At least US banks have outperformed motorcycle makers and housebuilders, says Lex – only just, however, with the sector languishing near the bottom of the S&P 500 for the year to date, down 14 per cent. European banks are off about half that, with only property stocks underperforming them, it notes. And the story is similar across most of Asia. Some names have fared worse than others: Lehman Brothers and Bear Stearns are down by almost a third this year, while Macquarie Bank in Australia has lost 25 per cent of its equity value since May.
On an earnings basis, valuation multiples are near 20-year lows:
The trailing price/earnings ratio for the Datastream World Banks index is now 12.4 times. It has only been lower twice before: at the nadir of the last stock market crash at the end of 2002 and momentarily during the Russia/LTCM crisis of 1998. Some investment bank heads are insisting that today’s credit woes will only have a limited effect on earnings. So far, equity investors seem to be sceptical; after all, five months after LTCM blew up global bank earnings fell 20 per cent.
After the last bubble, bank shares began tumbling at the beginning of 2001. But it was not until March 2002 that absolute book values fell off a cliff, dropping by 25 per cent in a quarter. Only then did prices rally.
In other words, there’s worse to come.