Investing Comment |
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Your Money > Investing Comment Articles > Eggs and baskets
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By Richard Hunter, Hargreaves Lansdown Stockbrokers
As HSBC brought the full year banking reporting season to a close earlier this week, there was an element of relief surrounding the numbers. The ongoing writedowns to the US sub-prime fallout were indeed in evidence, but in general these were not much higher then had been largely anticipated. Of rather more concern - as has been a theme for some months now - is the fear that there is still some way to go, and still some pain to go through, before the beginning of the end of the crisis can be confidently called. Nonetheless, there are some positives to be gleaned from this season, not least of which in the form of a couple of banks reporting record earnings. In addition, those banks with (a) more of an exposure to the powerhouse economies (such as China and India), (b) less of an exposure to sub-prime and (c) neutral exposure to the stuttering European economies, fared particularly well. If ever proof of the benefits of diversification were needed, these results certainly provided it. With this in mind, the current darling of the sector, Standard Chartered, reported pleasing results which were very well received, even if the shares have been subject to some profit taking over the last few days. Equally, HSBC's price reacted positively on the day of their announcement, notwithstanding the market's continuing unease over the exposure via their US consumer finance subsidiary. Conversely, with the small exception of Lloyds TSB, the banks which were worst hit were those whose business is either more or less reliant on the UK economy, or reliant on the UK property market due to their mortgage exposure - or, even worse, both. This was particularly bad news for HBOS, Alliance & Leicester and Bradford & Bingley, all of whom suffered further setbacks in their share prices following on from some unsubstantiated rumours that any one of them might need a rights issue to shore up their balance sheets. In any event - and such is the market caution around the sector at the moment - the small similarities between the business models of the likes of A&L and B&B to Northern Rock are in investors' minds, even if this pessimism may be somewhat overdone. Even RBS was rumoured to be considering a rights issue to raise fresh capital, which it denied, adding that any such requirement would more likely come from the disposal of assets. RBS is painfully aware that to announce a rights issue (or perhaps worse a cut in the dividend) at this moment in time would be little short of disastrous for its share price prospects and, in any event, neither appear necessary. There is a certain amount of downward momentum towards banking stocks which has had two main effects - firstly, it has tempted the bulls to proclaim that the sector is looking ridiculously cheap and, secondly, the share price declines have by definition bolstered dividend yields. Indeed, most of the banks have announced increases in their dividends of around 10%, which certainly signals management confidence in both prospects going forward and belief in their balance sheets. Nonetheless, they are fighting the momentum as mentioned above. The table below summarises the current position and the one month/one year share price moves are as revealing as the dividend yield and market consensus columns -
Prices as at 4 March 2008M In conclusion, some might argue that there is little else that the UK banks could have done to assuage the fears surrounding the sector at the moment. Unfortunately, it is the wider sentiment surrounding the extent of the sub-prime fallout - still falling US house prices will most likely result in further losses - let alone fears around the ever-increasing likelihood of a US recession which have combined to peg back the prices. If those share prices are on a coiled spring, then the ride could be a very profitable one for investors entering the sector at the current time. If, on the other hand, as the prophets of doom have predicted we are not yet even half way through the financial cost of the sub-prime fallout, it will be banking stocks globally which generally bear the brunt of this markdown - except perhaps those with the sort of diversification and exposure to the tiger economies which only a few provide. Useful links:
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