I'm Not Buying Banks
By Padraig O'Hannelly |
3 July 2008
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The banking sector is down by nearly half in the past year, but is this a good buying opportunity? A lot of money will be made by anyone who can correctly time an entry into the banks, but for the moment I'm staying clear of it.
My main concern is the effect that property prices could have on banks' loan books. On the way up, increasing property prices facilitated more lending, which drove property prices even higher, and so on. A similar dynamic can operate on the way down, with falling prices forcing distress sales of property to meet financial commitments, which in turn drives property lower.
As much lending is supported by property prices, this is not just a problem for borrowers but also for their banks. Whether banks get tough with borrowers and precipitate further falls in property prices, or waive some of their conditions, they will be in a difficult position.
Taylor Wimpey's (LSE: TW) failed attempt to raise funding shows just how vulnerable the house-building sector is. Writing £550m off the value of its portfolio may only be the start, and it will be interesting to see how this story plays out. Will there be a fire-sale of property to prevent breaching its banking covenants? House prices have a long way to fall before reaching their historical valuation norms, and the fall may not stop there. Banks would feel that pain as much as anyone.
And banks are having their own struggle to raise capital at the moment. The rights issue by RBS (LSE: RBS) went smoothly, and that was a huge amount of money -- £12bn, bigger than the total value of HBOS (LSE: HBOS). But Bradford & Bingley (LSE: BB) found it more difficult, and one has to ask how much more fund-raising will be required before the sector is finally back on an even keel.
I don't know the answer to that question, and I don't believe that anyone really does. The sudden change in Bradford & Bingley's position, from claiming all was well to needing a massive cash injection in the space of a few weeks, shows that even the insiders don't know.
My guess, and at the moment it can only be a guess, given the inscrutable nature of their business, is that banks are in for an even rougher time. And even if I thought the opposite, that could only be a guess too, and and I'd need something more substantial than that to justify investing.
“Good bankers, like good tea, can only be appreciated when they are in hot water.” -- Jaffar Hussein, Governor of the Malaysian Central Bank.
More: HBOS Hopes For A Recovery
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