And they thought it was all over. But with the global markets in minor disarray, the banks are finding themselves out of favour once again.
Credit Suisse on Monday piled on the gloom, advising their clients to avoid UK banks as the sector, and broader market, learns to live with heightened volatility. The team, led by Jonathan Pierce, cut expected 2008 earnings by about 18 per cent and said:
Sector PE valuations are towards the bottom end of historical ranges, but rightly so given the uncertain outlook in our view. Yields are strong (the main attack on the bear case we think) however we believe leverage in balance sheets, likely increased scrutiny by regulators, and limited earnings growth will curb significant dividend increases in the near term.
The analysts cite higher wholesale and retail funding costs, and a sustained higher interbank rate behind their changes, as well as higher levels of corporate impairment, falling trading revenues and lower investment gains.
That by the way is the base case. A melt-down in UK housing could drive significant further downgrades, Credit Suisse added:
We have not however taken into account the potentially more material downside to our forecasts and share prices in the event that the UK economy turns sharply and asset prices including residential property and commercial property fall notably. While this is not our central case scenario, we think it is an important consideration given the potential impact on the banks.