Merrill has called time on the US regional banks.
Over the past seven weeks, the BKX Bank Index is down 26%, and bank stocks now appear to be in capitulation mode, which means they could trade below fair value in the near-term as 1) emotion, 2) very high credit risk, 3) more dividend cuts and capital raises, and 4) a very uncertain earnings outlook all weigh on bank prices. Still, as more large banks cut dividends, raise capital, and significantly (and more realistically) increase their credit loss and reserve building assumptions (similar to WB, NCC, KEY & FITB), we should get closer to fully discounting the credit cycle in bank stock prices and commencing a sustainable price recovery.
Meanwhile, the London market isn’t ready to give the UK banking stocks a break. The only new news was Barclays, whose mooted $1bn investment from SMFG should surely qualify as a positive development. But HBOS’s latest numbers were still unsettling the market. Yet they contained relatively little in the way of unpleasant surprises.
Credit Suisse sums it up:
The HBOS statement wasn’t that negative. The problem was it highlighted the uncertain and volatile environment in which banks currently trade, with few clues where we go from here. Indeed, it’s the tail risk that keeps us cautious on UK banks generally. That the biggest mortgage lender can revise its 2008 house price forecast from -5% to -9% in seven weeks demonstrates the point.
Worries too that the latest outbreak of monoline angst will travel trans-Atlantic, meaning further writedowns. Panmure:
Given last night’s Moody’s downgrades of Ambac (to Aa3) and MBIA (to A2), we will focus on the £3.3bn of negative basis exposure as at 31 May 08 – the same level as at 31 Dec 07, despite a significant decline in the credit quality of the underlying assets that the negative basis CDS covered (from 1.00 in Dec07 to 1.08 in Mar08 to 2.54 in May08) and downgrades of the monolines that provide £2.8bn of the negative basis CDS protection. We would have expected significant write-downs to be recognised, along the lines of the the £2.7bn in gross write-downs that RBS detailed in its rights prospectus.
Related links
Unloved HBOS - Lex
Credit creep and the monoline monsters – FT Alphaville