Over the past year, UK banks have incurred a significant amount of writedowns on the back of devalued sub-prime related securities. Earnings and balance sheets across the banking sector were dented and a softening economic outlook in the UK and US, coupled with fresh sub-prime news, caused selling pressure on banking shares to mount.
Of the FTSE 100 banks; HSBC, RBS, HBOS and Barclays were the worst casualties in terms of writedowns and credit losses between 2007 and 2008 according to Bloomberg. During this period HSBC incurred £9.8 billion in writedowns and credit losses, followed by RBS with losses amounting to £7.8 billion. During the same period, HBOS and Barclays suffered from £3.6 billion and £3.2 billion in credit losses and writedowns, respectively. These writedowns (which are extremely complicated to value) have contributed to elevated levels of liquidity and default risks and the primary cause for the sharp sell-off in the sector.
Although the sector has incurred a large amount of writedowns, there remains a view that further losses are in the pipeline: analysts recently stated that banks may have to continue slashing dividends and issue additional equity in order to counter further writedowns and liquidity constraints. On 26 June 2008, this view was reinforced when Belgian bank Fortis announced that it would cancel its 2008 interim dividend, issue new shares and sell non-core assets in order to revive its balance sheet. Analysts at Goldman Sachs predicted further writedowns for Citigroup, the world’s largest bank. Consequently, expectations of further and possibly larger writedowns are likely to lead analysts to revise their banking sector earnings lower and this outcome will add further downward pressure on share prices.
High oil prices and a softening economic outlook have also contributed to the negative sentiment surrounding FTSE 100 stocks. Companies are shedding labour as energy costs eat into corporate profits and banks are scaling back on staff in order to prepare for potential losses and protect liquidity levels.
According to Anthony Grech of IG Index “This has had implications on the wider economy. As UK companies shed labour, mortgage defaults rise and banks, which are already anticipating the worst, continue to tighten lending criteria. Data released in June confirms that UK bank lending, as measured by the BBA mortgage approvals, dropped at an annual pace of 56.1% in May. This vicious circle is adding to fears and weakening the outlook for the British economy further. It is also enticing investors to safer, higher yielding cash and money market instruments and probably contributing to the selling pressures across the entire equity market”
However, are we close to the bottom? Should we be spread betting on equities like bank shares to go down or not? A recent analysis of the performance of seven FTSE 100-listed banks revealed that five out of the seven banks halved in value in just one year.
As of close on 23 June 2008, Alliance and Leicester was 74% below last year’s price followed by HBOS with a 73% annual decline. Moreover, RBS’s share price was 66% lower over the year while Barclays and Lloyds were down by 58% and 44% respectively. Is the sharp sell-off overdone or is it too premature to tell?
The above comments do not constitute investment advice and neither IG Index nor Clean Financial accept any responsibility for any use that may be made of them.
IG Index >>
"With IG Index you get all the normal advantages of Spread Betting plus..." >> read
IG Index review.
Risk Warning: Financial Spread Trading and CFDs carry a high level of risk to your capital. You may lose more than your initial investment. They may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by IG Index which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 114059.
'Spread Bet on UK Banks' edited by SD, updated 16-Sep-08
Related Articles:
Daily Spread Betting Blog, updated 23-May-12
The FTSE financial spread betting market is down 75 points in mid-morning trading, as hopes for today's Eurozone summit evaporate. The Germans have once again stated their firm opposition to Eurozone bonds as...read article: Daily Spread Betting Blog.
Spread Betting Prices, updated 23-May-12
Spread betting prices - a live spread betting price guide plus which spread betting companies offer live prices, how to use them and...read article: Spread Betting Prices.
Spread Betting Guide, updated 21-May-12
Spread Betting Guide: What is spread betting, how to spread bet, spread betting advantages, spread betting examples and...read article: Spread Betting Guide.
Spread Betting v Share Trading, updated 21-May-12
Some people see spread betting and standard trading as two different sides of the same coin. Whilst the pair do share similarities, it is fair to say that...read article: Spread Betting v Share Trading.
Sectors Spread Betting, updated 21-May-12
Sectors spread betting is a convenient way of taking a position on an entire industry by giving investors exposure to a basket of underlying stocks in a particular sector. Sectors are groups of firms that all...read article: Sectors Spread Betting.
A) Get free spread betting tips, offers, price updates, important news and more! All Free - Click here!
Risk Warning:
Please note that spread betting and CFD trading carry a high level of risk to your capital. You can lose more than your initial deposit. These products may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.
