Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Jeremy Warner's Outlook: Banking... the worst may be yet to come

Monday 09 June 2008 20:18 EDT
Comments

Your support helps us to tell the story

From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.

At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.

The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.

Your support makes all the difference.

Now that Royal Bank of Scotland has banked the £12bn proceeds of its record-breaking rights issue, are the shares worth buying again? It's been a mug's game trying to call the bottom for financial stocks over the last six months. I know, because like others, I've tried to do it, only to see prices continue to plummet into the abyss. In RBS's case, a rights issue which began life as deeply discounted came perilously close last week to being left with the underwriters.

In the event, the price recovered a bit, ensuring a decent, 95 per cent, rate of take-up. In these markets, that counts as a success, so with the bank's capital position now secure, and the threat of a sizeable overhang of unwanted stock removed, are not the shares due a rebound? On a long-term view, RBS and other bank stocks certainly look cheap, but there are plenty of reasons for remaining cautious for the immediate future.

Neither the data nor the newsflow on the wider economy looks like getting better any time soon. To the contrary, all the evidence is of further deterioration. Alarmingly, last week's survey from Halifax showed house prices were falling at a steeper rate than at any point in the last housing slump of the early 1990s. The read through from this adjustment to the wider economy is still far from clear, but it is hardly likely to be positive.

In any case, we may be moving into a second and even more difficult phase of the banking crisis where conventional bad debts and consequent impairment charges take over from where mortgage-backed securities, leveraged loans and monoline writedowns left off. It only requires a modest rise in bad debt experience to decimate the profits.

As it happens, RBS has a relatively low exposure to the mortgage market compared with HBOS and Barclays, but obviously it is highly sensitive to developments in the wider consumer debt environment, and, both in absolute and proportionate terms, its exposure to commercial property is the biggest of the lot. This is bound to be hit hard in the event of a prolonged recession.

For the time being, there is just too much uncertainty out there to think this definitely the bottom. Meanwhile, the outlook for the other three, still active, banking rights issues continues to look treacherous. HBOS and Bradford & Bingley have more than a month left before their rights issues close, leaving plenty of scope for already badly eroded discounts to be completely wiped out. On the Continent, the UBS rights issue again looks to be in danger, with the stock price just a whisker above the 21 Swiss francs at which the new shares have been priced.

The stock market desperately needs some positive news, but it is hard to see where it might come from. The workout from the debt overhang of the last boom looks as if it will be long and painful.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in