too large to be allowed to go bust," he said. Mustering a bit more optimism, he called Citigroup "the strongest bank in the world in terms of positioning, with a great international franchise and lots of customers," and said the stock "presents a sort of one-way bet" after losing more than half its value since June.

Another bank he favors, one that has been far less damaged by the credit crunch, is State Street. Its stock is up since June, before the crisis struck the industry, in part because much of its business involves bulletproof activities like providing administrative services for banks and insurance companies.

Jeremy Whitley, senior investment manager for global equities at Aberdeen Asset Management, likes a few banks operating in Asia, where growth is stronger and credit less crunchy. His firm holds Standard Chartered, a sort of Indiana Jones in pinstripes that focuses on emerging markets, and a couple of small institutions in Singapore, OCBC and UOB.

He is giving Western banks a wide berth, however. He views their multistage asset write-downs - some booked for the third quarter, now some for the fourth - as a way to try to cushion the blow for investors. "The markets can't take account of everything all in one go," Whitley said. "Banks realize that, so they don't tell them everything. If they did, the markets would implode, so they tell people what they feel they can handle at one time, then they come back with more a few months later."

If that is their intention, the tactic could backfire. Fear hurts stock prices, but confusion and uncertainty hurt more. The drip-feeding of grim financial results is like a horror film that offers only fleeting, incomplete glimpses of the monster, leaving the audience to imagine the worst.

Another reason that Whitley thinks banks are not telling investors everything is that they do not know everything.

"It will take a while for people to really understand how bad it's been," he said. "No one knows how big the numbers are."




^O^