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Time to buy bank shares?

Created:
15 May 2008
Written by:
Jonathan Eley

Unless you've been on an extended break at the North Pole, you'll be aware that bank shares have taken an absolute pounding over the past year. A glance at the share price charts shows that most have more than halved since the middle of 2007. But the recent spate of rights issues in the sector could mean the worst is over. After all, as a bank manager, why would you bother rebuilding your balance sheet now if you thought more heavy write-downs were in the pipeline?

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Anthony Bolton, probably the UK's best-known fund manager, has opined that it might be time to look a bank shares anew. He reportedly told a Fidelity lunch recently that banks were "near the end" of the liquidity crisis and that historically, investing in banks at the times when they raise fresh capital has been a profitable strategy. "For a medium-term investor, to buy a package of [bank shares] would be a good thing to do," The Times quoted him as saying.

Not everyone agrees, however. Paul Mumford, a fund manager with Cavendish Asset Management, thinks investors don't yet have an accurate picture of what's going on inside banks' treasury departments. Referring to Bradford & Bingley's announcement of a rights issue yesterday, he said: "The fact that the decision comes after sustained denials of plans to raise money from shareholders – as recently as one month ago - hints that banks are in a much worse state than has previously been thought and that shareholders can only half-believe what they are being told by management."

That bank shares are cheap is beyond doubt. Single-digit PE ratios and double-digit dividend yields are common. And although there have been write-downs, UK banks have relatively little exposure to the sorts of losses sustained by their Wall Street counterparts, and bad debts as a proportion of the overall loan books are still modest.

Private investors are also buying their shares heavily. According to data from TD Waterhouse, one of the UK's biggest execution-only brokers, RBS, LloydsTSB, Alliance & Leicester, Barclays, Bradford & Bingley and HBOS were among its ten most-bought shares last week.

Investors Chronicle views on major banks

Bank Recommendation View
Alliance & Leicester SELL Margins under pressure, bid speculation has faded
Allied Irish BUY Cheap shares and strong credit quality
Anglo Irish BUY Well-funded from deposits and shares cheap. Risk from slowing Irish housing market.
Bank of Ireland GOOD VALUE Well-run outfit, but profit guidance has already been cut
Barclays FAIRLY PRICED Sound long-term prospects but market sentiment has knocked the shares
Bradford & Bingley SELL Over-exposed to buy-to-let and expensive funding
HBOS SELL Over-exposed to mortgage lending
HSBC SELL US sub-prime exposure outweighs emerging market attractions, and rated higher than peers
LloydsTSB HIGH ENOUGH Low rating and high yield, but sluggish growth prospects owing to lack of overseas exposure
Royal Bank of Scotland FAIRLY PRICED Strong long-term prospects but rights issue has raised questions about management.
Standard Chartered SELL Exposure to high-growth markets is nice, but shares are pricey

(The links point to more articles and data on each company. For more articles about the sector, click here)

IC VIEW

Our core views on UK and Irish banks don't vary that much. In general, we think that emerging market specialists Standard Chartered and HSBC are too pricey, while LloydsTSB is dull-but-worthy and HBOS, Bradford & Bingley and Alliance & Leicester are over-exposed to the double whammy of slowing house prices and expensive wholesale funding. Our long-term favourites are Barclays and RBS - but the latter needs to mend fences with big shareholders after its recent rights issue.

Keep an eye on bank shares using a watchlist - click here to find out how to set one up.

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