ZURICH 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
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
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 --
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
"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.
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
"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
(Editing by Erica Billingham)