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?

Note that financial spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.



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An interesting report from paddypowertrader trader has landed on my desk. Despite spread betting having a reputation for catching investors out in extremely volatile markets the Irish firm has reported a 110% increase in clients placing equity trades in the past few days

Recent international market turmoil in the banking sector seems to have encouraged speculation rather than scare traders off.

To confirm the fact we asked Financial Spreads if they had seen an increase in activity. They had. Both from existing investors and speculators looking to open a spread betting account.

But is this sensible? What should we do after the Lehmans crash? The FTSE 100 has already broken the 5000 support level a number of times. According to Simon Denom of Financial Spreads “Investors will be hoping that the bounce from this level will support the view that a low has been reached but, in truth, the sensible thing for traders to do in the current scenario is to baton down the hatches, conserve your cash, and wait for the winds to die down. Many shares look extremely good value at current prices but I am sure that investors in Northern Rock, Merrill, Lehman and Bear Sterns thought the same thing just before they failed”.

I will take that as advice not to trade but what is the reality?

According to Davin McAnaney over at paddypowertrader “Compared to an average day we have seen an increase of 110% in banking shares trades, as well as those short selling both the UK and US indices. At the top of the list of those being traded are Merrill Lynch, AIG, Allied Irish Bank, Anglo Irish Bank, Barclays and Alliance and Leicester”,

“We have seen a huge increase in the number of trades compared to regular trading activity. Even though volatile markets such as these are difficult to predict, we have also seen a glut of clients taking profits from short selling the rapidly changing markets. US lenders Fannie Mae and Freddie Mac were the subject of nationalisation last week, but before they bowed out of the market they earned spread bettors going short quite a lot of money”.

Well it seems like the one place you should put your money is into your local spread betting company, they seem to be booming. However if that does not suit your needs then according to Denom, “In the current state of play the safest place for cash is no longer cash. Yields on AAA Short term Government Debt are falling like a stone as investors pull funds from the banks and search for a safer home. Oddly enough Northern Rock is now, probably, the safest place to have your hard earned in the UK”.

So it looks like we will be seeing more queues outside Northern Rock then.

Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.



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