Calling the bottom for banks seen a mug's game

ZURICH Sun Jan 13, 2008 3:32pm GMT

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ZURICH (Reuters) - Anyone trying to predict whether European bank stocks are about to fall again would be wise to tear up their wall-charts plotting price swings over recent decades.

Bank stocks have lost almost a quarter of their value since a global credit crisis struck last summer and many investors are now poring over data on previous downturns, hoping to get insights into whether the fall from "peak to trough" is complete.

Some analysts say the banks have lost most, if not all, of the ground they are going to give up in this downturn. But many say stocks are more likely to be driven by doom-laden sentiment and raw fear than by precedent - and that makes calling the bottom of the market all but impossible.

"There is more bad news to come and it is priced into the market, but prices can go down further, because everything is driven by sentiment and exaggeration," said Dirk Becker, an analyst at Landesbanki Kepler in Frankfurt.

"There is no limit, there is no natural floor where you can locate a trough for these things," he said.

The credit crunch, which broke with the drama of a midsummer thunderstorm, was brewing for months as U.S. subprime mortgages -- loans to people with poor credit histories -- finally imploded.

Once investors woke up to the extent of involvement by big global banks in packaging subprime loans into mortgage-backed securities and selling them or keeping them on their own books, they headed for the exits.

And they are still waiting on the sidelines for fear of more writedowns of subprime exposures despite banks around the globe such as UBS UBSN.VX, Citigroup (C.N), Morgan Stanley (MS.N) taking charges now running at about $100 billion.

"There are stocks in my universe such as (German mortgage lender) Hypo Real Estate trading at a multiple of 5 times estimated 2009 earnings. There is no rule saying they cannot fall to a multiple of 3 times 2009 earnings," said Becker.

A crushing weight of negative sentiment in the market makes it hard to predict by how much more prices would tumble if banks unveil more writedowns or if the subprime crisis engulfs another asset class, such as commercial mortgages.

FINDING THE TROUGH

The optimists say investors have already taken on board that a mild recession, at the least, is on the cards in the United States and this is reflected in stock prices.

"All said, we think that the banks sector has discounted most of its specific problems (subprime writedowns, capital, market revenues) and a good deal of the potential mild recession risks," said Dresdner Kleinwort in a research note .

Historical precedent may also support this line of reasoning, according to some investment strategists.

Ian Harnett at Absolute Strategy in London believes the closest parallel to the banks' latest subprime-fuelled tumble is with 1990, when the junk bond boom of the late 1980s collapsed.

"We see the parallels being quite strong. The collapse of the junk bond market was similar to pressure from the end of the leverage finance cycle and the squeeze on structured credit," said Harnett.

OVERSOLD

Harnett is telling clients that they should be looking for buying opportunities among European bank stocks. "We see this as a period to think about picking up possibilities in some of the oversold sectors."

Others believe that the last two big equity market shakeouts in 1998, when a market meltdown in Southeast Asia spread to Russia and Brazil, and in 2001-2 after a high technology bubble burst, may be a better guide to what is going on.

"2007 was not the worst year for banks in recent history. The two previous corrections ... were much worse with a 45 percent and 51 percent fall, respectively," said Dresdner, citing the FTSE 300 banks index.

But Derek Chambers at Standard & Poors equity research cautions against using history as a guide. "You can detect patterns historically but you cannot expect similar numbers to occur in future," he said.

A deepening economic slowdown in the United States and Europe could be a trigger for another step-down in bank stocks.

"We had a problem in subprime and in the financial sector and you can see light at the end of the tunnel but we have a much bigger problem of an economic slowdown," said Simon Maughan, at MF Global.

"Banks could still owe us another 20 percent fall," he said.

(Editing by Erica Billingham)